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, 2001
[ ] 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
AP PHARMA, INC.
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(FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.")
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(Exact name of registrant as specified in its charter)
Delaware 94-2875566
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(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
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At April 30, 2001, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,278,474.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements (unaudited):
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AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.")
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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March 31, 2001 December 31, 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 4,797,125 $ 6,493,336
Marketable securities 16,251,731 16,029,320
Trade accounts receivable, net 390,564 490,578
Receivables for royalties and
license fees 1,022,687 1,200,554
Inventory 76,605 71,079
Advances to employees 18,979 34,018
Prepaid expenses and other 627,902 730,964
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Total current assets 23,185,593 25,049,849
Property and equipment, net 1,731,139 1,795,313
Other long-term assets 151,000 151,000
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Total assets $ 25,067,732 $ 26,996,162
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 185,039 $ 329,305
Accrued expenses 3,082,657 3,987,794
Taxes payable 237,398 255,358
Deferred revenue 404,907 390,201
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Total current liabilities 3,910,001 4,962,658
Deferred revenue - long-term 857,093 874,250
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Total liabilities 4,767,094 5,836,908
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Shareholders' equity:
Common stock and common stock
warrants 86,364,601 86,102,083
Accumulated deficit (66,063,963) (64,942,829)
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Total shareholders' equity 20,300,638 21,159,254
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Total liabilities and shareholders'
equity $ 25,067,732 $ 26,996,162
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See accompanying notes to condensed consolidated financial statements.
AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.")
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended March 31,
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2001 2000
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Royalties and license fees $ 675,262 $ 425,686
Product revenues 295,473 304,562
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Total revenues 970,735 730,248
Cost of sales 93,320 124,443
Operating expenses:
Research & development, net 1,378,230 553,884
Selling & marketing 124,427 129,243
General & administration 688,390 638,734
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Total operating expenses 2,191,047 1,321,861
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Operating loss (1,313,632) (716,056)
Interest income 348,169 65,093
Interest expense -- 118,132
Other income, net 2,684 2,326
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Loss before taxes (962,779) (766,769)
Taxes -- 39,667
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Loss from continuing operations (962,779) (806,436)
(Loss) income from discontinued
operations (158,355) 1,026,733
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Net (loss) income $(1,121,134) $ 220,297
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Basic and diluted (loss) income
per common share:
Loss from continuing operations $ (0.05) $ (0.04)
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Net (loss) income $ (0.06) $ 0.01
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Weighted average common shares
outstanding-basic 20,220,040 20,133,683
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See accompanying notes to condensed consolidated financial statements.
AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.")
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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For the three months ended March 31,
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2001 2000
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Net cash used in operating activities $(1,461,977) $ (63,411)
Cash flows from investing activities:
Purchases of property and equipment (33,514) (11,436)
Purchases of marketable securities (6,054,883) --
Maturities of marketable securities 5,854,163 --
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Net cash used in investing activities (234,234) (11,436)
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Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants and
issuance of restricted stock -- 120,000
Repayment of debt -- (211,392)
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Net cash provided by financing
activities -- (91,392)
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Net increase (decrease) in cash and
cash equivalents (1,696,211) (166,239)
Cash and cash equivalents, beginning
of the period 6,493,336 3,705,194
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Cash and cash equivalents, end
of the period $ 4,797,125 $ 3,538,955
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Cash paid for interest $ -- $ 112,008
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Non-cash investing activities:
Change in unrealized appreciation
of marketable securities $ 124,574 $ --
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See accompanying notes to condensed consolidated financial statements.
AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.")
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MARCH 31, 2001 AND DECEMBER 31, 2000 (UNAUDITED)
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(1) Basis of Presentation
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On May 9, 2001, the Company's shareholders approved a change in
the Company name to AP Pharma, Inc.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of AP
Pharma, Inc. (formerly known as "Advanced Polymer Systems,
Inc.") and subsidiaries ("the Company" or "APP") as of March
31, 2001 and the results of their operations for the three
months ended March 31, 2001 and 2000.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 2000 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiaries,
Premier, Inc. ("Premier") and APS Analytical Standards, Inc.
All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company considers 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 longer than three months are
classified as marketable securities in the accompanying balance
sheets.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 2001.
(2) Common Shares Outstanding and Earnings Per Share Information
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Common stock outstanding as of March 31, 2001 is as follows:
Number of Shares
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Common stock outstanding as of
December 31, 2000 20,206,064
Shares issued to Directors after December
31, 2000 41,928
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Total shares 20,247,992
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(3) Revenue Recognition
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Licensing agreements that generally provide for the Company to
receive periodic minimum payments, royalties, and/or non-
refundable licenses fees typically allow customers to sell the
Company's proprietary products in a specific field or
territory. The license agreements provide for APP to earn
future revenue through royalty payments. The license fees are
non-refundable even if the agreements are terminated before
their term. These license fees are amortized on a straight-
line basis over the estimated life of the product to which they
relate.
(4) Comprehensive (Loss) Income
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Comprehensive (loss) income for the three months ended March
31, 2001 consists of the following:
Three Months Ended
March 31, March 31,
2001 2000
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Net (loss) income $(1,121,134) $ 220,297
Unrealized holding gains
arising during the period 124,574 --
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Comprehensive (loss) income $ (996,560) $ 220,297
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(5) Inventory
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The major components of inventory are as follows:
March 31, 2001 December 31, 2000
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Raw materials $ 43,308 $ 43,387
Finished goods 33,297 27,692
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Total inventory $ 76,605 $ 71,079
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(6) Discontinued Operations
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On July 25, 2000, the Company completed the sale of certain
technology rights for topical pharmaceuticals and its
cosmeceutical product lines and other assets ("cosmeceutical
and toiletry business") to R.P. Scherer Corporation, a
subsidiary of Cardinal Health, Inc. The Company received $25
million on closing and could receive up to an additional $26.5
million over the next three years relating to the performance
milestones of the cosmeceutical and toiletry business. In
accordance with Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," the
cosmeceutical and toiletry business is reported as a
discontinued operation for all periods presented in the
accompanying Condensed Consolidated Statements of Operations.
Basic and diluted (loss) income per common share from
discontinued operations was ($0.01) and $0.05 for the three
months ended March 31, 2001 and 2000, respectively.
(7) Legal Proceedings
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In February 2000, Douglas Kligman and Albert Kligman filed
a complaint against the Company in the U.S. District Court
for the Eastern District of Pennsylvania. The complaint
alleges that the plaintiffs entered into a partnership
with the Company to pursue development and sales of a
product developed by the plantiffs. The complaint states
various claims, dissolution of partnership, implied-in-law
contract and other claims. The complaint alleges damages
in excess of $75,000, but otherwise makes no specific
damage claim.
The Company has denied liability and is vigorously
defending the claims, basing its defense on the assertion
that its rights to the product are governed by a binding
license agreement that was executed in November 1995 and
amended in September 1996 and that there are no
partnership agreements entered into by the parties.
The Company expects that the outcome of this legal
proceeding will not have a material adverse effect on the
consolidated financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition
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and Results of Operations (all dollar amounts rounded to the
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nearest thousand)
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Results of Operations for the Three Months Ended March 31, 2001 and
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2000
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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 the Company's Securities
and Exchange Commission filings.
The Company's revenues are derived principally from royalties,
license fees, R&D fees and product sales. Under strategic alliance
arrangements entered into with certain corporations, APS can receive
non-refundable upfront fees, future milestone payments and royalties
based on third party product sales. Until July 25, 2000, the
Company manufactured and sold Microsponge(R) and Polytrap(R)
delivery systems for use by customers in a variety of personal care
and cosmetic products. On July 25, 2000, the Company completed the
sale of certain technology rights for topical pharmaceuticals and
its cosmeceutical product lines and other assets to R.P. Scherer
Corporation, a subsidiary of Cardinal Health, Inc.
Royalties and license fees for the first quarter of 2001 increased
by 59% to $675,000 from $426,000 in the corresponding quarter of the
prior year. This increase was primarily due to the launch of
Carac(TM), a topical prescription treatment for actinic keratoses
which received FDA marketing clearance in October 2000. It is being
marketed by the Company's partner, Dermik Laboratories, an Aventis
company.
Product revenues relating to sales of analytical standards decreased
by 3% to $295,000 from $304,000 in the corresponding quarter of the
prior year.
Gross profit on sales of analytical standards increased from 59% to
68% due mainly to sales mix as the year-ago quarter included higher
sales of low-margin instruments.
Research and development expense for the first quarter of 2001
increased by $824,000 to $1,378,000 due mainly to the cost of pre-
clinical trials associated with the Company's bioerodible
Biochronomer(TM) system for implantable or injectable applications.
Selling and marketing expense relating to analytical standards for
the first quarter of 2001 decreased by 4% to $124,000 from $129,000
due mainly to lower overhead allocations.
General and administrative expense for the first quarter of 2001
increased by $50,000 to $688,000 due mainly to increased
expenditures on investor relations and consultants.
Interest income for the first quarter of 2001 increased by $283,000
to $348,000 due mainly to the receipt of $25 million in July 2000 as
proceeds from the sale of the Company's cosmeceutical and toiletries
product lines to R.P. Scherer Corporation.
Interest expense for the first quarter of 2001 decreased from
$118,000 to $0 due to the repayment of all outstanding debt on the
receipt of the $25 million from R.P. Scherer.
Loss or income from discontinued operations represents the net
expense or contribution associated with the cosmeceutical product
lines which were sold to R.P. Scherer. The expense of $158,000 in
the first quarter of 2001 relates primarily to legal fees associated
with the Kligman lawsuit. The income of $1,027,000 in the first
quarter of 2000 represents the net contribution earned in the year-
ago quarter.
Capital Resources and Liquidity
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Total assets as of March 31, 2001 were $25,068,000 compared with
$26,996,000 at December 31, 2000. Working capital decreased to
$19,276,000 at March 31, 2001 from $20,087,000 at December 31, 2000.
Cash, cash equivalents and marketable securities at March 31, 2001
decreased to $21,049,000 from $22,523,000 at December 31, 2000.
During the first three months of 2001, the Company's operating
activities used $1,462,000 of cash compared to $63,000 in the
corresponding period of the prior year. The Company invested
approximately $1,378,000 in product research and development in the
first quarter of 2001.
Accounts receivable, net of allowances, decreased to $391,000 at
March 31, 2001 compared with $491,000 at December 31, 2000.
Receivables from royalties and license fees decreased to $1,023,000
from $1,201,000.
Capital expenditures for the quarter ended March 31, 2001 totaled
$33,000 compared to $11,000 in the corresponding period of the prior
year.
In the current year, the Company has financed its operations,
including technology and product research and development, from the
proceeds from the sale of its cosmeceutical and toiletries product
lines and certain technology rights to topical pharmaceuticals to
R.P. Scherer, Inc. for $25 million in July 2000, the sale of
analytical standard products, payments received under licensing
agreements, and interest earned on short-term investments.
Cash is being expended with regard to pre-clinical trials associated
with the Company's bioerodible Biochronomer System for implantable
and injectable pharmaceutical applications. The Company's existing
cash and cash equivalents, marketable securities, collections of
trade accounts receivable, together with interest income and other
revenue-producing activities including royalties, license fees and
R&D fees, are expected to be sufficient to meet the Company's
working capital requirements for the foreseeable future, assuming no
changes to existing business plans.
New Accounting Standards
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In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" which is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, which defers the implementation of SFAS 133 to be
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 generally provides for
matching the timing of gain or loss recognition on the hedging
instrument with the recognition of (a) the changes in the fair value
of the hedged asset or liability that are attributed to the hedged
risk or (b) the earnings effect of hedged forecasted transactions.
Adoption of this statement did not have a material effect on the
Company's consolidated financial statements.
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.
AP PHARMA, INC. (formerly
known as "ADVANCED POLYMER
SYSTEMS, INC.")
Date: May 15, 2001 By: /S/ Michael O'Connell
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Michael O'Connell
President and Chief
Executive Officer
Date: May 15, 2001 By: /S/ Gordon Sangster
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Gordon Sangster
Chief Financial Officer