U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission file Number 0-16109
A.P. PHARMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
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(Address of principal executive offices)
(650) 366-2626
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
---- ----
Non-accelerated filer [X ]
----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X ]
---- ----
At April 30, 2006, the number of outstanding shares of the Company's
common stock, par value $.01, was 25,330,941.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Balance Sheets
March 31, 2006 and December 31, 2005
Condensed Statements of Operations
for the three months ended March 31, 2006 and 2005
Condensed Statements of Cash Flows
for the three months ended March 31, 2006 and 2005
Notes to Condensed Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
ITEM 6. Exhibits
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements:
---------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED BALANCE SHEETS
(in thousands)
- ------------------------
March 31, December 31,
2006 2005
------------- ------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 10,970 $ 790
Marketable securities 15,202 5,019
Accounts receivable, net 75 1,519
Prepaid expenses and other 365 320
------ ------
Total current assets 26,612 7,648
Property and equipment, net 1,095 1,164
Other long-term assets 139 157
------ ------
Total assets $ 27,846 $ 8,969
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 388 $ 614
Accrued clinical trial expenses 820 892
Accrued disposition costs 245 248
Other accrued expenses 765 1,012
------ ------
Total current liabilities 2,218 2,766
------ ------
Stockholders' equity:
Common stock 99,404 99,248
Accumulated deficit (73,731) (93,029)
Accumulated other comprehensive
loss (45) (16)
------ ------
Total stockholders' equity 25,628 6,203
------ ------
Total liabilities and stockholders'
equity $ 27,846 $ 8,969
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------
(in thousands, except per share amounts)
- ---------------------------------------
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
Royalties $ -- $ 1,282
Contract revenues -- 78
------ ------
Total revenues -- 1,360
Operating expenses:
Research & development 3,469 1,822
General & administrative 932 849
------ ------
Total operating expenses 4,401 2,671
------ ------
Operating loss (4,401) (1,311)
Interest income, net 262 72
Gain on sale of interest in royalties 23,421 --
Other income (expense), net 10 (11)
------ ------
Income (Loss) from continuing
operations 19,292 (1,250)
Income (Loss) from discontinued
operations 7 (6)
------ ------
Net income (loss) $19,299 $(1,256)
====== ======
Basic earnings (loss) per share:
Income (Loss) from continuing
operations $ 0.77 $ (0.05)
====== ======
Net income (loss) $ 0.77 $ (0.05)
====== ======
Diluted earnings (loss) per share:
Income (Loss) from continuing
operations $ 0.76 $ (0.05)
====== ======
Net income (loss) $ 0.76 $ (0.05)
====== ======
Weighted average common shares
outstanding-basic 25,207 25,046
====== ======
Weighted average common shares
outstanding-diluted 25,483 25,046
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------
(in thousands)
- --------------
Three months ended March 31,
----------------------------
2006 2005
---------- ----------
Cash flows from operating activities:
Net income (loss) $19,299 $(1,256)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Gain/loss from discontinued
operations (7) 6
Loss on sale of marketable
securities 1 12
Depreciation and amortization 99 94
SFAS123R stock compensation expense 114 --
Stock and stock option compensation
awards to non-employees 31 29
Restricted stock awards 8 1
Amortization of premium/discount
and accretion of marketable
securities (2) 15
Changes in operating assets and
liabilities:
Accounts receivable 1,426 59
Prepaid expenses and other
current assets (46) 86
Other long-term assets 19 74
Accounts payable (226) (144)
Accrued clinical trial expenses (72) (717)
Other accrued expenses (247) (60)
------ ------
Net cash provided by (used in)
continuing operating activities 20,397 (1,801)
Net cash received from discontinued
operations 21 23
Cash flows from investing activities:
Purchases of property and equipment (29) (26)
Purchases of marketable securities (12,363) (5,156)
Maturities of marketable securities 500 3,792
Sales of marketable securities 1,651 400
------ ------
Net cash used in investing activities (10,241) (990)
Cash flows from financing activities:
Proceeds from the exercise of stock
options 3 11
Proceeds from issuance of restricted
stock -- 1
------ ------
Net cash provided by financing
activities 3 12
Net increase (decrease) in cash and
cash equivalents 10,180 (2,756)
Cash and cash equivalents, beginning
of the period 790 3,110
----- ------
Cash and cash equivalents, end
of the period $10,970 $ 354
===== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
- -----------------------------------
MARCH 31, 2006 and 2005 (UNAUDITED)
- -----------------------------------
(1) Basis of Presentation
---------------------
A.P. Pharma, Inc. (the "Company", "we", "our", or "us") is
developing patented polymer-based delivery systems to enhance
the safety and effectiveness of pharmaceutical compounds. New
products and technologies under development include bioerodible
polymers for injectable and implantable drug delivery. Projects
have also been conducted under feasibility and development
arrangements with pharmaceutical and biotechnology companies.
In the opinion of management, the accompanying unaudited
condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments of a
normal recurring nature considered necessary for a fair
presentation have been included. Operating results for the
three months ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2006 or any other period. The condensed
balance sheet as of December 31, 2005 has been derived from the
audited financial statements as of that date but it does not
include all of the information and notes required by U.S.
generally accepted accounting principles for complete financial
statements. These condensed financial statements should be
read in conjunction with the financial statements and notes
thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2005.
Summary of Critical Accounting Policies
- ---------------------------------------
Except for the adoption of FAS 123(R) (see Stock-Based
Compensation) we believe there have been no significant changes
in our critical accounting policies during the three months
ended March 31, 2006 compared to those previously disclosed in
our Annual Report on Form 10-K for the year ended December 31,
2005 filed with the U.S. Securities and Exchange Commission
(SEC) on March 31, 2006.
Use of Estimates
- ----------------
The preparation of our financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in our financial statements and accompanying
notes. Estimates were made relating to useful lives of fixed
assets, valuation allowances, impairment of assets, accrued
clinical and preclinical expenses, valuation of stock-based
compensation and contingencies. Actual results could differ
materially from those estimates.
Revenue Recognition
- -------------------
Our revenue arrangements with multiple deliverables are divided
into separate units of accounting if certain criteria are met,
including whether the delivered element has stand-alone value
to the customer and whether there is objective and reliable
evidence of the fair value of the undelivered elements. The
consideration we receive is allocated among the separate units
based on their respective fair values, and the applicable
revenue recognition criteria are considered separately for each
of the separate units. Advance payments received in excess of
amounts earned are classified as deferred revenue until earned.
* Royalties
Royalties from licensees are based on third-party sales of
licensed products or technologies and recorded as earned in
accordance with contract terms when third-party results can
be reliably determined and collectibility is reasonably
assured.
Generally, contractually required minimum royalties are
recorded ratably throughout the contractual period.
Royalties in excess of minimum royalties are recognized as
earned when the related product is shipped to the end
customer by our licensees based on information provided to
us by our licensees.
* License Fees
Licensing agreements generally provide for periodic minimum
payments, royalties, and/or non-refundable license fees.
These licensing agreements typically require a non-
refundable license fee and allow partners to sell our
proprietary products in a defined field or territory for a
defined period. License agreements provide for the Company
to earn future revenue through royalty payments. These non-
refundable license fees are initially reported as deferred
revenues and recognized as revenues over the estimated life
of the product to which they relate as we have continuing
involvement with licensees until the related product is
discontinued or the related patents expire, whichever is
earlier. License fees received in connection with
arrangements where we have no continuing involvement are
recognized as license fees when the amounts are received or
when collectibility is assured, whichever is earlier. No
such fees were recorded during the three months ended March
31, 2006.
A milestone payment is a payment made by a third party or
corporate partner to us upon the achievement of a
predetermined milestone as defined in a legally binding
contract. Milestone payments are recognized as license fees
when the milestone event has occurred and we have completed
all milestone related services such that the milestone
payment is currently due and is non-refundable. No such
fees were recorded during the three months ended March 31,
2006.
* Contract Revenues
Contract revenues relate to research and development
arrangements that generally provide for the Company to
invoice research and development fees based on full-time
equivalent hours for each project. Revenues from these
arrangements are recognized as the related development costs
are incurred. These revenues approximate the costs
incurred. No such revenues were recorded during the three
months ended March 31, 2006.
Sale of Royalty Revenues
------------------------
In January 2006, we completed the sale of our rights to
royalties on sales of Retin-A Micro(R) and Carac(R) for up to
$30 million. We received proceeds of $25 million upon the
closing of the transaction and we are entitled to receive an
additional $5 million based on the satisfaction of certain
predetermined milestones. The royalty interest agreement was
entered into by the parties in January 2006, but the effective
date of the sale of the royalty interest was October 1, 2005.
The royalties recognized by the Company from October 1, 2005
through December 31, 2005 were accounted for as an offset
against the $25 million gain.
Cash Equivalents and Short-term Investments
- -------------------------------------------
We consider all short-term investments in debt securities which
have original maturities of less than three months at date of
purchase to be cash equivalents. Investments which have
original maturities of three months or longer are classified as
marketable securities in the accompanying condensed balance
sheets.
Accrued Disposition Costs
- -------------------------
Costs relating to disposal of discontinued operations are
reported as accrued disposition costs in the accompanying
condensed balance sheets. Accrued disposition costs include
severance costs and gross profit guarantees.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
equivalents, short-term investments and trade accounts
receivable. We invest excess cash in a variety of high grade
short-term, interest-bearing securities. This diversification
of risk is consistent with our policy to ensure safety of
principal and to maintain liquidity.
Segment and Geographic Information
- ----------------------------------
Our operations are confined to a single business segment, the
design and commercialization of polymer technologies for
pharmaceutical and other applications. Substantially all of
our revenues are derived from domestic customers.
Stock-Based Compensation
- ------------------------
Refer to Note 2 "Stock-Based Compensation" and Note 8
Stockholders' Equity in our 2005 Annual Report for further
information regarding our adoption of SFAS 123(R) and our
stock-based compensation arrangements, including related
disclosures required upon the adoption of SFAS 123(R). On
January 1, 2006, we adopted the provisions of Financial
Accounting Standards Board Statement No. 123R, "Share-Based
Payment" (SFAS 123R). SFAS 123R revised SFAS 123, "Accounting
for Stock-Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123R
requires companies to measure and recognize compensation
expense for all employee share-based payments at fair value
over the service period underlying the arrangement. Therefore,
we are required to record the grant-date or purchase-date fair
value of stock options issued to employees and employee stock
purchases. We have recorded the compensation expense for stock
options issued to non-employees and restricted stock awards to
employees and directors. Compensation related to options
granted to non-employees is periodically remeasured as earned.
We adopted SFAS 123R using the "modified prospective" method,
whereby fair value of all previously-granted employee share-
based arrangements that remained unvested at January 1, 2006,
based on the grant-date value estimated in accordance with the
pro forma provisions of SFAS 123, and all grants made on or
after January 1, 2006, based on fair value estimated in
accordance with SFAS 123(R), have been included in our
determination of share-based compensation expense for the three
months ended March 31, 2006. We have not restated our
operating results for the three months ended March 31, 2005 to
reflect charges for the fair value of share-based arrangements.
We use the Black-Scholes option-pricing model with the
following weighted-average assumptions to estimate stock
compensation expense for the three months ended March 31, 2006:
1) risk-free interest rate of 4.4% for stock options and 3.4%
for employee stock purchase plan; 2) expected dividend yield of
0% for both stock options and employee stock purchase plan; 3)
expected holding period of 6.25 years based on the simplified
method provided in Staff Accounting Bulletin No. 107 for "plain
vanilla options" and expected term of 1.25 years for employee
stock purchase plan based on weighted-average purchase period
of the plan; 4) expected volatility of 240% for stock options
and 106% for employee stock purchase plan based on the
Company's historical stock prices; and 5) an estimated
forfeiture rate of 3% of the options granted based on
historical data.
The SFAS 123R share-based compensation expenses recorded for
awards granted under the stock option plans and employee stock
purchase plan were approximately $114,000, net of estimated
forfeitures, for the three months ended March 31, 2006. The
share-based compensation expense of $53,000 and $61,000 was
recorded in research and development expense and general and
administrative expense, respectively. No tax benefit was
recognized related to share-based compensation expense since we
have incurred operating losses and we have established a full
valuation allowance to offset all the potential tax benefits
associated with our deferred tax assets.
During the three months ended March 31, 2006 we granted 214,940
options to employees to purchase common stocks. The following
table summarizes option activity for the three months ended
March 31, 2006:
Weighted Average
Shares Exercise Price
------ ---------------
Outstanding at January 1, 2006 2,165,966 $3.40
Granted 214,940 $1.62
Exercised (1,797) $1.55
Expired or forfeited (11,335) $1.66
---------
Outstanding at March 31, 2006 2,367,774 $3.25
=========
Options exercisable at
March 31, 2006 1,870,718 $3.67
The following table summarizes our non-vested share activity
for the three months ended March 31, 2006.
Shares
------
Outstanding at January 1, 2006 337,133
Granted 214,940
Vested (43,682)
Forfeited (11,335)
-------
Outstanding at March 31, 2006 497,056
=======
As of March 31, 2006 there was approximately $604,000 of total
unrecognized compensation expense related to nonvested stock
options. This expense is expected to be recognized over a
weighted-average period of 1.33 years.
Prior to January 1, 2006, we accounted for employee stock-based
grants in accordance with SFAS No. 123, "Accounting for Stock-
Based Compensation," as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure". We
have provided below the pro forma disclosures of the effect on
net loss and net loss per share as if SFAS No. 123 had been
applied in measuring compensation expense for the three months
ended March 31, 2005.
Three Months Ended
March 31,
------------------
2005
----
Net loss, as reported $(1,256)
Deduct:
Stock-based employee
compensation expense
determined under SFAS No. 123 (84)
------
Pro forma net loss $(1,340)
======
Basic and diluted net loss per
share, as reported $ (0.05)
======
Basic and diluted pro forma
net loss per share $ (0.05)
======
Fair values of awards granted under the stock option plans and
employee stock purchase plan were estimated at grant date using
the Black-Scholes option pricing model. For pro forma
disclosure, the estimated fair value of the options is
amortized to expense over the vesting period of the options
using the straight line method. Forfeitures have been
accounted for in the period in which they occurred. The
multiple option approach is used to value the purchase rights
granted under the employee stock purchase plan. We used the
following assumptions for the three months ended March 31,
2005:
Three Months Ended
March 31,
------------------
2005
----
Expected life in years (from
grant date):
Stock options 5
Employee stock purchase plan 1.5 - 2
Interest rate:
Stock options 4.2%
Employee stock purchase plan 1.47%-2.6%
Volatility:
Stock options 79%
Employee stock purchase plan 65%-147%
Expected dividend yield: 0%
Reclassifications
- -----------------
Certain amounts in the prior quarter condensed financial
statements have been reclassified to conform with the current
presentation of the financial statements. Amortization of
premium/discount and accretion of marketable securities in the
prior quarter have been reclassified from investing activities
to operating activities on the Condensed Statements of Cash
Flows.
(2) Income (Loss) Per Share Information
-----------------------------------
Basic income (loss) per share is computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding. Because the Company is in a net loss position for
the three months ended March 31, 2005, diluted earnings per
share is also calculated using the weighted average number of
common shares outstanding and excludes the effects of options
which are antidilutive. For the three months ended March 31,
2006, diluted earnings per share is calculated using the
weighted average number of common shares outstanding and other
dilutive securities.
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations (in thousands):
Three Months Ended
March 31,
------------------
2006 2005
---- ----
Numerator:
Net income (loss) $19,299 $(1,256)
====== ======
Denominator:
Weighted-average shares
outstanding used to compute
basic earnings per share 25,207 25,046
Effect of dilutive stock options
and restricted stock awards 276 --
------ ------
Weighted-average shares
outstanding and dilutive
securities used to compute
diluted earnings per share 25,483 25,046
====== ======
(3) Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) for the three months ended March
31, 2006 and 2005 consists of the following (in thousands):
Three Months Ended
March 31,
------------------
2006 2005
---- ----
Net income (loss) $19,299 $(1,256)
Unrealized (losses) gains on
available-for-sale securities (29) 3
------ ------
Comprehensive income (loss) $19,270 $(1,253)
====== ======
(4) Stockholders' Equity
--------------------
During the three months ended March 31, 2006, 21,078 shares of
common stock were issued primarily through the exercise of
stock options by employees and for the payment of directors'
fees.
(5) Discontinued Operations
-----------------------
We completed the sale of certain assets of our Analytical
Standards division as well as certain technology rights for our
topical pharmaceutical and cosmeceutical product lines and
other assets ("cosmeceutical and toiletry business") in
February 2003 and July 2000, respectively.
The Analytical Standards division and cosmeceutical and
toiletry business are reported as discontinued operations for
all periods presented in the accompanying Condensed Statements
of Operations.
Income (loss) from discontinued operations represents the
income (loss) attributable to our Analytical Standards division
that was sold to GFS Chemicals on February 13, 2003, and
changes in estimates for our cosmeceutical and toiletry
business that was sold to RP Scherer on July 25, 2000, as
follows (in thousands):
For the Three
Months Ended
March 31,
-------------
2006 2005
---- ----
Analytical Standards Division
- -----------------------------
Royalties earned in excess of
minimum amount recorded $ 7 $ 12
Cosmeceutical and Toiletry Business
- -----------------------------------
Change in estimates for gross
profit guarantees -- (18)
---- ----
Total income (loss) from discontinued
operations $ 7 $ (6)
==== ====
Basic and diluted income (loss) per common share from
discontinued operations were less than $0.01 per share for the
three months ended March 31, 2006 and 2005, respectively.
Liabilities related to the discontinued operations at March 31,
2006 in the amount of $245,000 include severance costs and
accruals for gross profit guarantees. These liabilities are
reported as accrued disposition costs in the accompanying
condensed balance sheets.
Under the terms of the agreement with RP Scherer, we guaranteed
a minimum gross profit percentage on RP Scherer's combined
sales of products to Ortho Neutrogena and Dermik ("Gross Profit
Guaranty"). The guaranty period commenced on July 1, 2000 and
ends on the earlier of July 1, 2010 or the end of two
consecutive guaranty periods where the combined gross profit on
sales to Ortho and Dermik equals or exceeds the guaranteed
gross profit. We expect the annual Gross Profit Guaranty
payments to range from approximately $100,000 to $150,000 for
the remainder of the guaranty period. As the minimum amount of
Gross Profit Guaranty due is based on sales by RP Scherer and
can not be estimated, no accrual has been recorded relating to
sales in future periods.
Cash provided by discontinued operations primarily relates to
royalty payments received from GFS Chemicals for the sale of
certain products.
Below is a summary of activity for liabilities related to the
discontinued operations for the three months ended March 31,
2006 (in thousands):
Accrual at December 31, 2005 $248
Payment under severance agreement (3)
---
Accrual at March 31, 2006 $245
===
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
FORWARD-LOOKING STATEMENTS
Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially
from the statements made. These include, among others, uncertainty
associated with timely development, approval, launch and acceptance
of new products, establishment of new corporate alliances, progress
in research and development programs, and other risks described
below or identified from time to time in our Securities and Exchange
Commission filings. Except as may be required by law, we undertake
no obligation to update any forward-looking statement to reflect
events after the date of this report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in our
financial statements and accompanying notes. On an ongoing basis,
we evaluate our estimates including those related to the useful
lives of fixed assets, valuation allowances, impairment of assets,
accrued clinical and preclinical expenses, valuation of stock-based
compensation and contingencies. Actual results could differ
materially from those estimates.
Except for the adoption of SFAS 123(R) we believe there have been no
significant changes in our critical accounting policies and
estimates during the three months ended March 31, 2006 compared to
those previously disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2005 filed with the SEC on March 31, 2006.
For a description of our critical accounting policies and estimates,
please refer to our Annual Report on Form 10-K for the year ended
December 31, 2005.
On January 1, 2006, we adopted the provisions of Financial
Accounting Standards Board Statement No. 123R, "Share-Based Payment"
(SFAS 123R). SFAS 123R revised SFAS 123, "Accounting for Stock-
Based Compensation" and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123R requires companies to
measure and recognize compensation expense for all employee share-
based payments at fair value over the service period underlying the
arrangement. Therefore, we are required to record the grant-date or
purchase-date fair value of stock options issued to employees and
employee stock purchases. We have recorded the compensation
expenses for stock options issued to non-employees and restricted
stock awards to employees and directors. Compensation related to
options granted to non-employees is periodically remeasured as
earned. We adopted SFAS 123R using the "modified prospective"
method, whereby fair value of all previously-granted employee share-
based arrangements that remained unvested at January 1, 2006 and all
grants made on or after January 1, 2006 have been included in our
determination of share-based compensation expense for the three
months ended March 31, 2006. We have not restated our operating
results for the three months ended March 31, 2005 to reflect charges
for the fair value of share-based arrangements.
Results of Operations for the Three Months Ended March 31, 2006 and
- -------------------------------------------------------------------
2005
- ----
Our revenues have been derived principally from royalties and
contract revenues. Under strategic alliance arrangements entered
into with certain companies, we received non-refundable upfront
fees, milestone payments and royalties based on third party product
sales.
In January 2006, we completed the sale of our rights to royalties on
sales of Retin-A Micro(R) and Carac(R) for up to $30 million. We
received proceeds of $25 million upon the closing of the transaction
and we are entitled to receive an additional $5 million based on the
satisfaction of certain predetermined milestones. The royalty
interest agreement was entered into by the parties in January 2006,
but the effective date of the sale of the royalty interest was
October 1, 2005. The royalties recognized by the Company from
October 1, 2005 through December 31, 2005 were accounted for as an
offset against the $25 million gain. As a result of this
transaction, royalties for the first quarter of 2006 decreased to $0
from $1,282,000 in the corresponding quarter of the prior year. We
will not record additional royalty revenue on sales of Retin-A Micro
and Carac in future periods.
Contract revenues, which are derived from work performed under
collaborative research and development arrangements, decreased by
$78,000 from $78,000 to $0 in the first quarter of 2006. The amount
of contract revenues varies from period to period depending on the
level of activity requested of us by our collaborators. Therefore
we can not predict the amount of contract revenues in future
periods.
Research and development expense for the first quarter of 2006
increased by $1,647,000 from $1,822,000 to $3,469,000 due mainly to
expenditures in the first quarter on preparations for a Phase 3
study for APF530, our product candidate for the prevention of
chemotherapy-induced nausea and vomiting. We expect research and
development expense to increase in the second quarter of 2006 as we
initiate our Phase 3 trial program for APF530.
General and administrative expense increased for the first quarter
of 2006 by $83,000 from $849,000 to $932,000 due primarily to
increased use of outside consultants and increased legal fees. We
expect general and administrative expense to increase slightly
through the end of the year compared to 2005.
With the adoption of SFAS 123R, we expect an increase in our non-
cash operating expenses for employee share-based compensation in all
future periods.
Interest income, net, increased for the first quarter of 2006 by
$190,000 to $262,000 from $72,000 due to higher interest rates
earned on higher average cash and marketable securities balances.
Income/loss from discontinued operations represents the net
income/loss attributable to the Analytical Standards division which
was sold to GFS Chemicals, Inc. in February 2003 and the
cosmeceutical and toiletries business which was sold to RP Scherer
Corporation in July 2000. Net income from discontinued operations
totaled $7,000 for the three months ended March 31, 2006, compared
with a net loss of $6,000 in the three months ended March 31, 2005.
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities increased by
$20,363,000 to $26,172,000 at March 31, 2006 from $5,809,000 at
December 31, 2005 due to the sale of our interest in royalties on
sales of Retin-A Micro and Carac in January 2006, partially offset
by cash used in operating activities.
Net cash provided by continuing operating activities for the three
months ended March 31, 2006 was $20,397,000, compared to net cash of
$1,801,000 used in continuing operating activities for the three
months ended March 31, 2005. The increase in net cash provided by
operating activities from 2005 to 2006 was mainly due to proceeds
from the sale of our interest in royalties in January 2006.
Net cash used in investing activities for the three months ended
March 31, 2006 and 2005 was $10,241,000 and $990,000, respectively.
The increase in the cash used in investing activities was primarily
due to the purchases of $12,363,000 of marketable securities.
To date, we have financed our operations including technology and
product research and development, primarily through royalties
received on sales of Retin-A Micro and Carac, income from
collaborative research and development fees, the proceeds received
from the sales of our Analytical Standards division, our
cosmeceutical and toiletry business and our interest in royalties on
sales of Retin-A Micro(R) and Carac(R), the sale of common stock in
June 2004, and interest earned on short-term investments. Our
existing cash and cash equivalents, marketable securities, together
with interest income and other revenue-producing activities
including license and option fees and research and development fees,
are expected to be sufficient to meet our cash needs for at least
the next year. It is possible that we will seek additional
financing within this timeline through collaborative agreements,
debt financing, equity financing, the sale of certain assets and
technology rights or other arrangements.
Our future capital requirements will depend on numerous factors
including, among others, our ability to enter into collaborative
research and development and licensing agreements; progress of
product candidates in preclinical and clinical trials; investment in
new research and development programs; time required to gain
regulatory approvals; resources that we devote to self-funded
products; potential acquisitions of technology, product candidates
or businesses; and the costs of defending or prosecuting any patent
opposition or litigation necessary to protect our proprietary
technology.
Our capital resources will be unable to meet our long term capital
requirements. We are actively seeking partners in the U.S. and
abroad to take over the funding of the Phase 3 clinical trial of
APF530, and to commercialize the product upon approval by the FDA.
If we are unable to reach terms with a partner, we will have to
raise additional funds. We may be unable to raise sufficient
additional capital when we need it or to raise capital on favorable
terms. The sale of equity or convertible debt securities in the
future may be dilutive to our stockholders, and debt financing
arrangements may require us to pledge certain assets and enter into
covenants that could restrict certain business activities or our
ability to incur further indebtedness and may contain other terms
that are not favorable to us or our stockholders. If we are unable
to obtain adequate funds on reasonable terms, we may be required to
curtail operations significantly or to obtain funds by entering into
financing, supply or collaboration agreements on unattractive terms.
Below is a summary of fixed payments related to certain contractual
obligations (in thousands). This table excludes amounts already
recorded on our condensed balance sheet as current liabilities at
March 31, 2006.
Less More
than 2 to 3 4 to 5 than
Total 1 year years years 5 years
----- ------ ------ ------ -------
Operating Leases $2,378 $475 $949 $954 $ --
===== === === === ===
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
----------------------------------------------------------
Since December 31, 2005, there have been no material changes in the
Company's market risk exposure.
ITEM 4. Controls and Procedures
-----------------------
Evaluation of disclosure controls and procedures: We carried out an
evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operations
of our disclosure controls and procedures pursuant to Rule 13a-15(e)
and 15(d)-15(e) of the Exchange Act. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2006, the end of period covered by this report,
our disclosure controls and procedures were effective at the
reasonable assurance level to alert them in a timely manner to
material information relating to the Company required to be included
in our Exchange Act filings.
Changes in internal controls: During the three months ended March
31, 2006, there have been no significant changes in our internal
control over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
-----------------
ITEM 1A. Risk Factors
There have been no material changes to the risk factors set forth
in the "RISK FACTORS" section of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
ITEM 6. Exhibits
--------
Exhibit 10.1 Royalty Interest Agreement, dated as of January 17,
2006, between A.P. Pharma, Inc. and an affiliate of Paul Royalty Fund
II, L.P.
Exhibit 10.2 Security Agreement, dated as of January 17, 2006,
between A.P. Pharma, Inc. and an affiliate of Paul Royalty Fund II,
L.P.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rules 13A-15(e) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rules 13A-15(e) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
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.
A.P. PHARMA, INC.
Date: May 12, 2006 By: /S/ Michael O'Connell
------------------ -----------------------
Michael O'Connell
President and Chief
Executive Officer
Date: May 12, 2006 By: /S/ Gordon Sangster
------------------ ---------------------
Gordon Sangster
Chief Financial Officer
Exhibit 10-Y
CONFIDENTIAL TREATMENT REQUESTED
ROYALTY INTEREST AGREEMENT
Dated as of January 17, 2006
between
A.P. PHARMA, INC.
and
[***][an affiliate of Paul Royalty Fund II, L.P.,
a Delaware limited partnership]
TABLE OF CONTENTS
Page
----
Article I DEFINITIONS 1
Section 1.01 Definitions. 1
Article II PURCHASE AND SALE OF ROYALTY INTEREST 9
Section 2.01 Purchase and Sale. 9
Section 2.02 Transfers and Payments in Respect of
the Royalty Interest. 9
Section 2.03 Purchase Price. 9
Section 2.04 No Assumed Obligations. 10
Article III REPRESENTATIONS AND WARRANTIES
OF THE COMPANY 10
Section 3.01 Organization. 10
Section 3.02 Corporate Authorization. 10
Section 3.03 Governmental Authorization. 11
Section 3.04 Ownership. 11
Section 3.05 Public Filings. 11
Section 3.06 No Undisclosed Liabilities. 12
Section 3.07 Solvency. 12
Section 3.08 Litigation. 12
Section 3.09 Compliance with Laws. 12
Section 3.10 Conflicts. 12
Section 3.11 Material Contracts. 13
Section 3.12 Intellectual Property. 13
Section 3.13 Regulatory Approval. 16
Section 3.14 Subordination. 17
Section 3.15 Place of Business. 17
Section 3.16 Broker's Fees. 17
Section 3.17 Other Information. 17
Section 3.18 License Agreements. 18
Section 3.19 Related Agreements. 19
Section 3.20 Insurance. 20
Section 3.21 Applicable Royalty Rates and Duration
of Royalty Rates. 21
Section 3.22 Set-off. 21
Article IV REPRESENTATIONS AND WARRANTIES OF PRF 21
Section 4.01 Organization. 21
Section 4.02 Authorization. 21
Section 4.03 Broker's Fees. 21
Section 4.04 Conflicts. 22
Article V COVENANTS 22
Section 5.01 Consents and Waivers. 22
Section 5.02 Access; Information. 22
Section 5.03 Material Contracts. 23
Section 5.04 Public Announcement. 23
Section 5.05 Security Agreement. 23
Section 5.06 Reasonable Commercial Efforts;
Further Assurance. 24
Section 5.07 Remittance to PRF's Account. 24
Section 5.08 License Agreements. 25
Section 5.09 Insurance. 27
Section 5.10 Audits. 27
Section 5.11 Notice. 29
Section 5.12 Chain of Title. 29
Section 5.13 Treatment of Sale of Royalty
Interest 29
Article VI THE CLOSING; CONDITIONS TO CLOSING AND
FUNDING 29
Section 6.01 Closing. 29
Section 6.02 Conditions Applicable to PRF. 30
Section 6.03 Conditions Applicable to the Company. 31
Article VII TERMINATION 32
Section 7.01 Termination Date. 32
Section 7.02 Effect of Termination. 32
Article VIII MISCELLANEOUS 32
Section 8.01 Survival. 32
Section 8.02 Specific Performance. 33
Section 8.03 Notices. 33
Section 8.04 Successors and Assigns. 34
Section 8.05 Indemnification. 34
Section 8.06 Independent Nature of Relationship. 36
Section 8.07 Tax Treatment. 36
Section 8.08 Entire Agreement. 36
Section 8.09 Amendments; No Waivers. 37
Section 8.10 Interpretation. 37
Section 8.11 Headings and Captions. 37
Section 8.12 Counterparts; Effectiveness. 37
Section 8.13 Severability. 37
Section 8.14 Governing Law; Jurisdiction. 37
Section 8.15 Waiver of Jury Trial. 38
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
ROYALTY INTEREST AGREEMENT
This ROYALTY INTEREST AGREEMENT (as amended, supplemented or
otherwise modified from time to time, this "Agreement") is made
and entered into as of January 17, 2006 by and between A.P.
Pharma, Inc., a Delaware corporation (the "Company", as further
defined below), and [***][an affiliate of Paul Royalty Fund II,
L.P., a Delaware limited partnership].
WHEREAS, the Company has the right to all royalties and
payments under the License Agreements, Patent Rights and other
Intellectual Property necessary to commercialize, market and sell
the Products; and
WHEREAS, the Company wishes to sell, assign, convey and
transfer to PRF, and PRF wishes to purchase from the Company, the
Royalty Interest, upon and subject to the terms and conditions
hereinafter set forth; and
NOW, THEREFORE, in consideration of the mutual covenants,
agreements representations and warranties set forth herein, the
parties hereto agree as follows:
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
ARTICLE I
DEFINITIONS
Section 1.01 Definitions.
The following terms, as used herein, shall have the
following meanings:
"Affiliate" shall mean any Person that controls, is
controlled by, or is under common control with another Person.
For purposes of this definition, "control" shall mean (i) in the
case of corporate entities, direct or indirect ownership of at
least fifty percent (50%) of the stock or shares having the right
to vote for the election of directors, and (ii) in the case of
non-corporate entities, direct or indirect ownership of at least
fifty percent (50%) of the equity interest with the power to
direct the management and policies of such non-corporate
entities.
"Agreement" shall have the meaning set forth in the first
paragraph hereof.
"Amcol" shall mean Amcol International Inc. and its
Affiliates, successors and assigns.
"Amcol Supply Agreement" shall mean the supply agreement
entered into between RPS and Amcol in 2003. Representations and
warranties made by the Company herein with respect to the Amcol
Supply Agreement shall be based on the draft copy provided as
Exhibit J.
"Audit Costs" shall mean, with respect to any audit
described hereunder with respect to amounts payable or paid under
this Agreement or any License Party Audit, the cost of such
audit, including all fees, costs and expenses incurred in
connection therewith.
"Aventis" shall mean sanofi-aventis U.S. LLC, formerly
Rhone-Poulenc Rorer, Inc. and its Affiliates, including Dermik
Laboratories, Inc., successors and assigns.
"Aventis License Agreement" shall mean the Development and
License Agreement between Rhone-Poulenc Rorer, Inc. (a
predecessor of Aventis) and Advanced Polymer Systems, Inc. (a
predecessor of the Company) effective March 19, 1992, as amended
(including the amendments dated March 16, 1998, December 22, 1999
and September 23, 2003), superseded, replaced, succeeded, or
substituted from time to time.
"Bankruptcy Event" shall mean the occurrence of any of the
following:
(i) the Company shall commence any case, proceeding or
other action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization, relief of
debtors or the like, seeking to have an order for
relief entered with respect to it, or seeking to
adjudicate it bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief
with respect to it or its respective debts, or (B)
seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any
portion of its assets, or the Company shall make a
general assignment for the benefit of its respective
creditors; or
(ii) there shall be commenced against the Company any case,
proceeding or other action of a nature referred to in
clause (i) above which remains undismissed,
undischarged or unbonded for a period of ninety (90)
calendar days; or
(iii) there shall be commenced against the Company any case,
proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar
process against (A) all or any substantial portion of
its assets and/or (B) the Products or any substantial
portion of the Intellectual Property related to the
Products, which results in the entry of an order for
any such relief which shall not have been vacated,
discharged, stayed, satisfied or bonded pending appeal
within forty-five (45) calendar days from the entry
thereof; or
(iv) the Company shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence
in, any of the acts set forth in clause (i), (ii) or
(iii) above; or
(v) the Company shall generally not, or shall be unable to,
or shall admit in writing its inability to, pay its
respective debts as they become due; or
(vi) the Company shall be in a financial condition such that
the sum of its debts is greater than the fair market
value of its property, when taken together on a
consolidated basis.
"Bill of Sale" shall mean the Bill of Sale pursuant to which
the Company shall assign to PRF all of its rights and interests
in and to the Royalty Interest purchased hereunder, which Bill of
Sale shall be substantially in the form of Exhibit A.
"Business Day" shall mean any day other than a Saturday, a
Sunday, any day which is a legal holiday under the laws of the
State of New York, or any day on which banking institutions
located in the State of New York are required by law or other
governmental action to close.
"Business Report" shall mean a report in a format agreed
between the parties providing information on current business
activities, if any, relating to the licensing of Intellectual
Property and sale or supply of Products.
"Carac(R)" shall mean the Particles based 5-fluorouracil
product for the treatment of actinic keratoses currently sold by
Aventis in the United States of America under NDA No. 020985.
"Closing" shall have the meaning set forth in Section 6.01.
"Closing Date" shall mean the date of this Agreement.
"Company" shall mean A.P. Pharma, Inc., a Delaware
corporation, and its Affiliates, successors and assigns.
"Company Indemnified Party" shall have the meaning set forth
in Section 8.05(b).
"Company SEC Documents" shall have the meaning set forth in
Section 3.05.
"Company Supply Agreement" shall mean the Supply Agreement
entered into as of July 25, 2000 between the Company and RPS.
"Collateral" shall mean the property included in the
definition of "Collateral" in the Security Agreement.
"Contract Party" shall mean any party to a License Agreement
or a Related Agreement and includes the Company, Aventis, Ortho,
RPS and Amcol.
"Discrepancy Notice" shall have the meaning set forth in
Section 5.10(b).
"Dispute" shall have the meaning set forth in Section
3.12(i).
"EMEA" shall mean the European Medicines Agency.
"Excluded Liabilities and Obligations" shall have the
meaning set forth in Section 2.04.
"FDA" shall mean the United States Food and Drug
Administration.
"FDA Approval Date" shall mean the date of approval by the
FDA of a NDA and satisfaction of any related FDA requirements (if
any) for the Products.
"Financial Statements" shall mean the consolidated balance
sheets of the Company and its Subsidiaries at December 31, 2002,
December 31, 2003, December 31, 2004, and September 30, 2005 and
the related consolidated statements of operations, cash flows and
changes in stockholders' equity of the Company and its
Subsidiaries audited for the years ended December 31, 2002,
December 31, 2003, and December 31, 2004, and the quarter ended
September 30, 2005 and the accompanying footnotes thereto,
contained in the Company's Form 10-K for the year ended December
31, 2004 and Form 10-Q for the quarter ended September 30, 2005,
respectively.
"Future Agreement" shall mean any distribution, licensing or
similar agreement entered into by the Company or any of its
Affiliates with any other Person after the date hereof relating
to the manufacturing, marketing and/or sale of the Products, or
otherwise relating to the licensing of the Patent Rights, as the
same may be amended, supplemented or otherwise modified from time
to time.
"GAAP" shall mean generally accepted accounting principles
in the United States in effect from time to time.
"Governmental Authority" shall mean any government, court,
regulatory or administrative agency or commission, or other
governmental authority, agency or instrumentality, whether
foreign, federal, state or local (domestic or foreign), including
each Patent Office, the FDA, the United States National Institute
of Health, the EMEA, or any other government authority in any
country.
"Gross Products Payments" shall mean, including without
offset for withholding or any other tax, except to the extent
specifically provided for in the Aventis License Agreement, the
Ortho License Agreement or any Future Agreement, all Royalties
arising from or payable with respect to sales of the Products
under the Ortho License Agreement, Aventis License Agreement or
any successor Future Agreement and, subject to Section 5.08(i),
under any other License Agreement; and any collections,
recoveries, payments or other compensation made in lieu thereof
and any amounts paid or payable to the Company in respect of the
Ortho License Agreement, the Aventis License Agreement or any
other License Agreement pursuant to Section 365(n) of the United
States Bankruptcy Code.
"IND" shall mean an investigational new drug application and
all amendments and supplements thereto for regulatory approval by
the FDA, as defined in 21 C.F.R. Section 312 et seq. as such act
or regulations may be amended, supplemented or replaced from time
to time, filed with the FDA in the United States or an equivalent
application filed with a Regulatory Agency in any country outside
of the United States.
"Independent Accountants" shall have the meaning set forth
in Section 5.10(b).
"Intellectual Property" shall mean all Patent Rights; Know-
How; inventions (whether patentable or unpatentable and whether
or not reduced to practice) and all improvements thereto; all
registered or unregistered trademarks, trade names, service
marks, including all goodwill associated therewith; all domain
names and websites; and all registered and unregistered
copyrights and all applications, in each case that are owned,
controlled by, issued to, licensed to, licensed by or hereafter
acquired by or licensed by the Company or any of its
Subsidiaries, in each case relating to or involving the Products.
"Know-How" shall mean, relating to the Products, all trade
secrets, confidential information, materials, discoveries, data,
processes, methods of manufacture, devices, techniques,
algorithms, flow charts, computer software programs or
applications (in both source code and object code form),
schematics, compositions, formulations, formula, specifications,
uses, patterns, compilations and other information, including,
but not limited to (i) medical, chemical, pharmacological and
other scientific or clinical data or materials, and (ii)
methodology and information used in the manufacture, packaging,
labeling, development, testing or analysis of the Products, in
each case that is now owned, controlled by, licensed to, licensed
by or hereafter acquired by or licensed by the Company or any of
its Subsidiaries during the term of this Agreement.
"Knowledge" shall mean, with respect to the Company, (i) the
actual knowledge of an officer, employee or representative of the
Company relating to a particular matter, and (ii) the knowledge
or awareness which such a person would have obtained in the
conduct of his business after making a reasonably diligent
inquiry with respect to the particular matter in question.
"License Agreements" shall mean any existing or future
license, co-promotion, collaboration, distribution,
manufacturing, marketing or partnering agreements entered into by
the Company or any of its Affiliates relating to the Products
and/or the Intellectual Property, including the Aventis License
Agreement, Ortho License Agreement and any Future Agreements.
"License Party Audit" shall have the meaning set forth in
Section 5.10(a).
"Lien" shall mean any lien, hypothecation, charge,
instrument, license, preference, priority, security agreement,
security interest, interest, mortgage, option, privilege, pledge,
liability, covenant, order, tax, right of recovery, trust or
deemed trust (whether contractual, statutory or otherwise
arising) or any encumbrance, right or claim of any other Person
of any kind whatsoever whether choate or inchoate, filed or
unfiled, noticed or unnoticed, recorded or unrecorded, contingent
or non-contingent, material or non-material, known or unknown.
"Losses" shall mean collectively, any and all claims,
damages, losses, judgments, liabilities, costs and expenses
(including reasonable expenses of investigation and, in the
context of third party claims, reasonable attorneys' fees and
expenses in connection with any action, suit or proceeding).
"Material Adverse Effect" shall mean (i) a material adverse
effect on the validity or enforceability of any of the
Transaction Documents, (ii) a material adverse effect on the
ability of the Company to perform any of its obligations under
any of the Transaction Documents, (iii) a material adverse effect
on the rights or remedies of PRF under any of the Transaction
Documents, (iv) an adverse effect on the right of the Company to
receive any payments payable under any License Agreement or any
other material rights and remedies of the Company under any
License Agreement, (v) an adverse effect on the right of PRF to
receive the Royalty Interest or any payment due to PRF hereunder
or (vi) an adverse effect on the Royalty Interest, including any
material adverse effect on the Company's right to Intellectual
Property covering the Products, or on the ability of any Person
to manufacture, purchase, distribute, market and/or sell the
Products.
"Material Contract" shall mean any contract, agreement or
other arrangement to which either the Company or any of its
Subsidiaries is a party or any of the Company's or its
Subsidiaries' respective assets or properties are bound or
committed (other than the Transaction Documents) for which
breach, nonperformance, cancellation or failure to renew could
reasonably be expected to result in a Material Adverse Effect.
"NDA" shall mean a new drug application and all amendments
and supplements thereto for regulatory approval by the FDA, as
defined in 21 C.F.R. Section 314 et seq. as such act or
regulations may be amended, supplemented or replaced from time to
time, filed with the FDA in the United States or an equivalent
application filed with a Regulatory Agency in any country outside
the United States.
"Obligations" shall mean any and all obligations of the
Company under the Transaction Documents.
"Ortho" shall mean Ortho-McNeil Pharmaceutical, Inc.
formerly the Ortho Pharmaceutical Corporation and its Affiliates,
successors, and assigns.
"Ortho License Agreement" shall mean the Development and
License Agreement between Advanced Polymer Systems, Inc. (a
predecessor of the Company) and Ortho Pharmaceutical Corporation
(a predecessor of Ortho) effective April 14, 1992, as amended
(including the amendment dated May 1, 1992), superseded,
replaced, succeeded or substituted from time to time and
including any direct agreements with Ortho Affiliates pursuant to
the Development and License Agreement, attached hereto as Exhibit
G.
"Ortho Supply Agreement" shall mean the Supply Agreement
between the Company and Ortho Pharmaceutical Corporation
effective January 1, 1996 and subsequently assigned by the
Company to RPS.
"Particles" means any microsponge, microsphere, solid
particle, porous particle or porous microparticle.
"Patent Office" shall mean the respective patent office,
including the U.S. Patent and Trademark Office and any comparable
foreign patent office, for any Patent Rights.
"Patent Rights" shall mean all current and future patents,
patent applications and patent disclosures, together with all
reissuances, divisions, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, composition of
matter, formulation, or methods of manufacture or use thereof
that are issued or filed, including those identified on Schedule
3.12(b), that, in each case, are owned, controlled by, issued to,
licensed to, licensed by or hereafter acquired by or licensed by
the Company or any of its Subsidiaries, in each case relating to
the Products and/or the Intellectual Property.
"Person" shall mean an individual, corporation, partnership,
limited liability company, association, trust or other entity or
organization, but not including a government or political
subdivision or any agency or instrumentality of such government
or political subdivision.
"PRF" shall have the meaning set forth in the first
paragraph hereof.
"PRF Indemnified Party" shall have the meaning set forth in
Section 8.05(a).
"PRF's Account" shall mean an account maintained by PRF at
any financial institution and designated in writing by PRF to the
Company, as PRF may so designate from time to time.
"Products" shall mean (i) Retin A Micro(R) and any other
FDA-approved product or foreign equivalent utilizing Particles or
impregnated Particles containing retinoic acid in any
jurisdiction, (ii) Carac(R) and any other FDA-approved product or
foreign equivalent utilizing Particles or impregnated Particles
containing and in combination with 5-fluorouracil in any
jurisdiction, and (iii) any other FDA-approved product or foreign
equivalent to which Aventis or Ortho, respectively, currently has
rights to commercialize under the Aventis License Agreement or
the Ortho License Agreement and the equivalent thereof in any
jurisdiction.
"Purchase Price" shall have the meaning set forth in Section
2.03.
"Quarterly Report" shall mean, with respect to the relevant
calendar quarter of the Company, (i) a report showing all
payments made by the Company to PRF under this Agreement during
such quarter and showing in detail the basis for the calculation
of such payments, (ii) a reconciliation of such report referred
to in clause (i) above to all information and data deliverable to
the Company, PRF or their Affiliates by the parties to any of the
License Agreements, together with relevant supporting
documentation, (iii) a report showing the amount of gross end-
user sales of the Products and all deductions (if any)
supporting the Company's calculations of Gross Products Payments,
and (iv) such additional information as PRF may reasonably
request.
"Regulatory Agency" shall mean a Governmental Authority with
responsibility for the approval of the marketing and sale of
pharmaceuticals in any country or other regulation of
pharmaceuticals or biohazardous substances or materials.
"Regulatory Approvals" shall mean, collectively, all INDs,
NDAs and other regulatory approvals, registrations, certificates,
authorizations, permits and associated materials (including the
product dossier) relating to the Products, issued by the
appropriate Regulatory Agency as to the Products and all reports,
correspondence and other submissions related thereto and the
regulatory and clinical files and data pertaining thereto, and
all information, data, formulations, assays, or Intellectual
Property contained in such INDs and the NDAs, relating to the
Products together with all amendments, supplements and updates
thereto, and all comparable regulatory approvals, registrations
and associated materials throughout the world.
"Related Agreements" shall mean the RPS Agreements, the
Ortho Supply Agreement and the Amcol Supply Agreement.
"Retin A Micro(R)" shall mean the Particle based retinoic
acid product for the treatment of acne vulgaris currently sold by
Ortho under NDA No. 020475.
"Royalties" shall mean the gross amount of all royalties,
minimum royalty payments, profit payments, license fees,
settlement payments, judgments, payments, securities,
consideration or any other remuneration of any kind payable or
received under any License Agreement.
"Royalty Interest" shall mean an undivided interest in the
accounts (as such term is defined in the UCC) of the Company
consisting of one hundred percent (100%) of the Gross Products
Payments earned from October 1, 2005 until the expiration of the
Patent Rights.
"RPS" shall mean R.P. Scherer South, Inc. and its
Affiliates, successors and assigns.
"RPS Agreements" shall mean the Asset Purchase Agreement
between Advanced Polymer Systems, Inc. (a predecessor of the
Company) and RPS dated June 21, 2000 and all agreements entered
into thereto including the TTA and the Company Supply Agreement.
"SEC" shall have the meaning set forth in Section 3.05.
"Security Agreement" shall mean the Security Agreement of
even date herewith by and between the Company and PRF providing
for, among other things, the grant by the Company in favor of PRF
of a valid continuing, perfected lien on and security interest in
the Collateral.
"Set-off" shall have the meaning set forth in Section 3.22.
"Subsidiary" or "Subsidiaries" shall mean with respect to
any Person (i) any corporation of which the outstanding capital
stock having at least a majority of votes entitled to be cast in
the election of directors under ordinary circumstances shall at
the time owned, directly or indirectly, by such Person or (ii)
any other Person of which at least a majority voting interest
under ordinary circumstances is at the time, directly or
indirectly, owned by such Person.
"Term" shall mean the term of this Agreement, which shall
commence on the date hereof and terminate on December 31, 2021.
"Term Sheet" shall mean the letter dated November 30, 2005
between Paul Capital Advisors, LLC and the Company as the same
may be amended prior to the date hereof.
"Transaction Documents" shall mean, collectively, this
Agreement, the Bill of Sale, and the Security Agreement.
"Transfer" or "Transferred" shall mean any sale, conveyance,
assignment, disposition, license, sublicense, co-promotion
agreement, or other form of transfer.
"TTA" shall mean the Technology Transfer Agreement entered
into as of July 25, 2000 between Advanced Polymer Systems, Inc.
(a predecessor of the Company) and RPS.
"UCC" shall mean the Uniform Commercial Code (or any similar
or equivalent legislation) as in effect in any applicable
jurisdiction.
ARTICLE II
PURCHASE AND SALE OF ROYALTY INTEREST
Section 2.01 Purchase and Sale.
Upon the terms and subject to the conditions set forth in
this Agreement, on the Closing Date, the Company agrees to sell,
assign, transfer and convey to PRF, and PRF agrees to purchase
from the Company, free and clear of all Liens (except those Liens
created in favor of PRF pursuant to the Security Agreement and
any other Transaction Document), all of the Company's right,
title and interest in and to the Royalty Interest. It is the
intention of the parties that such transaction be treated as a
"true sale". The security interest granted pursuant to Section
5.05 is granted as a precaution against the possibility, contrary
to the parties' intentions, that the transaction be characterized
as other than a "true sale".
Section 2.02 Transfers and Payments in Respect of the
Royalty Interest.
PRF shall be entitled to receive, in respect of the Royalty
Interest, cash to be paid to PRF in respect of the Gross Products
Payments that are received from time to time in PRF's Account or
otherwise paid to PRF pursuant to Section 5.07.
Section 2.03 Purchase Price.
In full consideration for the sale of the Royalty Interest,
and subject to the terms and conditions set forth herein, PRF
shall pay to the Company, or its designee, the following (the
"Purchase Price"):
(a) Twenty-five million dollars ($25,000,000) on the Closing
Date;
(b) Two million five hundred thousand dollars ($2,500,000)
[***];
(c) One million five hundred thousand dollars ($1,500,000)
[***]; and
(d) One million dollars ($1,000,000)[***].
Section 2.04 No Assumed Obligations.
Notwithstanding any provision in this Agreement or any other
writing to the contrary, PRF is acquiring only the Royalty
Interest and is not assuming any liability or obligation of the
Company or any of its Affiliates of whatever nature, whether
presently in existence or arising or asserted hereafter, whether
under any of the License Agreements, Related Agreements or any
Transaction Document or otherwise. All such liabilities and
obligations shall be retained by and remain obligations and
liabilities of the Company or its Affiliates (the "Excluded
Liabilities and Obligations").
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The company hereby respresents and warrants to PRF the
following:
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Section 3.01 Organization.
The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware, and has all corporate powers and all licenses,
authorizations, consents and approvals required to carry on its
business as now conducted and as proposed to be conducted in
connection with the transactions contemplated by the Transaction
Documents. The Company is duly qualified to do business as a
foreign corporation and is in good standing in every jurisdiction
in which the failure to do so could reasonably be expected to
result in a Material Adverse Effect.
Section 3.02 Corporate Authorization.
The Company has all necessary power and authority to enter
into, execute and deliver the Transaction Documents and to
perform all of the obligations to be performed by it hereunder
and thereunder and to consummate the transactions contemplated
hereunder and thereunder. The Transaction Documents have been
duly authorized, executed and delivered by the Company and each
Transaction Document constitutes the valid and binding obligation
of the Company, enforceable against the Company in accordance
with its respective terms, subject, as to enforcement of
remedies, to bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally or general
equitable principles.
Section 3.03 Governmental Authorization.
The execution and delivery by the Company of the Transaction
Documents, and the performance by the Company of its obligations
hereunder and thereunder, does not require any notice to, action
or consent by, or in respect of, or filing with, any Government
Authority, except for the filing of proper financing statements
(including Form UCC-1s) under the UCC and filings with the U.S.
Patent and Trademark Office.
Section 3.04 Ownership.
The Company owns all right, title and interest in and to the
Collateral, including the Intellectual Property with respect to
the Products, free and clear of all Liens, and no license or
covenant not to sue under any Intellectual Property has been
granted to any third party, except as set forth on Schedule 3.04.
The Company has not (i) sold or transferred ownership of any
portion of the Royalty Interest nor (ii) granted any exclusive
license of or exclusive right to use any of the Intellectual
Property to any other Person, except as set forth on Schedule
3.04.
Section 3.05 Public Filings.
The Company has made available (including via filings with
EDGAR) to PRF a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by
the Company with the Securities and Exchange Commission (the
"SEC") since January 1, 2002 and prior to or on the date hereof
(the "Company SEC Documents"). As of their respective filing
dates, (i) the Company SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, as
the case may be, and the rules and regulations of the SEC
thereunder applicable to such Company SEC Documents and (ii) none
of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statement therein, in
light of the circumstances under which they were made, not
misleading, except to the extent such statements have been
modified or superseded by later Company SEC Documents filed and
publicly available prior to the date of this Agreement. The
Financial Statements complied as to form in all material respects
with the published rules and regulations of the SEC with respect
thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be
indicated in the notes thereto, or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulations S-X of the
SEC) and fairly presented in all material respects, in accordance
with applicable requirements of GAAP (subject, in the case of the
unaudited statements, to normal, recurring adjustments, none of
which are material), the consolidated financial position of the
Company and its Subsidiaries, taken as a whole, as of their
respective dates and the consolidated statements of operations
and the consolidated statements of cash flows of the Company and
its Subsidiaries for the periods presented therein.
Section 3.06 No Undisclosed Liabilities.
Except for those liabilities (i) specifically identified on
the face of the Financial Statements, (ii) incurred by the
Company or any of its Subsidiaries in the ordinary course of
business since September 30, 2005, or (iii) incurred in
connection with the Obligations under the Transaction Documents,
there are no material liabilities of the Company or any of its
Subsidiaries taken as a whole, of any kind whatsoever, whether
accrued, contingent, absolute, determined or determinable.
Section 3.07 Solvency.
The Company is not insolvent as defined in any statute of
the United States Bankruptcy Code or in the fraudulent conveyance
or fraudulent transfer statutes of the States of Delaware, New
York or California. Assuming consummation of the transactions
contemplated by the Transaction Documents, (i) the present fair
saleable value of the Company's assets is greater than the amount
required to pay its debts as they become due, (ii) the Company
does not have unreasonably small capital with which to engage in
its business, and (iii) the Company has not incurred, nor does it
have present plans to or intend to incur, debts or liabilities
beyond its ability to pay such debts or liabilities as they
become absolute and matured.
Section 3.08 Litigation.
There is no (i) action, suit, arbitration proceeding, claim,
investigation or other proceeding pending or, to the Knowledge of
the Company, threatened against the Company or (ii) any
governmental inquiry pending or, to the Knowledge of the Company,
threatened against the Company, in each case with respect to
clauses (i) and (ii) above, which, if adversely determined, would
question the validity of, or could adversely affect the
transactions contemplated by any of the Transaction Documents or
could reasonably be expected to result in a Material Adverse
Effect. There is no action, suit, claim, proceeding or
investigation pending or, to the Knowledge of the Company,
threatened against the Company or any other Person relating to
the Products, the Intellectual Property, the Regulatory Approvals
or the Royalty Interest.
Section 3.09 Compliance with Laws.
The Company (i) is not in violation of, has not violated, or
to the Knowledge of the Company, is not under investigation with
respect to, and (ii) has not been threatened to be charged with
or been given notice of any violation of any law, rule, ordinance
or regulation of, or any judgment, order, writ decree, permit or
license entered by any Government Authority applicable to the
Company or the Royalty Interest, which could reasonably be
expected to result in a Material Adverse Effect.
Section 3.10 Conflicts.
(a) Neither the execution and delivery of any of the
Transaction Documents nor the performance or consummation of the
transactions contemplated hereby and thereby will: (i)
contravene, conflict with, result in a breach or violation of,
constitute a default under, give rise to any additional rights,
including rights of first refusal, or accelerate the performance
provided by, in any material respects any provisions of: (A) any
law, rule, ordinance or regulation of any Government Authority,
or any judgment, order, writ, decree, permit or license of any
Government Authority, to which the Company or any of its
Subsidiaries or any of their respective assets or properties may
be subject or bound; or (B) any contract, agreement, commitment
or instrument to which the Company or any of its Subsidiaries is
a party, including any and all License Agreements, or any of the
Related Agreements, or by which the Company or any of its
Subsidiaries or any of their respective assets or properties is
bound or committed; (ii) contravene, conflict with, result in a
breach or violation of, constitute a default under, or accelerate
the performance provided by, any provisions of the certificate of
incorporation or by-laws (or other organizational or
constitutional documents) of the Company or any of its
Subsidiaries; (iii) except for the filing of the proper financing
statements (including Form UCC-1s) under the UCC required
hereunder and filings with any Patent Office, require any
notification to, filing with, or consent of, any Person or
Government Authority; (iv) give rise to any right of termination,
cancellation or acceleration of any right or obligation of the
Company or any of its Subsidiaries or any other Person or to a
loss of any benefit relating to the Royalty Interest; or (v)
result in the creation or imposition of any Lien on (A) the
assets or properties of the Company or any of its Subsidiaries or
(B) the Royalty Interest or any other Collateral, other than,
with respect to clause (v) above, pursuant to the Security
Agreement.
(b) The Company has not granted, nor does there exist, any
Lien on any License Agreement, the Royalty Interest or any other
Collateral other than pursuant to the Security Agreement.
Section 3.11 Material Contracts.
Neither the Company nor any of its Subsidiaries is in
breach of or in default under any Material Contract, including
this Agreement, any License Agreement or any Related Agreement.
To the Knowledge of the Company, nothing has occurred and no
condition exists that would permit any other party thereto to
terminate any Material Contract. Neither the Company nor any of
its Subsidiaries has received any notice or, to the Knowledge of
the Company, any threat of termination of any such Material
Contract. To the Knowledge of the Company, no other party to a
Material Contract is in breach of or in default under such
Material Contract. All Material Contracts are valid and binding
on the Company and its Subsidiaries and, to the Knowledge of the
Company, on each other party thereto, and are in full force and
effect.
Section 3.12 Intellectual Property.
(a) The Company has provided PRF all material information in
its possession, or otherwise known to it with respect to the
Intellectual Property.
(b) Schedule 3.12(b) sets forth an accurate and complete
list of all Intellectual Property (including all Intellectual
Property not owned by the Company), including all (i) patents,
(ii) applications for patent with the applicable Patent Office
worldwide, (iii) registrations with the applicable trademark or
copyright offices worldwide (including, if applicable, each
Patent Office) of trade names, trademarks and copyrights and (iv)
all material unregistered trademarks and copyrights, if any, in
each case that relate to the development, manufacture,
commercialization, marketing or other use of the Products. For
each item of the Intellectual Property listed on Schedule
3.12(b), the Company has indicated (A) the countries in each case
in which such item is patented, registered or in which an
application for patent or registration is pending, (B) the
application numbers, (C) the registration or patent numbers (D)
the scheduled expiration date of the issued patents, and (E) the
owner of such item of Intellectual Property.
(c) The Intellectual Property is valid, enforceable and
subsisting. Each individual associated with the filing and
prosecution of the Patent Rights, including the named inventors
of the Patent Rights, has complied in all material respects with
all applicable duties of candor and good faith in dealing with
any Patent Office, including any duty to disclose to any Patent
Office all information known to be material to the patentability
of each of the Patent Rights, in those jurisdictions where such
duties exist. Except as disclosed on Schedule 3.12(c), the
Company owns all right, title and interest in and to the
Intellectual Property, free and clear of all Liens. Except as
disclosed on Schedule 3.12(c), the Intellectual Property owned by
the Company is all the intellectual property necessary to make,
use and sell the Products.
(d) U.S. Patent No. 5,955,109 contains claims that cover
Retin A Micro(R) and U.S. Patent Nos. 4,690,825 and 6,670,335
contain claims that cover Carac(R), and U.S. Patent No. 5,145,675
contains claims related to the preparation of both Retin A
Micro(R) and Carac(R). Schedule 3.12(d) sets forth an accurate
and complete list of all other U.S. and non-U.S. patents that
have issued with at least one claim covering the relevant
Products.
(e) The Company has not sold or otherwise transferred any
patents or patent applications that have issued or may issue with
at least one claim covering the relevant Products.
(f) Schedule 3.12(f) sets forth an accurate and complete
list of all agreements, including any and all license agreements
to which the Company is a party, whether oral or written, express
or implied, including licenses, options, franchise, distribution,
marketing and manufacturing agreements, sponsorships, agreements
not to enforce, consents, settlements, assignments, security
interests, liens and other encumbrances or mortgages, and any
amendment(s), renewal(s), novation(s) and termination(s)
pertaining thereto, pursuant to which the Company or any party
thereto exploit any of the Intellectual Property. For each
agreement specified on Schedule 3.12(f), the Company has
indicated (A) whether such agreement relates to inbound licenses
of Intellectual Property to the Company or outbound licenses of
Intellectual Property by the Company, and (B) the specific
Intellectual Property relating to such agreement, including the
countries in which such Intellectual Property is patented,
registered or in which an application for patent or registration
is pending and the application number, registration number or
patent number of such Intellectual Property. Each agreement
specified on Schedule 3.12(f) constitutes a valid and binding
obligation, enforceable in accordance with its terms, subject, as
to enforcement of remedies, to bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors'
rights generally or general equitable principles. The Company is
not in breach of such agreements and, to the Knowledge of the
Company, no circumstances or grounds exist that would give rise
to a claim of breach or right of rescission, termination,
revision, or amendment of any of the agreements specified on
Schedule 3.12(f), including the signing of this Agreement.
(g) There are no unpaid maintenance or renewal fees payable
by the Company to any third party that are currently overdue for
any of the Patent Rights or other Intellectual Property. To the
Knowledge of the Company and no applications or registrations
therefor have lapsed or been abandoned, cancelled or expired.
(h) No payments by the Company or any Affiliate of the
Company, or to the Knowledge of the Company, no payments by any
other party are, or at any time in the future will become, due to
any other Person in respect of the Intellectual Property or the
Products, in each case that would diminish the Royalty Interest
in any way. There is no reduction in, or set-off against, the
Royalties payable thereunder to the Company as a result of
payments that Aventis or Ortho may be required to make to third
parties for the use of any intellectual property controlled by
the third party or for the manufacture, use or sale of the
Products, or any other set-off. The Company has not undertaken
and, to the Knowledge of the Company, neither Aventis, Ortho nor
RPS has undertaken or omitted to undertake any acts, and no
conduct, circumstances or grounds exist that would void,
invalidate, reduce or eliminate, in whole or in part, the
enforceability or scope of (i) any of the Intellectual Property,
and (ii) the Company's right to enjoy payments made pursuant to
any License Agreements. The manufacture, use and sale of the
Products does not infringe the intellectual property rights of
any third party.
(i) To the Knowledge of the Company there is, and has been,
no pending, decided or settled opposition, interference,
reexamination, injunction, claim, lawsuit, proceeding, hearing,
investigation, complaint, arbitration, mediation, demand,
International Trade Commission investigation, decree, or any
other dispute, disagreement, or claim (collectively referred to
hereinafter as "Disputes"), nor, to the Knowledge of the Company,
has any such Dispute been threatened, challenging the scope,
legality, validity, enforceability or ownership of any
Intellectual Property or which would give rise to a credit
against the payments due to the Company from the applicable
License Agreements for the use of the related licensed
Intellectual Property. To the Knowledge of the Company, there
are no Disputes by any third party against the Company, Aventis,
Ortho, RPS or Amcol relating to the Products. The Company has
not received, and to the Knowledge of the Company, neither
Aventis, Ortho, RPS nor Amcol has received, any written notice of
any such Dispute and, to the Knowledge of the Company, there
exist no circumstances or grounds upon which any such claim could
be asserted. The Company has not sent, and to the Knowledge of
the Company, neither Aventis, Ortho, RPS nor Amcol has sent, any
notice of any such Dispute and, to the Knowledge of the Company,
there exist no circumstances or grounds upon which the Company,
Aventis, Ortho, RPS or Amcol could assert any such claim. To the
Knowledge of the Company, the Intellectual Property is not
subject to any outstanding injunction, judgment, order, decree,
ruling, charge, settlement or other disposition of any Dispute.
(j) To the Knowledge of the Company, there is no pending or
threatened action, suit, or proceeding, or any investigation or
claim by any Government Authority to which the Company or, to the
Knowledge of the Company, to which Aventis, Ortho, RPS or Amcol
is a party (i) that would be the subject of a claim for
indemnification, if any, by or against the Company, Aventis,
Ortho or RPS under the License Agreements or RPS Agreements, and
(ii) that the manufacture, marketing, sale or distribution of the
Products by Aventis or Ortho or by any licensee of Aventis or
Ortho pursuant to the related License Agreements or by RPS or
Amcol pursuant to the Related Agreements does or will infringe on
any patent or other intellectual property rights of any other
Person. To the Knowledge of the Company, there are no pending
U.S., international or foreign patent applications owned by any
other Person, which, if issued, would limit or prohibit, in any
material respect, the manufacture, use or sale of any of the
Products, or the use of any licensed Intellectual Property, in
each case by the applicable Contract Party.
(k) The Company has taken, and to the Knowledge of the
Company, Ortho, Aventis, RPS and Amcol have and will continue to
take, all commercially reasonable measures and precautions
necessary to protect and maintain (i) the confidentiality of all
the Intellectual Property and (ii) the value of all the
Intellectual Property.
Section 3.13 Regulatory Approval.
(a) The Company has made available to PRF all of the
following documents that the Company has received in any form
from any Contract Party to any License Agreement or Related
Agreement:
(i) all regulatory correspondence, written notes in
respect of telephone communications, electronic communications,
copies of all submissions to any active regulatory files
regarding preclinical, clinical, manufacturing, adverse events,
any notices and forms received by a Contract Party from
appropriate Regulatory Agencies relating to compliance,
developmental (including safety, efficacy and potency), marketing
promotion or manufacturing activities concerning the Intellectual
Property or the Products;
(ii) correspondence or reports from both internal
corporate employees and non-governmental consultants relating to
any of the regulatory and/or product liability exposures,
marketing and reimbursement strategies, manufacturing (i.e.,
annual audit reports), preclinical and clinical data issues
concerning the Products; and
(iii) any information or communication that would
indicate that any Regulatory Agency (A) is not likely to approve
any application with respect to the Products, (B) is likely to
revise or revoke any current approval granted by any Regulatory
Agency with respect to the Products, or (C) is likely to pursue
compliance actions against the Company or any Contract Party
relating to a License Agreement or Related Agreement.
(b) Either the Company or, to the Company's Knowledge,
Ortho, Aventis, RPS or Amcol respectively, possesses all
Regulatory Approvals issued or required by the appropriate
Regulatory Agencies necessary to conduct its current business
relating to the Products, and neither the Company nor, to the
Company's Knowledge, Aventis, Ortho, RPS or Amcol has received
any notice of proceedings relating to, and there are no facts or
circumstances to the Company's Knowledge that would reasonably be
expected to lead to, the revocation, suspension, termination or
modification of any such Regulatory Approvals.
(c) The Company is in material compliance with, and has
materially complied with, all applicable federal, state, local
and foreign laws, rules, regulations, standards, orders and
decrees governing its business, including all regulations
promulgated by each Regulatory Agency, the failure of compliance
with which could reasonably be expected to result in a Material
Adverse Effect; the Company has not received any notice citing
action or inaction by it that would constitute any material non-
compliance with any applicable federal, state, local and foreign
laws, rules, regulations, or standards, which could reasonably be
expected to result in a Material Adverse Effect; and, to the
Company's Knowledge, no prospective change in any applicable
federal, state, local or foreign laws, rules, regulations or
standards has been adopted which, when made effective, could
reasonably be expected to result in a Material Adverse Effect.
(d) The studies, tests and preclinical and clinical trials
conducted relating to the Products by or on behalf of the Company
or, to the Company's Knowledge, Aventis, Ortho, RPS or Amcol were
and, if still pending, are being conducted in all material
respects in accordance with experimental protocols, procedures
and controls pursuant to, where applicable, accepted professional
and scientific standards; the descriptions of the results of such
studies, tests and trials provided to PRF are accurate in all
material respects; and neither the Company nor, to the Company's
Knowledge, Aventis, Ortho, RPS nor Amcol has received any notices
or correspondence from any Regulatory Agency or any institutional
review board or comparable authority requiring the termination,
suspension, or material modification or clinical hold of any such
studies, tests or preclinical or clinical trials conducted by or
on behalf of the Company, Aventis, Ortho, RPS or Amcol, which
termination, suspension, material modification or clinical hold
could reasonably be expected to result in a Material Adverse
Effect.
Section 3.14 Subordination.
The claims and rights of PRF created by any Transaction
Document in and to the Royalty Interest are not and shall not be
subordinated to any creditor of the Company or any other Person.
Place of Business.
Section 3.15 Place of Business.
The Company's principal place of business and chief
executive office are set forth on Schedule 3.15.
Section 3.16 Broker's Fees.
The Company has not taken any action that would entitle any
Person to any commission or broker's fee in connection with the
transactions contemplated by the Transaction Documents.
Section 3.17 Other Information.
No written statement (including in electronic mail),
information, report or materials prepared by or on behalf of the
Company and furnished to PRF by or on behalf of the Company in
connection with any Transaction Document or any transaction
contemplated hereby or thereby, no written representation,
warranty or statement made by the Company in any Transaction
Document, and no Schedule or Exhibit hereto, in each case taken
in the aggregate, contains any untrue statement of a material
fact or omits any statement of material fact necessary in order
to make the statements made therein in light of the circumstances
under which they were made not misleading.
Section 3.18 License Agreements.
(a) Exhibit F attached hereto sets forth an accurate,
complete and updated copy of the Aventis License Agreement and
Exhibit G attached hereto sets forth an accurate, complete and
updated copy of the Ortho License Agreement. Except as otherwise
disclosed on Schedule 3.18(a), there are no (i) other agreements,
writings, understandings, commitments, arrangements, or
amendments related to or affecting either of the Aventis License
Agreement or the Ortho License Agreement or the manufacture,
supply or sale of the Products, or (ii) outstanding royalties or
other payment obligations of the Company currently due and
payable to Aventis under the Aventis License Agreement or to
Ortho under Ortho License Agreement that have not been paid.
(b) The License Agreements are in full force and effect and
there has been no correspondence, notice or other written
communication sent by or on behalf of the Company to, or received
by or on behalf of the Company from, any Contract Party, the
subject matter of which would result in a Material Adverse
Effect. The Company has provided to PRF copies of all written
correspondence to or from Ortho, Aventis, RPS, Amcol and Cardinal
Health PTS, LLC within the past two (2) years from the date
hereof. With respect to each existing License Agreement:
(i) Such License Agreement is in full force and
effect and has not been impaired, waived, altered or modified in
any respect, whether by way of any sublicense or consent or
otherwise. To the Knowledge of the Company, no Contract Party
has granted a sublicense under such License Agreement.
(ii) The Contract Party under such License Agreement
has not been released, in whole or in part, from any of its
obligations under such License Agreement.
(iii) The Company has not received (A) any notice of
any Contract Party's intention to terminate such License
Agreement in whole or in part or (B) any notice requesting any
amendment, alteration or modification of such License Agreement.
(iv) Nothing has occurred and no condition exists
that would adversely impact the right of the Company to receive
any payments payable under such License Agreement. None of the
Company, or to the Knowledge of the Company, any Contract Party
has taken any action or omitted to take any action, that would
adversely impact the right of PRF to receive the Royalty
Interest.
(v) All payments required to be made under such
License Agreement have been made. To the Knowledge of the
Company, no payment required to be made under such License
Agreement has been subject to any claim pursuant to any right of
rescission, set-off, counterclaim or defense. No prepayments of
Royalties have been made under any License Agreement. The
Company has not conducted any audits under any License Agreement.
(vi) Such License Agreement has not been satisfied in
full, discharged, canceled, terminated, subordinated or
rescinded, in whole or in part. Such License Agreement is the
entire agreement between the Company and the Contract Party
thereto relating to the subject matter thereof.
(vii) Such License Agreement is the legal, valid and
binding obligation of each of the Company and the Contract Party
thereto, enforceable against the Company and such Contract Party
in accordance with its terms, subject, as to enforcement of
remedies, to bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally and general
equitable principles. The execution, delivery and performance of
such License Agreement was and is within the corporate powers of
the Company and, to the Knowledge of the Company, the Contract
Party thereto. Such License Agreement was duly authorized by all
necessary action on the part of, and validly executed and
delivered by, the Company and, to the Knowledge of the Company,
the Contract Party thereto. There is no breach or default, or
event which upon notice or the passage of time, or both, could
give rise to any breach or default, in the performance of such
License Agreement by the Company or, to the Knowledge of the
Company, the Contract Party thereto.
(viii) The representations and warranties made in such
License Agreement by the Company were as of the date made true
and correct in all material respects.
Section 3.19 Related Agreements.
(a) Exhibit H attached hereto sets forth an accurate,
complete and updated copy of the RPS Agreements, Exhibit I
attached hereto sets forth an accurate, complete and updated copy
of the Ortho Supply Agreement and Exhibit J sets forth, to the
Knowledge of the Company, an accurate, complete and updated draft
of the Amcol Supply Agreement. There are no (i) other
agreements, writings, understandings, commitments, arrangements,
or amendments related to or affecting the Related Agreements or
(ii) outstanding royalties or other payment obligations of the
Company currently due and payable under the Related Agreements
that have not been paid.
(b) The Related Agreements including the TTA are in full
force and effect and there has been no correspondence or other
written communication sent by or on behalf of the Company to, or
received by or on behalf of the Company from, any Contract Party,
the subject matter of which would result in a Material Adverse
Effect. With respect to each existing Related Agreement:
(i) Such Related Agreement is in full force and
effect and has not been impaired, waived, altered or modified in
any respect, whether by way of any sublicense or consent or
otherwise. To the Knowledge of the Company, no Contract Party
has granted a sublicense under such Related Agreement.
(ii) The Contract Party under such Related Agreement
has not been released, in whole or in part, from any of its
obligations under such Related Agreement.
(iii) The Company has not received (i) any notice of
any Contract Party's intention to terminate such Related
Agreement in whole or in part or (ii) any notice requesting any
amendment, alteration or modification of such Related Agreement.
(iv) None of the Company, or to the Knowledge of the
Company, any Contract Party has taken any action or omitted to
take any action, that would adversely impact the right of PRF to
receive the Royalty Interest.
(v) All payments required to be made under such
Related Agreement have been made. To the Knowledge of the
Company, no payment required to be made under such Related
Agreement has been subject to any claim pursuant to any right of
rescission, set-off, counterclaim or defense.
(vi) Such Related Agreement has not been satisfied in
full, discharged, canceled, terminated, subordinated or
rescinded, in whole or in part. Such Related Agreement is the
entire agreement between the Company and the Contract Party
thereto relating to the subject matter thereof.
(vii) Such Related Agreement is the legal, valid and
binding obligation of each of the Company and each Contract Party
thereto, enforceable against the Company and such Contract Party
in accordance with its terms, subject, as to enforcement of
remedies, to bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally and general
equitable principles. The execution, delivery and performance of
such Related Agreement was and is within the corporate powers of
the Company and, to the Knowledge of the Company, the Contract
Party thereto. Such Related Agreement was duly authorized by all
necessary action on the part of, and validly executed and
delivered by, the Company and, to the Knowledge of the Company,
the Contract Party thereto. There is no breach or default, or
event which upon notice or the passage of time, or both, could
give rise to any breach or default, in the performance of such
License Agreement by the Company or, to the Knowledge of the
Company, the Contract Party thereto.
(viii) The representations and warranties made in such
Related Agreements by the Company were as of the date made true
and correct in all material respects.
Section 3.13 Insurance.
There is in full force and effect insurance policies
maintained by the Company with an insurance company rated not
less than "A-" by A.M. Best Company, Inc., with coverages and in
amounts customary for companies of comparable size and condition
similarly situated in the same industry as the Company, including
product liability insurance, directors and officers insurance and
insurance against litigation liability, subject only to such
exclusions and deductible items as are usual and customary in
insurance policies of such type. The Company has named PRF as an
additional insured party with respect to its general liability
and product liability insurance policies. A schedule of the
Company's insurance policy or insurance policies is attached
hereto as Schedule 3.20.
Section 3.21 Applicable Royalty Rates and Duration of
Royalty Rates.
During the Term, the royalty rates and the duration of such
royalty rates in each country under the Aventis License Agreement
and Ortho License Agreement are now as set forth on Schedule 3.21
and such rates will continue in effect in accordance with the
terms of the Aventis License Agreement and the Ortho License
Agreement.
Section 3.13 Set-off.
Neither Aventis nor Ortho has any right of set-off,
rescission, counterclaim, reduction, deduction or defense (each a
"Set-off") against Royalties or any other amounts payable to the
Company under the Aventis License Agreement or the Ortho License
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PRF
PRF represents and warrants to the Company the following:
Section 4.01 Organization.
PRF is a private company with limited liability [***], duly
formed, validly existing and in good standing under the laws of
[***], and PRF has all limited liability company powers and all
licenses, authorizations, consents and approvals required to
carry on its business as now conducted.
Section 4.02 Authorization.
PRF has all necessary power and authority to enter into,
execute and deliver the Transaction Documents and to perform all
of the obligations to be performed by it hereunder and thereunder
and to consummate the transactions contemplated hereunder and
thereunder. The Transaction Documents have been duly authorized,
executed and delivered by PRF and each Transaction Document
constitutes the valid and binding obligation of PRF, enforceable
against PRF in accordance with
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
its terms, subject, as to enforcement of remedies, to bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or general equitable principles.
Section 4.03 Broker's Fees.
PRF has not taken any action that would entitle any Person
to any commission or broker's fee in connection with the
transactions contemplated by the Transaction Documents.
Section 4.04 Conflicts.
Neither the execution and delivery of this Agreement or any other
Transaction Document nor the performance or consummation of the
transactions contemplated hereby or thereby will: (i)
contravene, conflict with, result in a breach or violation of,
constitute a default under, or accelerate the performance
provided by, in any material respects any provisions of: (A) any
law, rule or regulation of any Government Authority, or any
judgment, order, writ, decree, permit or license of any
Government Authority, to which PRF or any of its assets or
properties may be subject or bound; or (B) any contract,
agreement, commitment or instrument to which PRF is a party or by
which PRF or any of its assets or properties is bound or
committed; (ii) contravene, conflict with, result in a breach or
violation of, constitute a default under, or accelerate the
performance provided by, any provisions of organizational or
constitutional documents of PRF; or (iii) require any
notification to, filing with, or consent of, any Person or
Government Authority.
ARTICLE V
COVENANTS
During the Term, the following covenants shall apply:
Section 5.01 Consents and Waivers.
The Company shall obtain any required consents,
acknowledgements, certificates or waivers so that the
transactions contemplated by any Transaction Document may be
consummated and/or shall not result in any default or breach or
termination of any of the License Agreements or other Material
Contracts.
Section 5.02 Access; Information.
(a) Promptly after receipt by the Company of notice of any
action, claim, investigation or proceeding (commenced or
threatened) relating to the transactions contemplated by any
Transaction Document, License Agreement or Related Agreement, the
Company shall inform PRF of the receipt of such notice and the
substance of such action, claim, investigation or proceeding and,
if in writing, shall furnish PRF with a copy of such notice and
any related materials with respect to such action, claim,
investigation or proceeding.
(b) The Company shall keep and maintain, or cause to be kept
and maintained, at all times full and accurate books of account
and records adequate to reflect accurately all payments paid
and/or payable with respect to the License Agreements and any
Future Agreement with respect to the Royalty Interest and all
deposits made into PRF's Account.
(c) Promptly after receipt by the Company of any written
notice, certificate, offer, proposal, correspondence, report or
other written communication relating directly to any License
Agreement, Related Agreement, the Gross Products Payments, or the
Products, including from Ortho, Aventis, RPS and Amcol, the
Company shall inform PRF of such receipt and the substance
contained therein and, if in writing, shall furnish PRF with a
copy of such notice, certificate, offer, proposal,
correspondence, report or other communication.
(d) Promptly after receipt by the Company of the final and
executed copy of the Amcol Supply Agreement, the Company shall
furnish PRF with a copy of such Amcol Supply Agreement.
(e) The Company shall, promptly after the end of each fiscal
quarter of the Company (but in no event later than forty (40)
calendar days following the end of such quarter), produce and
deliver to PRF a Business Report and Quarterly Report for such
quarter, together with a certificate of the Chief Financial
Officer of the Company, certifying that to the Knowledge of such
officer (i) such Business Report and Quarterly Report are true
and complete copies and (ii) any statements and any data and
information therein prepared by the Company are true, correct and
accurate in all material respects. To the extent that PRF
reasonably believes that current activities as detailed in a
Business Report require reports more frequently than quarterly,
for example, during any negotiation relating to any License
Agreement or supply of any Product, PRF shall have the right to
request or require that the Company prepare Business Reports to
deliver to PRF on a more frequent basis.
Section 5.03 Material Contracts.
The Company shall comply with all material terms and
conditions of and fulfill all of its obligations under all the
Material Contracts, including any License Agreement. Without
limiting Sections 5.08 and 5.09, the Company shall not amend any
Material Contract or issue any consents or other approvals under
any Material Contract without the prior written consent of PRF.
Section 5.04 Public Announcement.
The Company and PRF shall agree upon the form and content of
any press release following the Closing by the Company or PRF
with respect to the transactions contemplated by this Agreement.
Either party may disclose this Agreement as required by law or
regulation, including as may be required in connection with any
filings made with the SEC or similar non-US. regulatory
authority, or by the disclosure policies of a major stock
exchange; provided, however, that, if reasonably possible, the
party making such disclosures shall inform the other party prior
to any such disclosures; and provided further that, the
disclosing party shall seek confidential treatment to the extent
available.
Section 5.05 Security Agreement.
The Company shall, at all times until the Obligations are
paid and performed in full, grant in favor of PRF a valid,
continuing, first perfected lien on and security interest in the
Royalty Interest, each of the Transaction Documents, and the
other Collateral described in the Security Agreement.
Section 5.06 Reasonable Commercial Efforts; Further
Assurance.
(a) Subject to the terms and conditions of this Agreement,
each party hereto will use its reasonable commercial efforts to
take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary under applicable laws and regulations
to consummate the transactions contemplated by any Transaction
Document. PRF and the Company agree to execute and deliver such
other documents, certificates, agreements and other writings
(including proper financing statement filings (including Form
UCC-1s) requested by PRF) and to take such other actions as may
be necessary in order to consummate or implement expeditiously
the transactions contemplated by any Transaction Document and to
vest in PRF good, valid and marketable rights and interests in
and to the Royalty Interest, free and clear of all Liens, except
those Liens created in favor of PRF pursuant to the Security
Agreement and any other Transaction Document.
(b) Each of the parties hereto shall execute and deliver
such additional documents, certificates and instruments, and
perform such additional acts, as may be reasonably requested and
necessary or appropriate to carry out and effectuate all of the
provisions of any Transaction Document and to consummate all of
the transactions contemplated by any Transaction Document.
(c) The Company and PRF shall cooperate and provide
assistance as reasonably requested by the other parties in
connection with any litigation, arbitration or other proceeding
(whether existing or initiated prior to, on or after the date
hereof) to which any party hereto or any of its officers,
directors, shareholders, members, managers, agents or employees
is or may become a party or is or may become otherwise directly
or indirectly affected or as to which any such Persons have a
direct or indirect interest, in each case relating to any
Transaction Document, the Royalty Interest or any other
Collateral, or the transactions described herein or therein but
in all cases excluding any litigation brought by the Company
against PRF or brought by PRF against the Company.
Section 5.07 Remittance to PRF's Account.
(a) Each Contract Party under each License Agreement shall
agree in writing that all payments in respect of sales of the
Products and in respect of Royalties payable by Contract Parties
shall be remitted directly by the applicable party into PRF's
Account and the Company shall cause such payments to be remitted
directly by the applicable party into PRF's Account. Without in
any way limiting the foregoing, any and all payments in respect
of Gross Products Payments received by the Company shall be held
in trust for the benefit of PRF and directed into PRF's Account
within two (2) Business Days of the Company's receipt thereof or
otherwise as directed in writing by PRF.
(b) Subject to Section 5.08(i) hereof, with respect to any
License Agreement or other sale agreement or invoice entered into
or issued by the Company from and after the date hereof, the
Company shall (i) at the time of the execution and delivery of
such License Agreement or other sale agreement or the issuance of
any invoice, instruct any party thereto or recipient thereof to
remit to PRF's Account when due all applicable payments in
respect of sales of the Products and in respect of Royalties that
are due and payable to the Company in respect of or derived from
such License Agreement or other sale agreement or invoice during
the Term and (ii) in the case of any License Agreement or other
sale agreement, deliver to PRF written evidence of such
instruction and of such applicable party's agreement thereto.
Section 5.08 License Agreements.
(a) In the event that the Company becomes aware that the
making, using or selling of any product licensed by the Company
to a Contract Party under any of the License Agreements infringes
or violates any third party intellectual property, if requested
by PRF, the Company shall promptly use its reasonable best
efforts to attempt to secure the right to use such intellectual
property on behalf of itself and the affected Contract Party and
shall pay all costs and amounts associated with obtaining any
such license, without any charge to the Contract Party or any
reduction in the Royalty Interest.
(b) The Company shall not (i) forgive, release or compromise
any amount owed to the Company and relating to the Royalty
Interest or the Products, (ii) waive, amend, cancel or terminate,
exercise or fail to exercise, any of its material rights
constituting or relating to the right to receive the Gross
Products Payments, or (iii) amend, modify, restate, cancel,
supplement, terminate or waive any provision of any License
Agreement, or grant any consent thereunder, or agree to do any of
the foregoing, including entering into any agreement with the
Contract Party under the provisions of such License Agreement.
(c) Promptly after (i) receiving written or oral notice from
a Contract Party, (A) terminating the related License Agreement,
(B) alleging any material breach of or default under such License
Agreement by the Company or (C) asserting the existence of any
facts, circumstances or events which alone or together with other
facts, circumstances or events could reasonably be expected (with
or without the giving of notice or passage of time or both) to
give rise to a material breach of or default under or right to
terminate such License Agreement or (ii) the Company otherwise
having Knowledge of any fact, circumstance or event which alone
or together with other facts, circumstances or events could
reasonably be expected (with or without the giving of notice or
passage of time or both) to give rise to a material breach of or
default under such License Agreement by the Company or a right to
terminate such License Agreement by such Contract Party, in each
case, the Company shall (x) give a written notice to PRF
describing in reasonable detail the relevant breach, default or
termination event, including a copy of any written notice
received from such Contract Party and, in the case of any breach
or default or alleged breach or default by the Company,
describing any corrective action the Company proposes to take and
(y) take all commercially reasonable efforts to cure promptly
such breach, default or termination event; provided, however, the
Company will not take any actions under the applicable License
Agreement without the prior written consent of PRF.
(d) Promptly after becoming aware of a material breach of or
default of a Contract Party under a License Agreement or of the
existence of any facts, circumstances or events which alone or
together with other facts, circumstances or events could
reasonably be expected (with or without the giving of notice or
passage of time or both) to give rise to a material breach of or
default by a Contract Party under or right of the Company to
terminate such License Agreement, including any failure of a
Contract Party to meet their diligence or other commercialization
requirements, then in each case, the Company shall (i) give a
written notice to PRF describing in reasonable detail the
relevant breach, default or termination event, including a copy
of any written notice that the Company proposes to send to the
applicable Contract Party and, in the case of any breach or
default or alleged breach or default by such Contract Party,
describing any action the Company proposes to take, and (ii) make
all commercially reasonable efforts to enforce all of its rights
and remedies thereunder; provided, however, the Company will not
take any actions under the applicable License Agreement without
the prior written consent of PRF.
(e) The Company shall, at its sole expense, either directly
or by causing the Contract Party to do so, take any and all
actions and prepare, execute, deliver and file any and all
agreements, documents or instruments which are necessary or
desirable to (i) maintain diligently the applicable Intellectual
Property and (ii) defend diligently such Intellectual Property
against infringement or interference by any other Persons, and
against any claims of invalidity or unenforceability, in any
jurisdiction (including by bringing any legal action for
infringement or defending any counterclaim of invalidity or
action of a third party for declaratory judgment of non-
infringement or non-interference); provided, however, the Company
will not take any actions under the applicable License Agreement,
or fail to take any actions resulting in those actions being
taken by the Contract Party, without the prior written consent of
PRF. The Company shall not, and shall use commercially
reasonable efforts to cause the applicable Contract Party not to,
disclaim or abandon, or fail to take any action necessary or
desirable to prevent the disclaimer or abandonment of, the
applicable Intellectual Property.
(f) Prior to taking any action under any License Agreement,
including the Ortho License Agreement or Aventis License
Agreement, or failing to take any action where a right to take
such action exists under such agreements, the Company shall
promptly seek direction from PRF and shall take only such action
(or fail to take such actions) as directed by or consented to PRF
in writing.
(g) The Company shall cause each Contract Party under any
License Agreement, as applicable, to provide promptly following
the end of each calendar quarter all information with respect to
net end-user sales (including all components of information
required to calculate Gross Products Payments) under each such
agreement for inclusion in the Quarterly Report for such quarter,
and the Company shall cause such obligation to be included in
every License Agreement it enters into following the Closing
Date.
(h) The Company shall use commercially reasonable efforts
consistent with industry practices to maintain the Ortho License
Agreement and Aventis License Agreement in full force and effect,
including maintaining sufficient commercial relationships with
Ortho and Aventis and, subject to Section 5.08(f), exercising its
rights thereunder. In the event of the termination of either of
the Ortho License Agreement or Aventis License Agreement, the
Company shall use commercially reasonable best efforts to enter
into a Future Agreement of the same scope as such terminated
License Agreement on advantageous economic terms and shall keep
PRF informed of the status of negotiations on an ongoing basis.
Entry into any such Future Agreement shall be subject to the
prior written consent of PRF, such consent not to be unreasonably
withheld. All Royalties arising under such successor Future
Agreement shall be included in the definition of Royalty Interest
hereunder.
(i) The Company shall use its commercially reasonable
efforts to actively market and promote the Intellectual Property
and Products and to seek out and exploit opportunities for
entering into Future Agreements for all indications in those
countries of the world that are outside the geographic scope of
the Ortho License Agreement or the Aventis License Agreement and,
for those countries of the world within the geographic scope of
the Ortho License Agreement or the Aventis License Agreement, for
those indications outside the scope of such License Agreement,
including, with respect to Products relating to 5-fluorouracil,
for the treatment of photodamaged skin, flat warts and psoriasis.
Entry into any such Future Agreement shall be subject to the
prior written consent of PRF, such consent not to be unreasonably
withheld. If the Company enters into any such Future Agreement,
then sixty-seven percent (67%) of the Royalties shall be included
in the definition of Royalty Interest hereunder and the remaining
thirty-three percent (33%) of such Royalties shall be retained by
the Company. At the time of entry into any such Future
Agreement, if requested by the Company, the parties shall
negotiate in good faith a lockbox agreement to establish and
maintain a lockbox account pursuant to which payments made in
respect of the Royalties relating to such Future Agreement are to
be remitted, and any and all corresponding amendments to the
Security Agreement shall be made to provide PRF with a security
interest in such lockbox account. Notwithstanding the foregoing,
in the event that the Company fails to enter into any Future
Agreements by January 1, 2010, then PRF may pursue opportunities
for Future Agreements on behalf of the Company, in which event
the Company shall have no right to receive any economic interest
relating to any such Future Agreement and one hundred percent
(100%) of the Royalties for any such Future Agreement entered
into after January 1, 2010 shall be included in the definition of
Royalty Interest hereunder.
(j) [***].
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Section 5.09 Insurance.
The Company shall (i) maintain insurance policies with insurance
companies rated not less than "A-" by A.M. Best Company, Inc.
with coverages and in amounts customary for companies of
comparable size and condition similarly situated in the same
industry as the Company, including product liability insurance
and directors and officers insurance and insurance against
litigation, liability, subject only to such exclusions and
deductible items as are usual and customary in insurance policies
of such type, and (ii) maintain PRF as an additional insured
party with respect to its general liability and product liability
insurance policies.
Section 5.10 Audits.
(a) To the extent the Company has the right to perform or
cause to be performed inspections or audits under any of the
License Agreements regarding payments payable and/or paid to the
Company thereunder (each, a "License Party Audit"), the Company
shall, at the direction and reasonable request of PRF, cause a
License Party Audit to be performed promptly. In conducting a
License Party Audit, the Company may engage its then retained
internationally recognized independent public accounting firm,
or, if the Company elects otherwise, such other internationally
recognized independent public accounting firm reasonably
acceptable to PRF. Promptly after completion of any License
Party Audit (whether or not requested by PRF), the Company shall
promptly deliver to PRF an Audit Report in respect of such
License Party Audit.
(b) To the extent that either PRF or the Company has
determined that there is a discrepancy as to the amounts paid to
PRF pursuant to Section 2.02 in any calendar year, then the party
hereto who has made such determination may notify the other party
hereto in writing of such discrepancy indicating in reasonable
detail its reasons for such determination (the "Discrepancy
Notice"). In the event that either PRF or the Company delivers
to the other party a Discrepancy Notice, PRF and the Company
shall meet within ten (10) Business Days (or such other time as
mutually agreed by the parties) after the receiving party has
received a Discrepancy Notice to resolve in good faith such
discrepancy. If the discrepancy has been resolved and, as a
result thereof, it is determined that a payment is owing by PRF
to the Company or by the Company to PRF, then the party owing
such payment shall promptly pay such payment to the other party.
If, within thirty (30) Business Days after receipt of the
Discrepancy Notice, the Company and PRF cannot resolve any such
discrepancies, then PRF and the Company shall promptly instruct
their respective firms of independent certified public
accountants to select, within five (5) Business Days thereafter,
a third nationally recognized accounting firm (the "Independent
Accountants"). After offering the Company and its
representatives and PRF and its representatives the opportunity
to present their positions as to the disputed amounts, which
opportunity shall not extend for more than ten (10) Business Days
after the Independent Accountants have been selected, the
Independent Accountants shall review the disputed matters and the
materials submitted by the Company and PRF and, as promptly as
practicable, deliver to the Company and PRF a statement in
writing setting forth its determination of the proper treatment
of the discrepancies as to which there was disagreement, and that
determination will be final and binding upon the parties hereto
without any further right of appeal.
(c) PRF and any of its representatives shall have the right,
from time to time, to visit the Company's offices and properties
where the Company keeps and maintains its books and records
relating or pertaining to the Royalty Interest for purposes of
conducting an audit of such books and records, and to inspect,
copy and audit such books and records, during normal business
hours, and, upon five (5) Business Days written notice given by
PRF to the Company, the Company will provide PRF and any of PRF's
representatives reasonable access to such books and records, and
shall permit PRF and any of PRF's representatives to discuss the
business, operations, properties and financial and other
condition of the Company or any of its Affiliates relating or
pertaining to the Royalty Interest with officers of such parties,
and with their independent certified public accountants. PRF's
visits to the Company's offices pursuant to this Section 5.10(c)
shall occur not more than once per calendar year; provided,
however, that PRF may so visit more frequently to the extent that
there has occurred an event, which could reasonably be expected
to result in a Material Adverse Effect, and PRF's visit or visits
to the Company's offices in connection therewith are for purposes
related to such event.
(d) All Audit Costs in respect of a License Party Audit or
an audit of the Company's books and records pursuant to Section
5.10(c) shall be borne by PRF, unless the results of such audit,
as the case may be, reveals that the amounts paid to PRF for the
period subject to such audit have been understated by more than
five percent (5%) of the amounts due to PRF pursuant to this
Agreement for the period subject to such audit, then the Audit
Costs in respect of such audit shall be borne by the Company.
Section 5.11 Notice.
The Company shall provide PRF with written notice as
promptly as practicable (and in any event within five (5)
Business Days) after becoming aware of any of the following:
(i) the occurrence of a Bankruptcy Event;
(ii) any material breach or default by the Company of any
covenant, agreement or other provision of this
Agreement or any other Transaction Document; or
(iii) any representation or warranty made or deemed made by
the Company in any of the Transaction Documents or in
any certificate delivered to PRF pursuant hereto
shall prove to be untrue, inaccurate or incomplete in
any material respect on the date as of which made or
deemed made.
Section 5.12 Chain of Title.
Within fifteen (15) days of the Closing, the Company shall
provide to PRF evidence of the filing of documentation at the
appropriate Patent Office in the United States and thereafter in
all jurisdictions to reflect the current legal owner of the
Patent Rights as the owner of such Patent Rights in the public
records.
Section 5.13 Treatment of Sale of Royalty Interest
The Company shall account for the sale of the Royalty
Interest to PRF herein as a sale rather than a financing pursuant
to GAAP.
ARTICLE VI
THE CLOSING; CONDITIONS TO CLOSING AND FUNDING
Section 6.01 Closing.
Subject to the closing conditions set forth in Sections 6.02
and 6.03, the closing of this Agreement (the "Closing") shall
take place at the offices of Kirkland & Ellis LLP, 555 California
Street, San Francisco, CA 94104, on the Closing Date.
Section 6.02 Conditions Applicable to PRF.
The obligations of PRF to effect the Closing and comply with
the other terms of this Agreement, including payment of the
Purchase Price pursuant to Section 2.03, shall be subject to the
satisfaction of each of the following conditions, as of the
Closing Date, as applicable, any of which may be waived by PRF in
its sole discretion:
(a) Accuracy of Representations and Warranties. The
representations and warranties of the Company set forth in the
Transaction Documents shall be true, correct and complete in all
material respects.
(b) No Adverse Circumstances. There shall not have occurred
or be continuing any event or circumstance (including any
development with respect to the efficacy of the Products or the
Intellectual Property or the use or expected future use of the
same as opposed to competing products) that could reasonably be
expected to result in a Material Adverse Effect.
(c) Litigation. No action, suit, litigation, proceeding or
investigation shall have been instituted, be pending or
threatened (i) challenging or seeking to make illegal, to delay
or otherwise directly or indirectly to restrain or prohibit the
consummation of the transactions contemplated by this Agreement,
or seeking to obtain damages in connection with the transactions
contemplated by this Agreement, or (ii) seeking to restrain or
prohibit PRF's acquisition or future receipt of the Royalty
Interest.
(d) Officer's Certificate. PRF shall have received a
certificate of the Chief Financial Officer of the Company
pursuant to which such officer certifies that the conditions set
forth in Sections 6.02(a), (b), (c), and (i) have been satisfied
in all respects.
(e) Bill of Sale. A Bill of Sale in the form set forth in
Exhibit A shall have been executed and delivered by the Company
to PRF, and PRF shall have received the same.
(f) Security Agreement. The Security Agreement shall have
been duly executed and delivered by all the parties thereto and
shall be in form of Exhibit B hereto, together with proper
financing statements (including Form UCC-1s) for filing under the
UCC and/or any other applicable law, rule, statute or regulation
relating to the perfection of a security interest in filing
offices in the jurisdictions listed on Schedule 6.02(f), and such
agreement shall be in full force and effect.
(g) Legal Opinions.
(i) PRF shall have received an opinion of Heller
Ehrman LLP, transaction counsel to the Company, in form and
substance satisfactory to PRF and its counsel, to the effect set
forth in Exhibit C.
(ii) PRF shall have received an opinion of Heller
Ehrman LLP, transaction counsel to the Company, relating to the
characterization of the transaction as a "true sale" in form and
substance satisfactory to PRF and its counsel, to the effect set
forth in Exhibit D.
(iii) PRF shall have received an opinion of Heller
Ehrman LLP, patent counsel to the Company, in form and substance
satisfactory to PRF and its counsel, to the effect set forth in
Exhibit E.
(h) Corporate Documents of the Company. PRF shall have
received certificates of an executive officer of the Company (the
statements made in which shall be true and correct on and as of
the Closing Date): (i) attaching copies, certified by such
officer as true and complete, of the Company's certificate of
incorporation or other organizational documents (together with
any and all amendments thereto) certified by the appropriate
Government Authority as being true, correct and complete copies;
(ii) attaching copies, certified by such officer as true and
complete, of resolutions of the board of directors of the Company
authorizing and approving the execution, delivery and performance
by the Company of the Transaction Documents and the transactions
contemplated herein and therein; (iii) setting forth the
incumbency of the officer or officers of the Company who have
executed and delivered the Transaction Documents including
therein a signature specimen of each such officer or officers;
and (iv) attaching copies, certified by such officer as true and
complete, of a certificate of the appropriate Government
Authority of the Company's jurisdiction of incorporation, stating
that the Company is in good standing under the laws of the State
of Delaware.
(i) Covenants. The Company shall have complied in all
material respects with the covenants set forth in the Transaction
Documents.
(j) License Agreement and Other Consents. Consents and/or
amendments from Ortho, Aventis and RPS in the forms attached
hereto as Exhibits K-M.
Section 6.03 Conditions Applicable to the Company.
The obligations of the Company and to effect the Closing
shall be subject to the satisfaction of each of the following
conditions, any of which may be waived by the Company in its sole
discretion:
(a) Accuracy of Representations and Warranties. The
representations and warranties of PRF set forth in this Agreement
shall be true, correct and complete as of the Closing Date.
(b) Litigation. No action, suit, litigation, proceeding or
investigation shall have been instituted, be pending or
threatened (i) challenging or seeking to make illegal, to delay
or otherwise directly or indirectly to restrain or prohibit the
consummation of the transactions contemplated by this Agreement,
or seeking to obtain damages in connection with the transactions
contemplated by this Agreement, or (ii) seeking to restrain or
prohibit PRF's acquisition of the Royalty Interest.
(c) Officer's Certificate. The Company shall have received
at the Closing a certificate of an authorized representative of
PRF certifying that the conditions set forth in Sections 6.03(a)
and (b) have been satisfied in all respects as of the Closing
Date.
ARTICLE VII
TERMINATION
Section 7.01 Termination Date.
This Agreement shall terminate on the expiration of the
Term; provided, however, that if any Obligations under this
Agreement remain unpaid or any payments are required to be made
by one of the parties hereunder after that date, this Agreement
shall remain in full force and effect until any and all such
payments have been made in full, and solely for that purpose.
Section 7.02 Effect of Termination.
In the event of the termination of this Agreement pursuant
to Section 7.01, this Agreement shall forthwith become void and
have no effect without any liability on the part of any party
hereto or its Affiliates, directors, officers, stockholders,
managers or members other than the provisions of this Section
7.02 and Sections 5.04, 5.07(a), 5.10, 8.01, 8.04 and 8.05
hereof, which shall survive any termination as set forth in
Section 8.01. Nothing contained in this Section 7.02 shall
relieve any party from liability for any breach of this
Agreement.
ARTICLE VII
MISCELLANEOUS
Section 8.01 Survival.
(a) All representations and warranties made herein and in
any other Transaction Document, any certificates or in any other
writing delivered pursuant hereto or in connection herewith shall
survive the execution and delivery of this Agreement and the
Closing and shall continue to survive indefinitely.
Notwithstanding anything in this Agreement or implied by law to
the contrary, all the agreements contained in Sections 5.04,
5.07(a), 5.10, 8.01, 8.04 and 8.05 shall survive indefinitely
following the execution and delivery of this Agreement and the
Closing and the termination of this Agreement.
(b) Any investigation or other examination that may have
been made or may be made at any time by or on behalf of the party
to whom representations and warranties are made shall not limit,
diminish or in any way affect the representations and warranties
in the Transaction Documents, and the parties may rely on the
representations and warranties in the Transaction Documents
irrespective of any information obtained by them by any
investigation, examination or otherwise.
Section 8.02 Specific Performance.
Each of the parties hereto acknowledges that the other party
will have no adequate remedy at law if it fails to perform any of
its obligations under any of the Transaction Documents. In such
event, each of the parties agrees that the other party shall have
the right, in addition to any other rights it may have (whether
at law or in equity), to specific performance of this Agreement.
Section 8.03 Notices.
All notices, consents, waivers and communications hereunder
given by any party to the other shall be in writing (including
email and facsimile transmission) and delivered personally, by
email or by facsimile, by a recognized overnight courier, or by
dispatching the same by certified or registered mail, return
receipt requested, with postage prepaid, in each case addressed:
If to PRF to:
[***][an affiliate of Paul Royalty Fund II, L.P., a
Delaware limited partnership]
c/o Paul Capital Advisors, LLC
50 California Street, Suite 3000
San Francisco, CA 94111
Attention: Chief Financial Officer
Facsimile No.: (415) 283-4301
email: pjensen@paulcap.com
carchibald@paulcap.com
with a copy to:
[***][an affiliate of Paul Royalty Fund II, L.P., a
Delaware limited partnership]
c/o Paul Capital Advisors, LLC
Two Grand Central Tower
140th East 45th Street, 44th Floor
New York, NY 10017
Attention: Clarke B. Futch
Facsimile No.: (646) 264-1101
email: cfutch@paulcap.com
and
Kirkland & Ellis LLP
555 California Street, Suite 2700
San Francisco, CA 94104
Attention: Stephen Johnson
Facsimile No.: (415) 439-1500
email: sjohnson@kirkland.com
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
If to the Company to:
A.P. Pharma, Inc.
123 Saginaw Drive
Redwood City, CA 94063
Attention: Mike O'Connell
Facsimile No.: (650) 365-9452
email: moconnell@appharma.com
with a copy to:
Heller Ehrman LLP
275 Middlefield Road
Menlo Park, CA 94025-3506
Attention: Richard A. Peers
Matthew Gosling
Facsimile No.: (650) 324-0638
email: richard.peers@hellerehrman.com
matthew.gosling@hellerehrman.com
if or to such other address or addresses as PRF or the Company
may from time to time designate by notice as provided herein,
except that notices of changes of address shall be effective only
upon receipt. All such notices consents, waivers and
communications shall: (a) when posted by certified or registered
mail, postage prepaid, return receipt requested, be effective
three (3) Business Days after dispatch, unless such communication
is sent trans-Atlantic, in which case shall be deemed effective
five (5) Business Days after dispatch, (b) when emailed or
facsimiled, be effective upon receipt by the transmitting party
of confirmation of complete receipt by the addressees of such
email, or (c) when delivered by a recognized overnight courier or
in person, be effective upon receipt when hand delivered.
Section 8.04 Successors and Assigns.
The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns. The Company shall not be entitled to
assign any of its obligations and rights under the Transaction
Documents without the prior written consent of PRF. PRF may
assign any of its obligations and rights under the Transaction
Documents, without restriction and without the consent of the
Company.
Section 8.05 Indemnification.
(a) The Company hereby indemnifies and holds PRF and its
Affiliates and any of their respective partners, directors,
managers, members, officers, employees and agents (each an "PRF
Indemnified Party") harmless from and against any and all (i)
Losses incurred or suffered by any PRF Indemnified Party arising
out of any breach of any representation, warranty or
certification made by the Company in any of the Transaction
Documents or certificates given by the Company in writing
pursuant hereto or thereto or any breach of or default under any
covenant or agreement by the Company pursuant to any Transaction
Document, including any failure by the Company to satisfy any of
the Excluded Liabilities and Obligations, and (ii) any Losses in
connection with any product liability claims or claims of
infringement or misappropriation of any intellectual property
rights of any third parties or any Excluded Liabilities and
Obligations.
(b) PRF hereby indemnifies and holds the Company, its
Affiliates and any of their respective partners, directors,
managers, officers, employees and agents (each an "the Company
Indemnified Party") harmless from and against any and all Losses
incurred or suffered by an the Company Indemnified Party arising
out of any breach of any representation, warranty or
certification made by PRF in any of the Transaction Documents or
certificates given by PRF in writing pursuant hereto or thereto
or any breach of or default under any covenant or agreement by
PRF pursuant to any Transaction Document.
(c) If any claim, demand, action or proceeding (including
any investigation by any Government Authority) shall be brought
or alleged against an indemnified party in respect of which
indemnity is to be sought against an indemnifying party pursuant
to the preceding paragraphs, the indemnified party shall,
promptly after receipt of notice of the commencement of any such
claim, demand, action or proceeding, notify the indemnifying
party in writing of the commencement of such claim, demand,
action or proceeding, enclosing a copy of all papers served, if
any; provided, that, the omission to so notify such indemnifying
party will not relieve the indemnifying party from any liability
that it may have to any indemnified party under the foregoing
provisions of this Section 8.05 unless, and only to the extent
that, such omission results in the forfeiture of, or have a
material adverse effect on the exercise or prosecution of,
substantive rights or defenses by the indemnifying party. In
case any such action is brought against an indemnified party and
it notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein
and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice
from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party under this Section
8.05 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof
other than reasonable costs of investigation. In any such
proceeding, an indemnified party shall have the right to retain
its own counsel, but the reasonable fees and expenses of such
counsel shall be at the expense of such indemnified party unless
(i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel, (ii) the
indemnifying party has assumed the defense of such proceeding and
has failed within a reasonable time to retain counsel reasonably
satisfactory to such indemnified party or (iii) the named parties
to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential conflicts of interests
between them based on the advice of such counsel. It is agreed
that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be
liable for the reasonable fees and expenses of more than one
separate law firm (in addition to local counsel where necessary)
for all such indemnified parties. The indemnifying party shall
not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or
if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of
such proceeding.
Section 8.06 Independent Nature of Relationship.
(a) The relationship between the Company and PRF is solely
that of seller and purchaser, and neither PRF nor the Company has
any fiduciary or other special relationship with the other or any
of their respective Affiliates. Nothing contained herein or in
any other Transaction Document shall be deemed to constitute the
Company and PRF as a partnership, an association, a joint venture
or other kind of entity or legal form.
(b) No officer or employee of PRF will be located at the
premises of the Company or any of its Affiliates, except in
connection with an audit performed pursuant to Section 5.10. No
officer, manager or employee of PRF shall engage in any
commercial activity with the Company or any of its Affiliates
other than as contemplated herein and in the other Transaction
Documents.
(c) The Company and/or any of its Affiliates shall not at
any time obligate PRF, or impose on PRF any obligation, in any
manner or respect to any Person not a party hereto.
Section 8.07 Tax Treatment.
Payments made hereunder shall not be subject to withholding.
If required, PRF shall provide to the Company a Form W-8 BEN.
Section 8.08 Entire Agreement.
This Agreement, together with the Exhibits and Schedules
hereto (which are incorporated herein by reference), and the
other Transaction Documents constitute the entire agreement
between the parties with respect to the subject matter hereof and
supersede all prior agreements (including the Term Sheet),
understandings and negotiations, both written and oral, between
the parties with respect to the subject matter of this Agreement.
No representation, inducement, promise, understanding, condition
or warranty not set forth herein (or in the Exhibits, Schedules
or other Transaction Documents) has been made or relied upon by
either party hereto. None of this Agreement, nor any provision
hereof, is intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder.
Section 8.09 Amendments; No Waivers.
(a) This Agreement or any term or provision hereof may not
be amended, changed or modified except with the written consent
of the parties hereto. No waiver of any right hereunder shall be
effective unless such waiver is signed in writing by the party
against whom such waiver is sought to be enforced.
(b) No failure or delay by either party in exercising any
right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 8.10 Interpretation.
When a reference is made in this Agreement to Articles,
Sections, Schedules or Exhibits, such reference shall be to an
Article, Section, Schedule or Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be
followed by the words "without limitation." Neither party hereto
shall be or be deemed to be the drafter of this Agreement for the
purposes of construing this Agreement against one party or the
other.
Section 8.11 Headings and Captions.
The headings and captions in this Agreement are for
convenience and reference purposes only and shall not be
considered a part of or affect the construction or interpretation
of any provision of this Agreement.
Section 8.12 Counterparts; Effectiveness.
This Agreement may be executed in two or more counterparts,
each of which shall be an original, but all of which together
shall constitute one and the same instrument. This Agreement
shall become effective when each party hereto shall have received
a counterpart hereof signed by the other parties hereto. Any
counterpart may be executed by facsimile signature and such
facsimile signature shall be deemed an original.
Section 8.13 Severability.
If any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions shall nevertheless be
given full force and effect.
Section 8.14 Governing Law; Jurisdiction.
(a) This Agreement shall be governed by, and construed,
interpreted and enforced in accordance with, the laws of the
state of New York, without giving effect to the principles of
conflicts of law thereof.
(b) Any legal action or proceeding with respect to this
agreement or any other transaction document may be brought in any
state or federal court of competent jurisdiction in the state,
county and city of New York. By execution and delivery of this
agreement, each party hereto hereby irrevocably consents to and
accepts, for itself and in respect of its property, generally and
unconditionally the non-exclusive jurisdiction of such courts.
Each party hereto hereby further irrevocably waives any
objection, including any objection to the laying of venue or
based on the grounds of forum non conveniens, which it may now or
hereafter have to the bringing of any action or proceeding in
such jurisdiction in respect of any Transaction Document.
(c) Each party hereto hereby irrevocably consents to the
service of process out of any of the courts referred to in
subsection (b) above of this Section 8.14(b) above in any such
suit, action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to it at its
address set forth in this agreement. Each party hereto hereby
irrevocably waives any objection to such service of process and
further irrevocably waives and agrees not to plead or claim in
any suit, action or proceeding commenced hereunder or under any
other transaction document that service of process was in any way
invalid or ineffective. Nothing herein shall affect the right of
a party to serve process on the other party in any other manner
permitted by law.
Section 8.15 Waiver of Jury Trial.
Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by
jury in any action, proceeding, claim or counterclaim arising out
of or relating to any Transaction Document or the transactions
contemplated under any Transaction Document. This waiver shall
apply to any subsequent amendments, renewals, supplements or
modifications to any Transaction Document.
[Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized
officers as of the date first above written.
The Company: A.P. Pharma, Inc.
By: /S/ Michael O'Connell
----------------------
Name: Michael O'Connell
------------------
Title: President and Chief
Executive Officer
--------------------
PRF: [***][an affiliate of Paul Royalty Fund II,
L.P., a Delaware limited partnership]
By: Clarke B. Futch
----------------
Name: Clarke B. Futch
----------------
Title: Manager
--------
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Exhibit 10-Z
CONFIDENTIAL TREATMENT REQUESTED
SECURITY AGREEMENT
Dated as of January 17, 2006
between
[***][an affiliate of Paul Royalty Fund II, L.P.,
a Delaware limited partnership]
and
A.P. PHARMA, INC.
(in favor of [***][an affiliate of Paul Royalty Fund II,
L.P., a Delaware limited partnership])
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
TABLE OF CONTENTS
-----------------
Page
----
Section 1 Definitions 1
Section 2 Grant of Security 1
Section 3 Security for Obligations 2
Section 4 APP to Remain Liable 2
Section 5 Representations and Warrants 2
Section 6 Further Assurances 3
Section 7 Certain Covenants of APP 3
Section 8 Special Covenants With Respect
to the Collateral 4
Section 9 PRF Appointed Attorney-in-Fact 5
Section 10 Standard of Care 5
Section 11 Remedies Upon Event of Default 6
Section 12 Application of Proceeds 6
Section 13 Expenses 6
Section 14 Continuing Security Interest;
Termination and Release 7
Section 15 Amendments; Etc 7
Section 16 Notices 7
Section 17 Failure or Indulgence Not Waiver;
Remedies Cumulative 7
Section 18 Severability 7
Section 19 Interpretation 8
Section 20 Headings 8
Section 21 Governing Law 8
Section 22 Waiver of Jury Trial 8
Section 23 Counterparts; Effectiveness 8
Section 24 Successors and Assigns 8
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
SECURITY AGREEMENT
This SECURITY AGREEMENT (the "Agreement") is made and
entered into as of January 17, 2006 (the "Effective Date") by and
between A.P. Pharma, Inc., a Delaware corporation (including its
successors and assigns, "APP"), [***][an Affiliate of Paul
Royalty Fund II, L.P., a Delaware limited partnership] (including
its successors and assigns, "PRF"), an Affiliate of Paul Royalty
Fund II, L.P., a Delaware limited partnership.
W I T N E S S E T H:
WHEREAS, APP and PRF are parties to the Royalty Interest
Agreement between the parties of even date herewith (the "Royalty
Interest Agreement");
WHEREAS, APP has covenanted pursuant to the terms of the
Royalty Interest Agreement to enter into this Agreement, under
which APP grants to PRF a security interest in and to the
Collateral as general and continuing security for the due
performance and payment of all of APP's obligations to PRF under
the Royalty Interest Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements herein
contained, and intending to be legally bound, the parties hereto
agree as follows:
Section 1 Definitions. For purposes of this Agreement,
capitalized terms and certain other terms used herein shall have
the meanings set forth in Schedule 1 hereto. Capitalized terms
used herein and not otherwise defined herein or in Schedule 1
shall have the meanings given such terms in the Royalty Interest
Agreement or the UCC, as applicable.
Section 2 Grant of Security. APP hereby grants PRF a
security interest in the following personal property, whether now
or hereafter existing, and wherever the same may be located
(collectively, the "Collateral"):
(a) the Royalty Interest;
(b) the Intellectual Property, including the Patents and
Know-How;
(c) the License Agreements, including the Aventis License
Agreement and the Ortho License Agreement;
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
(d) the RPS Agreements;
(e) the Transaction Documents; and
(f) all Regulatory Approvals.
The Royalty Interest has been sold, assigned, transferred
and conveyed to PRF pursuant to the Royalty Interest Agreement
and it is the intention of the parties that such transaction be
treated as a "true sale". The security interest granted in this
Section 2 is granted as a precaution against the possibility,
contrary to the parties' intentions, that the transaction be
characterized as other than a "true sale". In no event shall the
security interest granted in this Section 2 hereof attach to any
personal property of APP other than the Collateral.
Section 3 Security for Obligations. This Agreement
secures, and the Collateral pledged by APP is collateral security
for, the due and punctual payment or performance in full
(including, without limitation, the payment of amounts that would
become due but for the operation of the automatic stay under
Subsection 362(a) of the United States Bankruptcy Code) of all
Secured Obligations of APP.
Section 4 APP to Remain Liable. Notwithstanding anything
to the contrary contained herein, (a) APP shall remain liable to
perform all of its duties and other obligations under the Royalty
Interest Agreement to the same extent as if this Agreement had
not been executed, and (b) the exercise by PRF of any of its
rights hereunder shall not release APP from any of its duties or
other obligations under the Royalty Interest Agreement.
Section 5 Representations and Warranties. APP represents
and warrants as follows as of the date hereof:
(a) Ownership of Collateral. APP has the power to
transfer and grant a lien and security interest in each item of
Collateral upon which it purports to grant a lien or security
interest hereunder and the grant of such security interest shall
not constitute or result in (i) the abandonment, invalidation or
unenforceability of any right, title or interest of APP under any
lease, license or contract to which it is a party or (ii) a
breach or termination pursuant to the terms of, or a default
under, any such lease, license, contract or agreement (other than
to the extent that any such term would be rendered ineffective
pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC).
Other than such as may have been filed in favor of PRF relating
to this Agreement or as contemplated by the Royalty Interest
Agreement, no effective UCC financing statement or other
instrument similar in effect covering all or any part of the
Collateral or the Patents is on file in any filing or recording
office.
(b) Validity. This Agreement, when executed and
delivered, will create a valid security interest in the
Collateral under the laws of the State of New York, and upon the
filing of the appropriate UCC financing statements naming PRF as
secured party and describing the Collateral in the applicable
filing office(s) in the jurisdiction(s) listed in Schedule 5(b),
such security interest will be perfected under the laws of the
State of Delaware and all filings, registrations and recordings
necessary or appropriate to create, preserve, protect and perfect
the security interest granted by APP to PRF in the Collateral
will have been accomplished, including the execution and filing
of the Collateral Assignment and Security Agreement set forth on
Exhibit B herein at the United States Patent and Trademark
Office.
(c) Authorization, Approval. No authorization, approval,
or other action by, and no notice to or filing with, any
government or agency of any government or other Person is
required either (i) for the assignment, pledge and grant by APP
of the security interest granted hereby or for the execution,
delivery and performance of this Agreement by APP; or (ii) for
the perfection of, the pledge, assignment and grant of the
security interest created hereby or the exercise by PRF of its
rights and remedies hereunder, other than (A) the filing of
financing statements in the appropriate office(s) located in the
jurisdiction(s) listed on Schedule 5(b), and (B) such as has been
obtained on or prior to the date hereof.
(d) Enforceability. This Agreement is the legally valid
and binding obligation of APP, enforceable against APP in
accordance with its terms, subject, as to enforcement of
remedies, to bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally or general
equitable principles.
(e) Office Locations; Type and Jurisdiction of
Organization. The chief place of business, the chief executive
office and the office where APP keeps its records regarding the
Collateral are, as of the date hereof, located at the locations
set forth on Schedule 5(e); APP's type of organization (i.e.,
corporation, limited partnership, etc.), jurisdiction of
organization and organization number provided by the applicable
government authority of the jurisdiction of organization are also
listed on Schedule 5(e).
(f) Names. APP (or any predecessor by merger or
otherwise) has not, within the four (4) month period preceding
the date hereof, had a different name from the name listed on the
signature pages hereof.
(g) Intellectual Property, License Agreements and Related
Agreements. APP confirms the representations and warranties made
by APP pursuant to Sections 3.12 (to the extent of the Patents
existing as of the date hereof), 3.18 and 3.19 of the Royalty
Interest Agreement.
Section 6 Further Assurances. APP agrees that, from time
to time, at its expense, APP will promptly execute and deliver
all further instruments and documents, and take all further
action that may be necessary or desirable, or that PRF may
reasonably request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable
PRF to exercise and enforce its rights and remedies hereunder
with respect to any Collateral. Without limiting the generality
of the foregoing, APP will: (i) (A) execute and file such
financing or continuation statements, or amendments thereto, (B)
execute and deliver, and cause to be executed and delivered,
agreements establishing that PRF has control of specified items
of Collateral, and (C) deliver such other instruments or notices,
in each case, as may be necessary or desirable, or as PRF may
reasonably request, in order to perfect and preserve the security
interests granted or purported to be granted hereby, (ii) furnish
to PRF from time to time statements and schedules further
identifying and describing the Collateral and such other reports
in connection with the Collateral as PRF may reasonably request,
all in reasonable detail, (iii) at PRF's request, appear in and
defend any action or proceeding that may affect APP's title to or
PRF's security interest in all or any part of the Collateral, and
(iv) use commercially reasonable efforts to obtain any necessary
consents of third parties to the assignment and perfection of a
security interest to PRF with respect to any Collateral. APP
hereby authorizes PRF to file one or more financing or
continuation statements, and amendments thereto, relative to all
or any part of the Collateral without the signature of APP. APP
agrees that a carbon, photographic or other reproduction of this
Agreement or of a financing statement signed by APP shall be
sufficient as a financing statement and may be filed as a
financing statement in any and all jurisdictions.
Section 7 Certain Covenants of APP. APP shall:
(a) not use or permit any Collateral to be used unlawfully
or in violation of any provision of this Agreement or any
applicable statute, regulation or ordinance or any policy of
insurance covering the Collateral;
(b) notify PRF of any change in its name, identity or
corporate structure within fifteen (15) days of such change;
(c) give PRF thirty (30) days' prior written notice of any
change in its chief place of business, chief executive office or
residence or the office where APP keeps its records regarding the
Collateral or a reincorporation, reorganization or other action
that results in a change of the jurisdiction of organization of
APP;
(d) pay promptly when due all taxes, assessments and
governmental charges or levies imposed upon, and all claims
against, the Collateral, except to the extent the validity
thereof is being contested in good faith; provided, however, that
APP shall in any event pay such taxes, assessments, charges,
levies or claims not later than five (5) days prior to the date
of any proposed sale under any judgment, writ or warrant of
attachment entered or filed against APP or any of the Collateral
as a result of the failure to make such payment; and
(e) not consent to amendments or modifications of any
license, lease, contract or agreement to which it is a party that
contain any provision that contravenes or otherwise prohibits APP
from granting to PRF a security interest in the Collateral.
Section 8 Special Covenants With Respect to the
Collateral.
(a) APP shall:
(i) diligently keep reasonable records respecting
the Collateral at its chief executive office or principal place
of business;
(ii) not create, incur, assume or cause to exist
any Lien, other than Permitted Liens, on the Collateral; and
(iii) not sell, assign (by operation of law or
otherwise), lease, transfer or otherwise dispose of, or grant any
Person an option with respect to, the Collateral.
(b) APP will reasonably process, prosecute and maintain,
or cause to be processed, prosecuted and maintained, the Patents,
subject in each case to the procedures set forth in the License
Agreements.
(c) APP shall, concurrently with the execution and
delivery of this Agreement, execute and deliver to PRF five (5)
originals of a Special Power of Attorney in the form of Exhibit A
annexed hereto for execution of an assignment of the Collateral
to PRF, or the implementation of the sale or other disposition of
the Collateral pursuant to PRF's good faith exercise of the
rights and remedies granted hereunder; provided, however, PRF
agrees that it will not exercise its rights under such Special
Power of Attorney unless an Event of Default has occurred and is
continuing.
(d) APP further agrees that a breach of any of the
covenants contained in this Section 8 will cause irreparable
injury to PRF, that PRF has no adequate remedy at law in respect
of such breach and, as a consequence, that each and every
covenant contained in this Section 8 shall be specifically
enforceable against APP, and APP hereby waives and agrees not to
assert any defenses against an action for specific performance of
such covenants.
Section 9 PRF Appointed Attorney-in-Fact. APP hereby
irrevocably appoints PRF, or any person or agent as PRF may
designate as such, APP's attorney-in-fact, with full authority in
the place and stead of APP and in the name of APP, PRF or
otherwise, from time to time in PRF's discretion to take any
action and to execute any instrument that PRF may in its good
faith sole discretion deem necessary or advisable to accomplish
the following:
(a) upon the occurrence and during the continuance of an
Event of Default, to ask for, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for monies
due and to become due under or in respect of any of the
Collateral;
(b) upon the occurrence and during the continuance of an
Event of Default, to receive, endorse and collect any drafts or
other instruments, documents and chattel paper in connection with
clause (a) above;
(c) upon the occurrence and during the continuance of an
Event of Default, to file any claims or take any action or
institute any proceedings that PRF may in its good faith sole
discretion deem necessary or desirable for the collection of any
of the Collateral or otherwise to enforce the rights of PRF with
respect to any of the Collateral;
(d) upon the occurrence and during the continuance of an
Event of Default, to pay or discharge taxes or liens levied or
placed upon or threatened against the Collateral, the legality or
validity thereof and the amounts necessary to discharge the same
to be determined by PRF in its sole discretion, any such payments
made by PRF to become obligations of APP to PRF, due and payable
immediately without demand;
(e) upon the occurrence and during the continuance of an
Event of Default, to sign and endorse any invoices, drafts
against debtors, assignments, verifications, notices and other
documents relating to the Collateral; and
(f) upon and at any time after the occurrence and during
the continuance of an Event of Default, to prepare, file and sign
APP's name on an assignment document in such form as PRF may in
its sole discretion deem necessary or desirable to transfer
ownership of the Collateral to PRF or an assignee or transferee
of PRF.
Section 10 Standard of Care. The powers conferred on PRF
hereunder are solely to protect its interest in the Collateral
and shall not impose any duty upon it to exercise any such
powers. Except for the exercise of good faith and of reasonable
care in the accounting for monies actually received by PRF
hereunder, PRF shall have no duty as to any Collateral or as to
the taking of any necessary steps to preserve rights against
prior parties or any other rights pertaining to any Collateral.
PRF shall be deemed to have exercised reasonable care in the
custody and preservation of Collateral in its possession if such
Collateral is accorded treatment substantially equal to that
which PRF accords its own property.
Section 11 Remedies Upon Event of Default.
(a) If, and only if, any Event of Default shall have
occurred and be continuing, PRF may, in good faith, exercise in
respect of the Collateral (i) all rights and remedies provided
for herein, under the Royalty Interest Agreement or otherwise
available to it, (ii) all the rights and remedies of a secured
party on default under the UCC (whether or not the UCC applies to
the Collateral), in all relevant jurisdictions, and (iii) the
right to:
(i) require APP to, and APP hereby agrees that it
will at its expense and upon request of PRF forthwith, assemble
all or part of the Collateral as directed by PRF and make it
available to PRF at a place to be designated by PRF that is
reasonably convenient to both parties;
(ii) personally or by agents or attorneys,
immediately take possession of the Collateral or any part
thereof, from APP or any other person who has possession of any
part thereof, with or without notice or process of law, and for
that purpose may enter upon APP's premises where any of the
Collateral is located and remove same;
(iii) foreclose or otherwise enforce PRF's security
interest in any manner permitted by law or provided for in this
Agreement; and
(iv) without notice except as may be required by
applicable law and that cannot be waived, sell the Collateral or
any part thereof in one or more parcels at public or private
sale, at any place or places for cash, on credit, or for future
delivery, and upon such other terms as PRF may deem commercially
reasonable.
(b) Anything contained herein to the contrary
notwithstanding, upon the occurrence and during the continuation
of an Event of Default, PRF shall have the right (but not the
obligation) to bring suit, in the name of APP, PRF or otherwise,
to enforce any Collateral, in which event APP shall, at the
request of PRF, do any and all lawful acts and execute any and
all documents required by PRF in aid of such enforcement and APP
shall promptly, upon demand, reimburse and indemnify PRF as
provided in the Royalty Interest Agreement and Section 13 hereof,
as applicable, in connection with the exercise of its rights
under this Section 11.
Section 12 Application of Proceeds. Except as expressly
provided elsewhere in this Agreement, all proceeds received by
PRF in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral shall be
applied in good faith to satisfy (to the extent of the net
proceeds received by PRF) such item or part of the Secured
Obligations as PRF may designate (with the right to reapply such
proceeds to such other items or part of the Secured Obligations
as PRF may see fit).
Section 13 Expenses.
(a) APP agrees to pay to PRF upon demand the amount of any
and all costs and expenses, including, without limitation, the
reasonable fees and expenses of its counsel and of any experts
and agents, that PRF may incur in connection with (i) the
custody, preservation, use or operation of, or the sale of,
collection from, or other realization upon, any of the
Collateral, (ii) the exercise or enforcement of any of the rights
of PRF hereunder, or (iii) the failure by APP to perform or
observe any of the provisions hereof.
(b) The obligations of APP in this Section 13 shall
survive the termination of this Agreement and the discharge of
APP's other obligations under this Agreement and the Royalty
Interest Agreement.
Section 14 Continuing Security Interest; Termination and
Release.
(a) This Agreement shall (i) create a continuing security
interest in the Collateral, (ii) remain in full force and effect
until the indefeasible payment and performance in full of the
Secured Obligations and the termination of the Royalty Interest
Agreement, (iii) be binding upon APP and its respective
successors and assigns, and (iv) inure, together with the rights
and remedies of PRF hereunder, to the benefit of PRF and its
successors, transferees and assigns.
(b) Upon the payment and performance in full of all
Secured Obligations, the security interest granted hereby shall
terminate and all rights to the Collateral shall revert to APP.
Upon any such termination PRF will, at APP's expense, execute and
deliver to APP such documents as APP shall reasonably request to
evidence such termination.
Section 15 Amendments; Etc. Any provision of this
Agreement may be amended or waived if, and only if, such
amendment or waiver is in writing and signed, in the case of an
amendment, by APP and PRF or in the case of a waiver, by PRF.
Any single waiver shall be effective only in the specific
instance and for the specific purpose for which it was given.
Section 16 Notices. All notices, consents, waivers and
other communications hereunder shall be in writing and shall be
delivered in person, sent by overnight courier, facsimile
transmission or posted by registered or certified mail, return
receipt requested, with postage prepaid, addressed to the address
of PRF or APP, as applicable, provided in Section 8.03 of the
Royalty Interest Agreement or to such other address or addresses
as PRF or APP may from time to time designate by notice as
provided herein. Any such notice shall be deemed given when
actually received when so delivered personally or by overnight
courier or if mailed, other than during a period of general
discontinuance or disruption of postal service due to strike,
lockout or otherwise, on the fifth (5th) day after its postmarked
date thereof or if sent by facsimile transmission on the date
sent if such day is a Business Day or the next following Business
Day if such day is not a business day.
Section 17 Failure or Indulgence Not Waiver; Remedies
Cumulative. No failure or delay by PRF in exercising any right,
power or privilege hereunder shall operate as a waiver thereof
nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 18 Severability. If a court deems any part of this
Agreement unenforceable, the parties agree that only the
offending part shall be stricken and that the remaining parts
shall be unaffected, and that any such stricken part of this
Agreement shall be replaced by a valid provision which shall
implement the commercial purpose of such stricken part.
Section 19 Interpretation. When a reference is made in
this Agreement to Articles, Sections, Schedules or Exhibits, such
reference shall be to an Article, Section, Schedule or Exhibit to
this Agreement unless otherwise indicated. The words "include,"
"includes" and "including" when used herein shall be deemed in
each case to be followed by the words "without limitation."
Neither party hereto shall be or be deemed to be the drafter of
this Agreement for the purposes of construing this Agreement
against one party or the other.
Section 20 Headings. Section and subsection headings in
this Agreement are included herein for convenience of reference
only and shall not constitute a part of this Agreement for any
other purpose or be given any substantive effect.
Section 21 Governing Law. THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE
OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAW PRINCIPLES
THEREOF THAT WOULD CALL FOR THE APPLICATION OF THE LAWS OF ANY
OTHER JURISDICTION. The parties hereto agree that any suit,
action or proceeding seeking to enforce any provision of, or
based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated hereby shall be
brought exclusively in the United States District Court for the
Southern District of New York or any Common Pleas court sitting
in New York County, so long as one of such courts shall have
subject matter jurisdiction over such suit, action or proceeding,
and that any cause of action arising out of this Agreement shall
be deemed to have arisen from a transaction of business in the
State of New York, and each of the parties hereby irrevocably
consents to the jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action
or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have
to the laying of the venue of any such suit, action or proceeding
in any such court or that any such suit, action or proceeding
which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or
proceeding may be served on any party anywhere in the world,
whether within or without the jurisdiction of any such court.
Without limiting the foregoing, each party agrees that services
of process on such party as provided in Section 8.14(c) of the
Royalty Interest Agreement shall be deemed effective service of
process on such party.
Section 22 Waiver of Jury Trial. EACH OF THE PARTIES
HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 23 Counterparts; Effectiveness. This Agreement may
be executed in two counterparts, each of which shall be an
original, but all of which together shall constitute one and the
same instrument. This Agreement shall become effective when each
party hereto shall have received a counterpart hereof signed by
the other party hereto.
Section 24 Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns. APP shall
not be entitled to assign any of its obligations and rights under
this Agreement without the prior written consent of PRF. PRF may
assign, without restriction and without the consent of APP, any
of its rights or obligations under this Agreement to any
Person(s).
[Signature page follows]
IN WITNESS WHEREOF, APP and PRF have caused this
Agreement to be duly executed and delivered by their respective
officers thereunto duly authorized as of the date first written
above.
A.P. PHARMA, INC.
By: /S/ Michael O'Connell
----------------------
Michael O'Connell
President and Chief
Executive Officer
[***][an affiliate of Paul
Royalty Fund II, L.P., a
Delaware limited
partnership]
By: /S/ Clarke Futch
-----------------
Clarke B. Futch
Manager
[SIGNATURE PAGE TO SECURITY AGREEMENT IN FAVOR OF PRF]
[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS
BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
Exhibit 31.1 SECTION 302 CERTIFICATIONS -------------------------- Certifications: I, Michael O'Connell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of A.P. Pharma, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could be reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2006 /s/ Michael O'Connell - --------------------- Michael O'Connell President and Chief Executive Officer
Exhibit 31.2 SECTION 302 CERTIFICATIONS -------------------------- Certifications: I, Gordon Sangster, certify that: 1. I have reviewed this quarterly report on Form 10-Q of A.P. Pharma, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could be reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2006 /s/ Gordon Sangster - ------------------- Gordon Sangster Chief Financial Officer
Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED - ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - --------------------------------------------------------- In connection with the Quarterly Report of A.P. Pharma, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael O'Connell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael O'Connell - --------------------- Michael O'Connell, Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED - ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - --------------------------------------------------------- In connection with the Quarterly Report of A.P. Pharma, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gordon Sangster, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Gordon Sangster - ------------------- Gordon Sangster, Chief Financial Officer