UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the quarterly period ended September 30, 2005
or
|
¨
|
TRANSACTION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from ______________________
to_______________________
Commission
File Number 1-10113
Acura
Pharmaceuticals, Inc.
(Exact
name of registrant as specified in its charter)
|
New
York
|
11-0853640
|
|
(State
or other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
|
|
616
N. North Court, Suite 120
|
|
|
Palatine,
Illinois
|
60067
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
847
705 7709
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report.)
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
þ
No
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes
o
No
þ
As
of
November 10, 2005 the registrant had 328,962,818 shares
of
Common Stock, $.01 par value, outstanding.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
|
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
3
|
||
|
4
|
||
|
5
|
||
|
7
|
||
|
8
|
||
|
16
|
||
|
31
|
||
|
41
|
||
|
PART
II. OTHER INFORMATION
|
||
|
41
|
||
|
41
|
||
|
42
|
||
PART
I. FINANCIAL INFORMATION
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(In
thousands)
|
(Unaudited)
|
|||||||
|
September
30,
|
|
December
31,
|
|||||
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
296
|
$
|
3,103
|
|||
|
Cash
and cash equivalents- restricted
|
200
|
–
|
|||||
|
Prepaid
expenses and other current assets
|
221
|
307
|
|||||
|
Total
current assets
|
717
|
3,410
|
|||||
|
PROPERTY,
PLANT & EQUIPMENT, NET
|
1,389
|
1,555
|
|||||
|
OTHER
ASSETS AND DEPOSITS
|
7
|
2
|
|||||
|
TOTAL
ASSETS
|
$
|
2,113
|
$
|
4,967
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Senior
secured term note payable
|
$
|
500
|
$
|
–
|
|||
|
Secured
term note payable
|
1,000
|
–
|
|||||
|
Current
maturities of capital lease obligations
|
30
|
29
|
|||||
|
Accrued
expenses
|
432
|
959
|
|||||
|
Total
current liabilities
|
1,962
|
988
|
|||||
|
SECURED
TERM NOTE PAYABLE
|
5,000
|
5,000
|
|||||
|
CAPITAL
LEASE OBLIGATIONS, less current maturities
|
40
|
64
|
|||||
|
TOTAL
LIABILITIES
|
7,002
|
6,052
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|||||||
|
Convertible
Preferred Stock - $.01 par value; authorized 290,000,000 shares;
issued
and outstanding, 217,694,414 and 217,972,986 shares, at September
30, 2005
and December 31, 2004, respectively
|
2,177
|
2,180
|
|||||
|
Common
stock - $.01 par value; authorized 650,000,000 shares; issued and
outstanding, 23,413,377 and 22,466,967 shares at September 30, 2005
and
December 31, 2004, respectively
|
234
|
225
|
|||||
|
Additional
paid-in capital
|
277,518
|
277,129
|
|||||
|
Unearned
compensation
|
(312
|
)
|
(1,078
|
)
|
|||
|
Accumulated
deficit
|
(284,506
|
)
|
(279,541
|
)
|
|||
|
STOCKHOLDERS’
DEFICIT
|
(4,889
|
)
|
(1,085
|
)
|
|||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
|
2,113
|
$
|
4,967
|
|||
See
accompanying notes to consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(UNAUDITED)
(In
thousands, except share and per share data)
|
SEPTEMBER
30,
|
|||||||||||||
|
|
FOR
THE NINE MONTHS ENDED
|
FOR
THE THREE MONTHS ENDED
|
|||||||||||
|
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
Net
revenues
|
$
|
–
|
$
|
838
|
$
|
–
|
$
|
–
|
|||||
|
Cost
of manufacturing
|
–
|
1,437
|
–
|
–
|
|||||||||
|
Research
and development
|
2,527
|
3,179
|
845
|
1,937
|
|||||||||
|
Selling,
marketing, general and administrative
|
2,120
|
4,236
|
628
|
1,873
|
|||||||||
|
Loss
from operations
|
(4,647
|
)
|
(8,014
|
)
|
(1,473
|
)
|
(3,810
|
)
|
|||||
|
Other
income (expense)
|
|||||||||||||
|
Interest
expense
|
(434
|
)
|
(2,839
|
)
|
(171
|
)
|
(687
|
)
|
|||||
|
Interest
income
|
30
|
40
|
6
|
18
|
|||||||||
|
Amortization
and write-off of deferred debt discount and private debt offering
costs
|
–
|
(72,491
|
)
|
–
|
(47,836
|
)
|
|||||||
|
Gain
on asset disposals
|
85
|
2,388
|
3
|
633
|
|||||||||
|
Gain
on debt restructure
|
–
|
12,401
|
–
|
–
|
|||||||||
|
Other
|
1
|
603
|
–
|
202
|
|||||||||
|
Total
other expense
|
(318
|
)
|
(59,898
|
)
|
(162
|
)
|
(47,670
|
)
|
|||||
|
NET
LOSS
|
$
|
(4,965
|
)
|
$
|
(67,912
|
)
|
$
|
(1,635
|
)
|
$
|
(51,480
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.22
|
)
|
$
|
(3.12
|
)
|
$
|
(0.07
|
)
|
$
|
(2.35
|
)
|
|
|
Weighted
average number of outstanding shares
|
22,906,380
|
21,749,212
|
23,169,179
|
21,927,943
|
|||||||||
See
accompanying notes to consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
FOR
THE NINE MONTHS ENDED
(UNAUDITED)
(In
thousands)
|
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows from Operating Activities:
|
|||||||
|
Net
loss
|
$
|
(4,965
|
)
|
$
|
(67,912
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|||||||
|
Depreciation
and amortization
|
97
|
328
|
|||||
|
Amortization
of deferred debt discount and private debt offering costs
|
–
|
30,684
|
|||||
|
Write-off
of unamortized deferred debt discount and private debt offering
costs
|
–
|
41,807
|
|||||
|
Non-cash
compensation charge on options
|
766
|
1,442
|
|||||
|
Gain
on asset disposals
|
(85
|
)
|
(2,388
|
)
|
|||
|
Gain
on debt restructure
|
–
|
(12,401
|
)
|
||||
|
Gain
on Department of Justice settlement
|
–
|
(403
|
)
|
||||
|
Bad
debt reserve
|
–
|
(428
|
)
|
||||
|
Changes
in assets and liabilities
|
|||||||
|
Accounts
receivable
|
–
|
729
|
|||||
|
Inventories
|
–
|
312
|
|||||
|
Prepaid
expenses and other current assets
|
86
|
176
|
|||||
|
Other
assets and deposits
|
(5
|
)
|
159
|
||||
|
Accounts
payable
|
–
|
(1,895
|
)
|
||||
|
Accrued
expenses
|
(137
|
)
|
1,650
|
||||
|
Total
adjustments
|
722
|
59,772
|
|||||
|
Net
cash used in operating activities
|
(4,243
|
)
|
(8,140
|
)
|
|||
|
Cash
flows from Investing Activities:
|
|||||||
|
Capital
expenditures
|
(34
|
)
|
(273
|
)
|
|||
|
Proceeds
from asset disposals
|
187
|
4,520
|
|||||
|
Net
cash provided by investing activities
|
153
|
4,247
|
|||||
|
Cash
flows from Financing Activities:
|
|||||||
|
Payments
on senior secured term note payable
|
–
|
(4,000
|
)
|
||||
|
Proceeds
from issuance of senior secured term note payable, less restricted
cash
|
1,300
|
–
|
|||||
|
Payments
on capital lease obligations
|
(21
|
)
|
(38
|
)
|
|||
|
Payments
on private offering costs
|
–
|
(315
|
)
|
||||
|
Proceeds
from issuance of subordinated convertible debentures
|
–
|
11,951
|
|||||
|
Proceeds
from exercise of stock options
|
|||||||
|
Payments
to Department of Justice
|
–
|
(31
|
)
|
||||
|
Net
cash provided by financing activities
|
1,283
|
7,567
|
|||||
|
(Decrease)
increase in cash and cash equivalents - unrestricted
|
(2,807
|
)
|
3,674
|
||||
|
Cash
and cash equivalents at beginning of period - unrestricted
|
3,103
|
942
|
|||||
|
Cash
and cash equivalents at end of period -
unrestricted
|
$
|
296
|
$
|
4,616
|
|||
|
Cash
paid for interest
|
$
|
44
|
$
|
47
|
|||
See
accompanying notes to consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For
the nine months ended September 30, 2005:
| 1. |
The
Company issued 632,588
shares of Common Stock as payment of $391,000 of Term Note payable
accrued
interest.
|
| 2. |
The
Company issued 278,572 shares of Common Stock as result of the conversion
of 278,572 shares of the Company’s Series C-1 Junior Preferred
Stock.
|
For
the nine months ended September 30, 2004:
| 1. |
The
Company's Convertible Subordinated Debentures contained beneficial
conversation features valued at
$14,000,000.
|
| 2. |
The
Company repaid $166,000 of indebtedness in the form of product
deliveries.
|
| 3. |
Bridge
Loans of $2,000,000 and accrued interest of $49,000 were converted
into
like amounts of Convertible Subordinated
Debentures.
|
| 4. |
The
Company issued 326,239 shares of Common Stock as payment of $169,000
of
Secured Term Note Payable accrued
interest.
|
| 5. |
Convertible
Subordinated Debentures of $100,632,000 and accrued interest of $3,939,000
were converted into 217,973,000 shares of Convertible Preferred Stock
(See
Note 11).
|
See
accompanying notes to consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NINE
MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
(In
thousands)
|
Preferred
Stock
$.01
Par Value
|
Common
Stock
$.01
Par Value
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Unearned
Compensation
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||
|
Balance
at January 1, 2005
|
217,973
|
$
|
2,180
|
22,467
|
$
|
225
|
$
|
277,129
|
$
|
(1,078
|
)
|
$
|
(279,541
|
)
|
$
|
(1,085
|
)
|
||||||||
|
Issuance
of Common Shares for interest
|
–
|
–
|
633
|
6
|
385
|
–
|
–
|
391
|
|||||||||||||||||
|
Issuance
of Common Shares for exercise of options
|
–
|
–
|
34
|
–
|
4
|
–
|
–
|
4
|
|||||||||||||||||
|
Conversion
of Series C-1 Junior Convertible Preferred Shares
|
(279
|
)
|
(3
|
)
|
279
|
3
|
–
|
–
|
–
|
–
|
|||||||||||||||
|
Amortization
of unearned compensation
|
–
|
–
|
–
|
–
|
–
|
766
|
–
|
766
|
|||||||||||||||||
|
Net
loss
|
–
|
–
|
–
|
–
|
–
|
–
|
(4,965
|
)
|
(4,965
|
)
|
|||||||||||||||
|
Balance
at September 30, 2005
|
217,694
|
$
|
2,177
|
23,413
|
$
|
234
|
$
|
277,518
|
$
|
(312
|
)
|
$
|
(284,506
|
)
|
$
|
(4,889
|
)
|
||||||||
See
accompanying notes to consolidated financial statements.
ACURA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTE
1 - BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Acura
Pharmaceuticals, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles in the United States for
complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accrual adjustments, considered necessary to
present fairly the financial position, results of operations and changes in
cash
flows for the three and nine months ended September 30, 2005, assuming that
the
Company will continue as a going concern, have been made. The results of
operations for the three and nine month period ended September 30, 2005 are
not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2005. The unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements and footnotes
thereto for the year ended December 31, 2004 included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.
In
the
fourth quarter of 2003 and first quarter of 2004, the Company restructured
its
operations and ceased the manufacture, sale and distribution of generic finished
dosage pharmaceutical products by the Company’s subsidiary, Axiom Pharmaceutical
Corporation.
As
restructured,
the
Company is a specialty pharmaceutical development company primarily engaged
in
development of proprietary abuse deterrent, abuse resistant and tamper proof
formulation technologies ("Aversion®
Technology") intended to discourage abuse of orally administered opioid
analgesic products. The
Company utilizes several contract research organizations and an academic
institution for laboratory and clinical evaluation and testing of product
candidates incorporating the Aversion®
Technology. The Company also conducts research, development, laboratory,
stability, manufacturing and warehousing activities relating to the
Aversion®Technology
at its Culver, Indiana operations facility (the "Culver Facility"). The Culver
Facility is registered by the DEA to perform research, development and
manufacture for certain Schedule II - V controlled substances in bulk and
finished dosage forms.
In
addition, to a much lesser extent, during 2004 and early 2005, the Company
was
engaged in research, development and manufacture of proprietary, high-yield,
short cycle time, environmentally sensitive opioid synthesis processes (the
"Opioid Synthesis Technologies" and, collectively with the Aversion®Technology,
the “Technologies”) intended for use in the commercial production of certain
bulk opioid active pharmaceutical ingredients (“APIs”). In early 2005, the
Company suspended development and commercialization efforts relating to the
Opioid Synthesis Technologies pending the Administrative Law Judge’s (“ALJ”)
determination relating to the Company’s Import Registration filed with the
U.S.
Drug
Enforcement Administration (the
“DEA”) in early 2001. As
of the
date of this Report, the Company's application for an Import Registration
remains pending with the ALJ. The
Import Registration, if ultimately granted, for which there can be no assurance,
could provide the Company with an economical source of narcotic raw materials
(“NRMs”) for use as starting materials in the commercial manufacture and supply
of certain opioid APIs.
To
generate revenue the
Company plans to enter into development and commercialization agreements with
strategically focused pharmaceutical company partners (the "Partners") providing
that such Partners license product candidates utilizing the Company’s
Aversion®
Technology and further develop, register and commercialize multiple formulations
and strengths of such product candidates. The Company expects to receive
milestone payments and a share of profits and/or royalty payments derived from
the Partners' sale of products incorporating the Aversion®
Technology. Future
revenue, if any, will be derived from milestone payments and a share of profits
and/or royalty payments relating to such collaborative partners' sale of
products incorporating the Aversion®
Technology. As of the date of this Report, the Company did not have any executed
collaborative agreements with Partners, nor can there be any assurance that
the
Company will successfully enter into such collaborative agreements in the
future.
The
Company's business involves inherent risk as set forth in Part 1, Item 2 of
this
Report. These risks include, among others, the need for Food and Drug
Administration (“FDA”) approval prior to commercial distribution of the
Company’s product candidates in the United States, acceptance by healthcare
providers and third party payors of such product candidates, dependence on
key
personnel, determination of patentability for our Aversion®
Technology by the United States Patent and Trademark Office, and freedom to
operate for the Company’s product candidates.
NOTE
2 - LIQUIDITY MATTERS
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. At
September 30, 2005, the Company had unrestricted cash and cash equivalents
of
$0.3 million, a working
capital deficit of $1.2 million, and an accumulated deficit of $284.5 million.
At December 31, 2004, the Company had cash and cash equivalents of $3.1 million,
a working
capital of $2.4
million
and an accumulated
deficit of $279.5 million.
The
Company incurred a loss from operations of $4.6 million and a net loss of $5.0
million during the nine months ended September 30, 2005 and a loss from
operations of $9.9 million
and a net loss of $70.0 million
during the year ended December 31, 2004. Historically,
the Company has incurred significant losses and until such time as its product
candidates are commercialized, of which no assurance can be given, the Company
will continue incurring losses. These
factors, among others, raise substantial doubt about the Company's ability
to
continue as a going concern.
The
Company estimates that its current cash reserves, including the net proceeds
from the November 2005 Bridge Loan, will fund continued development of the
Aversion®
Technology and related operating expenses through January, 2006.To continue
funding operations the Company must raise additional financing and/or enter
into
alliances or collaboration agreements with third parties. No assurance can
be
given that the Company will be successful in obtaining any such financing or
in
securing collaborative agreements with third parties on acceptable terms, if
at
all, or if secured, that such financing or collaborative agreements will provide
for payments to the Company sufficient to continue to fund operations. In the
absence of such financing or third-party collaborative agreements, the Company
will be required to scale back or terminate operations and/or seek protection
under applicable bankruptcy laws.
Even
assuming the Company is successful in securing additional sources of financing
and/or enters into alliances or collaborative agreements relating to the
Aversion®
Technology, there can be no assurance that the Company's development efforts
will result in commercially viable products. The Company's failure to
successfully develop the Aversion®
Technology in a timely manner, to obtain an issued U.S. patent relating to
the
Aversion®
Technology and to avoid infringing third-party patents and other intellectual
property rights will have a material adverse impact on its financial condition
and results of operations.
In
view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the Company's accompanying consolidated balance
sheets is dependent upon continued operations of the Company, which in turn
are
dependent upon the Company's ability to meet its financing requirements on
a
continuing basis, to maintain present financing, and to succeed in its future
operations. The Company's financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts
or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
NOTE
3 - NEW ACCOUNTING PRONOUNCEMENTS
Share-Based
Payment
On
December 16, 2004, the Financial Accounting Standards Board (the “FASB”)
released FASB Statement No. 123 (revised 2004), “Share-Based Payment, (“SFAS
123R”)”. These changes in accounting replace existing requirements under FASB
Statement No. 123, “Accounting for Stock-Based Compensation”, and eliminates the
ability to account for share-based compensation transaction using APB Opinion
No.25, “Accounting for Stock Issued to Employees”. The compensation cost
relating to share-based payment transactions will be measured based on the
fair
value of the equity or liability instruments issued. This Statement does not
change the accounting for similar transactions involving parties other than
employees. In April 2005, the Securities and Exchange Commission (the “SEC”)
delayed implementation of SFAS 123R for publicly traded companies such that
they
must apply this Standard as of the beginning of the next fiscal year that begins
after June 15, 2005. This Statement applies to all awards granted after the
required effective date and to awards modified, repurchased, or cancelled after
that date. The cumulative effect of initially applying this Statement, if any,
is recognized as of the required effective date. The Company has not completed
its evaluation of the impact of adopting SFAS 123R on its consolidated financial
statements, but anticipates that more compensation costs will be recorded in
the
future if the use of options for employees and director compensation continues
as in the past.
Changes
and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections - A Replacement of APB Opinion No.
20
and FASB Statement No. 3”, (“SFAS 154”). SFAS 154 primarily requires
retrospective application to prior periods’ financial statements for the direct
effects of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005, and early adoption
is
permitted. The Company is required to adopt the provision of SFAS 154, as
applicable, beginning in fiscal 2006.
NOTE
4 - RECLASSIFICATIONS
Certain
reclassifications have been made on the December 31, 2004 balance sheet to
conform to the September 30, 2005 balance sheet presentation.
NOTE
5
- CASH AND CASH EQUIVALENTS
For
purposes of the consolidated statements of cash flows, the Company considers
all
highly liquid debt instruments purchased with a maturity date of three months
or
less to be cash equivalents. At September 30, 2005, the Company did not have
any
purchased debt instruments. At December 31, 2004, cash equivalents consisted
of
bank investments totaling approximately $2.6 million.
At
September 30, 2005, the Company had a restricted cash of $200,000 placed against
the $1,500,000
Secured
Term Notes Payable maturing on June 1, 2006.
On
October 20, 2005, the lenders under the Secured Term Note Payables waived the
requirement that the Company maintain such restricted cash balances until such
time as the Company receives additional financing providing net proceeds to
the
Company of at least $2.0 million. As a result, the Company is permitted to
use
such amount to fund continuing operations.
NOTE
6 -
RESEARCH AND DEVELOPMENT
Research
and development expenses consist of direct costs and indirect costs. Direct
research and development costs include salaries and related costs of research
and development personnel, and the costs of consultants, patent counsel,
facilities, materials and supplies associated with research and development
projects and
various laboratory studies. Indirect research and development costs include
depreciation and other indirect overhead expenses. The Company considers that
regulatory and other uncertainties inherent in the research and development
of
new products preclude it from capitalizing such costs. This includes up-front
and milestone payments made to third parties in connection with research and
development collaborations. The Company had no research and development
commitments with third parties at September 30, 2005 or at December 31,
2004.
NOTE
7 - INCOME TAXES
At
December 31, 2004 the Company has net operating loss carryforwards aggregating
approximately $129.7 million expiring during the years 2009 through 2024. The
tax loss carryforwards of the Company and its subsidiaries may be subject to
limitation by Section 382 of the Internal Revenue Code with respect to the
amount utilizable each year. This limitation reduces the Company's ability
to
utilize net operating loss carryforwards each year. The amount of the limitation
has not been quantified. The Financial Accounting Standards Board Statement
“Accounting for Income Taxes” (“SFAS 109”) requires a valuation allowance
against deferred tax assets if, based on the weight of available evidence,
it is
more likely than not that some or all of the deferred tax assets may not be
realized. At December 31, 2004, a valuation allowance equal to 100% of the
net
deferred income tax assets was used and primarily pertains to uncertainties
with
respect to future utilization of net operating loss carryforwards.
NOTE
8 - STOCK-BASED COMPENSATION
The
Company accounts for stock-based compensation using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for
Stock Issued to Employees," and related Interpretations ("APB No. 25") and
has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure,
an amendment of FASB Statement No. 123." Under APB No. 25, when the exercise
price of the Company's employee stock options equals or exceeds the market
price
of the underlying stock on the date of grant, no compensation expense is
recognized. The following table illustrates the effect on net loss and loss
per
share had the Company applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
|
SEPTEMBER
30,
|
|||||||||||||
|
|
FOR
THE NINE MONTHS ENDED
|
FOR
THE THREE MONTHS ENDED
|
|||||||||||
|
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
(In
thousands, except per share data)
|
|||||||||||||
|
Net
loss, as reported
|
$
|
(4,965
|
)
|
$
|
(67,912
|
)
|
$
|
(1,635
|
)
|
$
|
(51,480
|
)
|
|
|
Add:
Stock-based employee compensation expense included in reported net
loss
|
766
|
1,442
|
173
|
-
|
|||||||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair value-based method for all awards
|
(1,156
|
)
|
(2,313
|
)
|
(267
|
)
|
(250
|
)
|
|||||
|
Net
loss, pro forma
|
$
|
(5,355
|
)
|
$
|
(68,783
|
)
|
$
|
(1,729
|
)
|
$
|
(51,730
|
)
|
|
|
Weighted
average number of outstanding shares
|
22,906
|
21,749
|
23,169
|
21,928
|
|||||||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
and diluted loss per share, as reported
|
$
|
(0.22
|
)
|
$
|
(3.12
|
)
|
$
|
(0.07
|
)
|
$
|
(2.35
|
)
|
|
|
Basic
and diluted loss per share, pro forma
|
$
|
(0.23
|
)
|
$
|
(3.16
|
)
|
$
|
(0.08
|
)
|
$
|
(2.36
|
)
|
|
Pro
forma
compensation expense may not be indicative of future disclosures because they
do
not take into effect pro forma compensation expense related to grants before
1995. For purposes of estimating the fair value of each option on the date
of
grant, the Company utilized the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE
9
-
UNEARNED COMPENSATION
In
2004
the Company granted approximately 13,175,000 options to employees to purchase
common stock for $0.13 per share. As a result of the grant the Company recorded
approximately $3,030,000 of unearned compensation in accordance with APB Opinion
No. 25; $766,000 and $1,442,000 of the unearned compensation was amortized
to
expense during the nine months ended September 30, 2005 and September 30, 2004,
respectively. The Company amortizes unearned compensation over the vesting
period of the underlying option, adjusted for employee
terminations.
NOTE
10
-
(LOSS) EARNINGS PER SHARE
Basic
earnings or
loss
per share is computed by dividing net earnings or loss by the weighted average
of common shares outstanding during the reporting period. Diluted earnings
or
loss per share is computed by dividing net earnings or loss by the weighted
average of common shares plus potential dilutive common share equivalents
outstanding during the reporting periods presented. Potential dilutive common
share equivalents consist of outstanding stock options assuming the exercise
of
all in-the-money stock options, warrants, and convertible preferred shares.
The
treasury stock method is used to calculate potential dilutive outstanding stock
options and warrants.
For
the
nine month periods ended September 30, 2005 and 2004, approximately 344.2
million and 355.9 million, respectively, and for the three month periods ended
September 30, 2005 and 2004, approximately 339.8 million and 355.9 million,
respectively, of common stock equivalents relating to outstanding warrants,
options and convertible preferred shares have been excluded from the calculation
of diluted loss per share because they are anti-dilutive.
NOTE
11
- CONVERTIBLE PREFERRED STOCK
At
September 30, 2005, convertible preferred stock consisted of the
following:
|
September
30, 2005
|
||||||||||||||||
|
Convertible
Preferred
Stock
|
Authorized
Shares
|
Issued
and
Outstanding
Shares
|
$.01
Par
Value
|
Common
Stock
Equivalents
|
Liquidation
Preference
|
|||||||||||
|
Series
A
|
45,000,000
|
21,963,757
|
$
|
219,638
|
109,818,785
|
$
|
70,558,570
|
|||||||||
|
Series
B Junior
|
25,000,000
|
20,246,506
|
202,465
|
20,246,506
|
6,924,305
|
|||||||||||
|
Series
C-1 Junior
|
70,000,000
|
56,143,987
|
561,440
|
56,143,987
|
32,428,767
|
|||||||||||
|
Series
C-2 Junior
|
50,000,000
|
37,433,096
|
374,331
|
37,433,096
|
22,433,655
|
|||||||||||
|
Series
C-3 Junior
|
100,000,000
|
81,907,068
|
819,071
|
81,907,068
|
28,511,850
|
|||||||||||
|
Total
|
290,000,000
|
217,694,414
|
$
|
2,176,945
|
305,549,442
|
$
|
160,857,147
|
|||||||||
Effective
November 10, 2005, all of the Company’s
issued and outstanding shares of preferred stock were
automatically and mandatorily converted into the Company’s common
stock in
accordance with the terms of the Company’s Restated Certification of
Incorporation (the “Preferred Stock Conversion”). In accordance with the
conversion provisions contained in the Restated Certificate of Incorporation,
all issued and outstanding shares of the Company’s Series A Preferred Stock,
Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred
Stock
and Series C-3 Preferred Stock (collectively, the “Preferred Stock”) are
converted automatically into the Company’s common stock upon the Company’s
receipt of the written consent to the Preferred Stock Conversion from the
holders of at least 51% of the shares of the Company’s Series A Preferred Stock.
On November 10, 2005, the Company received the consent to the Preferred Stock
Conversion from GCE Holdings LLC (the
assignee of all Preferred Stock formerly held by each of Care Capital
Investments II, LP, Care Capital Offshore Investments II, LP, Essex Woodlands
Health Ventures V, L.P., Galen Partners International III, L.P., Galen Partners
III, L.P. and Galen Employee Fund III, L.P.), such entity holding in the
aggregate in excess of 51% of the issued and outstanding shares of the Company’s
Series A Preferred Stock. In accordance with the terms of the Company’s Restated
Certificate of Incorporation, all shares of the Company’s Preferred Stock were
automatically converted into an aggregate of approximately 305.4 million shares
of the Company’s common stock. Had this conversion taken place on January 1,
2005, the Company's reported loss per share for the three months and nine months
ended September 30, 2005 would have been $0.0 and $0.02,
respectively.
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the "2004 Debentures") in the aggregate principal
amount of approximately $12.3 million (the "2004 Debenture Offering"). The
2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature
page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14.0
million. As the conversion price of the 2004 Debentures was less than the fair
market value of the Company’s Common Stock on the date of issue, beneficial
conversion features were determined to exist. The Company recorded approximately
$14.0 million of debt discount limited to the face amount of the new debt.
The
debt discount was amortized over the life of the debt, which matured on August
13, 2004, the date the 2004 Debentures were automatically converted into the
Company's Series A Convertible Preferred Stock.
Pursuant
to the terms of the 2004 Purchase Agreement and other documents executed in
connection with the 2004 Debentures, effective August 13, 2004, each of the
holders of the Company’s 2004 Debentures converted the 2004 Debentures into the
Company’s Series A preferred shares (the “Series A Preferred”). In addition,
effective August 13, 2004, each of the holders of the Company’s 5% convertible
senior secured debentures issued during the period 1998 through and including
2003 converted such debentures into the Company’s Series B Preferred Stock (the
“Series B Preferred”) and/or Series C-1, C-2 and/or C-3 preferred stock
(collectively, the “Series C Preferred”). The Series C Preferred shares together
with the Series B Preferred shares are herein referred to as the “Junior
Preferred Shares”). Upon conversion of the Company’s outstanding debentures, the
Company issued approximately 21.9 million Series A Preferred shares,
approximately 20.2 million Series B Preferred shares, approximately 56.4 million
Series C-1 Preferred shares, approximately 37.4 million Series C-2 Preferred
shares and approximately 81.9 million Series C-3 Preferred shares. The Series
A
Preferred Shares are convertible into the Company's Common Stock, with each
Series A Preferred Share convertible into the number of shares of Common Stock
obtained by dividing (i) the Series A Liquidation Preference, by (ii) the
$0.6425 Series A conversion price, as such conversion price may be adjusted,
from time to time, pursuant to the dilution protections of such shares. The
Junior Preferred Shares are convertible into the Company's Common Stock, with
each Junior Preferred Share convertible into one share of Common Stock.
Effective November 10, 2005, the Series A Preferred shares and the Junior
Preferred Shares were converted into an aggregate of approximately 305.4 million
shares of the Company’s Common Stock.
NOTE
12 - ACCRUED EXPENSES
Accrued
expenses are summarized as follows:
|
September
30, 2005
|
December
31, 2004
|
||||||
|
(In
thousands)
|
|||||||
|
Bonus,
Payroll, Payroll Taxes and Benefits
|
69
|
573
|
|||||
|
Legal
Fees
|
58
|
124
|
|||||
|
Audit
Examination and Tax Preparation Fees
|
62
|
85
|
|||||
|
Litigation
Settlement
|
35
|
25
|
|||||
|
Franchise
Taxes
|
20
|
–
|
|||||
|
Property
Taxes
|
59
|
30
|
|||||
|
Medicaid
Rebates
|
13
|
50
|
|||||
|
Regulatory,
Trademarks and Patent Consulting
|
–
|
40
|
|||||
|
Directors
Fees
|
9
|
–
|
|||||
|
Clinical
and Laboratory Testing
|
107
|
–
|
|||||
|
Other
|
–
|
32
|
|||||
|
|
$
|
432
|
$
|
959
|
|||
NOTE
13 - SENIOR SECURED TERM NOTES PAYABLE
November
2005 Bridge Loan Financing
The
Company is a party to a Loan Agreement, dated November 9, 2005 (the “November
2005 Bridge Loan Agreement”) by and among Essex Woodlands Health Venture V,
L.P., Care Capital Investments II, LP, Care Capital Offshore Investments II,
LP,
Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee
Fund III, L.P. and such Additional Lenders as may become a party pursuant to
the
terms of the November 2005 Bridge Loan Agreement (collectively, the “November
2005 Bridge Lenders”) providing for bridge financing to the Company in the
initial principal amount of $800,000, plus such additional amounts of up to
$250,000 as may be advanced thereunder (the “November 2005 Bridge Loan”). The
net proceeds from the November 2005 Bridge Loan, after the satisfaction of
related expenses, will be used by the Company to continue the development of
its
Aversion®
Technology and to fund operating expenses. The November 2005 Bridge Loan is
secured by a lien on all of the Company’s assets, senior in right of payment and
lien priority to all other indebtedness of the Company. The November 2005 Bridge
Loan bears interest at the rate of ten percent (10%) per annum and matures
on
June 1, 2006. The November 2005 Bridge Loan is subject to mandatory pre-payment
by the Company upon the Company’s completion of equity or debt financing or any
sale, transfer, license or similar arrangement pursuant to which the Company
or
any of its Subsidiaries sells, licenses or otherwise grant rights in any
material portion of the Company’s intellectual property to any third party,
provided that the consummation of any such transaction results in cash proceeds
to the Company, net of all costs and expenses, at least equal to the sum of
(i)
$4.0 million, plus (ii) the aggregate principal amount of the November 2005
Bridge Loan (a “Funding Event”). The November 2005 Bridge Loan Agreement
restricts the Company’s ability to issue any shares of its currently authorized
Series A, B or C preferred stock without the prior consent of the November
2005
Bridge Lenders, and grants the November 2005 Bridge Lenders preemptive rights
relating to the issuance of the Company’s Series A, B and C preferred stock. The
November 2005 Bridge Loan Agreement also contains normal and customary
affirmative and negative covenants, including restrictions on the Company’s
ability to incur additional debt or grant any lien on the assets of the Company
or its Subsidiaries, subject to certain permitted exclusions.
September
2005 Bridge
Loan Financing
The
Company is a party to a Loan Agreement, dated September
16,
2005
(the “September
2005 Bridge
Loan Agreement”) by and among Essex Woodlands Health Venture V, L.P., Care
Capital Investments II, L.P., Care Capital Offshore Investments II, L.P., Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, the “September
2005 Bridge
Lenders”) providing for bridge financing to the Company in the principal amount
of $0.5
million
(the “September
2005
Bridge Loan”). The net proceeds from the September
2005
Bridge Loan, after the satisfaction of related expenses, will be used by the
Company to continue the development of its Aversion®
Technology and to fund operating expenses. The terms of the September 2005
Bridge Loan are identical to the terms of the November 2005 Bridge Loan, except
that (i) the September 2005 Bridge Loan requires that the Company maintain
minimum cash reserves of $200,000, which requirement has been waived (see “Note
5” and “Item 2 - Liquidity and Capital Resources”), (ii) the lien securing the
September 2005 Bridge Loan is junior in right of payment and lien priority
to
the November
2005
Bridge Loan, and (iii) the Funding Event amount is $4.0 million.
June
2005 Bridge Loan Financing
The
Company also is a party to a Loan Agreement, dated June 22, 2005 (the “June 2005
Bridge Loan Agreement”) by and among Essex Woodlands Health Venture V, L.P.,
Care Capital Investments II, L.P., Care Capital Offshore Investments II, L.P.,
Galen Partners III, L.P., Galen Partners International III, L.P., and Galen
Employee Fund III, L.P. (collectively, the “June 2005 Bridge Lenders”) providing
for bridge financing to the Company in the principal amount of $1.0 million
(the
“June 2005 Bridge Loan”). The net proceeds from the June 2005 Bridge Loan, after
the satisfaction of related expenses, were used by the Company to continue
the
development of its Aversion®
Technology and to fund operating expenses. The terms of the June 2005 Bridge
Loan are identical to the terms of the November 2005 Bridge Loan described
above, except that (i) the June 2005 Bridge Loan requires that the Company
maintain minimum cash reserves of $200,000, which requirement has been waived
(See “Note 5” and Item 2 - Liquidity and Capital Resources”), (ii)
the
lien securing the June 2005 Bridge Loan is junior in right of payment and lien
priority to each of the November
2005
Bridge Loan and the September 2005 Bridge Loan and (ii) the Funding Event amount
is $3.5 million.
2004
Promissory Note
The
Company issued to Care Capital Investments II, LP, Care Capital Offshore
Investments II, LP, Galen Partners III, L.P., Galen Partners International
III,
L.P., Galen Employee Fund III, L.P., Essex Woodlands Health Ventures V, L.P.,
Michael Weisbrot, Susan Weisbrot, Peter Stieglitz, George Boudreau, John Heppe,
and Dennis Adams (collectively the “2004 Note Holders”) a promissory
note in
the principal amount of $5.0 million (the
“2004
Note”). The 2004 Note is subject to the terms of a loan agreement dated March
29, 2000, originally, between the Company and Watson Pharmaceuticals, as amended
on each of June 30, 2000, December 20, 2002 and February 6, 2004 (as amended,
the “2004 Loan Agreement”).
The
2004
Note
bears
interest at the rate equal to the prime rate plus four and one half percent
(4.5%) per annum and
has a
maturity date of June 30, 2007.
The
rate of interest under the 2004 Note
at
September 30, 2005 was 11.25%. On November 1, 2005, the rate of interest
increased to 11.50% to coincide with the increase in the prime rate of interest.
The
2004
Note also
provides
for satisfaction of
quarterly interest payments thereunder in the form of the Company’s Common
Stock, and
is
secured by
a lien
on all assets of the Company. Further, the Company’s obligations under the 2004
Note are guaranteed by Acura Pharmaceutical Technologies, Inc. and Axiom
Pharmaceutical Corporation, each a wholly-owned subsidiary of the Company,
which
guarantees are secured by all assets of such subsidiaries, and, in the case
of
Acura Pharmaceutical Technologies, Inc., by a mortgage lien on its real property
located in Culver, Indiana. As
part
of the completion of each
of
the June 2005 Bridge Loan, the September
2005
Bridge Loan and the November 2005 Bridge Loan, the 2004
Note
Holders, the November 2005 Bridge Lenders, the September 2005 Bridge Lenders
and
the June 2005
Bridge
Lenders executed
Subordination Agreements
providing for the subordination of the lien and payment priority of the 2004
Note in favor of the lien and payment priority of each
of
the November 2005 Bridge Loan, the September 2005 Bridge Loan and the
June
2005
Bridge Loan.
NOTE
14
- COMMITMENTS AND CONTINGENCIES
Employment
Contracts
Andrew
D.
Reddick is employed pursuant to an Employment Agreement effective as of August
26, 2003, with amendments dated May 26, 2004 and May 24, 2005 which provides
that Mr. Reddick will serve as the Company's Chief Executive Officer and
President for an initial term expiring August 26, 2005. The term of the
Employment Agreement provides for automatic one (1) year renewals in the absence
of written notice to the contrary from the Company or Mr. Reddick at least
ninety (90) days prior to the expiration of the initial term or any subsequent
renewal period. The Employment Agreement was amended on May 24, 2005 to reduce
the written notice period from at least ninety (90) days to thirty (30) days
prior to the expiration of the initial term. On August 26, 2005, the Employment
Agreement renewed for a term expiring August 26, 2006.
Ron
J.
Spivey, Ph.D., is employed pursuant to an Employment Agreement effective as
of
April 5, 2004, which provides that Dr. Spivey will serve as the Company's Senior
Vice President and Chief Scientific Officer for term expiring April 4, 2006.
The
term of the Employment Agreement provides for automatic one (1) year renewals
in
the absence of written notice to the contrary from the Company or Dr. Spivey
at
least ninety (90) days prior to the expiration of the initial term or any
subsequent renewal period.
Peter
A.
Clemens is employed pursuant to an Employment Agreement effective as of March
10, 1998, with amendments dated June 28, 2000, and January 5, 2005 which
provides that Mr. Clemens will serve as the Company's Senior Vice President
and
Chief Financial Officer for a term expiring April 30, 2006. The term of the
Employment Agreement provides for automatic one (1) year renewals in the absence
of written notice to the contrary from the Company or Mr. Clemens at least
one
hundred eighty (180) days prior to the expiration of the initial term or any
subsequent renewal period. On November 1, 2005, the Employment Agreement renewed
for a term expiring April 30, 2007.
This
discussion and analysis should be read in conjunction with the Company's
financial statements and accompanying notes included elsewhere in this Report.
Historical operating results are not necessarily indicative of results that
may
occur in future periods.
Forward
Looking Statements
Certain
statements in this Report including, without limitation, in this Item 2
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of
Acura Pharmaceuticals, Inc. ("Acura" or the "Company"), or industry results,
to
be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. The most significant
of
such factors include, but are not limited to, general economic conditions,
competitive conditions, technological conditions and governmental legislation.
More specifically, important factors that may affect future results include,
but
are not limited to: the
Company’s ability to secure additional financing to fund continued
operations,
changes
in laws and regulations, particularly those affecting the Company’s operations;
the Company’s ability to continue to attract, assimilate and retain highly
skilled personnel; its ability to secure and protect its patents, trademarks
and
proprietary rights; its ability to avoid infringement of patents, trademarks
and
other proprietary rights or trade secrets of third parties; litigation or
regulatory action that could require the Company to pay significant damages
or
change the way it conducts its business; the Company’s ability to successfully
develop and market its products; customer responsiveness to new products and
distribution channels; its ability to compete successfully against current
and
future competitors; its dependence on third-party suppliers of raw materials;
the availability of controlled substances that constitute the active ingredients
of the Company’s products in development; difficulties or delays in clinical
trials for Company products or in the manufacture of Company products; and
other
risks and uncertainties detailed in this Report. The Company is at an early
stage of development and may not ever have any products that generate
significant revenue. When used in this Report, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements. Additionally,
such forward-looking statements are subject to the risks and uncertainties
discussed below under the section entitled "Risk Factors Relating to the
Company".
Company
Overview
In
the
fourth quarter of 2003 and first quarter of 2004, the Company restructured
its
operations and ceased the manufacture, sale and distribution of generic finished
dosage pharmaceutical products by the Company’s subsidiary, Axiom Pharmaceutical
Corporation. As part of this restructuring, on February 18, 2004, the Company
sold certain of its inactive, non-revenue generating Abbreviated New Drug
Applications ("ANDAs") to Mutual Pharmaceutical Company, Inc. in consideration
of $2.0 million. In addition, on March 19, 2004, the Company and its
wholly-owned subsidiary, Axiom Pharmaceutical Corporation, entered into an
Asset
Purchase Agreement with IVAX Pharmaceuticals New York LLC ("IVAX") pursuant
to
which the Company and Axiom agreed to sell to IVAX substantially all of the
Company's assets used in the manufacture of generic finished dosage
pharmaceutical products in consideration of $2.5 million. On August 13, 2004,
the Company completed the sale of such assets to IVAX.
As
restructured,
the
Company is a specialty pharmaceutical development company primarily engaged
in
development of proprietary abuse deterrent, abuse resistant and tamper proof
formulation technologies ("Aversion®
Technology") intended to discourage abuse of orally administered opioid
analgesic products. The
Company utilizes several contract research organizations and an academic
institution for laboratory and clinical evaluation and testing of product
candidates incorporating the Aversion®
Technology. The Company also conducts research, development, laboratory,
stability, manufacturing and warehousing activities relating to the
Aversion®Technology
at its Culver, Indiana operations facility (the "Culver Facility"). The Culver
Facility is registered by the DEA to perform research, development and
manufacture for certain Schedule II - V controlled substances in bulk and
finished dosage forms.
In
addition, to a much lesser extent, during 2004 and early 2005, the Company
was
engaged in research, development and manufacture of proprietary, high-yield,
short cycle time, environmentally sensitive opioid synthesis processes (the
"Opioid Synthesis Technologies" and, collectively with the Aversion®Technology,
the “Technologies”) intended for use in the commercial production of certain
bulk opioid active pharmaceutical ingredients (“APIs”). In early 2005 the
Company suspended development and commercialization efforts relating to the
Opioid Synthesis Technologies pending the Administrative Law Judge’s
determination relating to the Company’s Import Registration filed with the
U.S.
Drug
Enforcement Administration (the
“DEA”) in early 2001. The
Import Registration, if ultimately granted, for which there can be no assurance,
could provide the Company with an economical source of narcotic raw materials
(“NRMs”) for use as starting materials in the commercial manufacture and supply
of certain opioid APIs.
To
fund
continuing operations and research and development activities on February 10,
2004, the Company completed a private offering of debentures in the aggregate
principal amount of approximately $12.3 million (the "2004 Debenture Offering").
As part of the completion of the 2004 Debenture Offering, the Company retired
approximately $16.4 million in indebtedness under the Company's $21.4 million
term loan with Watson Pharmaceuticals. On
April
14, 2004 and May 26, 2004 the Company completed additional funding under the
2004 Debenture Offering in the aggregate principal amount of approximately
$1.7
million resulting in an aggregate principal amount of convertible secured
debentures issued as part of the 2004 Debenture Offering of $14.0 million.
In
accordance with the terms of the documents executed in connection with the
2004
Debenture Offering, effective August 13, 2004, the aggregate principal amount
of
the 2004 Debentures as well as Company’s other convertible debentures issued
during the period 1998 through 2003 (aggregating approximately $80.6 million)
converted into various classes of the Company’s preferred shares. Effective
November 10, 2005, all of the Company’s issued and outstanding preferred stock
was converted into an aggregate of approximately 305.4 million shares of the
Company’s common stock.
The
Company has incurred net losses since 1992 and the Company's consolidated
financial statements for each of the years ended December 31, 2004 and 2003
have
been prepared on a going-concern basis, expressing substantial doubt about
the
Company's ability to continue as a going-concern as a result of recurring losses
and negative cash flows. The Company's future profitability will depend on
several factors, including:
| · |
The
Company’s ability to secure additional financing to fund continued
operations;
|
|
·
|
The
successful completion of the formulation development, clinical
testing and
acceptable regulatory review of product candidates utilizing
the
Aversion®
Technology;
|
|
·
|
The
receipt of issued patents from the U.S. Patent and Trademark Office
(“PTO”) for the material claims in the Company's patent applications
relating to the Aversion®Technology;
|
|
·
|
The
Company's ability to negotiate and execute appropriate licensing,
development and commercialization agreements with interested
third parties
relating to the Company’s product candidates;
and,
|
|
·
|
The
successful commercialization by licensees of products incorporating
the
Aversion®
Technology without infringing the patents and other intellectual
property
rights of third parties.
|
Company’s
Present Financial Condition,
Focus and Status
At
September 30, 2005, the Company had unrestricted cash and cash equivalents
of
$0.3 million compared to $3.1 million at December 31, 2004. The Company had
a
working capital deficit of $1.2 million at September 30, 2005 and working
capital of $2.4
million at
December 31, 2004. The Company had an accumulated deficit of $284.5 million
and
$279.5
million at September
30, 2005 and December 31, 2004, respectively. The
Company incurred a loss from operations of $4.6
million
and a net loss of $5.0
million
during the nine months ended September 30, 2005, compared to a loss from
operations of $8.0 million and net loss of $67.9
million during the nine months ended September 30, 2004.
At
November 9, 2005, the Company had cash and cash equivalents of approximately
$860,000.
The
Company estimates that its current cash reserves, including the net proceeds
from the November 2005 Bridge Loan, will fund continued development of the
Aversion®
Technology and related operating expenses through January, 2006. See “Liquidity
and Capital Resources - Commercial Focus, Cash Reserves and Funding
Requirements.”
The
Company is focused on:
| · |
Development
and evaluation, in concert with contract research organizations
(“CROs”),
in laboratory settings and clinical trials, of product candidates
utilizing the Company's Aversion®
Technology.
|
|
·
|
Manufacture,
quality assurance testing and release, and stability studies
of clinical
trial supplies and NDA submission batches of certain finished
dosage form
product candidates utilizing the Company’s Aversion®
Technology.
|
|
·
|
Prosecution
of the Company’s patent applications relating to the Aversion®
Technology with the United States Patent and Trademark Office (“PTO”) and
foreign equivalents.
|
|
·
|
Negotiation
and execution of license and development agreements with strategic
pharmaceutical company partners providing that such licensees
will further
develop certain finished dosage product candidates utilizing
the
Aversion®
Technology, file for regulatory approval with the FDA and other
regulatory
authorities and commercialize such
products.
|
|
·
|
Prosecution
of the Company's application to the U.S. Drug Enforcement Administration
(“DEA”) for registration to import narcotic raw materials
(“NRMs”).
|
Status of Patent Applications and Issued Patents
As
of the
date of this Report, the Company has one (1) provisional US, two (2) non
provisional US and one (1) international patent applications pending relating
to
its Aversion®
Technology. Additionally, the Company has five (5) US patents issued, one (1)
US
Notice of Allowance granted, three (3) US and one (1) international patent
applications pending related to its Opioid Synthesis Technologies.
As of
the date of this Report, the Company retained ownership of all intellectual
property and commercial rights to its product candidates and
Technologies
Status
of Strategy with Commercial Partners
To
generate revenue the
Company plans to enter into development and commercialization agreements with
strategically focused pharmaceutical company partners (the "Partners") providing
that such Partners license product candidates utilizing the Company’s
Aversion®
Technology and further develop, register and commercialize multiple formulations
and strengths of such product candidates. The Company expects to receive
milestone payments and a share of profits and/or royalty payments derived from
the Partners' sale of products incorporating the Aversion®
Technology. Future
revenue, if any, will be derived from milestone payments and a share of profits
and/or royalty payments relating to such collaborative partners' sale of
products incorporating the Aversion®
Technology. As of the date of this Report, the Company did not have any executed
collaborative agreements with Partners, nor can there be any assurance that
the
Company will successfully enter into such collaborative agreements in the
future.
Status
of Development of OxyADF™ Tablets
The
Company’s lead product candidate, OxyADF™ (formerly known as Product Candidate
#2) is an orally administered tablet product being developed pursuant to an
active investigational new drug application (“IND”) on file with the United
States Food and Drug Administration (“FDA”). The FDA has confirmed that OxyADF™
is an appropriate product candidate for submission as a 505(b)(2) new drug
application (“NDA”). To date the Company, in concert with CROs, has completed
patient enrollment in one phase I clinical trial and one phase II clinical
trial
relating to the development of OxyADF™. The data from these clinical studies are
being analyzed and the Company, subject to the results of the analyses, intends
to use such data in its 505(b)(2) NDA submission for OxyADF™. In written
correspondence to the Company the FDA has confirmed that completion of certain
additional clinical studies will be required prior to submission of a 505(b)(2)
NDA for OxyADF™.
In
addition, the Company, in concert with a CRO, has completed a pivotal
bioequivalence study for OxyADF™ using tablets from batches manufactured by the
Company at its Culver Facility at a scale of sufficient size to fulfill the
FDA’s requirements for a 505(b)(2) NDA submission. The final report from the CRO
confirms that OxyADF™ is bioequivalent to the applicable reference listed drug.
The Company intends to use such data in its 505(b)(2) NDA submission for
OxyADF™.
In
addition, the Company, in concert with an independent laboratory CRO, completed
a pivotal study to assess certain properties of OxyADF™ using tablets from
batches manufactured by the Company at its Culver Facility at a scale of
sufficient size to fulfill the FDA’s requirements for a 505(b)(2) NDA
submission. The final report from this pivotal laboratory study confirms that
extracting the active opioid ingredient from OxyADF™ tablets in a form which may
be abused via intravenous injection is substantially more difficult than
extracting the active opioid ingredient from several currently marketed
opioid-based commercial products. The Company intends to utilize the data from
this pivotal laboratory study in its 505(b)(2) NDA submission for
OxyADF™.
Estimating
the dates of completion of clinical development, and the costs to complete
development, of the Company's product candidates, including OxyADF™, would be
highly speculative, subjective and potentially misleading. Pharmaceutical
products require significant time to research, develop and commercialize. The
Company expects to reassess its future research and development plans based
on
the review of data received from current research and development activities.
The cost and pace of future research and development activities are linked
and
subject to change. At this stage there can be no assurance that any of the
Company’s research and development efforts, including those for OxyADF™, will
lead to a 505(b)(2) NDA submission or that if NDA submissions are made with
the
FDA, that any such submission will be approved by the FDA.
Results
of Operations for the Nine Months Ended September 30, 2005 and September 30,
2004
In
comparing results of operations for the nine months ended September 30, 2005
with those for 2004 it is important to consider that the Company, as
restructured, focused the majority of its efforts and resources on research
and
development activities and subsequent to March, 2004, no longer maintained
any
generic manufacturing facilities or conducted any finished dosage manufacturing
activities. Net product revenues and manufacturing expenses realized in early
2004 were incurred as part of an orderly phase out of all generic product
manufacturing and distribution activities.
Net
Revenues
The
Company's net revenues for the nine months ended September 30, 2005 and
September 30, 2004 were as follows (in thousands):
|
9
MONTHS ENDED 9/30/05
NET
REVENUES
|
9
MONTHS ENDED 9/30/04
NET
REVENUES
|
9
MONTHS ENDED
9/30/05-9/30/04
NETREVENUES
CHANGE
($)
|
9
MONTHS ENDED
9/30/05-9/30/04
NET
REVENUES
CHANGE
(%)
|
|
$
–
|
$838
|
$(838)
|
(100%)
|
The
decrease in net revenues was a result of the Company’s decision to restructure
operations and cease the manufacture and distribution of finished dosage generic
pharmaceutical products. The net revenues for the nine months ended September
30, 2004 reflect the sale of remaining inventories of finished dosage generic
pharmaceutical products during such period.
Cost
of Manufacturing
The
Company’s cost of manufacturing for the nine months ended September 30, 2005 and
September 30, 2004 were as follows (in thousands):
|
9
MONTHS ENDED 9/30/05
COST
OF MANUFACTURING
|
9
MONTHS ENDED 9/30/04
COST
OF MANUFACTURING
|
9
MONTHS ENDED
9/30/05-9/30/04
COST
OF MANUFACTURING
CHANGE
($)
|
9
MONTHS ENDED
9/30/05-9/30/04
COST
OF MANUFACTURING
CHANGE
(%)
|
|
$
–
|
$1,437
|
$(1,437)
|
(100%)
|
For
the
nine months ended September 30, 2004 cost of manufacturing includes the fixed
costs of the Company's generic finished dosage manufacturing operations
primarily incurred in the first quarter of 2004. The Company’s generic finished
dosage manufacturing operations ceased in March 2004.
Research
and Development Expenses
The
Company’s research and development expenses for the nine months ended September
30, 2005 and September 30, 2004 were as follows (in thousands):
|
9
MONTHS ENDED 9/30/05
R&D
EXPENSES
|
9
MONTHS ENDED 9/30/04
R&D
EXPENSES
|
9
MONTHS ENDED
9/30/05
and 9/30/04
R&D
EXPENSES
CHANGE
($)
|
9
MONTHS ENDED
9/30/05
and 9/30/04
R&D
EXPENSES
CHANGE
(%)
|
|
$2,527
|
$3,179
|
$(652)
|
(21%)
|
Research
and development expense in the nine months ended September 30, 2004 consisted
primarily of product development costs associated with the manufacture and
sale
of finished dosage pharmaceutical products. Subsequent to September 30, 2004,
research and development expense consists of drug development primarily
associated with our Aversion®
Technology, including costs of preclinical, clinical trials, clinical supplies
and related formulation and design costs, salaries and other personnel related
expenses, and facility costs. Included in the 2005 results is a $284 benefit
from the reversal of a bonus accrual and a non cash compensation charge of
$210
recorded for the vesting of non qualified stock options granted in the prior
year.
Selling,
Marketing, General and Administrative Expenses
Selling,
marketing, general and administrative expenses for the nine
months ended September 30, 2005 and 2004 were as follows (in
thousands):
|
9
MONTHS
ENDED
9/30/05
SELLING,
MARKETING, G&A EXPENSES
|
9
MONTHS
ENDED
9/30/04
SELLING,
MARKETING,
G&A EXPENSES
|
9
MONTHS ENDED
9/30/05
and 9/30/04
SELLING,
MARKETING,
G&A EXPENSES
CHANGE
($)
|
9
MONTHS ENDED
9/30/05
and 9/30/04
SELLING,
MARKETING,
G&A EXPENSES
CHANGE
(%)
|
|
$2,120
|
$4,236
|
$(2,116)
|
(50%)
|
Selling
and marketing expense in the nine months ended September 30, 2004 consisted
primarily of costs associated with a manufacturer and distributor of finished
dosage products. The decrease in selling, marketing, general and administrative
expenses resulted from the Company’s decision to restructure operations by
discontinuing the distribution and sale of generic finished dosage
pharmaceutical products and reducing its administrative support staff. During
the nine months ended September 30, 2005, the Company did not incur selling
expenses and the marketing expenses consisted of costs of Aversion®
Technology market research studies and internal payroll costs. The Company’s
general and administrative expenses consisted of legal and other professional
fees, corporate insurance, and payroll costs. Included in the 2005 results
is a
$211 benefit from the reversal of a bonus accrual and a non cash compensation
charge of $556 recorded for the vesting of non qualified stock options granted
in the prior year.
Environmental
Compliance Expenses
During
the nine months ended September 30, 2005 and September 30, 2004, the Company
incurred the following expenses in connection with environmental compliance
(in
thousands):
|
9
MONTHS ENDED 9/30/05
ENVIRONMENTAL
COMPLIANCE EXPENSES
|
9
MONTHS ENDED 9/30/04
ENVIRONMENTAL
COMPLIANCE EXPENSES
|
9
MONTHS ENDED
9/30/05
and 9/30/04
ENVIRONMENTAL
COMPLIANCE
EXPENSES
CHANGE
($)
|
9
MONTHS ENDED
9/30/05
and 9/30/04
ENVIRONMENTAL
COMPLIANCE EXPENSES
CHANGE
(%)
|
|
$
–
|
$180
|
$(180)
|
(100%)
|
The
environmental compliance expenses related primarily to disposal of hazardous
and
controlled substances waste and related personnel costs for environmental
compliance during the nine month period ended September 30, 2004 when the
Company maintained its manufacturing operations.
Interest
Expense, Net of Interest Income
The
Company’s interest expense, net of interest income for the nine months ended
September 30, 2005 and September 30, 2004 was as follows (in
thousands):
|
9
MONTHS ENDED 9/30/05
INTEREST
EXPENSE, NET OF INTEREST INCOME
|
9
MONTHS ENDED 9/30/04
INTEREST
EXPENSE, NET OF INTEREST INCOME
|
9
MONTHS ENDED
9/30/05
and 9/30/04
INTEREST
EXPENSE,
NET
OF INTEREST
INCOME
CHANGE
($)
|
9
MONTHS ENDED
9/30/05
and 9/30/04
INTEREST
EXPENSE,
NET
OF INTEREST INCOME
CHANGE
(%)
|
|
$404
|
$2,799
|
$(2,395)
|
(86%)
|
The
change in the interest expense, net of interest income reflects the interest
savings from both the restructuring of the Company's Secured Term Note
indebtedness to Watson Pharmaceuticals, Inc. in February, 2004 and the
conversion of the Company’s 5% convertible debentures into convertible preferred
stock on August 13, 2004. The Company incurs interest at the prime interest
rate
plus 4.5% on its $5.0 million Secured Term Note Payable and incurs 10.0%
interest on its $1.5 million Secured Term Notes Payable.
Amortization
of Deferred Debt Discount and Private Debt Offering Costs
The
Company’s deferred debt discount and private debt offering costs for the nine
months ended September 30, 2005 and September 30, 2004 were as follows (in
thousands):
|
9
MONTHS ENDED 9/30/05
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
|
9
MONTHS ENDED 9/30/04
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
|
9
MONTHS ENDED
9/30/05
and 9/30/04
DEFERRED
DEBT DISCOUNT AND
PRIVATE
DEBT
OFFERING
COSTS
CHANGE
($)
|
9
MONTHS ENDED
9/30/05
and 9/30/04
DEFERRED
DEBT DISCOUNT AND
PRIVATE
DEBT OFFERING COSTS CHANGE
(%)
|
|
$
–
|
$72,491,
consisting of
·
$1,030
private debt offering costs
· $71,461
deferred debt discount
|
$(72,491)
|
(100%)
|
The
Company incurred neither debt discount nor debt offering cost amortization
during the nine months ended September 30, 2005. In August 2004, as a result
of
the conversion of all convertible debentures into convertible preferred stock,
all remaining unamortized deferred debt discount and private debt offering
cost
balances were written off to expense.
Net
Loss
The
Company’s net loss for the nine months ended September 30, 2005 and September
30, 2004 was as follows (in thousands):
|
9
MONTHS ENDED 9/30/05
NET
LOSS
|
9
MONTHS ENDED 9/30/04
NET
LOSS
|
9
MONTHS ENDED
9/30/05
and 9/30/04
NET
LOSS
CHANGE
($)
|
9
MONTHS ENDED 9/30/05 and 9/30/04
NET
LOSS
CHANGE
(%)
|
|
$(4,965)
|
$(67,912)
|
$(62,947)
|
(93%)
|
Included
in the net loss for the nine months ended September 30, 2005 is $85 on gain
from
asset disposals. Included in net loss for the nine months ended September 30,
2004 are gains on debt restructuring of $12,401 and asset sales of $2,388 and
other income of $603 relating to settlement of a liabilities at
discount.
Results
of Operations for the Three Months Ended September 30, 2005 and September 30,
2004
In
comparing results of operations for the three months ended September 30, 2005
with those for 2004 it is important to consider that the Company, as
restructured, has focused the majority of its efforts and resources on research
and development activities and subsequent to March, 2004, no longer maintained
any generic manufacturing facilities or conducted any finished dosage
manufacturing and distribution activities. Accordingly the Company generated
no
net product revenues nor incurred any manufacturing expense during the three
months ended September 30, 2005 and 2004.
Research
and Development Expenses
The
Company’s research and development expenses for the three months ended September
30, 2005 and September 30, 2004 were as follows (in thousands):
|
3
MONTHS ENDED 9/30/05
R&D
EXPENSES
|
3
MONTHS ENDED 9/30/04
R&D
EXPENSES
|
3
MONTHS ENDED
9/30/05
and 9/30/04
R&D
EXPENSES
CHANGE
($)
|
3
MONTHS ENDED
9/30/05
and 9/30/04
R&D
EXPENSES
CHANGE
(%)
|
|
$845
|
$1,937
|
$(1,092)
|
(56%)
|
Research
and development expense in the three months ended September 30, 2004 consisted
primarily of product development costs associated with the manufacture and
sale
of finished dosage pharmaceutical products. Subsequent to September 30, 2004,
research and development expense consists of drug development work primarily
associated with our Aversion®
Technology, including costs of preclinical, clinical trials, clinical supplies
and related formulation and design costs, salaries and other personnel related
expenses, and facility costs. Included in the 2005 results is a $379 benefit
from the reversal of a bonus accrual and a non cash compensation charge of
$47
recorded for the vesting of non qualified stock options granted in the prior
year.
Selling,
Marketing, General and Administrative Expenses
Selling,
marketing, general and administrative expenses for the three
months ended September 30, 2005 and 2004 were as follows (in
thousands):
|
3
MONTHS ENDED 9/30/05
SELLING,
MARKETING, G&A EXPENSES
|
3
MONTHS ENDED 9/30/04
SELLING,
MARKETING, G&A EXPENSES
|
3
MONTHS ENDED
9/30/05
and 9/30/04
SELLING,
MARKETING,
G&A
EXPENSES
CHANGE
($)
|
3
MONTHS ENDED
9/30/05
and 9/30/04
SELLING,
MARKETING,
G&A
EXPENSES
CHANGE
(%)
|
|
$628
|
$1,873
|
$(1,245)
|
(67%)
|
Selling
and marketing expense in the three months ended September 30, 2004 consisted
primarily of costs associated with a manufacturer and distributor of finished
dosage products. The decrease in selling, marketing, general and administrative
expenses resulted from the Company’s decision to restructure operations by
discontinuing the distribution and sale of generic finished dosage
pharmaceutical products and reducing its administrative support staff. During
the three months ended September 30, 2005, the Company did not incur selling
expenses and the marketing expenses consisted of costs of Aversion®
Technology market research studies and payroll costs. The Company’s general and
administrative expenses consisted of legal and other professional fees,
corporate insurance, and payroll costs. Included in the 2005 results is a non
cash compensation charge of $125 recorded for the vesting of non qualified
stock
options granted in the prior year.
Environmental
Compliance Expenses
During
the three months ended September 30, 2005 and September 30, 2004, the Company
did not incur environmental compliance expense.
Interest
Expense, Net of Interest Income
The
Company’s interest expense, net of interest income for the three months ended
September 30, 2005 and September 30, 2004 was as follows (in
thousands):
|
3
MONTHS ENDED 9/30/05
INTEREST
EXPENSE, NET OF INTEREST INCOME
|
3
MONTHS ENDED 9/30/04
INTEREST
EXPENSE, NET OF INTEREST INCOME
|
3
MONTHS ENDED
9/30/05
and 9/30/04
INTEREST
EXPENSE,
NET
OF INTEREST
INCOME
CHANGE
($)
|
3
MONTHS ENDED
9/30/05
and 9/30/04
INTEREST
EXPENSE, NET OF INTEREST INCOME
CHANGE
(%)
|
|
$165
|
$669
|
($504)
|
(75%)
|
The
change in the interest expense, net of interest income reflects the interest
savings from both the restructuring of the Company's Secured Term Note
indebtedness to Watson Pharmaceuticals, Inc. in February, 2004 as well as the
conversion of the Company’s 5.0% convertible debentures into convertible
preferred stock in August 2004. The Company incurs interest at the prime
interest rate plus 4.5% on its $5.0 million Secured Term Note Payable and incurs
10.0% interest on its $1.5 million Secured Term Notes Payable.
Amortization
of Deferred Debt Discount and Private Debt Offering Costs
The
Company’s deferred debt discount and private debt offering costs for the three
months ended September 30, 2005 and September 30, 2004 were as follows (in
thousands):
|
3
MONTHS ENDED 9/30/05
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
|
3
MONTHS ENDED 9/30/04
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS
|
3
MONTHS ENDED
9/30/05
and 9/30/04
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS CHANGE
($)
|
3
MONTHS ENDED
9/30/05
and 9/30/04
DEFERRED
DEBT DISCOUNT AND PRIVATE DEBT OFFERING COSTS CHANGE
(%)
|
|
$
–
|
$47,836,
consisting of
· $796
private debt offering costs
· $47,040
deferred debt discount
|
$(47,836)
|
(100%)
|
The
Company incurred neither debt discount nor debt offering cost amortization
during the three months ended September 30, 2005. In August 2004, as a result
of
the conversion of all convertible debentures into convertible preferred stock,
all remaining unamortized deferred debt discount and private debt offering
cost
balances were written off to expense.
Net
Loss
The
Company’s net loss for the three months ended September 30, 2005 and September
30, 2004 was as follows (in thousands):
|
3
MONTHS ENDED 9/30/05
NET
LOSS
|
3
MONTHS ENDED 9/30/04
NET
LOSS
|
3
MONTHS ENDED
9/30/05
and 9/30/04
NET
LOSS
CHANGE
($)
|
3
MONTHS ENDED
9/30/05
and 9/30/04
NET
LOSS
CHANGE
(%)
|
|
$(1,635)
|
$(51,480)
|
$(49,845)
|
(97%)
|
Liquidity
and Capital Resources
At
September 30, 2005, the Company had unrestricted cash and cash equivalents
of
$0.3
million as compared to $3.1 million at December 31, 2004. The Company had
working capital deficit of $1.2 million at September 30, 2005 as compared to
working capital of $2.4 million at December 31, 2004.
November
2005 Bridge Loan Financing
The
Company is a party to a Loan Agreement, dated November 9, 2005 (the “November
2005 Bridge Loan Agreement”) by and among Essex Woodlands Health Venture V,
L.P., Care Capital Investments II, LP, Care Capital Offshore Investments II,
LP,
Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee
Fund III, L.P. and such Additional Lenders as may become a party pursuant to
the
terms of the November 2005 Bridge Loan Agreement (collectively, the “November
2005 Bridge Lenders”) providing for bridge financing to the Company in the
initial principal amount of $800,000, plus such additional amounts of up to
$250,000 as may be advanced thereunder (the “November 2005 Bridge Loan”). The
net proceeds from the November 2005 Bridge Loan, after the satisfaction of
related expenses, will be used by the Company to continue the development of
its
Aversion®
Technology and to fund operating expenses. The November 2005 Bridge Loan is
secured by a lien on all of the Company’s assets, senior in right of payment and
lien priority to all other indebtedness of the Company. The November 2005 Bridge
Loan bears interest at the rate of ten percent (10%) per annum and matures
on
June 1, 2006. The November 2005 Bridge Loan is subject to mandatory pre-payment
by the Company upon the Company’s completion of equity or debt financing or any
sale, transfer, license or similar arrangement pursuant to which the Company
or
any of its Subsidiaries sells, licenses or otherwise grant rights in any
material portion of the Company’s intellectual property to any third party,
provided that the consummation of any such transaction results in cash proceeds
to the Company, net of all costs and expenses, at least equal to the sum of
(i)
$4.0 million, plus (ii) the aggregate principal amount of the November 2005
Bridge Loan (a “Funding Event”). The November 2005 Bridge Loan Agreement
restricts the Company’s ability to issue any shares of its currently authorized
Series A, B or C preferred stock without the prior consent of the November
2005
Bridge Lenders, and grants the November 2005 Bridge Lenders preemptive rights
relating to the issuance of the Company’s Series A, B and C preferred stock. The
November 2005 Bridge Loan Agreement also contains normal and customary
affirmative and negative covenants, including restrictions on the Company’s
ability to incur additional debt or grant any lien on the assets of the Company
or its Subsidiaries, subject to certain permitted exclusions.
September
2005 Bridge
Loan Financing
The
Company is a party to a Loan Agreement, dated September
16,
2005
(the “
September 2005 Bridge
Loan Agreement”) by and among Essex Woodlands Health Venture V, L.P., Care
Capital Investments II, L.P., Care Capital Offshore Investments II, L.P., Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, the “September
2005 Bridge
Lenders”) providing for bridge financing to the Company in the principal amount
of $0.5
million
(the “September
2005
Bridge Loan”). The net proceeds from the September
2005
Bridge Loan, after the satisfaction of related expenses, will be used by the
Company to continue the development of its Aversion®
Technology and to fund operating expenses. The terms of the September 2005
Bridge Loan are identical to the terms of the November 2005 Bridge Loan, except
that (i) the September 2005 Bridge Loan requires that the Company maintain
minimum cash reserves of $200,000, (ii) the lien securing the September 2005
Bridge Loan is junior in right of payment and lien priority to the November
2005
Bridge Loan, and (iii) the Funding Event is $4.0 million. On October 20, 2005,
the September 2005 Bridge Lenders waived the requirement that the Company
maintain minimum cash reserves of $200,000 until such time as the Company
receives additional financing providing net proceeds to the Company of at least
$2.0 million.
June
2005 Bridge Loan Financing
The
Company also is a party to a Loan Agreement, dated June 22, 2005 (the “June 2005
Bridge Loan Agreement”) by and among Essex Woodlands Health Venture V, L.P.,
Care Capital Investments II, L.P., Care Capital Offshore Investments II, L.P.,
Galen Partners III, L.P., Galen Partners International III, L.P., and Galen
Employee Fund III, L.P. (collectively, the “June 2005 Bridge Lenders”) providing
for bridge financing to the Company in the principal amount of $1.0 million
(the
“June 2005 Bridge Loan”). The net proceeds from the June 2005 Bridge Loan, after
the satisfaction of related expenses, were used by the Company to continue
the
development of its Aversion®
Technology and to fund operating expenses. The terms of the June 2005 Bridge
Loan are identical to the terms of the November 2005 Bridge Loan described
above, except that (i) the June 2005 Bridge Loan requires that the Company
maintain minimum cash reserves of $200,000, (ii)
the
lien securing the June 2005 Bridge Loan is junior in right of payment and lien
priority to each of the November 2005 Bridge Loan and the September 2005 Bridge
Loan and (iii) the Funding Event amount is $3.5 million.
On
October 20, 2005, the June 30, 2005 Bridge Lenders waived the requirement that
the Company maintain minimum cash reserves of $200,000 until such time as the
Company receives additional financial providing net proceeds to the Company
of
at least $2.0 million.
2004
Debenture Offering
On
February 10, 2004, the Company consummated a private offering of convertible
senior secured debentures (the "2004 Debentures") in the aggregate principal
amount of approximately $12.3 million (the "2004 Debenture Offering"). The
2004
Debentures were issued by the Company pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
by and among the Company, Care Capital Investments, Essex Woodlands Health
Ventures, Galen Partners and each of the purchasers listed on the signature
page
thereto. On April 14, 2004 and May 26, 2004, the Company completed additional
closings under the 2004 Purchase Agreement raising the aggregate gross proceeds
received by the Company from the offering of the 2004 Debentures to $14.0
million. As the conversion price of the 2004 Debentures was less than the fair
market value of the Company’s Common Stock on the date of issue, beneficial
conversion features were determined to exist. The Company recorded approximately
$14.0 million of debt discount limited to the face amount of the new debt.
The
debt discount was amortized over the life of the debt, which matured on August
13, 2004, the date the 2004 Debentures were automatically converted into the
Company's Series A Convertible Preferred Stock.
Pursuant
to the terms of the 2004 Purchase Agreement and other documents executed in
connection with the 2004 Debentures, effective August 13, 2004, each of the
holders of the Company’s 2004 Debentures converted the 2004 Debentures into the
Company’s Series A preferred shares (the “Series A Preferred”). In addition,
effective August 13, 2004, each of the holders of the Company’s 5% convertible
senior secured debentures issued during the period 1998 through and including
2003 converted such debentures into the Company’s Series B Preferred Stock (the
“Series B Preferred”) and/or Series C-1, C-2 and/or C-3 preferred stock
(collectively, the “Series C Preferred”). The Series C Preferred shares together
with the Series B Preferred shares are herein referred to as the “Junior
Preferred Shares”). Upon conversion of the Company’s outstanding debentures, the
Company issued approximately 21.9 million Series A Preferred shares,
approximately 20.2 million Series B Preferred shares, approximately 56.4 million
Series C-1 Preferred shares, approximately 37.4 million Series C-2 Preferred
shares and approximately 81.9 million Series C-3 Preferred shares. The Series
A
Preferred Shares are convertible into the Company’s Common Stock, with each
Series A Preferred Share convertible into the number of shares of Common Stock
obtained by dividing (i) the Series A Liquidation Preference, by (ii) the
$0.6425 Series A conversion price, as such conversion price may be adjusted,
from time to time, pursuant to the dilution protections of such shares. The
Junior Preferred Shares are convertible into the Company’s Common Stock with
each Junior Preferred Share convertible into one share of Common
Stock.
Conversion
of Preferred Stock
Effective
November 10, 2005, all of the Company’s issued and outstanding shares of
preferred stock were automatically and mandatorily converted into the Company’s
common stock in accordance with the terms of the Company’s Restated
Certification of Incorporation (the “Preferred Stock Conversion”). In accordance
with the conversion provisions contained in the Restated Certificate of
Incorporation, all issued and outstanding shares of the Company’s Series A
Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series
C-2 Preferred Stock and Series C-3 Preferred Stock (collectively, the “Preferred
Stock”) are converted automatically into the Company’s common stock upon the
Company’s receipt of the written consent to the Preferred Stock Conversion from
the holders of at least 51% of the shares of the Company’s Series A Preferred
Stock. On November 10, 2005, the Company received the consent to the Preferred
Stock Conversion from GCE Holdings LLC (the
assignee of all Preferred Stock formerly held by each of Care Capital
Investments II, LP, Care Capital Offshore Investments II, LP, Essex Woodlands
Health Ventures V, L.P., Galen Partners International III, L.P., Galen Partners
III, L.P. and Galen Employee Fund III, L.P.), such entity holding in the
aggregate in excess of 51% of the issued and outstanding shares of the Company’s
Series A Preferred Stock. In accordance with the terms of the Company’s Restated
Certificate of Incorporation, all shares of the Company’s Preferred Stock were
automatically converted into an aggregate of approximately 305.4 million shares
of the Company’s common stock.
Amendment
to Watson Term Loan Agreement
The
Company was a party to a certain loan agreement with Watson Pharmaceuticals,
Inc. ("Watson") pursuant to which Watson made term loans to the Company (the
"Watson Term Loan Agreement") in the aggregate principal amount of $21.4 million
as evidenced by two promissory notes (the "Watson Notes"). It was a condition
to
the completion of the 2004 Debenture Offering that simultaneous with the closing
of the 2004 Purchase Agreement, the Company shall have paid Watson the sum
of
approximately $4.3 million (which amount was funded from the proceeds of the
2004 Debenture Offering) and conveyed to Watson certain Company assets in
consideration for Watson's forgiveness of approximately $16.4 million of
indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from June 30,
2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company's Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5.0 million, and
to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson
Notes
as so amended, the "2004 Note"). Simultaneous with the issuance of the 2004
Note, each of Care Capital, Essex Woodlands Health Ventures, Galen Partners
and
the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the "2004 Note Holders") purchased the 2004 Note from Watson
in
consideration for a payment to Watson of $1.0 million.
In
addition to Watson's forgiveness of approximately $16.4 million under the Watson
Notes, as additional consideration for the Company's payment to Watson of
approximately $4.3 million and the Company's conveyance of certain Company
assets, all supply agreements between the Company and Watson were terminated
and
Watson waived the dilution protections contained in the Common Stock purchase
warrant dated December 20, 2002 exercisable for approximately 10.7 million
shares of the Company's Common Stock previously issued by the Company to Watson,
to the extent such dilution protections were triggered by the transactions
provided in the 2004 Debenture Offering.
Terms
of the 2004
Note
The
2004
Note in the principal amount of $5.0 million as purchased by the Watson Note
Purchasers was secured by a first lien on all of the Company's and its
subsidiaries' assets, senior to the lien securing the Outstanding Debentures
and
all other Company indebtedness, carries a floating rate of interest equal to
the
prime rate plus 4.5% (paid quarterly in the Company’s common stock) and matures
on June 30, 2007.
As
part
of the completion of each
of
the November 2005 Bridge Loan, the September 2005 Bridge Loan and the
June 2005
Bridge Loan, the 2004
Note
Holders, the November 2005 Bridge Lenders, the September 2005 Bridge
Lenders and
the
June
2005 Bridge
Lenders executed
Subordination Agreements, providing
for the subordination of the lien and payment priority of the 2004 Note in
favor
of the lien and payment priority of each
of
the November 2005 Bridge Loan, the September 2005 Bridge Loan and the
June 2005
Bridge Loan.
Sale
of Certain Company Assets
On
March
19, 2004, the Company and its wholly-owned subsidiary, Axiom Pharmaceutical
Corporation (“Axiom”), entered into an Asset Purchase Agreement with IVAX
Pharmaceuticals New York LLC ("IVAX"). Pursuant to the Purchase Agreement,
the
Company and Axiom agreed to sell to IVAX substantially all of the Company's
assets used in the operation of the Company's former generic manufacturing
and
packaging operations located in Congers, New York in consideration of an
immediate payment of $2.0 million and an additional payment $0.5 million upon
receipt of shareholder approval of the transaction. Shareholder approval of
the
asset sale transaction with IVAX was obtained on August 12, 2004 and the closing
was completed on August 13, 2004, at which time the Company received the
remaining payment of $0.5 million from IVAX.
Commercial
Focus, Cash Reserves and Funding Requirements
As
of
November 9, 2005, the Company had cash and cash equivalents of approximately
$860,000. The majority of such cash reserves will be dedicated to the
development of the Company's Aversion®
Technology, the prosecution of the Company's patent applications relating to
the
Aversion®
Technology and for administrative and related operating expenses. The Company
has suspended further development and commercialization efforts relating to
the
Opioid Synthesis Technologies and expects to minimize the use of cash and cash
equivalents for the prosecution of patent applications relating to the Opioid
Synthesis Technologies.
The
Company must rely on its current cash reserves to fund the development of its
Aversion®
Technology and related ongoing operating expenses. The Company's future sources
of revenue, if any, will be derived from contract signing fees, milestone
payments and royalties and/or profit sharing payments from licensees for the
Company's Aversion®Technology.
The Company estimates that its current cash reserves, including the net proceeds
from the November 2005 Bridge Loan, will fund continued development of the
Aversion®
Technology and related operating expenses through January, 2006. To
fund
operations and product development activities the Company must raise additional
financing, or enter into alliances or collaboration agreements with third
parties. No assurance can be given that the Company will be successful in
obtaining any such financing or in securing collaborative agreements with third
parties on acceptable terms, if at all, or if secured, that such financing
or
collaborative agreements will provide for payments to the Company sufficient
to
continue to fund operations. In the absence of such financing or third-party
collaborative agreements, the Company will be required to scale back or
terminate operations and/or seek protection under applicable bankruptcy
laws.
Even
assuming the Company is successful in securing additional sources of financing
to fund the continued development of the Aversion®
Technology, or otherwise enters into alliances or collaborative agreements
relating to the Aversion®
Technology, there can be no assurance that the Company's development efforts
will result in commercially viable products. The Company's failure to
successfully develop the Aversion®
Technology in a timely manner, to obtain an issued U.S. patent relating to
the
Aversion®
Technology and to avoid infringing third-party patents and other intellectual
property rights will have a material adverse impact on its financial condition
and results of operations.
In
view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the Company's accompanying consolidated balance
sheets is dependent upon continued operations of the Company, which in turn
are
dependent upon the Company's ability to meet its financing requirements on
a
continuing basis, to maintain present financing, and to succeed in its future
operations. The Company's financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts
or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
The
following table presents the Company's expected cash requirements for
contractual obligations outstanding as of September 30, 2005 (In
thousands):
|
TOTAL
|
DUE
IN 4th
QUARTER OF
2005
|
DUE
IN
2006
|
DUE
IN
2007
|
DUE
THEREAFTER
|
||||||||||||
|
Term
notes
|
$
|
6,500
|
$
|
–
|
$
|
1,500
|
$
|
5,000
|
$
|
–
|
||||||
|
Interest
on term notes
|
100
|
38
|
62
|
–
|
–
|
|||||||||||
|
Capital
leases
|
70
|
7
|
31
|
25
|
7
|
|||||||||||
|
Operating
leases
|
12
|
7
|
5
|
–
|
–
|
|||||||||||
|
Employment
agreements
|
510
|
185
|
325
|
–
|
–
|
|||||||||||
|
Total
Contractual Cash Obligations
|
$
|
7,192
|
$
|
237
|
$
|
1,923
|
$
|
5,025
|
$
|
7
|
||||||
Critical
Accounting Policies
Financial
Reporting Release No. 60, which was released by the Securities and Exchange
Commission ("SEC") in December 2001, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of
financial statements. Note A of the Notes to Consolidated Financial Statements
included as a part of this Report, includes a summary of the Company's
significant accounting policies and methods used in the preparation of the
financial statements. In preparing these financial statements, the Company
has
made its best estimates and judgments of certain amounts included in the
financial statements, giving due consideration to materiality. The application
of these accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. The Company does not believe there is a
consequential likelihood that materially different amounts would be reported
under different conditions or using different assumptions. The Company's
critical accounting policies are as follows:
Income
Taxes
Deferred
income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carry-forwards
for which income tax benefits are expected to be realized in future years.
A
valuation allowance is established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. In estimating future tax
consequences, the Company generally considers all expected future events other
than an enactment of changes in the tax laws or rates. The Company has recorded
a full valuation allowance to reduce its net deferred income tax assets to
the
amount that is more likely than not to be realized. In the event the Company
were to determine that it would be able to realize its deferred income tax
assets in the future, an adjustment to reduce the valuation allowance would
increase income in the period such determination was made.
Stock
Compensation
The
Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and complies with the disclosure provision of
SFAS
No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123" ("SFAS No. 148"). The amounts disclosed
include various estimates used to determine fair value of stock options. If
the
Company were to include the cost of stock-based employee compensation in the
financial statements, the Company's operating results would decline based on
the
fair value of the stock-based employee compensation.
Deferred
Debt Discount
Deferred
debt discount will result from the issuance of stock warrants and beneficial
conversion features in connection with the issuance of subordinated debt, common
stock interest payments and other notes payable. The amount of the discount
is
recorded as a reduction of the related obligation and is amortized over the
remaining life of the related obligations. Management determines the amount
of
the discount, based, in part, by the relative fair values ascribed to the
warrants determined by an independent valuation or through the use of the
Black-Scholes valuation model. Inherent in the Black-Scholes valuation model
are
assumptions made by management regarding the estimated life of the warrant,
the
estimated volatility of the Company's common stock and the expected dividend
yield.
New
Accounting Pronouncements
Share-Based
Payment
On
December 16, 2004, the Financial Accounting Standards Board (the “FASB”)
released FASB Statement No. 123 (revised 2004), “Share-Based Payment, (“SFAS
123R”)”. These changes in accounting replace existing requirements under FASB
Statement No. 123, “Accounting for Stock-Based Compensation”, and eliminates the
ability to account for share-based compensation transaction using APB Opinion
No.25, “Accounting for Stock Issued to Employees”. The compensation cost
relating to share-based payment transactions will be measured based on the
fair
value of the equity or liability instruments issues. This Statement does not
change the accounting for similar transactions involving parties other than
employees. In April 2005, the Securities and Exchange Commission (the “SEC”)
delayed implementation of SFAS 123R for publicly traded companies such that
they
must apply this Standard as of the beginning of the next fiscal year that begins
after June 15, 2005. This Statement applies to all awards granted after the
required effective date and to awards modified, repurchased, or cancelled after
that date. The cumulative effect of initially applying this Statement, if any,
is recognized as of the required effective date. The Company has not completed
it evaluation of the impact of adopting SFAS 123R on its consolidated financial
statements, but anticipates that more compensation costs will be recorded in
the
future if the use of options for employees and director compensation continues
as in the past.
Changes
and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections - A Replacement of APB Opinion No.
20
and FASB Statement No. 3.”, (“SFAS 154”). SFAS 154 primarily requires
retrospective application to prior periods’ financial statements for the direct
effects of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005, and early adoption
is
permitted. The Company is required to adopt the provision of SFAS 154, as
applicable, beginning in fiscal 2006.
The
Company Received a "Going Concern" Opinion from Its Independent Registered
Public Accounting Firm, Has a History of Operating Losses and May Not Achieve
Profitability Sufficient to Generate a Positive Return on Shareholders'
Investment
We
have
incurred net losses since 1992, including net losses of approximately
$5.0
million
for nine months ended
September 30,
2005,
$70.0 million for the year ended December 31, 2004 and $48.5 million, $59.6
million and $12.6 million for fiscal 2003, 2002 and 2001, respectively. As
of
September 30,
2005
our accumulated deficit was approximately $284.5
million.
The Company's consolidated financial statements for the year ended December
31,
2004 and 2003 have been prepared on a “going concern” basis, expressing
substantial doubt about the Company's ability to continue as a going concern
as
a result of recurring losses and negative cash flows. Our future profitability
will depend on several factors, including:
| · |
The
Company’s ability to secure additional financing to fund continued
operations;
|
|
·
|
The
successful completion of the formulation development, clinical
testing and
acceptable regulatory review of product candidates utilizing
the
Aversion®
Technology;
|
|
·
|
The
receipt of issued patents from the U.S. Patent and Trademark Office
(“PTO”) for the material claims in the Company's patent applications
relating to the Aversion®Technology;
|
|
·
|
The
Company's ability to negotiate and execute appropriate licensing,
development and commercialization agreements with interested
third parties
relating to the Company’s product candidates;
and,
|
|
·
|
The
successful commercialization by licensees of products incorporating
the
Aversion®
Technology without infringing the patents and other intellectual
property
rights of third parties.
|
We
cannot
assure you that we will ever have a product approved by the FDA, that we will
bring any product to market or, if we are successful in doing so, that we will
ever become profitable.
We
Require Additional Funding
Our
requirements for additional new funding will depend on many factors,
including:
| · |
The
time required and expenses incurred in the development and
commercialization of products incorporating our Aversion®
Technology;
|
|
·
|
The
structure of any future collaborative or development agreements
relating
to the Aversion®
Technology, including the timing and amount of payments, if any,
that may
be received under possible future collaborative
agreements;
|
|
·
|
Our
ability to develop additional product candidates utilizing the
Aversion®
Technology;
|
|
·
|
Our
ability to negotiate agreements with third parties for development,
manufacture, marketing, sale and distribution of products utilizing
our
Aversion®
Technology;
|
|
·
|
The
prosecution, defense and enforcement of patent claims and other
intellectual property rights relating to the Aversion®
Technology; and
|
|
·
|
The
successful commercialization by licensees of products incorporating
our
Aversion®
Technology without infringing third-party patents or other intellectual
property rights.
|
We
anticipate that our existing cash reserves will be sufficient to fund operations
only through January, 2006. To continue funding operations the Company must
raise additional financing, or enter into alliances or collaborative agreements
with third parties providing for net proceeds to the Company. No assurance
can
be given that the Company will be successful in obtaining any such financing
or
in securing collaborative agreements with third parties on acceptable terms,
if
at all, or if secured, that such financing or collaborative agreements will
provide for payments to the Company sufficient to continue to fund operations.
In the absence of such financing or third-party collaborative agreements, the
Company will be required to scale back or terminate operations and/or seek
protection under applicable bankruptcy laws.
Even
assuming the Company is successful in securing additional sources of financing
to fund the continued development of the Aversion®
Technology, or otherwise enters into alliances or collaborative agreements
relating to the Aversion®
Technology, there can be no assurance that the Company's development efforts
will result in commercially viable products.
We
Have No Near Term Sources of Revenue and Must Rely on Current Cash Reserves,
Third-Party Financing, and Technology Licensing Fees to Fund Operations
Pending
the completion of the development of product candidates utilizing our
Aversion®
Technology, and the receipt of regulatory approval of products incorporating
such technology, and the negotiation of appropriate licensing agreements with
pharmaceutical company partners, of which no assurance can be given, the Company
must rely on its current cash reserves, third-party financing and technology
licensing fees to fund the Company's operations. As of November 9, 2005, we
had
cash and cash equivalents of approximately $860,000.
No
assurance can be given that such cash resources will be sufficient to fund
the
continued development of our product candidates until such time as we generate
revenue from the license of products incorporating the Aversion®
Technology to third parties. Moreover, no assurance can be given that we will
be
successful in raising additional financing to fund operations or, if funding
is
obtained, that such funding will be sufficient to fund operations until the
Company's product candidates incorporating our Aversion®
Technology, may be commercialized.
Our
Product Candidates Are Based on Technology That Could Ultimately Prove
Ineffective
The
first
product candidate ("Product Candidate #1") resulting from the
Aversion®
Technology is a tablet formulation intended for oral administration and has
an
active IND on file with FDA relating to such product candidate. The Company
has
formulated a second product candidate (“OxyADF™ tablets”) incorporating the
Aversion®Technology
and has an active IND on file with the FDA for such product candidate. Since
the
formulation of OxyADF™ tablets, the Company has suspended all development
activities for Product Candidate #1 and has focused all product development
activities on OxyADF™ tablets. Additional clinical and non-clinical testing will
be required to continue development of OxyADF™ tablets and for the preparation
and submission of a 505(b)(2) new drug application (“NDA”) with the FDA. There
can be no assurance that OxyADF™ tablets or any other product developed using
the Aversion®Technology
will lead to a NDA submission to the FDA and that if a NDA is submitted, that
the FDA will accept such submission and subsequently approve such regulatory
application to allow for commercial distribution of the product.
The
Company is committing substantially all of its resources and available capital
to the development of OxyADF™ tablets and the prosecution of its patent
applications for the Aversion®
Technology. The failure of the Company to successfully develop a product
candidate utilizing the Aversion®Technology,
to successfully obtain an issued patent from the PTO relating to the
Aversion®Technology
and to avoid infringing third-party patents and intellectual property rights
in
the commercialization of products utilizing the Aversion®Technology
will have a material adverse effect on the Company's operations and financial
condition.
If
Laboratory, Animal and/or Human Testing For Our Product Candidates Are
Unsuccessful or Delayed, We Will Be Unable to Meet Our Anticipated Development
and Commercialization Timelines.
To
obtain
FDA approval to commercially market any of our product candidates, we must
submit to the FDA an NDA demonstrating, among other things, that the product
candidate is safe and effective in humans for its intended use. This
demonstration requires significant laboratory, animal and human testing. As
we
do not possess the resources or employ all the personnel necessary to conduct
such testing it is our intention to rely on contract research organizations
for
the majority of this testing with our product candidates. As a result, we will
have less control over the timing and other aspects of our development program
than if we performed the testing entirely on our own. Third parties may not
perform their responsibilities on our anticipated schedule. Delays in our
development programs could significantly increase our product development costs
and delay product commercialization. In addition, many of the factors that
may
cause, or lead to, a delay in the development program may also ultimately lead
to denial of regulatory approval of a product candidate.
The
commencement of clinical trials with our product candidates can be delayed
for a
variety of reasons, including delays in demonstrating sufficient pre-clinical
safety data required to obtain regulatory approval to commence a clinical trial,
reaching agreement on acceptable terms with prospective collaborative partners,
manufacturing and quality assurance release of a sufficient supply of a product
candidate for use in our clinical trials and/or obtaining institutional review
board approval to conduct a clinical trial at a prospective site. Once a
clinical trial has begun, it may be delayed, suspended or terminated by us
or
the FDA or other regulatory authorities due to a number of factors, including
ongoing discussions with the FDA or other regulatory authorities regarding
the
scope or design of our clinical trials, failure to conduct clinical trials
in
accordance with regulatory requirements, lower than anticipated recruitment
or
retention rate of patients in clinical trials, inspection of the clinical trial
operations or trial sites by the FDA or other regulatory authorities resulting
in the imposition of a clinical hold, lack of adequate funding to continue
clinical trials; and/or negative results of clinical trials.
Clinical
trials, where required by the FDA for commercial approval of the Company’s
Product Candidates, may not demonstrate the safety or efficacy of our product
candidates. Success in pre-clinical testing and early clinical trials does
not
ensure that later clinical trials will be successful. Results of later clinical
trials may not replicate the results of prior clinical trials and pre-clinical
testing. Even if the results of our pivotal clinical trials are positive, we
and
our collaborative partners may have to commit substantial time and additional
resources to conduct further pre-clinical and clinical studies before we can
submit NDAs or obtain final FDA approval for our product
candidates.
Clinical
trials are often very expensive and difficult to design and implement, in part
because they are subject to rigorous requirements. Further, if participating
patients in clinical studies suffer drug-related adverse reactions during the
course of such trials, or if we, our collaborative partner or the FDA believes
that participating patients are being exposed to unacceptable health risks,
our
collaborative partner may have to suspend the clinical trials. Failure can
occur
at any stage of the trials, and our collaborative partner could encounter
problems that cause the abandonment of clinical trials or the need to conduct
additional clinical studies, relating to a product candidate.
Even
if
our clinical trials are completed as planned, their results may not support
our
product claims. The clinical trial process may fail to demonstrate that our
product candidates are safe and effective for their intended use. Such failure
would cause us or our collaborative partner to abandon a product candidate
and
could delay the development of other product candidates.
If
We Retain Collaborative Partners and Our Partners Do Not Satisfy Their
Obligations, We Will Be Unable to Develop Our Partnered Product Candidates
To
complete the development and regulatory approval of our products and
commercialize our products, if any are approved by the FDA, we plan to enter
into development and commercialization agreements with strategically focused
pharmaceutical company partners providing that such partners license our
Aversion®
Technologies and further develop, register, manufacture and commercialize
multiple formulations and strengths of orally administered opioid-containing
finished dosage products utilizing such Technologies. We expect to receive
a
share of profits and/or royalty payments derived from such collaborative
partners' sale of products incorporating the Technologies. Currently, we do
not
have any such collaborative agreements, nor can there be any assurance that
we
will actually enter into collaborative agreements in the future. Our inability
to enter into collaborative agreements, or our failure to maintain such
agreements, would limit the number of product candidates that we can develop
and
ultimately, decrease our sources of any future revenues. In the event we enter
into any collaborative agreements, we may not have day-to-day control over
the
activities of our collaborative partners with respect to any product candidate.
Any collaborative partner may not fulfill its obligations under such agreements.
If a collaborative partner fails to fulfill its obligations under an agreement
with us, we may be unable to assume the development of the product covered
by
that agreement or to enter into alternative arrangements with a third-party.
In
addition, we may encounter delays in the commercialization of the product
candidate that is the subject of a collaboration agreement. Accordingly, our
ability to receive any revenue from the product candidates covered by
collaboration agreements will be dependent on the efforts of our collaborative
partner. We could be involved in disputes with a collaborative partner, which
could lead to delays in or termination of, our development and commercialization
programs and result in time consuming and expensive litigation or arbitration.
In addition, any such dispute could diminish our collaborative partners’
commitment to us and reduce the resources they devote to developing and
commercializing our products. If any collaborative partner terminates or
breaches its agreement, or otherwise fails to complete its obligations in a
timely manner, our chances of successfully developing or commercializing our
product candidates would be materially and adversely effected.
Additionally,
due to the nature of the market for our product candidates it may be necessary
for us to license all or a significant portion of our product candidates to
a
single collaborator, thereby eliminating our opportunity to commercialize other
product candidates with other collaborative partners.
The
Market May Not Be Receptive to Products Incorporating Our
Technologies
The
commercial success of products incorporating our Technologies that are approved
for marketing by the FDA and other regulatory authorities will depend upon
their
acceptance by the medical community and third-party payors as clinically useful,
cost-effective and safe. There can be no assurance given, even if we succeed
in
the development of products incorporating our Technologies and receive FDA
approval for such products, that our products incorporating the Technologies
would be accepted by the medical community and others. Factors that we believe
could materially affect market acceptance of these products
include:
| · |
The
relative advantages and disadvantages of our Technologies and timing
to
commercial launch of products utilizing our Technologies compared
to
products incorporating competitive
technologies;
|
|
·
|
The
timing of the receipt of marketing approvals and the countries
in which
such approvals are obtained;
|
|
·
|
The
safety and efficacy of products incorporating our Technologies
as compared
to competitive products;
and/or
|
| · |
The
cost-effectiveness of products incorporating our Technologies and
the
ability to receive third-party
reimbursement.
|
Our
product candidates, if successfully developed, will compete with a number of
products manufactured and marketed by other brand focused pharmaceutical
companies, biotechnology companies and manufacturers of generic products. Our
products may also compete with new products currently under development by
others. Physicians, patients, third-party payors and the medical community
may
not accept or utilize any of our product candidates. Physicians may not be
inclined to prescribe the products utilizing the Aversion®Technology
unless our products bring demonstrable advantages over other products currently
marketed for the same indications. If our products do not achieve market
acceptance, we will not be able to generate significant revenues or become
profitable.
In
the Event That We Are Successful in Bringing Any Products to Market, Our
Revenues May Be Adversely Affected If We Fail to Obtain Acceptable Prices or
Adequate Reimbursement For Our Products From Third-Party Payors
Our
ability to commercialize pharmaceutical products successfully may depend in
part
on the availability of reimbursement for our products from government and health
administration authorities, private health insurers, and other third-party
payors, including Medicare.
We
cannot
predict the availability of reimbursement for newly-approved health care
products. Third-party payors, including Medicare, are challenging the prices
charged for medical products and services. Government and other third-party
payors increasingly are limiting both coverage and the level of reimbursement
for new drugs. Third-party insurance coverage may not be available to patients
for any of our products.
The
continuing efforts of government and third-party payors to contain or reduce
the
costs of health care may limit our commercial opportunity. If government and
other third-party payors do not provide adequate coverage and reimbursement
for
any product we bring to market, doctors may not prescribe them or patients
may
ask to have their physicians prescribe competing products with more favorable
reimbursement. In some foreign markets, pricing and profitability of
pharmaceutical products are subject to government control. In the United States,
we expect that there will continue to be federal and state proposals for similar
controls. In addition, we expect that increasing emphasis on managed care in
the
United States will continue to put pressure on the pricing of pharmaceutical
products. Cost control initiatives could decrease the price that we receive
for
any products in the future. Further, cost control initiatives could impair
our
ability to commercialize our products and our ability to earn revenues from
this
commercialization.
Our
Success Depends on Our Ability to Protect Our Intellectual
Property
Our
success depends in significant part on our ability to obtain patent protection
for our Aversion®Technology,
in the United States and in other countries, and to enforce these patents.
The
patent positions of pharmaceutical firms, including us, are generally uncertain
and involve complex legal and factual questions. There is no assurance that
any
of our patent applications for our Aversion®
Technology will issue or, if issued, that such patent(s) will be valid and
enforceable against third-party infringement or that such patent(s) will not
infringe any third-party patent or intellectual property. Moreover, even if
patents do issue on our Aversion®Technology,
the claims allowed may not be sufficiently broad to protect the products
incorporating the Aversion®Technology.
In addition, issued patents may be challenged, invalidated or circumvented.
Even
if issued, our patents may not afford us protection against competitors with
similar technology or permit the commercialization of our products without
infringing third-party patents or other intellectual property
rights.
Our
success also depends on our not infringing patents issued to competitors or
others. We may become aware of patents and patent applications belonging to
competitors and others that could require us to alter our Technologies. Such
alterations could be time consuming and costly.
We
may
not be able to obtain a license to any technology owned by or licensed to a
third party that we require to manufacture or market one or more products
incorporating our Technologies. Even if we can obtain a license, the financial
and other terms may be disadvantageous.
Our
success also depends on our maintaining the confidentiality of our trade secrets
and know-how. We seek to protect such information by entering into
confidentiality agreements with employees, potential collaborative partners,
potential investors and consultants. These agreements may be breached by such
parties. We may not be able to obtain an adequate, or perhaps, any remedy to
such a breach. In addition, our trade secrets may otherwise become known or
be
independently developed by our competitors. Our inability to protect our
intellectual property or to commercialize our products without infringing
third-party patents or other intellectual property rights would have a material
adverse effect on our operations and financial condition.
We
May Become Involved in Patent Litigation or Other Intellectual Property
Proceedings Relating to Our Products or Technologies Which Could Result in
Liability for Damages or Delay or Stop Our Development and Commercialization
Efforts
The
pharmaceutical industry has been characterized by significant litigation and
other proceedings regarding patents, patent applications and other intellectual
property rights. The types of situations in which we may become parties to
such
litigation or proceedings include:
| · |
We
may initiate litigation or other proceedings against third parties
to
enforce our patent rights or other intellectual property
rights;
|
| · |
We
may initiate litigation or other proceedings against third parties
to seek
to invalidate the patents held by such third parties or to obtain
a
judgment that our products or processes do not infringe such third
parties' patents;
|
| · |
If
our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention;
and
|
| · |
If
third parties initiate litigation claiming that our processes or
products
infringe their patent or other intellectual property rights, we
will need
to defend against such
proceedings.
|
The
costs
of resolving any patent litigation or other intellectual property proceeding,
even if resolved in our favor, could be substantial. Some of our competitors
may
be able to sustain the cost of such litigation and proceedings more effectively
than we can because of their substantially greater resources. Uncertainties
resulting from the initiation and continuation of patent litigation or other
intellectual property proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other intellectual
property proceedings may also consume significant management time.
Our
Technologies may be found to infringe upon claims of patents owned by others.
If
we determine or if we are found to be infringing on a patent held by another,
we
might have to seek a license to make, use, and sell the patented technologies.
In that case, we might not be able to obtain such license on terms acceptable
to
us, or at all. If a legal action is brought against us, we could incur
substantial defense costs, and any such action might not be resolved in our
favor. If such a dispute is resolved against us, we may have to pay the other
party large sums of money and our use of our Technologies and the testing,
manufacturing, marketing or sale of one or more of our products could be
restricted or prohibited. Even prior to resolution of such a dispute, use of
our
Technologies and the testing, manufacturing, marketing or sale of one or more
of
our products could be restricted or prohibited.
Moreover,
other parties could have blocking patent rights to products made using the
Aversion®Technology.
For example, the Company is aware of certain United States and European pending
patent applications owned by third parties claiming abuse deterrent
technologies. If such patent applications result in issued patents, with claims
encompassing our Aversion®Technology
or products, the Company may need to obtain a license to commercialize products
incorporating the Aversion®Technology,
should one be available or, alternatively, alter the Aversion®Technology
so as to avoid infringing such third-party patents. If the Company is unable
to
obtain a license on commercially reasonable terms, the Company could be
restricted or prevented from commercializing products utilizing the
Aversion®Technology.
Additionally, any alterations to the Aversion®Technology
in view of pending third-party patent applications could be time consuming
and
costly and may not result in technologies or products that are non-infringing
or
commercially viable.
The
Company expects to seek and obtain licenses to such patents or patent
applications when, in the Company's judgment, such licenses are needed. If
any
such licenses are required, there can be no assurances that the Company would
be
able to obtain any such license on commercially favorable terms, or at all,
and
if these licenses are not obtained, the Company might be prevented from making,
using and selling the Aversion®Technology
and products. The Company's failure to obtain a license to any technology that
it may require would materially harm the Company's business, financial condition
and results of operations. We cannot assure that the Company's products and/or
actions in developing products incorporating the Company's Aversion®Technology
will not infringe third-party patents.
We
May Not Obtain Required FDA Approval; the FDA Approval Process Is Time-Consuming
and Expensive
The
development, testing, manufacturing, marketing and sale of pharmaceutical
products are subject to extensive federal, state and local regulation in the
United States and other countries. Satisfaction of all regulatory requirements
typically takes many years, is dependent upon the type, complexity and novelty
of the product candidate, and requires the expenditure of substantial resources
for research, development and testing. Substantially all of the Company's
operations are subject to compliance with FDA regulations. Failure to adhere
to
applicable FDA regulations by the Company or its licensees, if any, would have
a
material adverse effect on the Company's operations and financial condition.
In
addition, in the event the Company is successful in developing product
candidates for sale in other countries, the Company would become subject to
regulation in such countries. Such foreign regulations and product approval
requirements are expected to be time consuming and expensive.
We
may
encounter delays or rejections during any stage of the regulatory approval
process based upon the failure of clinical or laboratory data to demonstrate
compliance with, or upon the failure of the products to meet, the FDA's
requirements for safety, efficacy and quality; and those requirements may become
more stringent due to changes in regulatory agency policy or the adoption of
new
regulations. After submission of a marketing application, in the form of a
new
drug applications (“NDA”), a 505(b)(2) NDA, or an Abbreviated New Drug
Application ("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. The FDA commonly takes one to
two
years to grant final approval to a marketing application (NDA, 505(b)(2) NDA
or
ANDA). Further, 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 the products incorporating the Aversion®
Technology.
Even
if
we comply with all FDA regulatory requirements, we may never obtain regulatory
approval for any of our product candidates. If we fail to obtain regulatory
approval for any of our product candidates, we will have fewer saleable products
and corresponding lower revenues. Even if we receive regulatory approval of
our
products, such approval may involve limitations on the indicated uses or
marketing claims we may make for our products.
The
FDA
also has the authority to revoke or suspend approvals of previously approved
products for cause, to debar companies and individuals from participating in
the
drug-approval process, to request recalls of allegedly violative products,
to
seize allegedly violative products, to obtain injunctions to close manufacturing
plants allegedly not operating in conformity with current Good Manufacturing
Practices (cGMP) and to stop shipments of allegedly violative products. As
any
future source of Company revenue will be derived from the sale of FDA approved
products, the taking of any such action by the FDA would have a material adverse
effect on the Company.
The
U.S. Drug Enforcement Administration ("DEA") Limits the Availability of the
Active Ingredients Used in Our Product Candidates and, as a Result, Our Quota
May Not Be Sufficient to Complete Clinical Trials or to Meet Commercial Demand
or May Result in Development Delays
The
DEA
regulates certain finished products and bulk active pharmaceutical ingredients.
Certain opioid active pharmaceutical ingredients in our current product
candidates are classified by the DEA as Schedule II substances under the
Controlled Substances Act of 1970. Consequently, their manufacture, research,
shipment, storage, sale and use are subject to a high degree of regulation.
Furthermore, the amount of Schedule II substances we can obtain for clinical
trials and commercial distribution is limited by the DEA and our quota may
not
be sufficient to complete clinical trials or meet commercial demand. There
is a
risk that DEA regulations may interfere with the supply of the products used
in
our clinical trials, and, in the future, our ability to produce and distribute
our products in the volume needed to meet commercial demand.
We
May Not Obtain Required Approval for Our DEA Import
Registration
We
are
seeking to obtain a registration from the DEA to import narcotic raw materials
("NRMs") and have been engaged in the application process seeking approval
to
import NRMs directly from foreign countries for use in our opioid API
manufacturing efforts since early 2001. No assurance can be given that the
Import Registration application will be approved by the DEA or that if granted
by DEA, the Import Registration would be upheld following an appellate
challenge. Furthermore, our cash flow and limited sources of available financing
make it uncertain that the Company will have sufficient capital to re-initiate
the development of the Opioid Synthesis Technologies, to obtain required DEA
approvals and to fund the capital improvements necessary for the commercial
manufacture of APIs and finished dosage products incorporating the Opioid
Synthesis Technologies.
We
Must
Maintain FDA Approval to Manufacture Our Products Candidates at Our Facilities;
Failure to Maintain Compliance with FDA Requirements May Prevent or Delay the
Manufacture of Our Product Candidates and Costs of Manufacture May Be Higher
Than Expected
We
have
constructed and installed the equipment necessary to manufacture clinical trial
supplies of our Aversion®product
candidates in tablet formulations at our Culver, Indiana facility. To be used
in
clinical trials, all of our product candidates must be manufactured in
conformity with current Good Manufacturing Practice (cGMP) regulations as
interpreted and enforced by the FDA. All such product candidates must be
manufactured, packaged, and labeled and stored in accordance with cGMPs.
Modifications, enhancements or changes in manufacturing sites of marketed
products are, in many circumstances, subject to FDA approval, which may be
subject to a lengthy application process or which we may be unable to obtain.
Our Culver, Indiana facility, as well as those of any third-party manufacturers
that we may use, are periodically subject to inspection by the FDA and other
governmental agencies, and operations at these facilities could be interrupted
or halted if such inspections are unsatisfactory.
Failure
to comply with FDA or other governmental regulations can result in fines,
unanticipated compliance expenditures, recall or seizure of products, total
or
partial suspension of production or distribution, suspension of FDA review
of
our products, termination of ongoing research, disqualification of data for
submission to regulatory authorities, enforcement actions, injunctions and
criminal prosecution.
We
Face Significant Competition, Which May Result in Others Discovering, Developing
or Commercializing Products Before or More Successfully Than We
Do
The
pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability
of
financing, litigation and other factors. If our product candidates receive
FDA
approval, they will compete with a number of existing and future drugs and
therapies developed, manufactured and marketed by others. Existing or future
competing products may provide greater therapeutic convenience or clinical
or
other benefits for a specific indication than our products, or may offer
comparable performance at lower costs. If our products are unable to capture
and
maintain market share, we will not achieve significant product revenues and
our
financial condition will be materially adversely affected.
We
will
compete for market share against fully integrated pharmaceutical companies
or
other companies that collaborate with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have opioid analgesics already approved
or in development. In addition, many of these competitors, either alone or
together with their collaborative partners, operate larger research and
development programs and have substantially greater financial resources then
we
do as well as significantly greater experience in developing products,
conducting pre-clinical testing and human clinical trials, obtaining FDA and
other regulatory approvals, formulating and manufacturing drugs, and
commercializing drugs.
We
will
be concentrating all of our efforts on the development of the Technologies.
The
commercial success of products using our Technologies will depend, in large
part, on the intensity of competition from branded opioid containing products,
generic versions of branded opioid containing products and other drugs and
technologies that compete with the products incorporating our Technologies,
and
the timing of new product approvals.
Alternative
technologies and products are being developed to improve or replace the use
of
opioids for pain management, several of which are in clinical trials or are
awaiting approval from the FDA. In addition, the opioid active ingredients
in
all of our product candidates are readily available for use in generic products.
Companies selling generic opioid containing products may represent substantial
competition. Most of these organizations competing with us have substantially
greater capital resources, larger research and development staff and facilities,
greater experience in drug development and in obtaining regulatory approvals
and
greater manufacturing and marketing capabilities than we do.
We
May Be Exposed to Product Liability Claims and May Not Be Able to Obtain
Adequate Product Liability Insurance
Our
business exposes us to potential product liability risks, which are inherent
in
the testing, manufacturing, marketing and sale of pharmaceutical products.
Product liability claims might be made by consumers, health care providers
or
pharmaceutical companies or others that sell our products. These claims may
be
made even with respect to those products that are manufactured in licensed
and
regulated facilities or that otherwise possess regulatory approval for
commercial sale.
We
are
currently covered by clinical trial product liability insurance on a claims-made
basis. This coverage may not be adequate to cover any product liability claims.
Product liability coverage is expensive. In the future, we may not be able
to
maintain or obtain such product liability insurance at a reasonable cost or
in
sufficient amounts to protect us against losses due to liability claims. Any
claims that are not covered by product liability insurance could have a material
adverse effect on our business, financial condition and results of
operations.
The
pharmaceutical industry is characterized by frequent litigation. Those companies
with significant financial resources will be better able to bring and defend
any
such litigation. No assurance can be given that we would not become involved
in
such litigation. Such litigation may have material adverse consequences to
the
Company's financial conditions and operations.
The
Market Price of Our Common Stock May Be Volatile
The
market price of our common stock, like the market price for securities of
pharmaceutical, biopharmaceutical and biotechnology companies, has historically
been highly volatile. The market from time to time experiences significant
price
and volume fluctuations that are unrelated to the operating performance of
particular companies. Factors, such as fluctuations in our operating results,
future sales of our common stock, announcements of technological innovations
or
new therapeutic products by us or our competitors, announcements regarding
collaborative agreements, clinical trial results, government regulation,
developments in patent or other proprietary rights, public concern as to the
safety of drugs developed by us or others, changes in reimbursement policies,
comments made by securities analysts and general market conditions may have
a
significant effect on the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted. A securities
class
action suit against us could result in substantial costs, potential liabilities
and the diversion of management's attention and resources.
The
Company's common stock trades on the OTC Bulletin Board, a NASD-sponsored
inter-dealer quotation system. As the Company's common stock is not quoted
on a
stock exchange and is not qualified for inclusion on the NASD Small-Cap Market,
our common stock could be subject to a rule by the Securities and Exchange
Commission that imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors. For transactions covered by this rule, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent for a transaction prior to sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's common stock and the ability of purchasers in the offering to sell
the
common stock received upon conversion of the Preferred Shares in the secondary
market. There is no guarantee that an active trading market for our common
stock
will be maintained on the OTC Bulletin Board. Investors may be not able to
sell
their shares of common stock quickly or at the latest market price if trading
in
our common stock is not active.
No
Dividends
The
Company has not declared and paid cash dividends on its common stock in the
past, and the Company does not anticipate paying any cash dividends in the
foreseeable future. The Company's senior term loan indebtedness prohibits the
payment of cash dividends.
Control
of the Company
GCE
Holdings LLC beneficially owns approximately 78.5% of
the
Company's common stock (after giving effect to the conversion of the Company’s
issued and outstanding preferred stock into common stock effective November
10,
2005). In addition, pursuant to the terms of the Amended and Restated Voting
Agreement dated February 6, 2004, as amended, between the Company and the former
holders of the Company's outstanding convertible preferred stock, all such
shareholders have agreed that the Board of Directors shall be comprised of
not
more than 7 members, 4 of whom shall be the designees of GCE Holdings LLC (as
assignee of the preferred stock held by each of Care Capital Investments II,
LP,
Essex Woodlands Health Venture V, L.P. and Galen Partners). As a result, GCE
Holdings LLC, in view of its ownership percentage of the Company and by virtue
of its controlling position on the Company's Board of Directors, will be able
to
control or significantly influence all matters requiring approval by our
shareholders, including the approval of mergers or other business combination
transactions. The interests of GCE Holdings LLC may not always coincide with
the
interests of other shareholders and such entities may take action in advance
of
their interests to the detriment of our other shareholders.
Key
Personnel Are Critical to Our Business, and Our Future Success Depends on Our
Ability to Retain Them
We
are
highly dependent on the principal members our of management and scientific
team,
particularly Andrew Reddick, our President and Chief Executive Officer, and
Ron
Spivey, Ph.D. our Senior Vice President and Chief Scientific Officer. We may
not
be able to attract and retain personnel on acceptable terms given the intense
competition for such personnel among biotechnology, pharmaceutical and
healthcare companies, universities and non-profit research institutions.
However, while we have employment agreements with certain of our employees,
all
of our employees are at-will employees who may terminate their employment at
any
time. We do not currently have key personnel insurance on any of our officers
or
employees. The loss of any of our key personnel, or the inability to attract
and
retain such personnel, may significantly delay or prevent the achievement of
our
research, development and business objectives and could materially adversely
affect our business, financial condition and results of such
operations.
We
Expect That Our Quarterly Results of Operations Will Fluctuate, and These
Fluctuations Could Cause Our Stock Price to Decline
Our
quarterly operating results are likely to fluctuate in the future. These
fluctuations could cause our stock price to decline. The nature of our business
involves variable factors, such as the timing of the research, development
and
regulatory pathways of our product candidates that could cause our operating
results to fluctuate.
The
Company Is Subject to Restrictions on the Incurrence of Additional Indebtedness,
Which May Adversely Impact the Company's Ability to Fund
Operations
Pursuant
to the terms of each of the Company's outstanding secured term loan indebtedness
and the Investor Rights Agreement with the holders of the Company's convertible
preferred stock, the Company is limited as to the type and amount of future
indebtedness it may incur. The restriction on the Company's ability to incur
additional indebtedness in the future may adversely impact the Company's ability
to fund the development and commercialization of its products.
Evaluation
of Disclosure Controls and Procedures. The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14 as of the end of the period covered by
this
Report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required
to be
included in the Company's periodic Securities and Exchange Commission filings.
No significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date
of
their evaluation.
Changes
in Internal Control over Financial Reporting. There
was
no change in the Company's internal control over financial reporting that
occurred during the period covered by this quarterly report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART
II
Issuance
of Common Shares
During
the quarter ended September 30, 2005, the Company issued 225,689
shares
of the Company’s common stock as payment of $138,000 of
interest payable due September 30, 2005 on the Company’s $5.0 million Secured
Term Note Payable.
Exemption
from Registration
The
Company issued the above-described Common Stock in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended and/or Regulation D promulgated under the Securities Act of 1933. Each
of the holders of the senior secured term note represented to the Company that
such holder was an accredited investor as defined in Rule 501(a) of the
Securities Act of 1933 and that the securities issued pursuant thereto were
being acquired for investment purposes.
The
exhibits required to be filed as part of this Report on form 10-Q are listed
in
the attached Exhibit Index.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| ACURA PHARMACEUTIALS, INC. | ||
| |
|
|
| Date: November 10, 2005 | By: | /s/ Andrew D. Reddick |
|
|
||
|
Andrew
D. Reddick
President & Chief Executive
Officer
|
||
| By: | /s/ Peter A. Clemens | |
|
|
||
|
Peter
A. Clemens
Senior VP & Chief Financial
Officer
|
||
Exhibit
Index
|
Exhibit
|
Document
|
|
|
31.1
|
Certification
of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14
and
15d-14 of the Securities Exchange Act of 1934.
|
|
|
31.2
|
Certification
of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14
and
15d-14 of the Securities Exchange Act of 1934.
|
|
|
32.1
|
Certification
of Periodic Report by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
32.2
|
Certification
of Periodic Report by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
-43-
EXHIBIT
31.1
CERTIFICATION OF PERIODIC REPORT PURSUANT TO RULES 13a-14 AND 15d-14
OF
THE
SECURITIES EXCHANGE ACT OF 1934
I,
Andrew
D. Reddick, the Chief Executive Officer of Acura Pharmaceuticals, Inc., certify
that:
| 1. |
I
have reviewed this quarterly report on Form 10-Q of Acura Pharmaceuticals,
Inc.;
|
| 2. |
Based
on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to
make the statements made, in light of the circumstances under
which such
statements were made, not misleading with respect to the period
covered by
this quarterly report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial
information
included in this quarterly report, fairly present in all material
respects
the financial condition, results of operations and cash flows
of the
registrant as of, and for, the periods presented in this quarterly
report;
|
| 4. |
The
registrant's other certifying officers and I are responsible
for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we
have:
|
| a) |
designed
such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being
prepared;
|
| b) |
evaluated
the effectiveness of the registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
|
| c) |
presented
in this quarterly report our conclusions about the effectiveness
of the
disclosure controls and procedures based on our evaluation as of
the
Evaluation Date;
|
| 5. |
The
registrant's other certifying officers and I have disclosed,
based on our
most recent evaluation, to the registrant's auditors and the
audit
committee of registrant's board of directors (or persons performing
the
equivalent function):
|
| a. |
all
significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record,
process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
|
| b. |
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
|
| 6. |
The
registrant's other certifying officers and I have indicated in
this
quarterly report whether or not there were significant changes
in internal
controls or in other factors that could significantly affect
internal
controls subsequent to the date of our most recent evaluation,
including
any corrective actions with regard to significant deficiencies
and
material weaknesses.
|
| Date: November 10, 2005 | By: | /s/ Andrew D. Reddick |
|
|
||
|
Andrew
D. Reddick
Chief Executive Officer
|
||
-44-
EXHIBIT
31.2
CERTIFICATION
OF PERIODIC REPORT PURSUANT TO RULES 13a-14 AND 15d-14
OF
THE
SECURITIES EXCHANGE ACT OF 1934
I,
Peter
A. Clemens, the Chief Financial Officer of Acura Pharmaceuticals, Inc., certify
that:
| 1. |
I
have reviewed this quarterly report on Form 10-Q of Acura Pharmaceuticals,
Inc.;
|
|
2.
|
Based
on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to
make the statements made, in light of the circumstances under which
such
statements were made, not misleading with respect to the period covered
by
this quarterly report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial
information
included in this quarterly report, fairly present in all material
respects
the financial condition, results of operations and cash flows
of the
registrant as of, and for, the periods presented in this quarterly
report;
|
|
4.
|
The
registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we
have:
|
| a) |
designed
such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being
prepared;
|
| b) |
evaluated
the effectiveness of the registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
|
| c) |
presented
in this quarterly report our conclusions about the effectiveness
of the
disclosure controls and procedures based on our evaluation as of
the
Evaluation Date;
|
|
5.
|
The
registrant's other certifying officers and I have disclosed, based
on our
most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the
equivalent function):
|
| a. |
all
significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record,
process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
|
| b. |
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
|
| 6. |
The
registrant's other certifying officers and I have indicated in
this
quarterly report whether or not there were significant changes
in internal
controls or in other factors that could significantly affect
internal
controls subsequent to the date of our most recent evaluation,
including
any corrective actions with regard to significant deficiencies
and
material weaknesses.
|
| Date: November 10, 2005 | By: | /s/ Peter A. Clemens |
|
|
||
|
Peter
A. Clemens
Chief Financial
Officer
|
||
-45-