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| DDD > SEC Filings for DDD > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the financial statements, including the notes thereto, appearing in Item 1 of Part I of this quarterly report and in our 2008 annual report on Form 10-K.
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "anticipate," "believe," "estimate," "may," "intend," "expect," and similar expressions identify certain of such forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Actual result, performance or achievements could differ materially from historical results or those contemplated, expressed or implied by the forward-looking statements contained in this report. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in our Annual Report on form 10-K for the year ended December 31, 2008, as updated by Item 1A of Part II of this Quarterly Report on Form 10-Q, and as otherwise detailed in our periodic reports filed with the SEC. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this report in Item 1A of Part II, and are detailed from time to time in our periodic reports filed with the SEC. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a specialty pharmaceutical company. Our corporate objective is to combine our formulation experience and knowledge with our proprietary and patented Controlled Delivery Technology (CDT®) platforms to develop novel pharmaceutical, OTC, and nutritional products. Our CDT platforms are based on multiple issued and pending patents and other intellectual property for the programmed release or enhanced performance of active pharmaceutical ingredients and nutritional products.
We have developed multiple private label controlled release nutritional products incorporating our CDT platforms that are sold by national retailers. In October 2005, we entered into a strategic alliance with a subsidiary of Perrigo Company for the manufacture, marketing, distribution, sale and use of certain dietary supplement products in the United States. We receive royalty payments based on a percentage of Perrigo's net profits derived from the sales of products covered by our agreement. We have developed additional nutritional products and are seeking to expand sales of nutritional products through additional channels in the United States, as well as in Canada, Europe and other markets.
Our lead product candidate is a CDT-based controlled release formulation of ibuprofen, an analgesic typically used for the treatment of pain, fever and inflammation. In November 2008, we successfully completed our pivotal phase III trial to evaluate the safety and efficacy of our 12 hour CDT 600 mg controlled release ibuprofen for the OTC market. There are currently no controlled release formulations of ibuprofen approved for use in North America. In addition, our first Abbreviated New Drug Application, or ANDA, for our 12 hour pseudoephedrine product was accepted by the FDA in September 2008. In January 2009, we received a complete response letter from the FDA which requested additional information in the area of chemical manufacturing and controls, all of which was identified by the FDA as "minor." In August 2009, we amended our submission and provided the requested information to the FDA. We believe our formulation will offer attractive tablet size and cost saving opportunities when compared to similar tablets already on the market.
We expect our operating losses and negative cash flow to continue as we advance preclinical research and related work to support applications for regulatory approvals and commercialization of our product candidates. We need to raise additional capital to fund operations, continue research and development projects, and commercialize our products. We may not be able to secure additional financing on favorable terms, or at all. If we are unable to obtain necessary additional financing, our business will be adversely affected and we may be required to reduce the scope of our development activities, discontinue operations, or seek bankruptcy protection.
Critical Accounting Policies and Estimates
Since December 31, 2008, none of our critical accounting policies, or our application thereof, as more fully described in our annual report on Form 10-K for the year ended December 31, 2008, has significantly changed. However, as the nature and scope of our business operations mature, certain of our accounting policies and estimates may become more critical. You should understand that generally accepted accounting principles require management to make estimates and assumptions that affect the amounts of assets and liabilities or contingent assets and liabilities at the date of our financial statements, as well as the amounts of revenues and expenses during the periods covered by our financial statements. The actual amounts of these items could differ materially from these estimates.
New Accounting Pronouncements
In May 2009, the FASB issued Accounting Standards Codification (ASC) 855, previously known as SFAS No. 165, "Subsequent Events." ASC 855 defines subsequent events as transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events). In addition, ASC 855 requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the ?nancial statements were issued or the date the ?nancial statements were available to be issued. ASC 855 is effective for periods ending after June 15, 2009. The adoption of ASC 855, effective June 30, 2009 did not have any effect on our financial position, results of operations or cash flows.
In June 2009, the FASB issued Accounting Standards Codification (ASC) 105, previously known as SFAS No. 168, "FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162." ASC 105 will become the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. As we believe that our accounting practices are consistent with the Codification, we do not believe that the adoption of ASC 105 had a material effect on our financial position, results of operations or cash flows.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." This position states that unvested share-based payment awards that contain nonforfeitable rights to dividends (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, "Earnings per Share." FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of EITF 03-6-1 in the current year did not have an effect on the Company's calculation of EPS for the three and nine months ended September 30, 2009 and 2008.
ASU 2009-04, Accounting for Redeemable Equity Instruments-Amendment to Section 480-10-S99, updates the SEC staff's guidance on the classification and measurement of redeemable securities that was originally issued as EITF Topic D-98, "Classification and Measurement of Redeemable Securities." In addition to updating the guidance for Codification references, the revision reorganizes Topic D-98's guidance. Instruments with nontraditional redemption features discussed throughout Topic D-98 are now grouped in an expanded scope section that explains whether or not each instrument is subject to the temporary equity classification of SEC Accounting Series Release 268, Presentation in Financial Statements of "Redeemable Preferred Stocks," and related SEC staff guidance. The revised guidance also groups securities with specific contractual provisions that would require classification in temporary equity, and similarly organizes securities with contractual provisions for which permanent equity classification is appropriate. In addition, disclosure guidance throughout Topic D-98 is combined in a new section on disclosures. The issuance of ASU 2009-04 did not have a significant effect on the Company's financial statements.
The FASB issued Statement 167, Amendments to FASB Interpretation No. 46(R) (not yet included in the Codification), to improve how enterprises account for and disclose their involvement with variable interest entities (VIEs), which are special-purpose entities and other entities whose equity at risk is insufficient or lacks certain characteristics. The issuance of Statement 167 did not have a significant effect on the Company's financial statements. Results of Operations
Comparison of the Three Months Ended September 30, 2009 and 2008
Revenues
Total revenues, which consist of royalty revenue from our collaboration agreements, increased 11%, or $25,343 to $261,651 for the three months ended September 30, 2009, compared to $236,308 for the same period in 2008. This increase is a result of increased sales of our nutrional products by Perrigo. Royalty payments are based on Perrigo's net profits from the sale of CDT-based products.
Operating Expenses
Marketing and Selling Expenses
Marketing and selling expenses decreased 53%, or $62,489 to $54,351 for the three months ended September 30, 2009, compared to $116,840 for the same period in 2008. Of this reduction in expense, $29,961 is due to a reduction in personnel and $53,714 reflects the impact of lower advertising and tradeshow expenses.
Research and Development Expenses
Research and development expenses decreased 75%, or $1.7 million to $572,189 for the three months ended September 30, 2009, compared to $2.3 million for the same period in 2008. Our deferral of development activities on certain projects pending additional funding resulted in a $1.6 million reduction in expenses. In addition, personnel related expenses decreased $48,969 due to personnel reductions. These decreases were offset by an increase of $93,791 in non-cash share based compensation expense related to stock options granted during the year.
General and Administrative Expenses
General and administrative expenses increased 29%, or $273,061 to $1.2 million for the three months ended September 30, 2009, compared to $947,684 for the same period in 2008, primarily due to higher personnel related costs, offset by lower non-cash share based compensation expense, insurance premiums, and director and shareholder relations expense. Personnel related expenses increased $413,334 due to the recognition of severance costs associated with the resignation of our chief executive officer. Non-cash share based compensation expense decreased $77,673 due to a lower number of stock options granted during the year. Insurance premiums decreased $29,630 due to lower rates, and director and shareholder relations expense decreased $28,788 due to a decrease in the number of directors.
Facility Lease Termination
In May 2008, we entered an agreement to terminate the lease for our former corporate facility for consideration of $4.1 million which was recognized as a reduction to operating expense in September 2008. Under the terms of the agreement, we received $1.0 million upon execution of the agreement and the remaining $3.1 million in September 2008, at the time we vacated the premises. We incurred costs of $116,867 related to relocation to our new facility and the lease buyout which were recognized in operating expense in September 2008.
Other Income (Expense), Net
Other income decreased 98%, or $41,608 to $948 for the three months ended September 30, 2009, compared to $42,556 for the comparable period in 2008. This decrease was due to a decrease in interest income due to lower cash balances.
Net Loss
Net loss increased $2.5 million to $1.6 million for the three months ended September 30, 2009, compared to $890,370 of net income for the same period in 2008. The increased net loss reflects the net impact of the non-recurring $4.0 million income recognized in the prior year for the facility lease buyout.
Comparison of the Nine Months Ended September 30, 2009, and 2008
Revenues
Total revenues decreased 15%, or $117,223 to $664,212 for the nine months ended September 30, 2009, compared to $781,435 for the same period in 2008. This decrease is primarily due to lower royalty income from our strategic alliance with Perrigo.
Operating Expenses
Marketing and Selling Expenses
Marketing and selling expenses decreased 63%, or $345,177 to $200,402 for the nine months ended September 30, 2009, compared to $545,579 for the same period in 2008. This decrease was primarily due to a decrease of $189,339 in personnel related expenses through personnel reductions, a decrease of $107,500 in advertising and tradeshow expense, and lower commission expense of $21,106 associated with lower revenues.
Research and Development Expenses
Research and development expenses decreased 50%, or $2.2 million to $2.2 million for the nine months ended September 30, 2009, compared to $4.4 million for the same period in 2008. The decrease is primarily due to a reduction in personnel related expenses of $342,951 through reductions in personnel and a decrease of $2.0 million in clinical trial and outside manufacturing, and repairs and maintenance expenses as a result of our decision to defer development activities on certain projects pending additional funding. These decreases were offset by an increase of $89,721 in non-cash share based compensation expense related to options granted in the current year.
General and Administrative Expenses
General and administrative expenses increased 3%, or $104,665, to $3.3 million for the nine months ended September 30, 2009, compared to $3.2 million for the same period in 2008, primarily due to an increase of $305,164 in personnel related expenses. Personnel related expenses increased due to the recognition of severance costs associated with the resignation of our chief executive officer. In addition, other outside service expenses increased $94,632 due to investment banking activities. These increases were offset by lower insurance premium expense of $84,954, a decrease in director and shareholder relations expense of $78,274 due to a reduced number of directors, and a decrease of $55,342 in travel expenses.
Facility Lease Termination
In May 2008, we entered an agreement to terminate the lease for our former corporate facility for consideration of $4.1 million, which was recognized as a reduction to operating expense in September 2008. Under the terms of the agreement, we received $1.0 million upon execution of the agreement and the remaining $3.1 million in September 2008, at the time we vacated the premises. We incurred costs of $116,867 related to relocation to our new facility and the lease buyout which were recognized in operating expense in September 2008.
Other Income (Expense), Net
Other income (expense) decreased 96%, or $186,746 to $8,548 for the nine months ended September 30, 2009, compared to $195,294 of net income for the same period in 2008. This change was due to a decrease in interest income from lower cash balances.
Net Loss
The net loss for the nine months ended September 30, 2009, increased 57%, or $1.8 million to $5.1 million, compared with a net loss of $3.2 million for the same period in 2008. This change was primarily due to the net impact of the non-recurring $4.0 million income recognized in the prior year for the facility lease buyout.
Liquidity and Capital Resources
We had approximately $1.9 million in cash and cash equivalents, and $473,711 in restricted cash as of September 30, 2009. Based on our current operating plan, we anticipate that our existing cash and cash equivalents, together with expected royalties from third parties, will be sufficient to fund our operations through February 2010, assuming we do not trigger additional obligations, and unless unforeseen events arise that negatively impact our liquidity. In the event we are unsuccessful in generating additional revenues or raising additional funds, it will be necessary to substantially reduce our operations to preserve capital or seek bankruptcy protection or otherwise wind up our business.
Our current operating strategy is to actively manage our liquidity by limiting clinical and development expenses to our ibuprofen and pseudoephedrine lead products, and reducing our general administrative and other operating expenses while also supporting additional marketing and distribution of our nutritional products. We have deferred all significant expenditures on our development projects, including the actual use study required by the FDA as a prerequisite to submission of our regulatory application for ibuprofen, pending additional financing or partnership support. Without increased revenues or additional funding we do not expect to be able to complete development of our current projects. In addition, we have reduced our marketing and general and administrative expenses and continue to evaluate opportunities to reduce operating expenses. As described in Item 5 of Part II of this Quarterly Report, we rengotiated the lease of our corporate facility to reduce our rent and leased space. In addition, in accordance with the amended lease agreement, we reduced our monthly cash lease payment by $18,000 for a period of one year commencing November 1, 2009. During this one year period, the $18,000 of our monthly rent will be paid through draw downs on the letter of credit collateralized by $473,711 of our restricted cash. The letter of credit secures our lease obligation. In August 2009, we paid the rent due for July, August and September 2009. In addition to renegotiating our lease, in August 2009 we eliminated one executive position and in October 2009 reduced the annual cash compensation for two executive officers effective November 2009.
Our capital resources are very limited and operations to date have been funded primarily with the proceeds from public equity financings, royalty payments, and collaborative research agreements. We are pursuing additional sources of financing that could involve strategic transactions, including mergers and business combinations, new collaborations, as well as opportunities to expand product sales and other options. However, there are significant uncertainties as to our ability to increase revenues or access potential sources of capital. We may not be able to enter any collaboration on terms acceptable to us, or at all, due to conditions in the pharmaceutical industry or in the economy in general. Competition for such arrangements is intense, with many biopharmaceutical companies attempting to secure alliances with more established pharmaceutical or consumer products companies. Although we have been engaged in discussions with potential partners, there is no assurance that any agreements will result from these discussions in a timely manner, or at all, or that revenues generated from such an agreement will offset operating expenses to enable us to meet our short term funding requirements.
In addition to our efforts to enter into alliances and licensing agreements, we plan to continue to seek access to the capital markets to fund our operations. We filed a shelf registration statement in the amount of $40 million which was declared effective by the Securities and Exchange Commission on November 25, 2008. Under the shelf registration statement we may offer from time-to-time, one or more offerings of securities up to an aggregate public offering price of $40 million. However, the financial markets have been very difficult for companies at our development stage and financial condition and financing may not be available on favorable terms or at all. Additionally, we have received notice from the NYSE Amex that we are not in compliance with continued listing requirements. While we have provided the NYSE Amex with a plan to regain compliance with applicable listing standards, our inability to maintain listing our common stock on the NYSE Amex may further limit our ability to access the capital markets. Delisting from NYSE Amex could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities. Any issuance of additional securities would be extremely dilutive to the Company's existing stockholders.
Our failure to increase revenues or raise capital, including financial support from partnerships or other collaborations prior to February 2010 would materially adversely affect our business, financial condition and results of operations, and could force us to reduce or cease operations. If we are forced to reduce or cease our operations we may trigger additional obligations, including contractual severance obligations aggregating as much as $975000. In addition, we may be forced to liquidate assets at reduced levels due to our immediate liquidity requirements. These conditions raise substantial doubt about our ability to continue as a going concern. Consequently, the audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2008 included a going concern explanatory paragraph.
Cash flows from operating activities-Net cash used in operating activities for the nine months ended September 30, 2009 was approximately $4.2 million compared to $2.2 million for the nine months ended September 30, 2008. The nine months ended September 30, 2008 include a $4.0 million gain on our lease termination. Expenditures for the nine months ended September 30, 2009 decreased substantially and operating revenues decreased due to lower income.
Cash flows from investing activities-Cash flows used in investing activities of $89,064 during the nine months ended September 30, 2009 primarily represent payments made for patent rights and the purchase of a new tablet press from an insurance settlement related to our facility move. Cash flows used in investing activities of $726,447 during the nine months ended September 30, 2008 primarily represented the payments made for patent rights and $564,000 of restricted cash associated with our facility lease.
Cash flows from financing activities- Cash flows used by financing activities for the nine months ended September 30, 2009 primarily represent payments of $111,119 made on our term loan through April 2009, at which time the loan was paid off. In the nine months ended September 30, 2008 cash flows used by financing activities primarily represented payments made on our term loan offset by the proceeds from the exercise of options and warrants.
As of September 30, 2009, we had $1.8 million of working capital compared to $5.8 million as of December 31, 2008. We have accumulated net losses of approximately $69.0 million from our inception through September 30, 2009. We have funded our operations primarily through the issuance of equity securities, including $3.6 million and $10.9 million in net proceeds from our registered direct offerings in December 2007 and April 2006, respectively, and $14.1 million from our private placement in February 2005.
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