Liquidity and management's plans

6 Months Ended

Jun. 30, 2013

2.	Liquidity and management’s plans:

Since inception, the Company has financed its operations principally from the sale of equity securities, proceeds from short-term borrowings or convertible notes, funded research arrangements and revenue generated as a result of its agreements with Meda regarding ONSOLIS^® and Endo regarding BEMA^® Buprenorphine. The Company intends to finance its research and development and commercialization efforts and its working capital needs from existing cash, royalty revenue, new sources of financing, existing and new licensing and commercial partnership agreements and, potentially, through the exercise of outstanding Common Stock options and warrants to purchase Common Stock.

Significant new operating sources during the six months ended June 30, 2013 consisted of:

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approximately $0.9 million in net royalties under the Meda agreements.

Significant new operating sources during the year ended December 31, 2012 consisted of:

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approximately $45 million in upfront and milestone payments from the Endo license agreement (see note 4);

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approximately $38.4 million in net proceeds from a registered direct offering of Common Stock and newly designated Series A Non-Voting Convertible Preferred Stock, par value $.001 per share (the “Series A Preferred”) in November 2012;

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approximately $2.1 million from the exercise of stock options; and

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approximately $0.9 million from the exercise of Common Stock warrants.

On July 5, 2013, the Company, together with Arius One and Arius Two, entered into a $20 million secured loan facility pursuant to a Credit and Security Agreement (the “Credit Agreement”) with MidCap Financial SBIC, LP, as agent and lender (“MidCap”). The Company received net proceeds in the aggregate amount of $19.9 million and will use the loan proceeds for general corporate purposes or other activities permitted under the Credit Agreement. See Note 12.

At June 30, 2013, the Company had cash and cash equivalents of approximately $37.4 million. The Company used $25.8 million of cash from operations during the six months ended June 30, 2013. As of June 30, 2013, the Company had stockholders’ equity of $27.1 million, versus $49.8 million at December 31, 2012. The Company’s existing cash (after giving effect to the proceeds of the loan from MidCap), supplemented with other expected cash inflows from milestones, royalties and the aforementioned loan, is anticipated by management to be sufficient to fully fund the Company’s operations through the fourth quarter of 2014 at the planned level of expenditures. Certain planned expenditures are discretionary and could be deferred if the Company is required to do so to fund critical operations.

Accordingly, additional capital will be required to support commercialization activities for BUNAVAIL™, clinical development programs for BEMA^® Buprenorphine (the scale of which is being governed in large part by the requirements of the Company’s agreement with Endo), the reformulation project for and anticipated commercial relaunch of ONSOLIS^®, planned development of the Company’s Clonidine Topical Gel product for painful diabetic neuropathy and general working capital. Based on product development timelines and agreements with the Company’s development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding.

- Definition

Disclosure of accounting policy for reporting when there is a substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time (generally a year from the balance sheet date). Disclose: (a) pertinent conditions and events giving rise to the assessment of substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, (b) the possible effects of such conditions and events, (c) management's evaluation of the significance of those conditions and events and any mitigating factors, (d) possible discontinuance of operations, (e) management's plans (including relevant prospective financial information), and (f) information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities. If management's plans alleviate the substantial doubt about the entity's ability to continue as a going concern, disclosure of the principal conditions and events that initially raised the substantial doubt about the entity's ability to continue as a going concern would be expected to be considered. Disclose whether operations for the current or prior years generated sufficient cash to cover current obligations, whether waivers were obtained from creditors relating to the company's default under the provisions of debt agreements and possible effects of such conditions and events, such as: whether there is a possible need to obtain additional financing (debt or equity) or to liquidate certain holdings to offset future cash flow deficiencies. Disclose appropriate parent company information when parent is dependent upon remittances from subsidiaries to satisfy its obligations.

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