UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________
FORM
10-Q
_____________
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the quarterly period ended March 31, 2008
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the transition period from
to .
Commission
File Number: 001-31982
_____________
SCOLR
Pharma, Inc.
(Exact
name of registrant as specified in its charter)
_____________
|
Delaware
|
91-1689591
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
3625
132nd Avenue
S.E., Suite 400, Bellevue, Washington 98006
(Address
of principal executive offices)
425-373-0171
(Registrant’s
telephone number, including area code)
_____________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
|
Large
accelerated filer o
|
Accelerated
filer x
|
|
Non-accelerated
filer o (Do not check if
a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Title
|
Shares
outstanding as of May 1, 2008
|
|
Common
Stock, par value $0.001
|
41,128,359
|
FORM
10-Q
For
the Three Months Ended March 31, 2008
|
PART
I: Financial Information
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3
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3
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4
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5
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6
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8
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11
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11
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PART
II: Other Information
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11
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11
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20
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21
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PART
I: FINANCIAL INFORMATION
SCOLR
Pharma, Inc.
|
|
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March 31,
2008
(Unaudited)
|
|
|
December 31,
2007
|
|
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ASSETS
|
|
|
|
|
|
|
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Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
9,459,276 |
|
|
$ |
11,825,371 |
|
|
Accounts
receivable
|
|
|
264,038 |
|
|
|
225,900 |
|
|
Interest
and other receivables
|
|
|
185 |
|
|
|
16 |
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Prepaid
expenses
|
|
|
382,008 |
|
|
|
423,213 |
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Total
current assets
|
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10,105,507 |
|
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|
12,474,500 |
|
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|
|
|
|
|
|
|
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Property
and Equipment — net of accumulated depreciation of $1,048,943 and
$964,738, respectively
|
|
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664,726 |
|
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748,931 |
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Intangible
assets — net of accumulated amortization of $404,668 and $385,452,
respectively
|
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507,051 |
|
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|
464,023 |
|
|
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$ |
11,277,284 |
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$ |
13,687,454 |
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
Liabilities
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Accounts
payable
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$ |
214,300 |
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$ |
757,420 |
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Accrued
liabilities
|
|
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348,437 |
|
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|
586,849 |
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Current
portion of term loan
|
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81,930 |
|
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|
80,047 |
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Total
current liabilities
|
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644,667 |
|
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1,424,316 |
|
|
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|
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|
|
|
|
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Long-term
portion of term loan
|
|
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89,917 |
|
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111,119 |
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Total
liabilities
|
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734,584 |
|
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1,535,435 |
|
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Commitments
and Contingencies (Note 8)
|
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Stockholders’
Equity
|
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Preferred
stock, authorized 5,000,000 shares, $.01 par value, none issued or
outstanding
|
|
|
— |
|
|
|
— |
|
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Common
stock, authorized 100,000,000 shares, $.001 par value 41,128,359 and
40,991,385 issued and outstanding as of March 31, 2008 and
December 31, 2007, respectively
|
|
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41,128 |
|
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40,991 |
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Additional
paid-in capital
|
|
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70,327,838 |
|
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69,945,666 |
|
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Accumulated
deficit
|
|
|
(59,826,266 |
) |
|
|
(57,834,638 |
) |
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Total
stockholders’ equity
|
|
|
10,542,700 |
|
|
|
12,152,019 |
|
|
|
|
$ |
11,277,284 |
|
|
$ |
13,687,454 |
|
The
accompanying notes are an integral part of these financial
statements.
SCOLR
Pharma, Inc.
(Unaudited)
|
|
|
Three
months ended
March 31,
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2008
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2007
|
|
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Revenues
|
|
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|
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Licensing
fees
|
|
$ |
— |
|
|
$ |
173,077 |
|
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Royalty
|
|
|
265,555 |
|
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|
325,620 |
|
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Research
and development
|
|
|
— |
|
|
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621,222 |
|
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Total
revenues
|
|
|
265,555 |
|
|
|
1,119,919 |
|
|
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Operating
expenses
|
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Marketing
and selling
|
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237,693 |
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249,882 |
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Research
and development
|
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883,212 |
|
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1,795,874 |
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General
and administrative
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1,232,284 |
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1,176,498 |
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Total
operating expenses
|
|
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2,353,189 |
|
|
|
3,222,254 |
|
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Loss
from operations
|
|
|
(2,087,634 |
) |
|
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(2,102,335 |
) |
|
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|
|
|
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|
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Other
income (expense)
|
|
|
|
|
|
|
|
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Interest
income
|
|
|
100,319 |
|
|
|
204,976 |
|
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Interest
expense
|
|
|
(4,313 |
) |
|
|
(161 |
) |
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Other
|
|
|
— |
|
|
|
2,941 |
|
|
|
|
|
96,006 |
|
|
|
207,756 |
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Net
Loss
|
|
$ |
(1,991,628 |
) |
|
$ |
(1,894,579 |
) |
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Net
loss per share, basic and diluted
|
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
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Shares
used in computing basic and diluted net loss per share
|
|
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41,025,450 |
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|
38,084,501 |
|
The
accompanying notes are an integral part of these financial
statements.
SCOLR
Pharma, Inc.
(Unaudited)
|
|
|
Three
months ended
March 31,
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2008
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2007
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Cash
flows from operating activities:
|
|
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|
|
|
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Net
loss
|
|
$ |
(1,991,628 |
) |
|
$ |
(1,894,579 |
) |
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Reconciliation
of net loss to net cash used in operating activities
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|
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|
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|
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Depreciation
and amortization
|
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|
104,863 |
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|
92,262 |
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Write-off
of intangible assets
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19,043 |
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|
6,571 |
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Loss
on the disposal of equipment
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|
— |
|
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|
5,700 |
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Share-based
compensation for non-employee services
|
|
|
— |
|
|
|
25,742 |
|
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Share-based
compensation for employee services
|
|
|
342,222 |
|
|
|
404,655 |
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Increase
(decrease) in cash resulting from changes in assets and
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
and other receivables
|
|
|
(38,307 |
) |
|
|
414,034 |
|
|
Prepaid
expenses and other current assets
|
|
|
41,205 |
|
|
|
(16,545 |
) |
|
Accounts
payable and accrued expenses
|
|
|
(781,532 |
) |
|
|
426,042 |
|
|
Deferred
revenue
|
|
|
— |
|
|
|
(185,577 |
) |
|
Net
cash used in operating activities
|
|
|
(2,304,134 |
) |
|
|
(721,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment and furniture
|
|
|
— |
|
|
|
(282,496 |
) |
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Patent
and technology rights payments
|
|
|
(82,729 |
) |
|
|
(110,783 |
) |
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Purchase
of short-term investments
|
|
|
— |
|
|
|
(438,111 |
) |
|
Maturities
and sales of short-term investments
|
|
|
— |
|
|
|
985,939 |
|
|
Net
cash (used) provided by investing activities
|
|
|
(82,729 |
) |
|
|
154,549 |
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from term loan
|
|
|
— |
|
|
|
246,500 |
|
|
Payments
on term loan
|
|
|
(19,319 |
) |
|
|
— |
|
|
Proceeds
from exercise of common stock options and warrants
|
|
|
40,087 |
|
|
|
61,969 |
|
|
Net
cash provided by financing activities
|
|
|
20,768 |
|
|
|
308,469 |
|
|
Net
(decrease) in cash
|
|
|
(2,366,095 |
) |
|
|
(258,677 |
) |
|
Cash
at beginning of period
|
|
|
11,825,371 |
|
|
|
15,217,946 |
|
|
Cash
at end of period
|
|
$ |
9,459,276 |
|
|
$ |
14,959,269 |
|
|
Cash
paid during the period for interest
|
|
$ |
3,897 |
|
|
$ |
— |
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on short-term investments
|
|
$ |
— |
|
|
$ |
(56 |
) |
|
Reclassification
of fair value of warrant liability to equity
|
|
$ |
— |
|
|
$ |
1,171,045 |
|
The
accompanying notes are an integral part of these financial
statements.
SCOLR
Pharma, Inc.
Note
1 — Financial Statements
The
unaudited financial statements of SCOLR Pharma, Inc. (the “Company”) have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting and pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the financial information includes all normal and recurring
adjustments that the Company considers necessary for a fair presentation of the
financial position at such dates and the results of operations and cash flows
for the periods then ended. The balance sheet at December 31, 2007, has
been derived from the audited financials statements at that date. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to SEC rules
and regulations on quarterly reporting. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 2008. The accompanying unaudited
financial statements and related notes should be read in conjunction with the
audited financial statements and the Form 10-K for the Company’s fiscal year
ended December 31, 2007.
Use
of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for, but not limited to those
used in revenue recognition, the determination of the allowance for doubtful
accounts, depreciable lives of assets, estimates and assumptions used in the
determination of fair value of stock options and warrants, including share-based
compensation expense, and deferred tax valuation allowances. Future events and
their effects cannot be determined with certainty. Accordingly, the accounting
estimates require the exercise of judgment. The accounting estimates used in the
preparation of the financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company’s operating environment changes. Actual results could differ from those
estimates.
Note
2 — New Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS 159 permits companies to fair value certain financial assets
and liabilities on an instrument-by-instrument basis with changes in fair value
recognized in earnings as they occur. The election to fair value a financial
asset or liability is generally irrevocable. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Adoption of this statement did not have
a material impact on the Company’s financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" ("SFAS
157"). The Statement provides guidance for using fair value to measure assets
and liabilities. The Statement also expands disclosures about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurement on
earnings. This Statement applies under other accounting pronouncements that
require or permit fair value measurements. This Statement does not expand the
use of fair value measurements in any new circumstances. Under this Statement,
fair value refers to the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants in
the market in which the entity transacts. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS 157 did not have a
material impact on the Company’s financial position, results of operation or
cash flows.
Note
3 – Accounts Receivable
At
March 31, 2008, accounts receivable consisted of royalty receivables from
CDT-based product sales.
Note
4 — Liquidity
The
Company incurred a net loss of approximately $2.0 million for the three months
ended March 31, 2008, and used cash from operations of approximately $2.3
million. Cash flows of $82,729 used by investing activities during the three
months ended March 31, 2008, primarily represented patent and trademark
related expenditures. Cash flow provided by
financing
activities of $20,768 for the three months ended March 31, 2008, primarily
reflected net proceeds from the exercise of stock options and warrants during
the quarter.
The
Company had approximately $9.5 million in cash, and cash equivalents at
March 31, 2008. The Company has a history of recurring losses and expects
such net losses to continue as the Company proceeds with clinical trials and
preclinical development for multiple product candidates and applies for
regulatory approvals of product candidates. The financial statements have been
prepared on the basis of a going concern which contemplates realization of
assets and satisfaction of liabilities in the normal course of
business.
The
Company plans to raise additional capital to fund operations, conduct clinical
trials, and continue research and development projects and commercialization of
its product candidates. The Company may raise additional capital through public
or private equity financing, partnerships, debt financing, or other sources. In
November 2005, the Securities and Exchange Commission declared effective the
Company’s registration statement that it filed using a “shelf” registration
process.
In
addition to the registered direct offering completed on December 4, 2007, and
April 21, 2006, for approximately $4.2 million and $11.9 million
respectively, the Company may offer from time-to-time, one or more additional
offerings of common stock and/or warrants to purchase common stock under this
shelf registration up to an aggregate public offering price of $40 million. As
of March 31, 2008, approximately $21.1 million remained available for
issuance under this shelf registration statement which expires in November
2008. Additional funds may not be available on favorable terms or at
all. If adequate funds are not available, the Company may curtail operations
significantly including the delay, modification or cancellation of research and
development projects.
Note
5 — Income Taxes
The
Company continues to maintain a valuation allowance for the full amount of the
net deferred tax asset balance associated with its net operating losses as
sufficient uncertainty exists regarding its ability to realize such tax assets
in the future. The Company expects the amount of the net deferred tax asset
balance and full valuation allowance to increase in future periods as it incurs
future net operating losses. There were no unrecognized tax benefits as of
December 31, 2007, or March 31, 2008. The Company does not anticipate any
significant changes to its unrecognized tax benefits within the next twelve
months.
Note
6 — Share-Based Compensation
During
the three-month period ended March 31, 2008, the Company granted 86,500 shares
of service-based, restricted stock awards. The fair value of these awards
was $1.29 per share based on the fair market value at the grant date. The
restrictions on the grants lapse at the end of the required three year service
period. Stock compensation expense of $4,818 was included in the Company’s
results for the three months ended March 31, 2008.
Note
7 — Net Loss Per Share Applicable to Common Stockholders
Basic net
loss per share represents loss available to common stockholders divided by the
weighted-average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share include the effect of potential common stock,
except when the effect is anti-dilutive. The weighted average shares for
computing basic earnings (loss) per share were 41,025,450 for the three months
ended March 31, 2008, and 38,084,501 for the three months ended
March 31, 2007.
At
March 31, 2008, and 2007, the weighted average number of diluted shares
does not include potential common shares which are anti-dilutive, nor does it
include restricted stock awards if the measurement has not been met. The
following potential common shares were not included in the calculation of
diluted net loss per share as the effect would have been
anti-dilutive.
|
Common
shares from:
|
|
2008
|
|
|
2007
|
|
|
Assumed
exercise of stock options
|
|
|
3,554,321 |
|
|
|
3,188,665 |
|
|
Assumed
conversion of warrants
|
|
|
3,624,342 |
|
|
|
2,368,792 |
|
|
Assumed
vesting of restricted stock
|
|
|
86,500 |
|
|
|
— |
|
|
Total
|
|
|
7,265,163 |
|
|
|
5,557,457 |
|
Note
8 — Future Commitments
The
Company has certain material agreements with its manufacturing and testing
vendors related to its ongoing clinical trial work associated with its drug
delivery technology. Contract amounts are paid based on materials used and on a
work performed basis. Generally, the Company has the right to terminate these
agreements upon 30 days notice and would be responsible for services and
materials and related costs incurred prior to termination.
Note
9 — Warrants
During
the three months ended March 31, 2008, 50,000 warrants with an exercise
price of $1.00 were exercised. There were no new warrants issued during the
quarter. The Company had the following warrants to purchase common stock
outstanding at March 31, 2008:
|
Issue
Date
|
|
Issued
Warrants
|
|
|
Exercise
Price
|
|
Term
|
|
Outstanding
Warrants
|
|
Expiration
Date
|
|
September 30, 2002
|
|
|
750,000 |
|
|
$ |
0.50 |
|
10 years
|
|
|
750,000 |
|
September 30, 2012
|
|
June 25,
2003
|
|
|
476,191 |
|
|
|
1.16 |
|
5
years
|
|
|
452,943 |
|
June
25, 2008
|
|
February 24, 2004
|
|
|
1,046,773 |
|
|
|
4.75 |
|
5
years
|
|
|
944,849 |
|
February
23, 2009
|
|
February 8, 2005
|
|
|
75,000 |
|
|
|
5.00 |
|
5
years
|
|
|
75,000 |
|
February
7, 2010
|
|
April
21, 2006
|
|
|
11,000 |
|
|
|
7.50 |
|
5
years
|
|
|
11,000 |
|
April
20, 2011
|
|
December
4, 2007
|
|
|
1,390,550 |
|
|
|
2.10 |
|
5
years
|
|
|
1,390,550 |
|
December
3, 2012
|
|
Grand
Total
|
|
|
3,749,514 |
|
|
|
|
|
|
|
|
3,624,342 |
|
|
Each
warrant entitles the holder to purchase one share of common stock at the
exercise price.
Note
10 – Subsequent Event
On April
30, 2008, the Company executed an agreement to terminate the existing lease for
its corporate facility for consideration of $4.1 million. Under the terms of the
agreement, $1.0 million was paid upon execution of the agreement and the
remaining $3.1 million is due at the time the Company vacates the premises. The
Agreement requires the Company to vacate the premises no later than October 31,
2008.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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The
following discussion and analysis should be read in conjunction with the
financial statements, including the notes thereto, appearing in Item 1 of
Part I of this quarterly report and in our 2007 annual report on Form
10-K.
This
report includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
“anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” and similar
expressions identify certain of such forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
plans, intentions or expectations will be achieved. Actual result, performance
or achievements could differ materially from historical results or those
contemplated, expressed or implied by the forward-looking statements contained
in this report. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth in this report in
Item 1A of Part II, and are detailed from time to time in our periodic
reports filed with the SEC. We undertake no obligation to update any
forward-looking statements, whether as a results of new information, future
events or otherwise.
Overview
We are a
specialty pharmaceutical company. Our corporate objective is to combine our
formulation experience and knowledge with our proprietary and patented
Controlled Delivery Technology (CDT®) platform to develop novel pharmaceutical,
over-the-counter (OTC), and nutritional products. Our CDT platform is based on
multiple issued and pending patents and other intellectual property for the
programmed release or enhanced performance of active pharmaceutical ingredients
and nutritional products.
Our
innovative drug delivery technologies enable us to formulate tablets or capsules
that release their active agents predictably and programmably over a specified
timeframe of up to 24 hours. Our platform is designed to reduce the frequency of
drug administration, improve the effectiveness of the drug treatment, ensure
greater patient compliance with a treatment program, reduce side effects, or
increase drug safety. In addition, our technology can be incorporated into oral
formulations
to increase the solubility characteristics of previously non-soluble and
sparingly-soluble drugs without employing costly or complex nano-crystalization,
micro-milling or coated particle technologies.
We have
developed multiple private label extended-release nutritional products
incorporating our CDT platform that are sold by national retailers. In October
2005, we entered into a strategic alliance with a subsidiary of Perrigo Company
for the manufacture, marketing, distribution, sale and use of certain dietary
supplement products in the United States. We receive royalty payments based on a
percentage of Perrigo’s net profits derived from the sales of products covered
by our agreement.
Our
strategy includes a significant commitment to research and development
activities in connection with the growth of our drug delivery platform. Our
results of operations going forward will be dependent on our ability to
commercialize our products and technology and generate royalties, licensing
fees, development fees, milestone and similar payments.
Critical
Accounting Policies and Estimates
Since
December 31, 2007, none of our critical accounting policies, or our
application thereof, as more fully described in our annual report on Form 10-K
for the year ended December 31, 2007, has significantly changed. However,
as the nature and scope of our business operations mature, certain of our
accounting policies and estimates may become more critical. You should
understand that generally accepted accounting principles require management to
make estimates and assumptions that affect the amounts of assets and liabilities
or contingent assets and liabilities at the date of our financial statements, as
well as the amounts of revenues and expenses during the periods covered by our
financial statements. The actual amounts of these items could differ materially
from these estimates.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS 159 permits companies to fair value certain financial assets
and liabilities on an instrument-by-instrument basis with changes in fair value
recognized in earnings as they occur. The election to fair value a financial
asset or liability is generally irrevocable. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Adoption of this statement did not have
a material impact on the Company’s financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" ("SFAS
157"). The Statement provides guidance for using fair value to measure assets
and liabilities. The Statement also expands disclosures about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurement on
earnings. This Statement applies under other accounting pronouncements that
require or permit fair value measurements. This Statement does not expand the
use of fair value measurements in any new circumstances. Under this Statement,
fair value refers to the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants in
the market in which the entity transacts. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS 157 did not have a
material impact on the Company’s financial position, results of operation or
cash flows.
Results
of Operations
Comparison
of the Three Months Ended March 31, 2008 and 2007
Revenues
Total
revenues decreased 76%, or $854,364 to $265,555 for the three months ended March
31, 2008, compared to $1.1 million for the same period in 2007. This decrease is
primarily due to the higher level of research and development fees and licensing
revenues in 2007 relating to a license agreement that was terminated in
2007.
Royalty
income increased 19%, or $43,221 to $265,555 in the three months ended March 31,
2008 compared to the fourth quarter of 2007. This increase reflects the positive
trend in sales of our nutritional products from our alliance with Perrigo.
Royalty income decreased 18%, or $60,065 to $265,555 for the first quarter of
2008, compared to $325,620 for the same period in 2007. Royalty payments from
Perrigo are based on Perrigo’s net profits of CDT-based products which involve
uncertainties and are difficult to predict. We expect these sales to increase
during the remainder of 2008 as Perrigo expands sales at a large national
retailer. Sales from our relationship with Nutraceutix remained substantially
unchanged compared to the prior year. However, we expect these sales to decline
as Nutraceutix sells through its inventory following termination of our license
agreement as of December 31, 2007.
In the
three months ended March 31, 2007, we received approximately $600,000 in
research and development milestone payments, and we also recognized previously
deferred licensing fee income of approximately $173,000 associated with our
agreement with Wyeth. The December 2005 agreement with Wyeth provided for an
upfront fee of $250,000 which
was
recorded as deferred revenue and was being amortized over the development period
until the contract was terminated in March 2007, at which time the remaining
balance was recorded to income.
Operating
Expenses
Marketing
and Selling Expenses
Marketing
and selling expenses decreased 5%, or $12,189 to $237,693 for the three months
ended March 31, 2008, compared to $249,882 for the same period in 2007,
primarily due to a reduction of $7,371 of non-cash, share-based compensation
expense related to stock option grants. Additionally, advertising and tradeshow
expense decreased $6,773 due a reduction in advertising, reduced participation
in tradeshows, and commission expense decreased $4,363 due to lower royalty
income. These expense decreases were offset by an increase in payroll related
expenses due to annual increases.
Research
and Development Expenses
Research
and development expenses decreased 51%, or $912,662 to $883,212 for the three
months ended March 31, 2008, compared to approximately $1.8 million for the
same period in 2007. This decrease of $854,242 was primarily due to our
previously reported decision to defer development activities on certain projects
pending additional funding, as well as the delayed commencement of our third
ibuprofen trial while we waited for guidance from the FDA regarding our special
protocol assessment. In addition, non-cash, share-based compensation expense
related to stock option grants decreased $94,955. These decreases were offset by
increases of $22,995 in outside consulting expense related to regulatory efforts
on our projects, $23,057 of depreciation and amortization expense, and $19,043
related to the write-off of long-term intangible assets. While we expect to
proceed with additional clinical activities for extended-release ibuprofen
during 2008, we expect our research and development expenditures to decline
unless we obtain additional financing.
General
and Administrative Expenses
General
and administrative expenses increased 5%, or $55,786 to $1.2 million for the
three months ended March 31, 2008, compared to $1.2 million for the same
period in 2007, primarily due to increases in payroll related expenses and the
non-cash, share-based compensation expense related to stock option
grants.
Other
Income (Expense), Net
Other
income decreased 54%, or $111,750 to $96,006 for the three months ended
March 31, 2008, compared to $207,756 for the same period in 2007. The
decrease in interest income was a result of lower interest rates and lower cash
balances.
Net
Loss
Net loss
increased 5%, or $97,049, to $2.0 million for the three months ended
March 31, 2008, compared to $1.9 million for the same period in 2007. The
increase was primarily due to reduced research and development contract
revenues.
Liquidity
and Capital Resources
As of
March 31, 2008, we had $9.5 million of working capital compared to $14.7
million as of March 31, 2007. We had approximately $9.5 million in cash and
cash equivalents as of March 31, 2008. On April 30, 2008 we agreed to a buyout
of our corporate facility in exchange for a payment from the landlord of $4.1
million. Under the agreement, we received an upfront payment of $1.0 million and
the remaining $3.1 million is due when we vacate the premises no later than
October 31, 2008. With the additional funding provided from this transaction
after payment of relocation costs, together with reductions in certain operating
costs, we believe that our cash and cash equivalents will be sufficient to fund
our operations at planned levels through the end of 2009.
Cash flows from operating
activities—Net cash used in operating activities for the three months
ended March 31, 2008, was approximately $2.3 million compared to $721,695
for the three months ended March 31, 2007. Expenditures for the three
months ended March 31, 2008, decreased substantially and operating revenues
decreased due to lower royalty income and the lack of research and development
revenue.
Cash flows from investing
activities—Cash flows used by investing activities of $82,729 primarily
represent payments made for patent rights during the three months ended March
31, 2008. Cash flows provided by investing activities of $154,549
during the three months ended March 31, 2007, primarily represented the
application of maturing short-term investments to fund operating activities,
off-set by purchases of equipment.
Cash flows from financing
activities— Cash flows provided by financing activities of $20,768
primarily represent the exercise of stock options and warrants offset by
payments made on our term loan during the three months ended March 31, 2008. In
the three months ended March 31, 2007, cash flows from financing activities
primarily represented the proceeds from a term loan to purchase a piece of
equipment to be used in our research and development activities. We received
cash of $61,969 in the first quarter of 2007 from the exercise of outstanding
stock options and warrants.
We expect
our operating losses and negative cash flow to continue as the Company advances
preclinical research, applies for regulatory approvals and development of its
product candidates. We will need to raise additional capital to fund operations,
continue research and development projects, and commercialize our products. We
may not be able to secure additional financing on favorable terms, or at all. In
November 2005, the Securities and Exchange Commission declared effective our
registration statement that we filed using a “shelf” registration
process.
We may
offer from time-to-time, one or more additional offerings of common stock and/or
warrants to purchase common stock under this shelf registration up to an
aggregate public offering price of $40 million. As of March 31, 2008,
approximately $21.1 million remains available for issuance under this shelf
registration statement which expires in November 2008. Additional
funds may not be available on favorable terms or at all. If adequate funds are
not available, we may curtail operations significantly including the delay,
modification or cancellation of research and development projects. The issuance
of a large number of additional equity securities could cause substantial
dilution to existing stockholders and could cause a decrease in the market price
for shares of our common stock, which could impair our ability to raise capital
in the future through the issuance of equity securities. If we are unable to
obtain necessary additional financing, our ability to run our business will be
adversely affected and we may be required to reduce the scope of our development
activities or discontinue operations.
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Quantitative
and Qualitative Disclosures About Market
Risk
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The
primary objective of our investment activities is to preserve principal while
maximizing the income we receive from our investments without significantly
increasing our risk. We invest excess cash principally in U.S. marketable
securities from a diversified portfolio of institutions with strong credit
ratings and in U.S. government and agency bills and notes, and by policy, limit
the amount of credit exposure at any one institution. Some of the securities we
invest in may have market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. To minimize
this risk, we schedule our investments to have maturities that coincide with our
expected cash flow needs, thus avoiding the need to redeem an investment prior
to its maturity date. Accordingly, we believe we have no material exposure to
interest rate risk arising from our investments.
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this quarterly
report.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
first quarter of fiscal 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II: OTHER INFORMATION
We are
not a party to any material litigation.
This
quarterly report on Form 10-Q contains forward looking statements that involve
risks and uncertainties. Our business, operating results, financial performance,
and share price may be materially adversely affected by a number of factors,
including but not limited to the following risk factors, any one of which could
cause actual results to vary materially from
anticipated results or from those expressed in any forward-looking statements
made by us in this quarterly report on Form 10-Q or in other reports, press
releases or other statements issued from time to time. Additional factors that
may cause such a difference are set forth elsewhere in this quarterly report on
Form 10-Q.
We
have incurred substantial operating losses since we started doing business and
we expect to continue to incur substantial losses in the future, which may
negatively impact our ability to run our business.
We have
incurred net losses since 2000, including net losses of $2.0 million through
March 31, 2008, $10.6 million in 2007, $10.7 million in 2006, and $8.9 million
in 2005. We have accumulated net losses of approximately $59.8 million from our
inception through March 31, 2008, and we expect to continue to incur significant
operating losses in the future.
We plan
to continue the costly process of simultaneously conducting clinical trials and
preclinical research for multiple product candidates. Our product development
program may not lead to commercial products, either because our product
candidates fail to be effective, are not attractive to the market, or because we
lack the necessary financial or other resources or relationships to pursue our
programs through commercialization. Our net losses are likely to increase
significantly as we continue preclinical research and clinical trials, apply for
regulatory approvals, develop our product candidates, and develop the
infrastructure to support commercialization of our potential
products.
We have
funded our operations primarily through the issuance of equity securities and we
may not be able to generate positive cash flow in the future. We expect that we
will need to seek additional funds through the issuance of equity securities or
other sources of financing during 2008. If we are unable to obtain necessary
additional financing, our ability to run our business will be adversely affected
and we may be required to reduce the scope of our research and business activity
or cease our operations.
We
do not have sufficient cash to fund the development of our drug delivery
operations. If we are unable to obtain additional equity or debt financing in
the future, we will be required to delay, reduce or eliminate the pursuit of
licensing, strategic alliances and development of drug delivery
programs.
We
believe that our cash on hand, including our cash equivalents and the proceeds
from the buyout of our corporate facility lease, will be sufficient to fund our
drug delivery business at planned levels through early 2009. We will need to
raise additional capital to fund operations, conduct clinical trials, continue
research and development projects, and commercialize our product candidates. The
timing and amount of our need for additional financing will depend on a number
of factors, including:
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the
structure and timing of collaborations with strategic partners and
licensees;
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our
timetable and costs for the development of marketing operations and other
activities related to the commercialization of our product
candidates;
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the
progress of our research and development programs and expansion of such
programs;
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the
emergence of competing technologies and other adverse market developments;
and,
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the
prosecution, defense and enforcement of potential patent claims and other
intellectual property rights.
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Additional
equity or debt financing may not be available to us on acceptable terms, or at
all. If we raise additional capital by issuing equity securities, substantial
dilution to our existing stockholders may result which could decrease the market
price of our common stock due to the sale of a large number of shares of our
common stock in the market, or the perception that these sales could occur.
These sales, or the perception of possible sales, could also impair our ability
to raise capital in the future. In addition, the terms of any equity financing
may adversely affect the rights of our existing stockholders. If we raise
additional funds through strategic alliance or licensing arrangements, we may be
required to relinquish rights to certain of our technologies or product
candidates, or to grant licenses on terms that are unfavorable to us, which
could substantially reduce the value of our business.
If we are
unable to obtain sufficient additional financing, we would be unable to meet our
obligations and we would be required to delay, reduce or eliminate some or all
of our business operations, including the pursuit of licensing, strategic
alliances and development of drug delivery programs.
Our
limited experience in preparing applications for regulatory approval of our
products, and our lack of experience in obtaining such approval, may increase
the cost of and extend the time required for preparation of necessary
applications.
Each OTC
or pharmaceutical product we develop will require a separate costly and time
consuming regulatory approval before we or our collaborators can manufacture and
sell it in the United States or internationally. The regulatory process to
obtain market approval for a new drug takes many years and requires the
expenditure of substantial resources. We
have had
only limited experience in preparing applications and do not have experience in
obtaining regulatory approvals. As a result, we believe we will rely primarily
on third party contractors to help us prepare applications for regulatory
approval, which means we will have less control over the timing and other
aspects of the regulatory process than if we had our own expertise in this area.
Our limited experience in preparing applications and obtaining regulatory
approval could delay or prevent us from obtaining regulatory approval and could
substantially increase the cost of applying for such
approval.
We
may not obtain regulatory approval for our products, which would materially
impair our ability to generate revenue.
We may
encounter delays or rejections during any stage of the regulatory approval
process based upon the failure of clinical data to demonstrate compliance with,
or upon the failure of the product to meet the FDA’s requirements for safety,
efficacy, quality, and/or bioequivalence; and, those requirements may become
more stringent due to changes in regulatory agency policy or the adoption of new
regulations. For example, after submission of a marketing application, in the
form of an NDA or ANDA, the FDA may deny the application, may require additional
testing or data, and/or may require post marketing testing and surveillance to
monitor the safety or efficacy of a product. In addition, the terms of approval
of any marketing application, including the labeling content, may be more
restrictive than we desire and could affect the marketability of products
incorporating our controlled release technology.
Certain
products incorporating our technology will require the filing of an NDA. A full
NDA must include complete reports of preclinical, clinical, and other studies to
prove adequately that the product is safe and effective, which involves among
other things, full clinical testing, and as a result requires the expenditure of
substantial resources. In certain cases involving controlled release versions of
FDA-approved immediate release products, we may be able to rely on existing
publicly available safety and efficacy data to support an NDA for controlled
release products under Section 505(b)(2) of the FDCA when such data exists
for an approved immediate release or controlled release version of the same
active chemical ingredient. We can provide no assurance, however, that the FDA
will accept a Section 505(b)(2) NDA, or that we will be able to obtain
publicly available data that is useful. The Section 505(b)(2) NDA process
is a highly uncertain avenue to approval because the FDA’s policies on
Section 505(b)(2) have not yet been fully developed. There can be no
assurance that the FDA will approve an application submitted under
Section 505(b)(2) in a timely manner or at all. Our inability to rely on
the 505(b)(2) process would increase the cost and extend the time frame for FDA
approvals.
If
our clinical trials are not successful or take longer to complete than we
expect, we may not be able to develop and commercialize our
products.
In order
to obtain regulatory approvals for the commercial sale of potential products
utilizing our CDT platform, we or our collaborators will be required to complete
clinical trials in humans to demonstrate the safety and efficacy, or in certain
cases, the bioequivalence, of the products. However, we or our collaborators may
not be able to commence or complete these clinical trials in any specified time
period, or at all, either because the appropriate regulatory agency objects or
for other reasons, including:
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unexpected
delays in the initiation of clinical
sites;
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slower
than projected enrollment of eligible
patients;
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competition
with other ongoing clinical trials for clinical investigators or eligible
patients;
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scheduling
conflicts with participating
clinicians;
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limits
on manufacturing capacity, including delays of clinical supplies;
and,
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the
failure of our products to meet required
standards.
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We also
rely on academic institutions and clinical research organizations to conduct,
supervise or monitor some or all aspects of clinical trials involving our
product candidates. We have less control over the timing and other aspects of
these clinical trials than if we conducted the monitoring and supervision on our
own. Third parties may not perform their responsibilities for our clinical
trials on our anticipated scheduled or consistent with a clinical trial
protocol.
Even if
we complete a clinical trial of one of our potential products, the clinical
trial may not indicate that our product is safe or effective to the extent
required by the FDA or other regulatory agency to approve the product. If
clinical trials do not show
any potential product to be safe, efficacious, or bioequivalent, or if we are
required to conduct additional clinical trials or other testing of our products
in development beyond those that we currently contemplate, we may be delayed in
obtaining, or may not obtain, marketing approval for our products. Our product
development costs may also increase if we
experience
delays in testing or approvals, which could allow our competitors to bring
products to market before we do and would impair our ability to commercialize
our products.
We
face intense competition in the drug delivery business, and our failure to
compete effectively would decrease our ability to generate meaningful revenues
from our products.
The drug
delivery business is highly competitive and is affected by new technologies,
governmental regulations, health care legislation, availability of financing,
litigation and other factors. Many of our competitors have longer operating
histories and greater financial, research and development, marketing and other
resources than we do. We are subject to competition from numerous other entities
that currently operate or intend to operate in the industry. These include
companies that are engaged in the development of controlled-release drug
delivery technologies and products as well as other manufacturers that may
decide to undertake in-house development of these products. Some of our direct
competitors in the drug delivery industry include Alza Corporation, Biovail,
Inc., Penwest, Skyepharma PLC, Elan, Flamel, Impax Laboratories, Inc.,
Labopharm, and KV Pharmaceuticals, Inc.
Many of
our competitors have more extensive experience than we have in conducting
preclinical studies and clinical trials, obtaining regulatory approvals, and
manufacturing and marketing pharmaceutical products. Many competitors also have
competing products that have already received regulatory approval or are in
late-stage development, and may have collaborative arrangements in our target
markets with leading companies and research institutions.
Our
competitors may develop or commercialize more effective, safer or more
affordable products, or obtain more effective patent protection, than we are
able to develop, commercialize or obtain. As a result, our competitors may
commercialize products more rapidly or effectively than we do, which would
adversely affect our competitive position, the likelihood that our products will
achieve market acceptance, and our ability to generate meaningful revenues from
our products.
If
we fail to comply with extensive government regulations covering the
manufacture, distribution and labeling of our products, we may have to withdraw
our products from the market, close our facilities or cease our
operations.
Our
products, potential products, and manufacturing and research activities are
subject to varying degrees of regulation by a number of government authorities
in the United States (including the Drug Enforcement Agency, FDA, Federal Trade
Commission, and Environmental Protection Agency) and in other countries. For
example, our activities, including preclinical studies, clinical trials,
manufacturing, distribution, and labeling are subject to extensive regulation by
the FDA and comparable authorities outside the United States. Also, our
statements and our customers’ statements regarding dietary supplement products
are subject to regulation by the FTC. The FTC enforces laws prohibiting unfair
or deceptive trade practices, including false or misleading advertising. In
recent years, the FTC has brought a number of actions challenging claims by
nutraceutical companies.
Each OTC
or pharmaceutical product we develop will require a separate costly and time
consuming regulatory approval before we or our collaborators can manufacture and
sell it in the United States or internationally. Even if regulatory approval is
received, there may be limits imposed by regulators on a product’s use or it may
face subsequent regulatory difficulties. Approved products are subject to
continuous review and the facilities that manufacture them are subject to
periodic inspections. Furthermore, regulatory agencies may require additional
and expensive post-approval studies. If previously unknown problems with a
product candidate surface or the manufacturing or laboratory facility is deemed
non-compliant with applicable regulatory requirements, an agency may impose
restrictions on that product or on us, including requiring us to withdraw the
product from the market, close the facility, and/or pay substantial
fines.
We also
may incur significant costs in complying with environmental laws and
regulations. We are subject to federal, state, local and other laws and
regulations governing the use, manufacture, storage, handling, and disposal of
materials and certain waste products. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. If an accident
occurs, we could be held liable for any damages that result and these damages
could exceed our resources.
Our
ability to commercialize products containing pseudoephedrine may be adversely
impacted by retail sales controls, legislation, and other measures designed to
counter diversion and misuse of pseudoephedrine in the production of
methamphetamine, an illegal drug.
We are
engaged in the development of an extended-release formulation of
pseudoephedrine. On March 10, 2006, Congress enacted the Patriot Act, which
included the Combat Methamphetamine Epidemic Act of 2005. Among its various
provisions,
this national legislation placed restrictions on the purchase and sale of all
products containing pseudoephedrine and imposed quotas on manufacturers relating
to the sale of products containing pseudoephedrine. Many states have also
imposed statutory and regulatory restrictions on the manufacture, distribution
and sale of pseudoephedrine products. We
believe
that such quotas and restrictions resulted in delays in obtaining materials
necessary for the development of our pseudoephedrine product. While we have
obtained sufficient supplies to support the planned submission of our ANDA with
the FDA in 2008, our ability to commercialize products containing
pseudoephedrine and the market for such products may be adversely impacted by
existing or new retail sales controls, legislation and market changes relating
to diversion and misuse of pseudoephedrine in the production of
methamphetamine.
If
we cannot establish collaborative arrangements with leading individuals,
companies and research institutions, we may have to discontinue the development
and commercialization of our products.
We have
limited experience in conducting full scale clinical trials, preparing and
submitting regulatory applications, or manufacturing and selling pharmaceutical
products. In addition, we do not have sufficient resources to fund the
development, regulatory approval, and commercialization of our products. We
expect to seek collaborative arrangements and alliances with corporate and
academic partners, licensors and licensees to assist with funding research and
development, to conduct clinical testing, and to provide manufacturing,
marketing, and commercialization of our product candidates. We may rely on
collaborative arrangements to obtain the regulatory approvals for our
products.
For our
collaboration efforts to be successful, we must identify partners whose
competencies complement ours. We must also enter into collaboration agreements
with them on terms that are favorable to us and integrate and coordinate their
resources and capabilities with our own. We may be unsuccessful in entering into
collaboration agreements with acceptable partners or negotiating favorable terms
in these agreements.
If we
cannot establish collaborative relationships, we will be required to find
alternative sources of funding and to develop our own capabilities to
manufacture, market, and sell our products. If we were not successful in finding
funding and developing these capabilities, we would have to terminate the
development and commercialization of our products.
If
our existing or new collaborations are not successful, we will have to establish
our own commercialization capabilities, which would be expensive and time
consuming and could delay the commercialization of the affected
product.
Some of
our products are being developed and commercialized in collaboration with
corporate partners. Under these collaborations, we may be dependent on our
collaborators to fund some portion of development, to conduct clinical trials,
to obtain regulatory approvals for, and manufacture, market and sell products
using our CDT platform.
We have
very limited experience in manufacturing, marketing and selling pharmaceutical
products. There can be no assurance that we will be successful in developing
these capabilities.
Our
existing collaborations may be subject to termination on short notice. If any of
our collaborations are terminated, we may be required to devote additional
resources to the product covered by the collaboration, seek a new collaborator
on short notice or abandon the product. The terms of any additional
collaborations or other arrangements that we establish may not be favorable to
us.
Our
collaborations or other arrangements may not be successful because of factors
such as:
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our
collaborators may have insufficient economic motivation to continue their
funding, research, development, and commercialization
activities;
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our
collaborators may discontinue funding any particular program, which could
delay or halt the development or commercialization of any product
candidates arising out of the
program;
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our
collaborators may choose to pursue alternative technologies or products,
either on their own or in collaboration with others, including our
competitors;
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our
collaborators may lack sufficient financial, technical or other
capabilities to develop these product
candidates;
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we
may underestimate the length of time that it takes for our collaborators
to achieve various clinical development and regulatory approval
milestones; or,
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our
collaborators may be unable to successfully address any regulatory or
technical challenges they may
encounter.
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We
have no manufacturing capabilities and will be dependent on third party
manufacturers.
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We do not
have commercial scale facilities to manufacture any products we may develop in
accordance with requirements prescribed by the FDA. Consequently, we have to
rely on third party manufacturers of the products we are evaluating in clinical
trials. If any of our product candidates receive FDA or other regulatory
authority approval, we will rely on third-party contractors to perform the
manufacturing steps for our products on a commercial scale. We may be unable to
identify manufacturers on acceptable terms or at all because the number of
potential manufacturers is limited and the FDA and other regulatory authorities,
as applicable, must approve any replacement manufacturer, including us, and we
or any such third party manufacturer may be unable to formulate and manufacture
our drug products in the volume and of the quality required to meet our clinical
and commercial needs. We will be dependent upon these third parties to supply us
in a timely manner with products manufactured in compliance with current good
manufacturing practices (cGMPs) or similar manufacturing standards imposed by
foreign regulatory authorities where our products will be tested and/or
marketed. While the FDA and other regulatory authorities maintain oversight for
cGMP compliance of drug manufacturers, contract manufacturers may at times
violate cGMPs. The FDA and other regulatory authorities may take action against
a contract manufacturer who violates cGMPs. We currently rely on Catalent Pharma
Solutions, LLC (formerly Cardinal Health PTS, LLC) for the production of a
number of our product candidates. If Catalent or other third party manufacturers
are unable to provide adequate products and services to us, we could suffer a
delay in our clinical trials and the development of or the submission of
products for regulatory approval. In addition, we would not have the ability to
commercialize products as planned and deliver products on a timely basis, and we
may have higher product costs or we may be required to cease distribution or
recall some or all batches of our products.
If
we fail to protect and maintain the proprietary nature of our intellectual
property, our business, financial condition and ability to compete would
suffer.
We
principally rely on patent, trademark, copyright, trade secret and contract law
to establish and protect our proprietary rights. We own or have exclusive rights
to several U.S. patents and patent applications and we expect to apply for
additional U.S. and foreign patents in the future. The patent positions of
pharmaceutical, nutraceutical, and bio-pharmaceutical firms, including ours, are
uncertain and involve complex legal and factual questions for which important
legal issues are largely unresolved. The coverage claimed in our patent
applications can be significantly reduced before a patent is issued, and the
claims allowed on any patents or trademarks we hold may not be broad enough to
protect our technology. In addition, our patents or trademarks may be
challenged, invalidated or circumvented, or the patents of others may impede our
collaborators’ ability to commercialize the technology covered by our owned or
licensed patents. Moreover, any current or future issued or licensed patents, or
trademarks, or existing or future trade secrets or know-how, may not afford
sufficient protection against competitors with similar technologies or
processes, and the possibility exists that certain of our already issued patents
or trademarks may infringe upon third party patents or trademarks or be designed
around by others. In addition, there is a risk that others may independently
develop proprietary technologies and processes that are the same as, or
substantially equivalent or superior to ours, or become available in the market
at a lower price. There is a risk that we have infringed or in the future will
infringe patents or trademarks owned by others, that we will need to acquire
licenses under patents or trademarks belonging to others for technology
potentially useful or necessary to us, and that licenses will not be available
to us on acceptable terms, if at all. We cannot assure you that:
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our
patents or any future patents will prevent other companies from developing
similar or functionally equivalent products or from successfully
challenging the validity of our
patents;
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any
of our future processes or products will be
patentable;
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any
pending or additional patents will be issued in any or all appropriate
jurisdictions;
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our
processes or products will not infringe upon the patents of third parties;
or,
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we
will have the resources to defend against charges of patent infringement
by third parties or to protect our own patent rights against infringement
by third parties.
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We may
have to litigate to enforce our patents or trademarks or to determine the scope
and validity of other parties’ proprietary rights. Litigation could be very
costly and divert management’s attention. An adverse outcome in any litigation
could adversely affect our financial results and stock price.
We also
rely on trade secrets and proprietary know-how, which we seek to protect by
confidentiality agreements with our employees, consultants, advisors, and
collaborators. There is a risk that these agreements may be breached, and that
the remedies available to us may not be adequate. In addition, our trade secrets
and proprietary know-how may otherwise become known to or be independently
discovered by others.
Significant
expenses in applying for patent protection and prosecuting our patent
applications will increase our need for capital and could harm our business and
financial condition.
We intend
to continue our substantial efforts in applying for patent protection and
prosecuting pending and future patent applications both in the United States and
internationally. These efforts have historically required the expenditure of
considerable time and money, and we expect that they will continue to require
significant expenditures. If future changes in United States or foreign patent
laws complicate or hinder our efforts to obtain patent protection, the costs
associated with patent prosecution may increase significantly.
If
we fail to attract and retain key executive and technical personnel we could
experience a negative impact on our ability to develop and commercialize our
products and our business will suffer.
The
success of our operations will depend to a great extent on the collective
experience, abilities and continued service of relatively few individuals. We
are dependent upon the continued availability of the services of our employees,
many of whom are individually key to our future success. For example, if we lose
the services of our President and CEO, Daniel O. Wilds, or our Vice President
and Chief Technical Officer, Stephen J. Turner, we could experience a negative
impact on our ability to develop and commercialize our CDT technology, our
financial results, and our stock price. We also rely on members of our
scientific staff for product research and development. The loss of the services
of key members of this staff could substantially impair our ongoing research and
development and our ability to obtain additional financing. We do not carry key
man life insurance on any of our personnel.
In
addition, we are dependent upon the continued availability of Dr. Reza
Fassihi, a member of our board of directors with whom we have a consulting
agreement. The agreement may be terminated by either party on 30 days’ notice.
If our relationship with Dr. Fassihi is terminated, we could experience a
negative impact on our ability to develop and commercialize our CDT
technology.
Our
success also significantly depends upon our ability to attract and retain highly
qualified personnel. We face intense competition for personnel in the drug
delivery industry. To compete for personnel, we may need to pay higher salaries
and provide other incentives than those paid and provided by more established
entities. Our limited financial resources may hinder our ability to provide such
salaries and incentives. Our personnel may voluntarily terminate their
relationship with us at any time, and the process of locating additional
personnel with the combination of skills and attributes required to carry out
our strategy could be lengthy, costly, and disruptive. If we lose the services
of key personnel, or fail to replace the services of key personnel who depart,
we could experience a severe negative impact on our financial results and stock
price.
Future
laws or regulations may hinder or prohibit the production or sale of our
products.
We may be
subject to additional laws or regulations in the future, such as those
administered by the FDA or other federal, state or foreign regulatory
authorities. Laws or regulations that we consider favorable, such as the Dietary
Supplement Health and Education Act, DSHEA, may be repealed. Current laws or
regulations may be interpreted more stringently. We are unable to predict the
nature of such future laws, regulations or interpretations, nor can we predict
what effect they may have on our business. Possible effects or requirements
could include the following:
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the
reformulation of certain products to meet new
standards;
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the
recall or discontinuance of certain products unable to be
reformulated;
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imposition
of additional record keeping
requirements;
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expanded
documentation of the properties of certain products;
or,
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expanded
or different labeling, or scientific
substantiation.
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Any such
requirement could have a material adverse effect on our results of operations
and financial condition.
If
we fail to adequately manage the size of our business, it could have a severe
negative impact on our financial results or stock price.
Our
management believes that, to be successful, we must appropriately manage the
size of our business. We have added numerous personnel and have added several
new research and development projects. We anticipate that we will experience
additional growth in connection with the development, manufacture, and
commercialization of our products. If we experience rapid growth of our
operations, we will be required to implement operational, financial and
information procedures and controls that are efficient and appropriate for the
size and scope of our operations. The management skills and
systems
currently in place may not be adequate and we may not be able to manage any
significant growth effectively. Our failure to effectively manage our existing
operations or our growth could have a material adverse effect on our financial
performance or stock price.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed.
A
significant number of shares of our common stock are or will be eligible for
sale in the open market, which could drive down the market price for our common
stock and make it difficult for us to raise capital.
As of May
1, 2008, 41,128,359 shares of our common stock were outstanding, and there were
7,265,163 shares of our common stock issuable upon outstanding options,
restricted stock, and warrants. In addition, approximately $21.1 million in
shares of our common stock will remain available for issuance under a shelf
registration statement declared effective by the SEC in November 2005. Our
stockholders may experience substantial dilution if we raise additional funds
through the sale of equity securities, and sales of a large number of shares by
us or by existing stockholders could materially decrease the market price of our
common stock and make it more difficult for us to raise additional capital
through the sale of equity securities. The risk of dilution and the resulting
downward pressure on our stock price could also encourage stockholders to engage
in short sales of our common stock. By increasing the number of shares offered
for sale, material amounts of short selling could further contribute to
progressive price declines in our common stock.
Our
stock price is subject to significant volatility.
The
market price of our common stock could fluctuate significantly. Those
fluctuations could be based on various factors in addition to those otherwise
described in this report, including:
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general
conditions in the healthcare
industry;
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general
conditions in the financial
markets;
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our
failure or the failure of our collaborative partners, for any reason, to
obtain FDA approval for any of our products or products we
license;
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for
those products that are ultimately approved by the FDA, the failure of the
FDA to approve such products in a timely manner consistent with the FDA’s
historical approval process;
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our
failure, or the failure of our third-party partners, to successfully
commercialize products approved by the
FDA;
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our
failure to generate product revenues anticipated by
investors;
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problems
with our sole contract
manufacturer;
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the
exercise of our right to redeem certain outstanding warrants to purchase
our common stock;
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the
sale of additional debt and/or equity securities by
us;
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announcements
by us or others of the results of preclinical testing and clinical trials
and regulatory actions, technological innovations or new commercial
therapeutic products; and,
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developments
or disputes concerning patent or any other proprietary
rights.
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Certain
provisions in our charter documents and otherwise may discourage third parties
from attempting to acquire control of our company, which may have an adverse
effect on the price of our common stock.
Our board
of directors has the authority, without obtaining stockholder approval, to issue
up to 5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
our stockholders. Our certificate of incorporation and bylaws also provide for
special advance notice provisions for proposed business at annual meetings. In
addition, Delaware and Washington law contain certain provisions that may have
the effect of delaying, deferring or preventing a hostile takeover of our
company. Further, we have a stockholder rights plan that is designed to cause
substantial dilution to a person or group that attempts to acquire our company
without approval of our board of directors, and thereby make a hostile takeover
attempt prohibitively expensive for a potential acquiror. These
provisions,
among others, may have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control of
our company, even if stockholders may consider such a change in control to be in
their best interests, which may cause the price of our common stock to
suffer.
The
following exhibits are filed herewith:
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Filed
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Incorporated
by Reference
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Exhibit No.
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Description
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Herewith
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Form
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Exhibit No.
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File No.
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Filing Date
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31.1
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of. 2002
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X
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31.2
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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X
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32.1
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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X
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32.2
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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X
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In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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SCOLR
Pharma, Inc.
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Date:
May 2, 2008
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By:
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/s/
Daniel O. Wilds
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Daniel
O. Wilds
Chief
Executive Officer and President
(Principal
Executive Officer)
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Date:
May 2, 2008
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By:
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/s/
Richard M. Levy
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Richard
M. Levy
Chief Financial Officer and Vice President - Finance
(Principal
Financial Officer)
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EXHIBIT
INDEX
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Filed
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Incorporated
by Reference
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Exhibit No.
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Description
|
Herewith
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Form
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Exhibit No.
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File No.
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Filing Date
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31.1
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of. 2002
|
X
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31.2
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
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32.1
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
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32.2
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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X
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