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| AIS > SEC Filings for AIS > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
Forward-Looking Statements
Management's discussion and analysis of the significant changes in the consolidated results of operations, financial condition and cash flows of the Company is set forth below. Certain statements in this report may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective" and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. In particular, these forward-looking statements include, among others, statements about:
• the impact of new accounting pronouncements;
• our expectations regarding the product development of AnturolTM;
• our expectations regarding continued product development with Teva Pharmaceutical Industries, Ltd.;
• our plans regarding potential manufacturing and marketing partners;
• our future cash flow and our ability to service or repay our existing debt;
• our expectations regarding a net loss for the year ending December 31, 2009;
• the risks that our recurring losses, negative cash flows and inability to raise additional capital could threaten our ability to continue as a going concern; and
• our ability to raise additional financing, reduce expenses or generate funds in light of our current and projected level of operations and general economic conditions.
The words "may," "will," "expect," "intend," "anticipate," "estimate," "believe," "continue," and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements involve known and unknown risks, uncertainties and achievements, and other factors that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the future about which we cannot be certain. Many factors may affect our ability to achieve our objectives, including:
• our inability to compete successfully against new and existing competitors or to leverage our marketing capabilities and our research and development capabilities;
• delays in product introduction and marketing or interruptions in supply;
• a decrease in business from our major customers and partners;
• adverse economic and political conditions;
• our inability to obtain additional financing, reduce expenses or generate funds when necessary;
• our inability to attract and retain key personnel; and
• our inability to effectively market our services or obtain and maintain arrangements with our customers, partners and manufacturers.
In addition, you should refer to the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2008 for a discussion of other factors that may cause our actual results to differ materially from those described by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements contained in this report will prove to be accurate and, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material.
We encourage readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements speak only as of the date they are made. We do not intend to update publicly any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events except as required by law. In light of the significant uncertainties in these forward-looking statements, you should read not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all.
The following discussion and analysis, the purpose of which is to provide investors and others with information that we believe to be necessary for an understanding of our financial condition, changes in financial condition and results of operations, should be read in conjunction with the financial statements, notes and other information contained in this report.
Overview
We develop, produce and market pharmaceutical delivery products, including transdermal gels, oral disintegrating tablets and reusable needle-free and disposable pressure assisted auto injector and pen injector systems. In addition, we have several products and compound formulations under development. We have operating facilities in the U.S. and Switzerland. Our U.S. operation manufactures and markets reusable needle-free injection devices and related disposables, and develops disposable pressure assisted auto injector and pen injector systems. These operations, including all development and some U.S. administrative activities, are located in Minneapolis, Minnesota. We also have operations located in Basel, Switzerland, which consist of administration and facilities for the development of transdermal gels and oral disintegrating tablet products. Our Swiss operations focus principally on research, development and commercialization of pharmaceutical products and include a number of license agreements with pharmaceutical companies for the application of its drug delivery systems. Our corporate offices are located in Ewing, New Jersey.
We operate as a product development/drug delivery company in the broader pharmaceutical industry. Companies in this sector generally bring technology and know-how in the area of drug formulation and/or delivery to pharmaceutical product marketers through licensing and development agreements
while actively pursuing development of their own products. We currently view pharmaceutical and biotechnology companies as our primary customers. We have negotiated and executed licensing relationships in the growth hormone segment (reusable needle-free devices in the U.S., Europe and Asia) and the transdermal gels segment (several development programs in place worldwide, including the U.S. and Europe). In addition, we continue to support existing customers of our reusable needle-free devices for the home or alternate site administration of insulin in the U.S. market through distributors and have licensed both disposable auto and pen injection devices to Teva Pharmaceutical Industries, Ltd. ("Teva") for use in undisclosed fields and territories. On June 29, 2009, we announced with Teva that Teva received approval of a Supplemental New Drug Application which added "needle-free injection" to its Tev-Tropin® brand human growth hormone drug label. Teva will market our needle-free device as the Tev-Tropin Tjet Injector system.
We incurred a net loss of $4,990,318 for the six-month period ended June 30, 2009 and we expect to report a net loss for the year ending December 31, 2009. We have not historically generated sufficient revenue to provide the cash needed to support our operations, and we have continued to operate primarily by raising capital and incurring debt. Capital requirements will depend on numerous factors, including the status of collaborative arrangements and payments received under such arrangements, the progress of research and development programs, the receipt of revenues from sales of products and royalties and the ability to control costs.
Results of Operations
Critical Accounting Policies
We have identified certain of our significant accounting policies that we consider particularly important to the portrayal of our results of operations and financial position and which may require the application of a higher level of judgment by management and, as a result, are subject to an inherent level of uncertainty. These policies are characterized as "critical accounting policies" and address revenue recognition, valuation of long-lived and intangible assets and goodwill and accounting for debt and equity instruments, as more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2008. We have made no changes to these policies during the six-month period ended June 30, 2009.
Three and Six Months Ended June 30, 2009 and 2008
Revenues
Total revenues for the three and six months ended June 30, 2009 were $1,661,844 and $3,688,247, compared to revenues for the same prior-year periods of $1,390,115 and $2,504,493. Product revenue increased to $1,168,620 and $1,992,371 in the three and six months ended June 30, 2009 compared to $945,017 and $1,683,386 in the three and six months ended June 30, 2008. The increases were primarily due to initial sales of needle-free injection devices and disposable components to Teva in anticipation of Teva's launch of our Tjet needle-free device with their human growth hormone Tev-Tropin®. Development revenue also increased in the three and six month periods to $299,674 and $979,844 in 2009 compared to $106,101 and $210,098 in the same periods of the prior year. The increases were primarily due to development work related to our transdermal gel and auto injector technologies. Licensing revenue decreased in the three month period to $82,379 in 2009 from $225,321 in 2008. The decrease was due primarily to the termination of a license agreement related to our oral disintegrating tablet technology in the first quarter of 2009 under which revenue was being recognized in 2008.
Licensing revenue increased in the six month period to $508,086 in 2009 from $448,294 in 2008 primarily due to recognition in the first quarter of 2009 of approximately $338,000 of a previously deferred license fee related to our oral disintegrating tablet technology after the customer terminated the agreement due to technical challenges with their drug molecule.
Cost of Revenues
The cost of product sales are related to reusable needle free injector devices and disposable components. For the three and six month periods ended June 30, 2009, cost of product sales was $523,931 and $968,047, respectively, compared to $513,109 and $928,042 for the same periods of the prior year. Cost of product sales as a percentage of product sales was 45% and 54% in three month periods ended June 30, 2009 and 2008, respectively, and was 49% and 55% for the six month periods ended June 30, 2009 and 2008, respectively. Cost of product sales as a percentage of product sales was lower in 2009 than in 2008 mainly as a result of higher average selling prices in 2009 as compared to 2008. In addition, the 2008 periods included a write-down of inventory of approximately $55,000.
The cost of development revenue consists of labor costs, direct external costs and an allocation of certain overhead expenses based on actual costs and time spent in revenue-generating activities. Cost of development revenue as a percentage of development revenue was 32% and 20% for the second quarters of 2009 and 2008 and was 37% and 28% for the six-month periods ended June 30, 2009 and 2008. The increases in each period were due mainly to an increase in the overhead allocation rate used in 2009 compared to the rate used in 2008.
Research and Development
The majority of research and development expenses consist of external costs for studies and analysis activities, design work and prototype development. While we are typically engaged in research and development activities involving each of our drug delivery platforms, over 75% of our total research and development expenses in each period were generated in connection with projects related to transdermal gel products, primarily AnturolTM. Research and development expenses were $1,745,309 and $3,952,068 in the three and six-month periods ended June 30, 2009, respectively, compared to $1,791,214 and $3,757,486 in the same periods of the prior year. The increase in the first half of 2009 compared to the same period of 2008 was due primarily to the Phase III study of AnturolTM.
Sales, Marketing and Business Development
Sales, marketing and business development expenses totaled $216,863 and $552,380 for the three and six-month periods ended June 30, 2009, respectively, compared to $574,566 and $1,005,230 in the same prior year periods. The decreases in each period were primarily due to reductions in payroll costs associated with headcount reductions and decreases in consulting fees.
General and Administrative
General and administrative expenses totaled $1,140,951 and $2,452,965 in the three and six-month periods ended June 30, 2009, respectively, compared to $1,635,763 and $3,323,168 in the same periods of the prior year. The decreases in each period were due mainly to decreases in payroll and patent related expenses.
Other Income (Expense)
Other expense was $191,690 and $388,655 in the three and six-month periods ended June 30, 2009, respectively, compared to expense of $114,633 and $190,320 in the same periods of the prior year. The increases were due primarily to decreases in interest income of $137,507 in the three-month period and $364,307 in the six-month period due to both a reduction in funds available for investment and a reduction in market interest rates received on invested funds. The impact of the decreases in interest income was partially offset by decreases in interest expense of $104,234 in the three-month period and $198,269 in the six-month period primarily due to a lower notes payable principal balance.
Liquidity and Capital Resources
We have not historically generated, and do not currently generate, sufficient revenue to provide the cash needed to support our operations and we have continued to operate primarily by raising capital and incurring debt.
In the first half of 2009, we received proceeds of $53,667 in connection with exercises of warrants and options to purchase shares of our common stock, which resulted in the issuance of 85,333 shares of our common stock. In 2008, we received proceeds of $1,319,950 in connection with exercises of warrants to purchase shares of our common stock, which resulted in the issuance of 2,400,000 shares of our common stock.
In 2007, we borrowed $7,500,000 under a note payable in two tranches of $5,000,000 and $2,500,000. The total remaining principal balance was $3,736,618 at June 30, 2009. The per annum interest rate under the note payable is 12.7% for the first tranche and 11% for the second tranche. The maturity dates under the note payable are (i) 42 months from the first funding date for the first tranche, and (ii) 36 months from the second funding date for the second tranche. We have scheduled debt payments of $2,930,671 and $805,947 for the 12 month periods ending June 30, 2010 and 2011. The amount payable under the note is secured by all of our personal property, including all intellectual property. The credit agreement governing the note payable contains certain covenants and provisions, including, without limitation, covenants and provisions that:
• restrict our ability to create or incur indebtedness (subject to enumerated exceptions);
• restrict our ability to create or incur certain liens on our property (subject to enumerated exceptions);
• in certain circumstances, require us to maintain, on a consolidated basis, unrestricted cash and cash equivalents of at least $2,500,000;
• in certain circumstances, restrict our ability to declare or pay any dividends on any shares of our capital stock, purchase or redeem any shares of our capital stock, return any capital to any holder of our equity securities or payment of certain bonuses; and
• restrict our ability to make certain investments.
On July 29, 2009 we closed on a registered direct offering in which we raised gross proceeds of $8,500,000 through the sale of shares of our common stock and warrants. We sold a total of 10,625,000 units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase 0.4 of a share of common stock (or a total of 4,250,000 shares), at a purchase price of $0.80 per unit. The warrants will be exercisable six months after issuance at $1.00 per share and will expire 5 years from the date of issuance.
In July of 2009, the Company received a payment from Teva in the amount of approximately $4,000,000 in connection with an amendment to a License, Development and Supply Agreement signed in July 2006. Teva purchased tooling from the Company that had a carrying value of approximately $1,200,000 and paid the Company in advance for the design, development and purchase of additional tooling and automation equipment.
We believe that the recent equity financing, the recent payment from Teva and projected product sales, product development, license revenues, milestone payments and royalties will provide sufficient funds to support operations for at least the next 12 months. We do not currently have any bank credit lines. In the future, if we need additional financing and are unable to obtain such financing when needed, or obtain it on favorable terms, we may be required to curtail development of new products, limit expansion of operations or accept financing terms that are not as attractive as we may desire.
Cash Flows
Net cash used in operating activities was $4,754,534 and $5,158,321 for the six-month periods ended June 30, 2009 and 2008, respectively. Although the loss in the first half of 2009 was $1,768,150 less than the loss in the first half of 2008, the cash used in operating activities was only $403,787 less in 2009 than in 2008 due primarily to changes in operating assets and liabilities. In 2009 changes in operating assets and liabilities resulted in a use of cash of $493,968, while in 2008 changes in operating assets and liabilities resulted in a source of cash of $771,145. The 2009 use of cash was driven primarily by a decrease in deferred revenue of $964,554 partially offset by a decrease in accounts receivable of $450,566 while the 2008 source of cash was driven primarily by an increase in accounts payable of $1,297,501 partially offset by an increase in other assets of $591,840.
Net cash used in investing activities was $87,001 in the first half of 2009, which consisted of additions to patent rights and purchases of equipment, molds, furniture and fixtures. Net cash provided by investing activities was $14,362,659 in the first half of 2008, which consisted of proceeds from maturity of short-term investments of $15,061,897 that were partially offset by cash used for purchases of equipment of $647,444 and patent rights of $51,794. The equipment purchases consisted primarily of tooling and production equipment related to commercial device deals.
In the first half of 2009, net cash used in financing activities of $1,206,917 consisted of principal payments on long-term debt of $1,260,584 and proceeds from exercise of warrants and stock options of $53,667. In the first half of 2008, net cash provided by financing activities of $191,366 consisted of proceeds from the exercise of warrants of $1,319,950 less principal payments on long-term debt of $1,128,584.
Research and Development Programs
Our current research and development activities are primarily related to AnturolTM and device development projects.
AnturolTM. We are currently evaluating AnturolTM for the treatment of overactive bladder ("OAB"). In the fourth quarter of 2007 we initiated a Phase III pivotal trial designed toevaluate the efficacy of AnturolTM when administered topically once daily for 12 weeks in patients predominantly with urge incontinence episodes. The randomized, double-blind, parallel, placebo-controlled, multi-center trial is expected to involve 600 patients (200 per arm) using two dose strengths (selected from the Phase II clinical trial) versus a placebo. Enrollment expanded to approximately sixty centers throughout the United States in 2009. In addition to the Phase III trial, we have incurred significant costs related to AnturolTM manufacturing development. We have contracted with Patheon, Inc. ("Patheon"), a manufacturing development company, to supply clinical quantities of Anturol™ and to develop a commercial manufacturing process for AnturolTM. With Patheon, we have completed limited commercial scale up activities associated with AnturolTM manufacturing. As of June 30, 2009, we have incurred total external costs of approximately $10,400,000 in connection with our AnturolTM research and development, of which approximately $2,700,000 was incurred in the six months ended June 30, 2009. We intend to seek a marketing partner to help fund the development of AnturolTM and to complete the Phase III trial. To date, we have not entered into an agreement with a marketing partner. However, in July 2009, we raised gross proceeds of $8,500,000 in a registered direct offering through the sale of shares of our common stock and warrants. Because of the additional funding received, we will continue the AnturolTM development program and expect total expenses to be approximately $5,000,000 in 2009. Although the Phase III program for AnturolTM will continue, the rate of progress of the program will be determined by the level of expenditures, which may be affected by the timing of engaging a marketing partner. If we cannot find a marketing partner, we may not have the resources to complete the development program and may have to delay or stop enrollment in the trial.
Device Development Projects. We are engaged in research and development activities related to our Vibex™ disposable pressure assisted auto injectors and our disposable pen injectors. We have signed license agreements with Teva for our VibexTM system for two undisclosed products and for our pen injector device for two undisclosed products. Our pressure assisted auto injectors are designed to deliver drugs by injection from single dose prefilled syringes. The auto injectors are in the advanced commercial stage of development. The disposable pen injector device is designed to deliver drugs by injection through needles from multi-dose cartridges. The disposable pen is in the early stage of development where devices are being evaluated in clinical studies. Our development programs consist of determination of the device design, development of prototype tooling, production of prototype devices for testing and clinical studies, performance of clinical studies, and development of commercial tooling and assembly. As of June 30, 2009, we have incurred total external costs of approximately $2,400,000 in connection with research and development activities associated with our auto and pen injectors, of which approximately $140,000 was incurred in the six months ended June 30, 2009. As of June 30, 2009, $1,300,000 of the total costs have been deferred and will be recognized as an expense over the same period as the related deferred revenue will be recognized. The development timelines of the auto and pen injectors related to the Teva products are controlled by Teva. We expect development related to the Teva products to continue in 2009, but the timing and extent of near-term future development will be dependent on certain decisions made by Teva. We recently received a payment from Teva in the amount of approximately $4,000,000 in connection with an amendment to a License, Development and Supply Agreement signed in July 2006 related to an undisclosed, fixed, single-dose, disposable injector product using our Vibex™ autoinjector platform. Although this payment and certain upfront and milestone payments have been received from Teva, there have been no commercial sales, timelines have been extended and there can be no assurance that there ever will be commercial sales or future milestone payments under these agreements.
Other research and development costs. In addition to the AnturolTM project and Teva related device development projects, we incur direct costs in connection with other research and development projects related to our technologies and indirect costs that include salaries, administrative and other overhead costs of managing research and development projects. Total other research and development costs were approximately $1,300,000 for the six months ended June 30, 2009.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2009, we adopted FASB Statement of Financial Accounting Standards No. 141R (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in the business combination. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. Our adoption of SFAS 141R will apply prospectively to any business combinations completed after January 1, 2009.
Effective January 1, 2009, we adopted the required provisions of FASB Staff Position No. FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets." This guidance will be applied prospectively to our intangible assets acquired on or after January 1, 2009. The adoption of FSP 142-3 had no impact on our consolidated financial statements.
Effective January 1, 2009, we adopted the provisions of Emerging Issues Task Force ("EITF") Issue No. 07-1, "Accounting for Collaborative Arrangements" ("EITF 07-1"). EITF 07-1 provides guidance on how to determine whether an arrangement constitutes a collaborative arrangement, how costs incurred and revenue generated on sales to third parties should be reported by the participants in a collaborative arrangement, how payments made between . . .
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