FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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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(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
--- ---
At July 31, 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
June 30, 2001 and December 31, 2000
Condensed Consolidated Statements of Operations
for the three months and six months ended June 30, 2001
and 2000
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000
Notes to Condensed Consolidated 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
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
AP PHARMA, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 30, 2001 December 31, 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 4,155,903 $ 6,493,336
Marketable securities 15,882,058 16,029,320
Trade accounts receivable, net 362,770 490,578
Receivables for royalties and
other 899,424 1,200,554
Inventory 79,947 71,079
Advances to employees -- 34,018
Prepaid expenses and other 664,640 730,964
---------- ----------
Total current assets 22,044,742 25,049,849
Property and equipment, net 1,727,157 1,795,313
Other long-term assets 151,000 151,000
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Total assets $ 23,922,899 $ 26,996,162
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 666,756 $ 329,305
Accrued expenses 2,730,158 3,987,794
Taxes payable 237,398 255,358
Deferred revenue 404,907 390,201
---------- ----------
Total current liabilities 4,039,219 4,962,658
Deferred revenue - long-term 732,107 874,250
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Total liabilities 4,771,326 5,836,908
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 86,413,010 86,102,083
Accumulated deficit (67,261,437) (64,942,829)
---------- ----------
Total shareholders' equity 19,151,573 21,159,254
---------- ----------
Total liabilities and shareholders'
equity $ 23,922,899 $ 26,996,162
========== ==========
See accompanying notes.
AP PHARMA, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
Three Months Ended Six Months Ended
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June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Royalties $ 699,138 $ 563,556 $ 1,374,400 $ 989,242
Product revenues 301,079 305,483 596,552 610,045
---------- ---------- ---------- ----------
Total revenues 1,000,217 869,039 1,970,952 1,599,287
Expenses:
Cost of sales 113,319 131,885 206,639 187,494
Research & development 1,543,972 850,631 2,922,202 1,404,515
Selling & marketing 113,981 147,561 238,408 276,804
General & administration 750,781 752,718 1,439,171 1,391,452
---------- ---------- ---------- ----------
Operating loss (1,521,836) (1,013,756) (2,835,468) (1,660,978)
Interest income 274,918 53,958 623,087 119,051
Interest expense -- (109,907) -- (228,039)
Other income, net 74,863 4,189 77,547 6,515
---------- ---------- ---------- ----------
Loss before taxes (1,172,055) (1,065,516) (2,134,834) (1,763,451)
Taxes -- (39,667) -- --
---------- ---------- ---------- ----------
Loss from continuing operations (1,172,055) (1,025,849) (2,134,834) (1,763,451)
(Loss) income from discontinued
operations (25,418) 392,167 (183,774) 1,350,066
---------- ---------- ---------- ----------
Net loss $(1,197,473) $ (633,682) $(2,318,608) $ (413,385)
========== ========== ========== ==========
Basic and diluted loss per
common share:
Continuing operations $ (0.06) $ (0.05) $ (0.11) $ (0.09)
Net loss $ (0.06) $ (0.03) $ (0.11) $ (0.02)
Weighted average common shares
outstanding-basic 20,278,474 20,187,190 20,249,257 20,160,437
========== ========== ========== ==========
See accompanying notes.
AP PHARMA, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the six months ended June 30,
---------------------------------
2001 2000
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Net cash used in operating activities (2,408,477) (694,158)
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Cash flows from investing activities:
Purchase of property and equipment (126,994) (5,621)
Purchase of intangibles -- (100,000)
Purchase of marketable securities (10,769,360) --
Maturities and sales of marketable
securities 10,938,764 --
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Net cash provided by (used in)
investing activities 42,410 (105,621)
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Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants -- 120,000
Proceeds from issuance of shares
under the Employee Stock Purchase
Plan 28,634 75,595
Repayment of debt -- (430,200)
---------- ---------
Net cash provided by (used in)
financing activities 28,634 (234,605)
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Net decrease in cash and cash
equivalents (2,337,433) (1,034,384)
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 $ 4,155,903 $ 2,670,810
========== =========
Cash paid for interest $ -- $ 216,600
========== =========
See accompanying notes.
AP PHARMA, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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JUNE 30, 2001 AND 2000 (UNAUDITED)
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(1) Basis of Presentation
---------------------
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 of normal recurring adjustments,
necessary to present fairly the financial position of AP
Pharma, Inc. and subsidiaries ("the Company" or "APP") as of
June 30, 2001 and the results of their operations and cash
flows for the three and six months ended June 30, 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
------------------------------------------------------------
Common stock outstanding as of June 30, 2001 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 2000 20,206,064
Shares issued to Directors after December
31, 2000 60,590
Shares issued under the Employee Stock
Purchase Plan 11,820
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Total shares 20,278,474
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(3) Revenue Recognition
-------------------
Licensing agreements that generally provide for the Company to
receive periodic minimum payments, royalties, and/or non-
refundable licenses fees typically allow customers to develop,
use or 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 appropriate period.
(4) Comprehensive Loss
------------------
Comprehensive loss for the three and six months ended June 30,
2001 and 2000 consists of the following:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Net loss $(1,197,473) $ (633,682) $(2,318,608) $ (413,385)
Unrealized holding (losses)
gains arising during the
period (58,671) -- 65,903 --
---------- ---------- ---------- ----------
Comprehensive loss $(1,256,144) $ (633,682) $(2,252,705) $ (413,385)
========== ========== ========== ==========
(5) Inventory
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The major components of inventory are as follows:
June 30, 2001 December 31, 2000
-------------- -----------------
Raw materials $ 45,490 $ 43,387
Finished goods 34,457 27,692
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Total inventory $ 79,947 $ 71,079
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(6) Discontinued Operations
-----------------------
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 additional amounts 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 per common share from discontinued
operations was ($0.00) and ($0.01) for the three and six months
ended June 30, 2001, respectively.
Basic and diluted income per common share from discontinued
operations was $0.02 and $0.07 for the three and six months
ended June 30, 2000, respectively.
(7) Legal Proceedings
-----------------
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
plaintiffs. 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)
-----------------
Results of Operations for the Three Months Ended June 30, 2001 and
- -------------------------------------------------------------------
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 approximately 100 different
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 for the second quarter of 2001 increased by 24% to
$699,000 from $564,000 in the corresponding quarter of the prior
year. This increase was primarily due to royalties earned following
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
slightly by 1% to $301,000 from $305,000 in the corresponding
quarter of the prior year.
Gross profit on sales of analytical standards increased from 57% to
62% due mainly to sales mix as the year-ago quarter included higher
sales of low-margin instruments.
Research and development expense for the second quarter of 2001
totaled $1,544,000, an increase of $693,000 or 81% over the
corresponding quarter of the prior year. The increase is mainly due
to the cost of pre-clinical trials associated with the Company's
bioerodible Biochronomer(TM) system for implantable and injectable
drug delivery applications.
Selling and marketing expense relating to analytical standards for
the second quarter of 2001 decreased by 23% to $114,000 from
$148,000 in the corresponding quarter of the prior year due mainly
to lower overhead allocations.
General and administrative expense for the quarter ended June 30,
2001 of $751,000 was essentially flat with the reported $753,000 in
the corresponding quarter of the prior year.
Interest income for the second quarter of 2001 increased by $221,000
to $275,000 due mainly to interest earned from the cash received 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 quarter ended June 30, 2001 decreased to $0
from $110,000 in the corresponding quarter of the prior year 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 loss from discontinued
operations of $25,000 in the second quarter of 2001 relates
primarily to legal fees associated with the Kligman lawsuit. The
income of $392,000 in the second quarter of 2000 represents the net
contribution earned in the year-ago quarter.
Results of Operations for the Six Months Ended June 30, 2001 and
- ----------------------------------------------------------------
2000
- ----
Royalties for the six months ended June 30, 2001 totaled $1,374,000
representing an increase of $385,000 or 39% over the corresponding
period of the prior year. This increase was primarily due to
royalties earned following 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 from sales of analytical standards totaled $597,000, a
decrease of $13,000 or 2% over the corresponding period of the prior
year.
As a percentage of sales, gross profit on product revenues for the
six months ended June 30, 2001 of $390,000 represented 65% of
product revenues compared with 69% in the corresponding period of
the prior year.
Research and development expenses for the six months ended June 30,
2001 totaled $2,922,000, an increase of $1,518,000 or 108% over the
corresponding period of the prior year. This increase was due
mainly to increased preclinical study costs for the Company's new
bioerodible Biochronomer(TM) system for implantable and injectable
drug delivery applications.
Selling and marketing expenses for the six months ended June 30,
2001 decreased by $39,000 or 14% from the corresponding period of
the prior year, mainly due to lower overhead allocation.
General and administrative expenses for the six months ended June
30, 2001 increased by $48,000 or 3% over the second half of the
prior year mainly due to increased investor relations expenses.
Interest income for the six months ended June 30, 2001 totaled
$623,000, an increase of $504,000 or 423% over the corresponding
period of the prior year. This increase is due mainly to interest
earned from the $25 million cash received 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 six
months ended June 30, 2001 was $0, a decrease of $228,000 from the
same period of the prior year due to the repayment of all
outstanding debt on the receipt of $25 million from R.P. Scherer.
Loss from discontinued operations for the six months ended June 30,
2001 totaled $184,000 compared with income from discontinued
operations of $1,350,000 in the corresponding period of the prior
year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of June 30, 2001 were $23,923,000 compared with
$26,996,000 at December 31, 2000. Working capital decreased to
$18,006,000 from $20,087,000 at December 31, 2000. Cash, cash
equivalents and marketable securities decreased to $20,038,000 at
June 30, 2001 from $22,523,000 at December 31, 2000. During the
first six months of 2001, the Company's operating activities used
$2,408,000 compared with $694,000 in the first half of 2000. In the
first six months of 2001, the Company invested approximately
$2,922,000 in research and development.
Capital expenditures for the six months ended June 30, 2001 totaled
$127,000, an increase from the amount spent in the corresponding
period of the prior year of $121,000.
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
- ------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets."
SFAS No. 141 addresses the accounting for and reporting of business
combinations and requires that all business combinations be
accounted for using the purchase method of accounting for
acquisitions and eliminates the use of the pooling method. This
Statement applies to all business combinations initiated after June
30, 2001. The Company does not expect that the adoption of SFAS No.
141 will have a material effect on its consolidated financial
statements.
SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. This Statement
changes the accounting for goodwill from an amortization method to
an impairment-only method. The amortization of goodwill, including
goodwill recorded in past business combinations will cease upon
adoption of this Statement, which will begin with the Company's
fiscal year beginning January 1, 2002. However, goodwill and
intangible assets acquired after June 30, 2001 will be subject to
immediate adoption of the Statement. The Company does not expect
that the adoption of SFAS No. 141 will have a material effect on its
consolidated financial statements. If in a future period the
Company determines that goodwill or another intangible asset is
impaired, the impairment could have a material impact on earnings
for that period.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
Since December 31, 2000, there have been no material changes in the
Company's market risk exposure.
PART II. OTHER INFORMATION
-----------------
ITEM 4. Submission of Matters to a Vote of Security Holders
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The Company's annual shareholder's meeting was held on May 9, 2001,
at which the following proposals were approved:
Proposal I: Election for the following directors:
Votes For Votes Withheld
--------- --------------
Paul Goddard
Chairman of the Board 18,007,514 124,926
Stephen Drury 18,005,994 126,446
Michael O'Connell 15,170,421 2,962,019
Peter Riepenhausen 17,937,294 195,146
Toby Rosenblatt 17,942,279 190,161
Gregory Turnbull 17,938,614 193,826
Dennis Winger 17,974,414 158,026
Proposal II: Amendment to Advanced Polymer Systems' Certificate of
Incorporation to change the name of the Company to AP Pharma, Inc.
Votes For Votes Against Abstain
--------- ------------- -------
17,997,813 99,267 35,360
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.
Date: August 14, 2001 By: /S/ Michael O'Connell
---------------- ----------------------------
Michael O'Connell
President and Chief
Executive Officer
Date: August 14, 2001 By: /S/ Gordon Sangster
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Gordon Sangster
Chief Financial Officer