form_10-q.htm
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 September 30, 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.)
|
19204
North Creek Parkway, Suite 100, Bothell, Washington 98011
(Address
of principal executive offices)
425-368-1050
(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, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
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 October 31, 2008
|
Common
Stock, par value $0.001
|
|
SCOLR
Pharma, Inc.
FORM
10-Q
For
the Quarterly Period Ended September 30, 2008
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3
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3
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3
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4
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5
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6
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9
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13
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14
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14
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22
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23
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SCOLR
Pharma, Inc.
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|
|
|
|
|
|
|
|
|
|
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|
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$ |
8,908,986 |
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|
$ |
11,825,371 |
|
|
|
|
244,214 |
|
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225,900 |
|
|
|
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— |
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16 |
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323,407 |
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423,213 |
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9,476,607 |
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12,474,500 |
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502,510 |
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748,931 |
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522,403 |
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464,023 |
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564,000 |
|
|
|
— |
|
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$ |
11,065,520 |
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$ |
13,687,454 |
|
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$ |
324,890 |
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$ |
757,420 |
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738,330 |
|
|
|
586,849 |
|
|
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85,831 |
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80,047 |
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1,149,051 |
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1,424,316 |
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46,004 |
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111,119 |
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1,195,055 |
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1,535,435 |
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— |
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— |
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Common stock, authorized 100,000,000 shares, $.001 par value
41,130,270 and 40,991,385 issued and outstanding as of September 30, 2008,
and December 31, 2007, respectively
|
|
|
41,130 |
|
|
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40,991 |
|
|
|
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70,879,940 |
|
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69,945,666 |
|
|
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(61,050,605 |
) |
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|
(57,834,638 |
) |
|
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9,870,465 |
|
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|
12,152,019 |
|
|
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$ |
11,065,520 |
|
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$ |
13,687,454 |
|
|
|
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
173,077 |
|
|
|
|
236,308 |
|
|
|
207,474 |
|
|
|
781,435 |
|
|
|
955,149 |
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|
|
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— |
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— |
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— |
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621,222 |
|
|
|
|
236,308 |
|
|
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207,474 |
|
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781,435 |
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1,749,448 |
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|
|
|
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|
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|
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116,840 |
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198,520 |
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545,579 |
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673,776 |
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2,307,103 |
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2,236,852 |
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4,387,636 |
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5,410,226 |
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947,684 |
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1,017,177 |
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3,242,614 |
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3,305,918 |
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3,371,627 |
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3,452,549 |
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8,175,829 |
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9,389,920 |
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(4,100,000 |
) |
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— |
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(4,100,000 |
) |
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— |
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116,867 |
|
|
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— |
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116,867 |
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— |
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(3,983,133 |
) |
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— |
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|
(3,983,133 |
) |
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|
— |
|
|
|
|
(611,506 |
) |
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|
3,452,549 |
|
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4,192,696 |
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|
9,389,920 |
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847,814 |
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|
(3,245,075 |
) |
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(3,411,261 |
) |
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(7,640,472 |
) |
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|
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|
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|
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|
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45,858 |
|
|
|
160,080 |
|
|
|
205,530 |
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|
550,402 |
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(3,393 |
) |
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(5,191 |
) |
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(11,565 |
) |
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(10,967 |
) |
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91 |
|
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— |
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|
1,329 |
|
|
|
2,941 |
|
|
|
|
42,556 |
|
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|
154,889 |
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|
195,294 |
|
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|
542,376 |
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$ |
890,370 |
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|
$ |
(3,090,186 |
) |
|
$ |
(3,215,967 |
) |
|
$ |
(7,098,096 |
) |
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$ |
.02 |
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$ |
(0.08 |
) |
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$ |
(0.08 |
) |
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$ |
(0.19 |
) |
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41,043,770 |
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38,153,316 |
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41,037,128 |
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38,123,071 |
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41,561,623 |
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38,153,316 |
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41,037,128 |
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38,123,071 |
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|
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$ |
(3,215,967 |
) |
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$ |
(7,098,096 |
) |
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|
|
|
|
|
|
|
|
312,064 |
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|
297,093 |
|
|
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|
38,424 |
|
|
|
21,278 |
|
|
|
|
— |
|
|
|
5,700 |
|
|
|
|
— |
|
|
|
126,060 |
|
|
|
|
894,327 |
|
|
|
1,163,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,298 |
) |
|
|
696,909 |
|
|
|
|
99,806 |
|
|
|
(67,072 |
) |
|
|
|
(281,049 |
) |
|
|
343,028 |
|
|
|
|
— |
|
|
|
(185,577 |
) |
|
|
|
(2,170,693 |
) |
|
|
(4,697,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(2,615 |
) |
|
|
(346,295 |
) |
|
|
|
(159,832 |
) |
|
|
(157,480 |
) |
|
|
|
— |
|
|
|
(1,323,761 |
) |
|
|
|
— |
|
|
|
2,317,249 |
|
|
|
|
(564,000 |
) |
|
|
— |
|
|
|
|
(726,447 |
) |
|
|
489,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
246,500 |
|
|
|
|
(59,331 |
) |
|
|
(36,459 |
) |
|
|
|
40,086 |
|
|
|
132,385 |
|
|
|
|
(19,245 |
) |
|
|
342,426 |
|
|
|
|
(2,916,385 |
) |
|
|
(3,865,052 |
) |
|
|
|
11,825,371 |
|
|
|
15,217,946 |
|
|
|
$ |
8,908,986 |
|
|
$ |
11,352,894 |
|
|
|
$ |
10,502 |
|
|
$ |
9,829 |
|
Note
1 — Financial Statements
The
unaudited financial statements of SCOLR Pharma, Inc. 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 June 2008,
the Financial Accounting Standards Board ratified a consensus opinion reached by
the Emerging Issues Task Force (EITF) on EITF Issue 07-5, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” to
provide guidance for determining whether an equity-linked financial instrument
or embedded feature is considered indexed to an entity’s own stock. The
consensus establishes a two-step approach as a framework for determining whether
an instrument or embedded feature is indexed to an entity’s own stock. The
approach includes evaluating (1) the instrument’s contingent exercise
provisions, if any, and (2) the instrument’s settlement provisions.
Entities that
issue financial instruments such as warrants or options on their own shares,
convertible debt, convertible preferred stock, forward contracts on their own
shares, or market-based employee stock option valuation instruments will be
affected by EITF Issue 07-5.
The Company
intends to adopt EITF Issue 07-5 effective January 1, 2009, and apply its
provisions to its outstanding instruments as of that date, as well as to
instruments issued subsequent to that date. The Company does not believe there
will be a material impact to its financial statements upon adoption on January
1, 2009.
Note
3 – Accounts Receivable
At
September 30, 2008, accounts receivable consisted of royalty receivables from
CDT-based product sales.
Note
4 — Lease Arrangements
In May 2008,
the Company entered into a Lease Termination and Surrender Agreement, under
which the Company agreed to terminate the lease for its corporate facility for
consideration of $4.1 million. Under the terms of the agreement, the Company
received $1.0 million upon execution of the agreement and the remaining $3.1
million in September 2008, at the time the Company vacated the premises. The
$4.1 million cash settlement and $116,867 in costs that were incurred related to
the lease and relocation to the new space were recognized in operating expense
in September 2008.
In June
2008, the Company entered into an agreement to lease 20,468 rentable square feet
at 19204 North Creek Parkway, Bothell, Washington for the Company’s office
and research and development facilities. The lease commenced on September 19,
2008, for a term of 88 months ending on January 31, 2016. Under the terms of the
lease, the Company
received four months of free rent. The Company has the option
to extend the lease term for one five-year period at the fair market rate at the
time of extension. The average rent under the lease term is approximately
$400,000 per year, subject to annual increases of approximately 3%. The related
rent expense is recognized on a straight-line basis over the term of the lease.
In connection with the lease agreement, the Company provided a $564,000
irrevocable, unconditional standby letter of credit which is secured by a money
market account classified in the balance sheet as a non-current asset in restricted cash. The stated amount of
the standby letter of credit and the related security will be reduced
further over the term of the lease.
Note
5 — Liquidity
The Company
incurred a net loss of approximately $3.2 million for the nine months ended
September 30, 2008, and used cash from operations of approximately $2.2 million.
These amounts include the net lease settlement gain of $4.0 million. Cash flows
of $726,447 used by investing activities during the nine months ended September
30, 2008, represents $564,000 in restricted cash plus patent and trademark
related expenditures. The restricted cash is collateral for the letter of credit
issued to secure the Company’s obligations under the lease of the new facility.
Cash flow used by financing activities of $19,245 for the nine months ended
September 30, 2008, reflects net proceeds from the exercise of stock options and
warrants during the quarter, offset by payments on the term loan.
The Company
had approximately $8.9 million in cash and cash equivalents, and $564,000 in
restricted cash as of September 30, 2008. The Company is investing its cash and
cash equivalents in government-backed securities. These securities are
considered level 1 securities in accordance with FASB 157 “Fair Value
Measurements” as the securities have quoted prices in active markets. 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. If the
Company is unable to obtain necessary additional financing, its ability to run
its business will be adversely affected and it may be required to reduce the
scope of its development activities or discontinue operations.
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 offerings 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 September 30, 2008, approximately $21.1 million remains available for
issuance under this shelf registration statement which expires on December 1,
2008. We may not be able to secure additional financing on favorable terms, or
at all. 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 operations.
Note
6 — Income Taxes
The Company
has incurred net operating losses. 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 September 30, 2008, or December 31, 2007. The
Company does not anticipate any significant changes to its unrecognized tax
benefits within the next twelve months.
Note
7 — Share-Based Compensation
During the
nine month periods ended September 30, 2008, and 2007, the Company granted
996,500 and 370,833 stock options and restricted stock with a fair value of
$757,416 and $586,602, respectively. No stock options or restricted stock were
issued during the three month period ended September 30, 2008.
Share based
compensation expense related to all outstanding stock options and restricted
stock for the three and nine month periods were recorded as
follows:
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
Functions
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Marketing
and selling
|
|
$ |
10,139 |
|
|
$ |
34,107 |
|
|
$ |
53,219 |
|
|
$ |
98,979 |
|
Research
and development
|
|
|
95,731 |
|
|
|
142,745 |
|
|
|
267,451 |
|
|
|
487,337 |
|
General
and administrative
|
|
|
172,580 |
|
|
|
244,393 |
|
|
|
573,657 |
|
|
|
703,230 |
|
Total
|
|
$ |
278,450 |
|
|
$ |
421,245 |
|
|
$ |
894,327 |
|
|
$ |
1,289,546 |
|
Note
8 — Net Income (Loss) Per Share Applicable to Common Stockholders
Basic net
income (loss) per common share is calculated based on the weighted-average
number of shares of our common stock outstanding during the period. Diluted net
income (loss) per common share is calculated based on the weighted-average
number of shares of our common stock outstanding and other dilutive securities
outstanding during the period. The potential dilutive shares of our common stock
resulting from the assumed exercise of outstanding stock options, and the
assumed exercise of the warrants are determined under the treasury stock method.
Diluted net income (loss) per share includes the effect of potential issuances
of common stock, except when the effect is anti-dilutive. Shares used in the
computation of net income (loss) per common share are as follows:
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
number shares – basic
|
|
|
41,043,770 |
|
|
|
38,153,316 |
|
|
|
41,037,128 |
|
|
|
38,123,071 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
83,431 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Warrants
|
|
|
347,922 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted
stock
|
|
|
86,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted-average
shares - diluted
|
|
|
41,561,623 |
|
|
|
38,153,316 |
|
|
|
41,037,128 |
|
|
|
38,123,071 |
|
For the
three month period ending September 30, 2007, and the nine month periods ending
September 30, 2008, and 2007, the weighted average number of diluted shares does
not include potential issuances of common shares which are anti-dilutive. 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.
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Assumed
exercise of stock options
|
|
|
4,086,012 |
|
|
|
3,349,209 |
|
|
|
4,352,512 |
|
|
|
3,349,209 |
|
Assumed
conversion of warrants
|
|
|
2,421,399 |
|
|
|
2,368,792 |
|
|
|
3,171,399 |
|
|
|
2,368,792 |
|
Assumed
vesting of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
86,500 |
|
|
|
— |
|
Total
|
|
|
6,507,411 |
|
|
|
5,718,001 |
|
|
|
7,610,411 |
|
|
|
5,718,001 |
|
Note
9 — Future Commitments
The
Company has certain material agreements with its manufacturing and testing
vendors related to its clinical trials and research and development programs.
Contract amounts are paid based on materials used and work performed. 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
10 — Warrants
During
the nine months ended September 30, 2008, a total of 140,238 warrants were
exercised including 127,853 warrants surrendered to satisfy the exercise price
for cashless exercises. As a result, 12,385 shares of common stock with a
weighted average exercise price of $1.10 were issued during the nine months
ended September 30, 2008.
No
warrants were issued or exercised during the three month period ended September
30, 2008. The Company had the following warrants to purchase common stock
outstanding at September 30, 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
|
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
|
|
|
3,273,323 |
|
|
|
|
|
|
|
|
3,171,399 |
|
|
Each
warrant entitles the holder to purchase one share of common stock at the
exercise price.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
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 results, 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 result 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 strategy includes a significant commitment to
research and development activities in connection with our drug delivery
platform. Our results of operations going forward depend on our ability to
commercialize our products and technology and generate royalties, licensing
fees, development fees, milestone and similar payments.
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, and/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 lead product candidate
is a CDT-based extended release formulation of ibuprofen, an analgesic that is
sold in immediate-dose products as Advil® and Motrin®, among others, as well as
generically. On November 6, 2008, we reported favorable top-line results from
our pivotal phase III trial to evaluate the safety and efficacy of our 12-hour
CDT 600 mg extended-release ibuprofen for the OTC market. This
randomized, placebo-controlled, double-blind, parallel group study was designed
to evaluate the efficacy and safety of multiple doses of our
extended-release ibuprofen in dental pain following third molar extraction.
The first primary endpoint was to demonstrate analgesic efficacy for the 8-12
hour period after the first dose of our extended-release ibuprofen as
compared to placebo. The second primary endpoint measured the durability of
effect of our formulation by the proportion of subjects in
the extended-release group with meaningful improvement in pain intensity
from baseline at all three assessment periods of 24, 36, and 48 hours. Both
endpoints achieved positive, statistically significant results, at the
p<0.0001 level. There are currently no
extended-release formulations of ibuprofen approved for use in North America. In
addition, our Abbreviated New Drug Application, or ANDA, for our formulation of
12-hour extended-release
pseudoephedrine
was accepted for review by the Food and Drug Administration as of August 5,
2008. Pseudoephedrine is a decongestant that is widely used to relieve sinus
pressure related to allergies and the common cold. We continue to support our
strategic alliances and collaborations, including work with Dr. Reddy’s
Laboratories to develop and commercialize an oral prescription product for the
cardiopulmonary market.
During
September 2008, we relocated our offices to a more cost-effective facility in
Bothell, Washington. The move allowed us to satisfy the final conditions for
payment of the remaining $3.1 million payment due of the $4.1 million aggregate
amount received for termination of our prior office lease. We have taken other
steps to reduce expenses, including reductions in personnel and marketing, and
the termination of a lease for additional space in Bellevue, Washington. We are
actively managing our liquidity and capital resources by deferring development
activities of other projects pending additional financing or partnership
opportunities
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 June 2008,
the Financial Accounting Standards Board ratified a consensus opinion reached by
the Emerging Issues Task Force (EITF) on EITF Issue 07-5, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” to
provide guidance for determining whether an equity-linked financial instrument
or embedded feature is considered indexed to an entity’s own stock. The
consensus establishes a two-step approach as a framework for determining whether
an instrument or embedded feature is indexed to an entity’s own stock. The
approach includes evaluating (1) the instrument’s contingent exercise
provisions, if any, and (2) the instrument’s settlement provisions.
Entities that
issue financial instruments such as warrants or options on their own shares,
convertible debt, convertible preferred stock, forward contracts on their own
shares, or market-based employee stock option valuation instruments will be
affected by EITF Issue 07-5.
We intend to
adopt EITF Issue 07-5 effective January 1, 2009, and apply its provisions to its
outstanding instruments as of that date, as well as to instruments issued
subsequent to that date. We do not believe there will be a material impact to
its financial statements upon adoption on January 1, 2009.
Results
of Operations
Comparison
of the Three Months Ended September 30, 2008, and 2007
Revenues
Total
revenues, which consist of royalty revenue from our collaboration agreements,
increased 14%, or $28,834 to $236,308 for the three months ended September 30,
2008, compared to $207,474 for the same period in 2007. This increase is due to
higher royalty income from our alliance with Perrigo.
Royalty
income decreased 15%, or $43,263 to $236,308 in the three months ended September
30, 2008, compared to $279,571 for the second quarter of 2008. Sales from
Perrigo in 2008 increased during the second quarter compared to the first
quarter, and decreased slightly in the third quarter. These changes are related
to the reintroduction of one of our products at a large customer with
fluctuations in revenue due to the timing of shipments. Royalty payments from
Perrigo are based on Perrigo’s net profits from the sale of CDT-based products
which involve uncertainties and are difficult to predict. Royalties from our
relationship with Nutraceutix continue to decline as Nutraceutix sells through
its inventory following the termination of our license agreement as of December
31, 2007.
Operating
Expenses
Marketing
and Selling Expenses
Marketing
and selling expenses decreased 41%, or $81,680 to $116,840 for the three months
ended September 30, 2008, compared to $198,520 for the same period in 2007, due
in part to a reduction of $29,393 in advertising, tradeshow activities and
related travel. In addition, payroll and related expenses decreased $44,309 due
to the reduction in staff earlier in the year.
Research
and Development Expenses
Research and
development expenses increased 3%, or $70,251 to $2.3 million for the three
months ended September 30, 2008, compared to $2.2 million for the same
period in 2007. The increase is primarily due to commencement of our third
ibuprofen trial and outside consulting expenses related to submission of our
ANDA for extended-release pseudoephedrine to the Food and Drug
Administration.
General
and Administrative Expenses
General
and administrative expenses decreased 7%, or $69,493 to $947,684 for the three
months ended September 30, 2008, compared to $1.0 million for the same period in
2007, due to a decrease of $55,120 in accounting fees associated with annual
Sarbanes-Oxley Act of 2002 compliance requirements. Non-cash, share based
compensation expense related to employee stock option grants decreased $71,813
due to the lower fair value of the stock options. In addition, travel
and related expenses decreased $23,376. These decreases were off-set by an
increase of $57,636 of expenses associated with the write-off of previously
capitalized expenses associated with our shelf registration and discontinued
projects.
Lease
Termination
In May
2008, we entered an agreement to terminate the lease for our corporate facility
for consideration of $4.1 million which was recognized as a reduction to
operating expense in September 2008. Under the terms of the
agreement, we received $1.0 million upon execution of the agreement and the
remaining $3.1 million in September 2008, at the time we vacated the premises.
We incurred costs of $116,867 related to relocation to our new facility and the
lease buyout which were recognized in operating expense in September
2008.
Other
Income (Expense), Net
Other
income decreased 73%, or $112,333 to $42,556 for the three months ended
September 30, 2008, compared to $154,889 for the comparable period in 2007. This
decrease was due to a reduction in interest income due to lower cash balances
and interest rates.
Net
Income
Net income
for the three months ended September 30, 2008 was $890,370, compared to a net
loss of ($3.1) million for the same period in 2007. The increase was primarily
due to the gain from the termination of the lease for our corporate
facility.
Comparison
of the Nine Months Ended September 30, 2008, and 2007
Revenues
Total
revenues decreased 55%, or $968,013 to $781,435 for the nine months ended
September 30, 2008, compared to $1.7 million for the same period in 2007. This
decrease is primarily due to the higher level of research and development fees
and licensing revenues recognized in 2007 relating to a license agreement that
was terminated in March 2007.
Royalty
income decreased 18%, or $173,714 to $781,435 in the nine months ended September
30, 2008, compared to $955,149 for the same period in 2007. This decrease is
primarily due to lower royalty income from our alliance with Perrigo. Royalty
payments from Perrigo are based on Perrigo’s net profits from the sale of
CDT-based products which involve uncertainties and are difficult to predict.
Royalties from our relationship with Nutraceutix of approximately $72,000 for
the period ending September 30, 2008, continue to decline as Nutraceutix sells
through its inventory following the termination of our license agreement as of
December 31, 2007.
In the first
quarter of 2007, we received approximately $600,000 in research and development
milestone payments, and recognized previously deferred licensing fee income of
approximately $173,000 associated with our agreement with Wyeth Consumer
Healthcare. 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 19%, or $128,197 to $545,579 for the nine months
ended September 30, 2008, compared to $673,776 for the same period in 2007.
This decrease was primarily due to a decrease in advertising, tradeshow and
related travel expenses due to a reduction in the number of advertisements and
the number of employees attending tradeshows.
Research
and Development Expenses
Research and
development expenses decreased 19%, or $1.0 million to $4.4 million for the nine
months ended September 30, 2008, compared to $5.4 million for the same
period in 2007. The decrease of approximately $1.0 million was primarily due to
our decision to defer development activities on certain projects pending
additional funding. In addition, non-cash, share based compensation expense
decreased $219,886 related to annual employee stock option grants due to the
lower fair value of the stock options as a result of the decrease in stock
price. These decreases were partially offset by an increase in
outside consulting expense of $148,704 related to regulatory activities
associated with our ibuprofen and pseudoephedrine projects.
General
and Administrative Expenses
General
and administrative expenses decreased 2%, or $63,304, to $3.2 million for the
nine months ended September 30, 2008, compared to $3.3 million for the same
period in 2007, primarily due to a decrease in non-cash, share-based
compensation expense of $129,573 related to employee stock option grants due to
the lower fair value of the stock options. Accounting charges associated with
the annual Sarbanes-Oxley Act of 2002 compliance requirements decreased $62,692
and business and occupational taxes and travel expenses decreased $33,965. There
decreases were offset by an increase in personnel expense of $106,692 for
severance costs and annual increases in employee compensation.
Lease
Termination
In May 2008,
we entered an agreement to terminate the lease for our corporate facility for
consideration of $4.1 million, which was recognized as a reduction to operating
expense in September 2008. Under the terms of the agreement, we received $1.0
million upon execution of the agreement and the remaining $3.1 million in
September 2008, at the time we vacated the premises. We incurred costs of
$116,867 related to relocation to our new facility and the lease buyout which
were recognized in operating expense in September 2008.
Other
Income (Expense), Net
Other
income (expense) decreased 64%, or $347,082 to $195,294 for the nine months
ended September 30, 2008, compared to $542,376 for the same period in 2007.
This decrease was due to a decrease in interest income due to lower cash
balances and interest rates.
Net
Loss
The net loss
for the nine months ended September 30, 2008, decreased 55%, or $3.9
million to $3.2 million, compared with a net loss of $7.1 million for the same
period in 2007. This decrease was primarily due to the gain of $4.1 million from
the Lease Termination and Surrender Agreement associated with our corporate
facility.
Liquidity
and Capital Resources
We had
approximately $8.9 million in cash and cash equivalents, and $564,000 in
restricted cash as of September 30, 2008. We are investing our cash and cash
equivalents in government-backed securities. We anticipate that, based on our
current operating plan, our existing cash and cash equivalents, together with
expected royalties from third parties, will be sufficient to fund our operations
through the end of 2009. Our current operating plan reflects reductions in
personnel,
marketing and other expenses implemented earlier this year. We are
actively managing our liquidity by limiting our clinical and development
expenses to our lead products and supporting our existing alliances and
collaborations. We have deferred expenditures on new projects pending additional
financing or partnership opportunities. We plan to continue efforts to enter
into collaboration and licensing agreements for our product candidates and seek
other sources of capital to provide additional funding for our operations. If we
are unsuccessful with these efforts, we may have to reduce operations or planned
development activities.
In
November 2005, the Securities and Exchange Commission declared effective our
registration statement that we 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, 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
September 30, 2008, approximately $21.1 million remains available for issuance
under this shelf registration statement which expires on December 1, 2008. We
anticipate that we will file a new shelf registration statement prior to the
expiration of our existing shelf registration. Under SEC rules, the Company
would be permitted to offer securities under its existing registration statement
while the new registration is on file with the SEC, but has not yet been
declared effective.
We expect
our operating losses and negative cash flow to continue as we advance
preclinical research and clinical trials, apply for regulatory approvals, and
support commercialization of our product candidates. We will need to raise
additional capital to fund operations, continue research and development
projects, and commercialize our products. 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. We may not be able to secure
additional financing on favorable terms, or at all. 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.
Cash flows from operating
activities—Net cash used in operating activities for the nine months
ended September 30, 2008, was approximately $2.2 million compared to $4.7
million for the nine months ended September 30, 2007. Expenditures for the nine
months ended September 30, 2008, decreased approximately $1.2 million. In
addition, during the nine month period ended September 30, 2008, operating
revenues decreased approximately $1.0 million due to lower royalty income and no
research and development revenue and we received a cash payment of $4.1 million
related to our facility lease buyout, which was recognized as a reduction to
operating expense in September 2008.
Cash flows from investing
activities—Cash flows used by investing activities of $726,447 represents
restricted cash of $564,000 plus payments made for patent rights during the nine
months ended September 30, 2008. The restricted cash is collateral for the
outstanding letter of credit issued as collateral for our new facility lease.
Cash flows provided by investing activities of $489,713 during the nine months
ended September 30, 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 used by financing activities of $19,245 represent
the exercise of stock options and warrants offset by payments made on our term
loan during the nine months ended September 30, 2008. In the nine months ended
September 30, 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 and proceeds from the exercise
of stock options and warrants. We received cash of $40,086 during the
nine months ended September 30, 2008, from the exercise of outstanding stock
options.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
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
third quarter of fiscal 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
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 $3.2 million for the
three months ended September 30, 2008, $10.6 million in 2007, $10.7 million in
2006, and $8.9 million in 2005. We have accumulated net losses of approximately
$61.1 million from our inception through September 30, 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 continue as we
advance preclinical research and clinical trials, apply for regulatory
approvals, develop our product candidates, and 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. 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
anticipate that, based on our current operating plan, our existing cash and cash
equivalents, together with expected royalties from third parties, will be
sufficient to fund our operations through the end of 2009. Our current operating
plan reflects reductions in personnel, marketing and other expenses implemented
earlier this year. We are actively managing our
liquidity by limiting our clinical and development expenses to our
lead products and supporting our existing alliances and collaborations. We have
deferred expenditures on new projects pending additional funding or partnership
opportunities. We plan to continue efforts to enter into collaboration and
licensing agreements for our product candidates, including extended-release
ibuprofen, that may provide additional funding for our operations. If we are
unsuccessful with these efforts, we may have to curtail operations or planned
development activities.
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:
|
•
|
the
structure and timing of collaborations with strategic partners and
licensees;
|
|
•
|
our
timetable and costs for the development of marketing operations and other
activities related to the commercialization of our product
candidates;
|
|
•
|
the
progress of our research and development programs and expansion of such
programs;
|
|
•
|
the
emergence of competing technologies and other adverse market developments;
and,
|
|
•
|
the
prosecution, defense and enforcement of potential patent claims and other
intellectual property rights.
|
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 Biovail, Inc., Penwest,
SkyePharma PLC, Depomed, 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. 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.
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 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 October 31, 2008,
41,130,270 shares
of our common stock were outstanding, and there were 7,502,253
shares of our common stock issuable upon the exercise of
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:
November 6, 2008
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By:
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/s/ Daniel
O. Wilds |
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Daniel
O. Wilds |
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Chief
Executive Officer and President |
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(Principal
Executive Officer) |
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Date:
November 6, 2008
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By:
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/s/ Richard
M. Levy |
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Chief
Financial Officer and Vice President - Finance |
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(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
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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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24