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 September 30, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
A.P. PHARMA, INC.
------------------------------
(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
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
----------------------------------------------------
(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 October 31, 2001, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,302,763.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2001
and 2000
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
September 30, 2001 December 31, 2000
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,627,477 $ 6,493,336
Marketable securities 16,619,456 16,029,320
Receivables for royalties and
other 2,631,066 706,242
Trade accounts receivable, net 217,332 490,578
Inventory 83,864 71,079
Advances to employees -- 34,018
Prepaid expenses and other 770,085 1,225,276
---------- ----------
Total current assets 22,949,280 25,049,849
Property and equipment, net 1,674,051 1,795,313
Other long-term assets 151,000 151,000
---------- ----------
Total assets $ 24,774,331 $ 26,996,162
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 653,330 $ 329,305
Accrued expenses 2,083,154 3,987,794
Taxes payable -- 255,358
Deferred revenue 404,906 390,201
---------- ----------
Total current liabilities 3,141,390 4,962,658
Deferred revenue - long-term 849,318 874,250
---------- ----------
Total liabilities 3,990,708 5,836,908
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 86,268,341 86,023,316
Accumulated deficit (65,770,196) (64,942,829)
Accumulated other comprehensive
income 285,478 78,767
---------- ----------
Total shareholders' equity 20,783,623 21,159,254
---------- ----------
Total liabilities and shareholders'
equity $ 24,774,331 $ 26,996,162
========== ==========
See accompanying notes.
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Royalties $ 725,794 $ 605,392 $ 2,100,194 $ 1,594,634
Product revenues 242,833 281,170 839,385 891,215
---------- ---------- ---------- ----------
Total revenues 968,627 886,562 2,939,579 2,485,849
Expenses:
Cost of sales 87,341 116,627 293,980 304,121
Research & development 1,987,474 790,295 4,909,676 2,194,810
Selling & marketing 106,391 149,517 344,799 426,321
General & administration 719,776 722,116 2,158,947 2,113,568
---------- ---------- ---------- ----------
Operating loss (1,932,355) (891,993) (4,767,823) (2,552,971)
Interest income 237,802 302,192 860,889 421,243
Interest expense -- (66,208) -- (294,247)
Other (expense) income net (12,393) (1,992) 65,154 4,523
---------- ---------- ---------- ----------
Loss before taxes (1,706,946) (658,001) (3,841,780) (2,421,452)
Taxes -- -- -- --
---------- ---------- ---------- ----------
Loss from continuing operations (1,706,946) (658,001) (3,841,780) (2,421,452)
Income from discontinued
operations 198,187 30,980 14,413 1,381,046
Gain on disposition of
discontinued operations,
net of taxes 3,000,000 11,184,793 3,000,000 11,184,793
---------- ---------- ---------- ----------
Net income (loss) $ 1,491,241 $10,557,772 $ (827,367) $10,144,387
========== ========== ========== ==========
Basic income (loss) per
common share:
Loss from continuing operations $ (0.08) $ (0.03) $ (0.19) $ (0.12)
Net income (loss) $ 0.07 $ 0.52 $ (0.04) $ 0.50
Diluted income (loss) per
common share
Loss from continuing operations $ (0.08) $ (0.03) $ (0.19) $ (0.12)
Net income (loss) $ 0.07 $ 0.52 $ (0.04) $ 0.50
Weighted average common shares
outstanding-basic 20,278,474 20,190,181 20,258,996 20,170,351
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,301,240 20,194,157 20,258,996 20,194,017
========== ========== ========== ==========
See accompanying notes.
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the nine months ended
-------------------------
September 30, September 30,
2001 2000
---------- -------------
Net cash used in operating activities $ (4,294,427) $ (1,588,649)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (178,617) (141,678)
Purchase of intangibles -- (100,000)
Purchases of marketable securities (14,407,155) (13,866,677)
Maturities and sales of marketable
securities 13,962,706 --
----------- ----------
Net cash used in investing
activities (623,066) (14,108,355)
----------- ----------
Cash flows from financing activities:
Proceeds from disposal of
discontinued operations 1,023,000 25,000,000
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 -- (3,300,044)
----------- ----------
Net cash provided by financing
activities 1,051,634 21,895,551
----------- ----------
Net (decrease) increase in cash
and cash equivalents (3,865,859) 6,198,547
Cash and cash equivalents, beginning
of the period 6,493,336 3,705,194
----------- ----------
Cash and cash equivalents, end
of the period $ 2,627,477 $ 9,903,741
=========== ==========
Cash paid for interest $ -- $ 250,025
=========== ==========
Non-cash investing activities:
Changes in unrealized
appreciation of marketable
securities $ 206,711 $ 7,234
=========== ==========
See accompanying notes.
A.P. PHARMA, INC.
- -----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
- ---------------------------------------
(1) Basis of Presentation
---------------------
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 A.P.
Pharma, Inc. and subsidiaries ("the Company" or "APP") as of
September 30, 2001 and the results of their operations and cash
flows for the three and nine months ended September 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 subsidiary, APS
Analytical Standards, Inc. All significant intercompany
balances and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the amounts reported in the
consolidated financial statements and related notes to
financial statements. Changes in such estimates may affect
amounts in future periods.
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. The Company has classified all its investments in
certain debt and equity securities as "available-for-sale".
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 September 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
----------
Total shares 20,278,474
==========
(3) Revenue Recognition
- -------------------
Licensing agreements that generally provide for the Company to
receive periodic minimum payments, royalties, and/or non-
refundable license 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 nine months ended
September 30, 2001 and 2000 consists of the following:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Net income (loss) $ 1,491,241 $10,557,772 $ (827,367) $10,144,387
Unrealized holding gains
arising during the period 140,808 7,234 206,711 7,234
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 1,632,049 $10,565,006 $ (620,656) $10,151,621
========== ========== ========== ==========
(5) Inventory
---------
The major components of inventory are as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $45,092 $43,387
Finished goods 38,772 27,692
------ ------
Total inventory $83,864 $71,079
====== ======
(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 RP Scherer Corporation, a subsidiary
of Cardinal Health, Inc. The Company received $25 million on
closing and is entitled to receive additional amounts over the
three years following the sale relating to the achievement of
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.
Due to the attainment of certain performance milestones by the
cosmeceutical product lines, an additional $3.6 million in
earnout income was achieved in accordance with the sale
agreement. After reserves for certain indemnification claims
allowable under the sale agreement, the accompanying condensed
consolidated financial statements include an additional
$3,000,000 of net gain on disposition of discontinued
operations.
Basic and diluted income per common share from discontinued
operations excluding the gain on sale of the cosmeceutical
product lines was $0.01 and $0.00 for the three and nine months
ended September 30, 2001, respectively.
Basic and diluted income per common share from discontinued
operations excluding the gain on sale of the cosmeceutical
product lines was $0.00 and $0.07 for the three and nine months
ended September 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 alleged
that the plaintiffs entered into a partnership with the Company
to pursue development and sales of a product developed by the
plaintiffs. The complaint stated various claims, dissolution
of partnership, implied-in-law contract and other claims.
On September 28, 2001, the U.S. District Court for the Eastern
District of Pennsylvania granted a summary judgment in favor of
A.P. Pharma, Inc.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
Results of Operations for the Three Months Ended September 30, 2001
- -------------------------------------------------------------------
and 2000
- --------
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 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, APP can receive
non-refundable upfront fees, future milestone payments and royalties
based on third party product sales. On July 25, 2000, the Company
completed the sale of certain technology rights for topical
pharmaceuticals and its cosmeceutical product lines and associated
assets to RP Scherer Corporation, a subsidiary of Cardinal Health,
Inc.
Royalties for the third quarter of 2001 increased by 20% to $726,000
from $605,000 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 was launched in April, 2001 by the Company's marketing
partner, Dermik Laboratories, an Aventis Company.
Product revenues relating to sales of analytical standards decreased
by 14% to 243,000 from $281,000 in the corresponding quarter of the
prior year.
Gross profit on sales of analytical standards increased from 59% to
64% due mainly to sales mix as the year-ago quarter included higher
sales of low-margin instruments.
Research and development expense for the third quarter of 2001
totaled $1,987,000, an increase of $1,197,000 or 151% over the
corresponding quarter of the prior year. The increase is mainly due
to the completion of pre-clinical trials associated with the
Company's bioerodible Biochronomer(TM) system in preparation for the
filing of an Investigational New Drug Application (IND) for a
treatment for post-surgical pain.
Selling and marketing expense relating to analytical standards for
the third quarter of 2001 decreased by 29% to $106,000 from $150,000
in the corresponding quarter of the prior year due mainly to lower
overhead allocations.
General and administrative expense for the quarter ended September
30, 2001 of $720,000, was essentially flat with the reported
$722,000 in the corresponding quarter of the prior year.
Interest income for the third quarter of 2001 decreased by $64,000
to $238,000 due mainly to lower interest rates compared with the
corresponding quarter of the prior year.
Interest expense for the quarter ended September 30, 2001 decreased
to $0 from $66,000 in the corresponding quarter of the prior year
due to the repayment of all outstanding debt on the receipt of the
payment of $25 million from RP Scherer in the corresponding quarter
of the prior year.
Income from discontinued operations represents the net contribution
associated with the cosmeceutical product lines which were sold to
RP Scherer in July 2000. The gain on disposition in the current
quarter includes net earnout income of $3.0 million from the sale of
the Company's cosmeceutical product lines in the prior year, which
represents additional earnout income of $3.6 million less reserves
for certain indemnification claims allowable under the sale
agreement. The earnout income is the first of three contractual
annual payments, the amounts of which are dependent on the
performance of the cosmeceutical business which was sold.
Results of Operations for the Nine Months Ended September 30, 2001
- ------------------------------------------------------------------
and 2000
- --------
Royalties for the nine months ended September 30, 2001 totaled
$2,100,000 representing an increase of $505,000 or 32% 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 was launched by
the Company's marketing partner, Dermik Laboratories, an Aventis
company. Product revenues from sales of analytical standards
totaled $839,000, a decrease of $52,000 or 6% over the corresponding
period of the prior year.
As a percentage of sales, gross profit on product revenues for the
nine months ended September 30, 2001 of $545,000 represented 65% of
product revenues compared with 66% in the corresponding period of
the prior year.
Research and development expense for the nine months ended September
30, 2001 totaled $4,910,000, an increase of $2,715,000 or 124% over
the corresponding period of the prior year. This increase was due
to ongoing development of the Company's bioerodible Biochronomer(TM)
system including the scale-up and GMP manufacturing of the polymer
and the completion of pre-clinical studies in preparation for an IND
filing this year for a treatment for post-surgical pain.
Selling and marketing expense for the nine months ended September
30, 2001 decreased by $82,000 or 19% from the corresponding period
of the prior year, mainly due to lower overhead allocation.
General and administrative expense for the nine months ended
September 30, 2001 increased by $45,000 or 2% over the corresponding
period of the prior year mainly due to increased investor relations
expenses.
Interest income for the nine months ended September 30, 2001 totaled
$861,000, an increase of $440,000 or 104% over the corresponding
period of the prior year. This increase is due mainly to interest
earned from the receipt of $25 million received in July 2000 as
proceeds from the sale of the company's cosmeceutical product lines
to RP Scherer Corporation. Interest expense for the nine months
ended September 30, 2001 was $0, a decrease of $294,000 from the
same period of the prior year due to the repayment of all
outstanding debt following the receipt of $25 million from RP
Scherer.
Income from discontinued operations for the nine months ended
September 30, 2001 totaled $14,000 compared with $1,381,000 in the
corresponding period of the prior year and represents the net
contribution associated with the cosmeceutical product lines which
were sold to RP Scherer in July 2000. The current period also
included net earnout income of $3.0 million from the sale of the
Company's cosmeceutical product lines in the prior year, which
represents additional earnout income of $3.6 million less reserves
for certain indemnification claims allowable under the sale
agreement. The earnout income is the first of three contractual
annual payments, the amounts of which are dependent on the
performance of the cosmeceutical product lines which were sold.
Capital Resources and Liquidity
- -------------------------------
Total assets as of September 30, 2001 were $24,774,000 compared with
$26,996,000 at December 31, 2000. Working capital decreased to
$19,808,000 from $20,087,000. Cash, cash equivalents and marketable
securities decreased to $19,247,000 from $22,523,000 at December 31,
2000. During the first nine months of 2001, the Company's operating
activities used $4,294,000 compared with $1,589,000 in the
corresponding period of the prior year.
Trade accounts receivable decreased to $217,000 at September 30,
2001 from $491,000 at December 31, 2000 due primarily to collections
of receivables relating to discontinued operations.
Receivables for royalties and other increased to $2,631,000 from
$706,000 at December 31, 2000 due mainly to a receivable relating to
a portion of the earnout from the sale of discontinued operations.
Capital expenditures for the nine months ended September 30, 2001
totaled $179,000, an increase of $37,000 from the corresponding
period of the prior year.
The Company has financed its operations, including technology and
product research and development, from the proceeds of the sale of
its cosmeceutical product lines and certain technology rights to
topical pharmaceuticals to RP 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 development and 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 adopted this statement as of July 1, 2001.
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 the 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. 142 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.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires liability recognition
for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. The Company
is required to adopt the provisions of SFAS 143 effective January 1,
2003, with earlier application encouraged. The Company believes
that the adoption of this standard will not have a material effect
on its financial statements.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," in that it removes
goodwill from its impairment scope and allows for different
approaches in cash flow estimation. However, SFAS 144 retains the
fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and
used and (b) measurement of long-lived assets to be disposed of.
SFAS 144 also supercedes the business segment concept in APB 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," in that it
permits presentation of a component of an entity, whether classified
as held for sale or disposed of, as a discontinued operation.
However, SFAS 144 retains the requirement of APB Opinion No. 30 to
report discontinued operations separately from continuing
operations. The Company is required to adopt the provisions of SFAS
144 effective January 1, 2002, with earlier application encouraged.
The Company believes that the implementation of this standard will
not have a material effect on the Company's results of operations
and financial position.
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
-----------------
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: November 13, 2001 By: /S/ Michael O'Connell
------------------ -------------------------
Michael O'Connell
President and Chief
Executive Officer
Date: November 13, 2001 By: /S/ Gordon Sangster
------------------ -------------------------
Gordon Sangster
Chief Financial Officer