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| APPY > SEC Filings for APPY > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
Results of Operations
Comparative Results for the Nine Months Ended September 30, 2009 and 2008
Sales for the nine months ended September 30, 2009, totaled $222,000, which is a $481,000 or 68% decrease from the 2008 period. This decrease in sales is primarily attributable to general economic conditions and the timing of existing customers' order placement, as it is not unusual for the orders from our customers to vary by quarter depending upon the customers' sales and production needs combined with a change in product mix between the two periods. In April 2008, the Company entered into a long term exclusive license and commercialization agreement to develop and launch the Company's novel recombinant single-chain bovine products. The total payments received under this agreement were recorded as deferred revenue and will be recognized in the future, with $48,000 of such license fee recognized in the nine months ended September 30, 2009 and $32,000 in the nine months ended September 30, 2008.
Cost of sales for the nine months ended September 30, 2009 totaled $304,000 which is a $193,000 or 39% decrease as compared to the 2008 period. As a percentage of sales, there was a gross loss of 37% in the 2009 period as compared to a gross margin of 29% in the 2008 period. The change in the gross margin percent resulted from the lower level of sales in the 2009 period combined with certain fixed overhead costs.
Selling, general and administrative expenses in the nine months ended September 30, 2009, totaled $4,428,000, which is a $907,000 or 26% increase as compared to the 2008 period. During late 2008 and into early 2009, the Company increased its overhead costs to support its development activities and advance its licensing activities and negotiations for the single-chain animal products. These changes have resulted in among other items, advancing the AppyScore product in clinical trials and filing a Premarket Notification [510(k)] with the FDA. The hiring of additional personnel resulted in approximately $1,050,000 of additional expenses in the 2009 period, which included approximately $480,000 in additional employee related stock based compensation expense in 2009 over 2008 amounts. This was offset by a decrease of approximately $320,000 in public company expenses for 2009 with $275,000 of this decrease due to a reduction in the stock option expense to the investor relations firm which was off-set by a $73,000 increase in Sarbanes-Oxley related expenses in 2009. Selling, general and administrative expenses also increased in the nine months ended September 30, 2009 by an additional $73,000 in insurance related costs primarily due to increased staff and an increase in general liability insurance.
Research and development expenses in the 2009 period totaled $5,933,000, which is a $1,609,000 or 37% increase as compared to the 2008 period. Development efforts and advances on the appendicitis test, including product development advances, the clinical trial, FDA submission related activities and market research resulted in an expense increase in 2009 of approximately $1,582,000. This was offset by a decrease in the development expenses on the single-chain animal products of approximately $110,000 as the bovine products moved from feasibility development by AspenBio to a commercialization and licensing arrangement with Novartis commencing in late 2008. Additions to research staff, including temporary contract personnel, to support accelerating development efforts, increased expenses by approximately $147,000 in the 2009 period.
Primarily as a result of the lower levels of cash and reduced investment returns in 2009 as compared to 2008, interest income of approximately $171,000 was earned in 2009 as compared to $634,000 in 2008.
No income tax benefit was recorded on the loss for the nine months ended September 30, 2009, as management was unable to determine that it was more likely than not that such benefit would be realized.
Comparative Results for the Three Months Ended September 30, 2009 and 2008
Sales for the three months ended September 30, 2009 totaled $69,000, which is a $158,000 or 70% decrease from the 2008 period. The decrease in sales is primarily attributable to general economic conditions, a change in product mix between the two periods combined with the timing of existing customers' order placement, as it is not unusual for the orders from our customers to vary by quarter depending upon the customers' sales and production needs. In April 2008, the Company entered into a long term exclusive license and commercialization agreement to develop and launch the Company's novel recombinant single-chain bovine products. The total payments received under this agreement were recorded as deferred revenue and will be recognized in the future, with $16,000 of such license fee recognized in each of the three months ended September 30, 2009 and 2008.
Cost of sales for the three months ended September 30, 2009 totaled $17,000; a $125,000 or 88% increase as compared to the 2008 period. As a percentage of sales, gross margin increased to 76% in the 2009 period as compared to a gross margin of 38% in the 2008 period. The increase in gross profit margin is primarily the result of a decrease in certain fixed overhead costs attributable to products being produced and sold during the 2009 period.
Selling, general and administrative expenses in the three months ended September 30, 2009, totaled $1,602,000, which is a $565,000 or 54% increase as compared to the 2008 period. During late 2008 and into early 2009, the Company increased its overhead costs to support its development activities and advance its licensing activities and negotiations for the single-chain animal products. These changes have resulted in among other items, advancing the AppyScore product in clinical trials and filing a Premarket Notification [510(k)] with the FDA. The hiring of additional personnel resulted in approximately $411,000 of additional expenses in the 2009 period, which included approximately $151,000 in additional employee related stock based compensation expense in 2009 over 2008 amounts. This was offset by a decrease of approximately $82,000 in public company expenses for 2009 with $98,000 of this decrease in public company expenses due to a reduction in the stock option expense to the investor relations firm which was off-set by a $16,000 increase in Sarbanes-Oxley related expenses being higher in 2009. Selling, general and administrative expenses also increased in the three months ended September 30, 2009 by an additional $48,000 in insurance related costs primarily due to health insurance for increased staff and an increase in general liability insurance.
Research and development expenses in the 2009 period totaled $2,275,000, which is a $312,000 or 16% increase as compared to the 2008 period. Development efforts and advances on the appendicitis test, including product development advances, the clinical trial, FDA submission related activities and market research resulted in an expense increase in 2009 of approximately $707,000. This was offset by a decrease in the development expenses on the single-chain animal products of approximately $498,000 as the bovine products moved from feasibility development by AspenBio to a commercialization and licensing arrangement with Novartis commencing in late 2008. Additions to research staff, including temporary contract personnel, to support accelerating development efforts, increased expenses by approximately $61,000 in the 2009 period.
Primarily as a result of the lower levels of cash and reduced investment returns in 2009 as compared to 2008, interest income of approximately $28,000 was earned in 2009 as compared to $178,000 in 2008.
Liquidity and Capital Resources
We reported a net loss of $10,331,000 during the nine months ended September 30, 2009, which included $1,476,000 in non-cash expenses relating to stock-based compensation totaling $1,215,000 and depreciation, amortization and other items totaling $261,000. At September 30, 2009, we had working capital of $7,245,000. Subsequent to September 30, 2009, the Company completed a public offering generating approximately $8,764,000 in gross proceeds from the sale of 5,155,000 shares of common stock ($8,300,000 in net proceeds). We believe that our current working capital position is sufficient to continue with the technology development activities and support the current level of operations for the near term. Our primary focus currently is to continue the development activities on the appendicitis and single chain products in order to attempt to continue to secure near-term value from these products from either additional entering licensing agreements for their rights or generating revenues directly from sales of the products.
Capital expenditures, primarily for production, laboratory and facility improvement costs for the remainder of the fiscal year ending December 31, 2009, are anticipated to total approximately $200,000. We anticipate these capital expenditures to be financed out of working capital.
We anticipate that expenditures for research and development for the fiscal year ending December 31, 2009 will generally be in line with or increased somewhat from amounts expended in the nine months ended September 30, 2009. Development and testing costs in support of the current pipeline products as well as costs to file patents and revise and update previous filings on our technologies will continue to be substantial. Our principal development products consist of the appendicitis tests and the single-chain animal hormone products. As we continue towards commercialization of these products we will need to consider a number of strategic alternatives to effectively maximize the value of our technology, including possible transaction and partnering opportunities, working capital requirements including possible product management and distribution alternatives and implications of product manufacturing and associated carrying costs. Certain costs such as manufacturing and license / royalty agreements have different implications depending upon the ultimate strategic commercialization path determined.
We expect that our primary expenditures will be incurred to continue to advance our appendicitis blood test technology, AppyScore™ through the FDA clearance process in addition to advancing development and testing of the appendicitis product in the cassette and instrument format. During the nine months ended September 30, 2009 and 2008, we expended approximately $4,317,000 and $2,734,000, respectively in direct costs for the appendicitis test development and related efforts. While commercialization of the appendicitis product will be an ongoing and evolving process with subsequent generations and improvements being made in the test, we believe that 2009 and 2010 will reflect significant progress in advancing and commercializing the test. Should we be unable to achieve FDA clearance of the AppyScore test and generate revenues from the product, we would need to rely on other product opportunities to generate revenues and the costs that we have incurred for the appendicitis patent may be deemed to be impaired. In May 2003, we signed the Assignment and Consultation Agreement ("Bealer Agreement") with Dr. John Bealer, whom we collaborated with on the appendicitis test. In the event that the product is commercialized and we sell it or in the event of a transaction involving a sale of all or a portion of the Company's assets (but not the sale of the common stock of the Company), the Bealer Agreement provides for a royalty payment to Dr. Bealer, based upon what the Company receives.
The Company periodically enters generally short term consulting and development agreements primarily for product development, testing services and in connection with clinical trials conducted as part of the Company's FDA clearance process. Such commitments at any point in time may be significant but the agreements typically contain cancellation provisions.
We have a permanent mortgage facility on our land and building. The mortgage is held by a commercial bank and includes a portion guaranteed by the U. S. Small Business Administration. The loan is collateralized by the real property and is also personally guaranteed by a stockholder. The average approximate interest rate is 7% and the loan requires monthly payments of approximately $23,700 through June 2013 with the then remaining principal balance due July 2013.
During the nine months ended September 30, 2009, we received cash proceeds of $469,000 from the exercise of 643,000 options.
In April, 2008 our Board of Directors authorized a stock repurchase plan to purchase shares of our common stock up to a maximum of $5.0 million. Purchases are being made in routine, open market transactions, when management determines to effect purchases and any purchased common shares are thereupon retired. Management may elect to purchase less than $5.0 million. The repurchase program allows us to repurchase our shares in accordance with the requirements of the Securities and Exchange Commission on the open market, in block trades and in privately negotiated transactions, depending upon market conditions and other factors. The repurchase program is being funded using our working capital. A total of approximately 232,000 common shares were purchased through September 30, 2008 at a total cost of approximately $992,000 with no purchases in 2009 and no anticipated purchases in the near-term.
We expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur product development, contract consulting and product related expenses. We have also increased our overhead expenses with the hiring of additional management personnel. We believe that our current working capital position will be sufficient to meet our near-term needs. Our investments are maintained in relatively short term, high quality investments instruments, to ensure we have ready access to cash as needed.
With the recent changes in market conditions, combined with our conservative investment policy and lower average investable balances due to cash consumption, we expect that our investment earnings in 2009 will be significantly lower than that in 2008. Our Board of Directors has approved an investment policy covering the investment parameters to be followed with the primary goals being the safety of principal amounts and maintaining liquidity of the fund. The policy provides for minimum investment rating requirements as well as limitations on investment duration and concentrations. Commencing in the fourth quarter of 2008, based upon market conditions, the investment guidelines were temporarily tightened to raise the minimum acceptable investment ratings required for investments and shorten the maximum investment term. Current investment guidelines require investments to be made in investments with minimum ratings purchasing commercial paper with an A1/P1 rating, longer-term bonds with an A- rating or better, a maximum maturity of nine months and a concentration guideline of 10% (no security or issuer representing more than 10% of the portfolio).
As of September 30, 2009 approximately 75% of the investment portfolio was in cash equivalents which are included with cash and the remaining funds were invested in short term marketable securities with none individually representing more than 10% of the portfolio and none maturing past January 2010. Of the marketable securities investment portion, 100% was invested in companies in the financial sector, all in large market cap public companies. To date the cumulative market loss from the investments has been insignificant. The investment account was established in late December 2007 and, during the nine months ended September 30, 2009, gross marketable securities investments acquired totaled approximately $2.3 million, sales of investments totaled approximately $6.1 million, interest and dividend income totaled approximately $152,000 and there were no significant losses. We expect gain and loss activity in the future to be less than the historical levels.
Due to recent market events that have adversely affected all industries and the economy as a whole, management has placed increased emphasis on monitoring the risks associated with the current environment, particularly the investment parameters of the short term investments, the recoverability of receivables and inventories, the fair value of assets, and the Company's liquidity. At this point in time, there has not been a material impact on the Company's assets and liquidity. Management will continue to monitor the risks associated with the current environment and their impact on the Company's results.
Net cash consumed by operating activities was $7,774,000 during the nine months ended September 30, 2009. Cash was consumed by the loss of $10,331,000, less non-cash expenses of $1,215,000 for stock-based compensation and $261,000 for depreciation and amortization and other non-cash items. Our base antigen business is generally not significant to our operations and therefore does not generally significantly impact operating cash flows. As of September 30, 2009 inventories had increased by $124,000 due to receipt of a recent raw material supply order and prepaid expenses and other current assets generated cash of $676,000 primarily related to collection of shared costs incurred under the Novartis agreement, payable by Novartis, in the amount of $425,000.
Net cash consumed by operating activities was $3,959,000 during the nine months ended September 30, 2008. Cash was consumed by the loss of $7,123,000 less non-cash expenses of $1,065,000 for stock-based compensation issued for services, $274,000 for depreciation and amortization and $311,000 in non-cash charges. A net increase in accounts payable and accrued liabilities of $28,000 generated cash. Deferred revenues increased by $1,560,000 from the Novartis license agreement.
Net cash inflows from investing activities generated $3,412,000 during the nine months ended September 30, 2009. Marketable securities investments acquired totaled approximately $2,307,000 and sales of marketable securities totaled approximately $6,138,000. A $418,000 use of cash was attributable to additional costs incurred from patent filings and equipment additions for upgrades and expansion of equipment.
Net cash outflows from investing activities consumed $4,439,000 during the nine months ended September 30, 2008. Marketable securities investments acquired totaled approximately $14,257,000 and sales of marketable securities totaled approximately $10,322,000. A $504,000 use of cash was attributable to additional costs incurred from patent filings and equipment additions for upgrades and expansion of equipment.
Net cash inflow from financing activities generated $185,000 during the first nine months of 2009. The Company received proceeds of $469,000 from the exercise of common stock options and $283,000 was consumed for repayments under existing debt agreements.
Net cash outflow from financing activities consumed $1,169,000 during the similar period in 2008. The Company received proceeds of $532,000 from the exercise of common stock options, $992,000 was consumed to repurchase and retire the Company's common stock and $709,000 was used for repayments under existing debt agreements.
Recently Issued and Recently Adopted Accounting Pronouncements
See Note 1 to the accompanying financial statements in Part I, Item 1 of this report regarding recently issued and recently adopted accounting pronouncements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the timing of revenue recognition, the impairment analysis of intangibles and stock-based compensation.
The Company's financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company's financial statements, one must have a clear understanding of the accounting policies employed. A summary of the Company's critical accounting policies follows:
Investments: The Company invests excess cash from time to time in highly liquid debt and equity securities of highly rated entities which are classified as trading securities. Such amounts are recorded at market and are classified as current, as the Company does not intend to hold the investments beyond twelve months. Such excess funds are invested under the Company's investment policy but an unexpected decline or loss could have an adverse and material effect on the carrying value, recoverability or investment returns of such investments. Our Board has approved an investment policy covering the investment parameters to be followed with the primary goals being the safety of principal amounts and maintaining liquidity of the fund. The policy provides for minimum investment rating requirements as well as limitations on investment duration and concentrations.
Accounts Receivable: Accounts receivable balances are stated net of allowances for doubtful accounts. The Company records allowances for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowances for doubtful accounts, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, the industry and size of its clients. A financial decline of any one of the Company's large clients could have an adverse and material effect on the collectability of receivables and thus the adequacy of the allowance for doubtful accounts. Increases in the allowance for doubtful accounts are recorded as charges to bad debt expense and are reflected in operating expenses in the Company's statements of operations. Write-offs of uncollectible accounts are charged against the allowance for doubtful accounts.
Inventories: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. The elements of cost in inventories include materials, labor and overhead. The Company does not have supply agreements in place for the antigen business raw material purchases but believes that there are multiple suppliers for our antigen raw material; however in 2009 and 2008 substantially all of our purchases were made from one supplier. Management believes that its relationship with this supplier is strong; however if necessary this relationship can be replaced. If the relationship was to be replaced there may be a short term disruption to the base antigen business and operations, a period of time in which products would not be available and additional expenses may be incurred.
Long-Lived Assets: The Company records property and equipment at cost. Depreciation of the assets is recorded on the straight-line basis over the estimated useful lives of the assets. Dispositions of property and equipment are recorded in the period of disposition and any resulting gains or losses are charged to income or expense when the disposal occurs. The carrying value of the Company's long-lived assets is reviewed at least annually to determine that such carrying amounts are not in excess of estimated market value. Goodwill is reviewed annually for impairment by comparing the carrying value to the present value of its expected cash flows or future value. The required annual testing resulted in no impairment charges being recorded to date.
Revenue Recognition: The Company's revenues are recognized when products are shipped or delivered to unaffiliated customers. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 104, provides guidance on the application of generally accepted accounting principles to select revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with SAB No. 104. Revenue is recognized under development and distribution agreements only after the following criteria are met: (i) there exists adequate evidence of the transactions; (ii) delivery of goods has occurred or services have been rendered; and (iii) the price is not contingent on future activity and collectability is reasonably assured.
Stock-based Compensation: ASC 718 (formerly - SFAS No. 123(R)), Share-Based Payment, defines the fair-value-based method of accounting for stock-based employee compensation plans and transactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and advisors and for goods or services received from non-employees are accounted for based on the fair value of the equity instruments issued. The Company utilizes pricing models in . . .
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