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, 2002
[ ] 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
--- ---
At April 30, 2002, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,399,665.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and 2001
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 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements:
---------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited) (Note A)
ASSETS
Current assets:
Cash and cash equivalents $ 4,802,226 $ 3,617,927
Marketable securities 13,238,299 15,876,445
Trade accounts receivable, net 372,455 338,275
Receivables for royalties and
license fees 1,096,671 1,129,668
Inventory 50,030 60,567
Prepaid expenses and other 353,216 600,945
---------- ----------
Total current assets 19,912,897 21,623,827
Property and equipment, net 1,569,906 1,667,904
Other long-term assets 209,062 215,283
---------- ----------
Total assets $ 21,691,865 $ 23,507,014
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 136,229 $ 346,674
Accrued expenses 992,382 1,409,091
Accrued disposition costs 1,346,502 1,479,005
Deferred revenue 324,706 314,706
---------- ----------
Total current liabilities 2,799,819 3,549,476
Deferred revenue - long-term 785,266 785,266
---------- ----------
Shareholders' equity:
Common stock 86,455,590 86,391,144
Accumulated deficit (68,462,312) (67,456,428)
Accumulated other comprehensive
income 113,502 237,556
---------- ----------
Total shareholders' equity 18,106,780 19,172,272
---------- ----------
Total liabilities and shareholders'
equity $ 21,691,865 $ 23,507,014
========== ==========
Note A Information derived from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
A.P. PHARMA, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
Three Months Ended March 31,
----------------------------
2002 2001
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Royalties $ 903,628 $ 650,262
Contract revenues 48,023 25,000
Product revenues 285,922 295,473
---------- ----------
Total revenues 1,237,573 970,735
Cost of sales 113,910 93,320
Operating expenses:
Research & development, net 1,496,541 1,378,230
Selling & marketing 126,745 124,427
General & administration 710,089 688,390
---------- ----------
Total operating expenses 2,333,375 2,191,047
---------- ----------
Operating loss (1,209,712) (1,313,632)
Interest income 185,891 348,169
Other income, net 18,738 2,684
---------- ----------
Loss from continuing operations (1,005,884) (962,779)
Loss from discontinued operations -- (158,355)
---------- ----------
Net loss $(1,005,884) $(1,121,134)
========== ==========
Basic and diluted loss
per share:
Loss from continuing operations $ (0.05) $ (0.05)
========== ==========
Net loss $ (0.05) $ (0.06)
========== ==========
Weighted average common shares
outstanding-basic and diluted 20,359,972 20,220,040
========== ==========
See accompanying notes to condensed consolidated financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the three months ended March 31,
------------------------------------
2002 2001
---------- ----------
Net cash used in operating activities $(1,322,293) $(1,461,977)
Cash flows from investing activities:
Purchases of property and equipment (8,851) (33,514)
Purchases of marketable securities (2,519,153) (6,054,883)
Maturities of marketable securities 5,034,596 5,854,163
---------- ----------
Net cash provided by (used in)
investing activities 2,506,592 (234,234)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 1,184,299 (1,696,211)
Cash and cash equivalents, beginning
of the period 3,617,927 6,493,336
---------- ----------
Cash and cash equivalents, end
of the period $ 4,802,226 $ 4,797,125
========== ==========
See accompanying notes to condensed consolidated financial statements.
A.P. PHARMA, INC.
- -----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
MARCH 31, 2002 AND DECEMBER 31, 2001 (UNAUDITED)
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(1) Summary of Significant Accounting Policies
Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in
the United States 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 accounting principles generally accepted
in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting only of
adjustments of a normal recurring nature) considered necessary
for a fair presentation have been included. Operating results
for the three month periods ended March 31, 2002 and 2001 are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2002. The condensed
consolidated balance sheet as of December 31, 2001 has been
derived from the audited financial statements as of that date.
For further information, refer to the consolidated financial
statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December, 31, 2001.
The condensed consolidated financial statements include the
financial statements of A.P. Pharma (the Company or APP) and
its subsidiary, APS Analytical Standards, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 2002.
Use of Estimates
----------------
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
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 and accruals. Actual results could differ materially
from those estimates. The items in our financial statements
requiring significant estimates and judgments are as follows:
Revenue Recognition
-------------------
Product revenues are recorded upon shipment of products when
four basic criteria are met: 1) persuasive evidence of an
arrangement exists, 2) delivery has occurred or services have
been rendered, 3) the fee is fixed and determinable, and 4)
collectibility is reasonably assured. Determination of
criteria 3 and 4 are based on management's judgments regarding
the fixed nature of the fees charged for products delivered and
the collectibility of those fees. Should changes in conditions
cause management to determine these criteria are not met for
certain future transactions, revenue recognized for any
reporting period could be adversely affected.
The Company has licensing agreements that generally provide for
the Company to receive periodic minimum payments, royalties,
milestone payments and/or non-refundable license fees. These
licensing agreements typically require a non-refundable license
fee and allow partners to sell the Company's proprietary
products in a defined field or territory for a defined period.
The license agreements provide for APP to earn future revenue
through royalty payments. These non-refundable license fees
are initially reported as deferred revenues and recognized as
contract revenues over the estimated life of the product to
which they relate as long as the Company has continuing
involvement with licensees and until the related product is
discontinued. Revenue recognized from deferred license fees is
classified as contract revenues in the accompanying condensed
consolidated statements of operations. License fees received
in connection with arrangements where the Company has no
continuing involvement are recognized as revenue when the
amounts are received or when collectibility is assured,
whichever is earlier.
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 customer by the Company's licensees
based on information received by the Company from its
licensees.
A milestone payment is a payment made by a third party or
corporate partner to the Company upon the achievement of a
predetermined milestone as defined in a legally binding
contract. Milestone payments are recognized as revenue when
the milestone event has occurred and the Company has completed
all milestone related services such that the milestone payment
is currently due and is non-refundable.
Contract revenues from research and development arrangements
are recognized as the related research and development costs
are incurred.
Cash Equivalents and Short-term Investments
- -------------------------------------------
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.
Recent Accounting Pronouncements
--------------------------------
In July 2001, the FASB issued FAS 141, "Business Combinations"
(FAS 141). FAS 141 supersedes APB 16, "Business Combinations,"
and FAS 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." FAS 141 requires the purchase method
of accounting for all business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method.
FAS 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising
from business combinations completed after June 30, 2001.
In July 2001, the FASB issued FAS 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 142 supersedes APB 17,
"Intangible Assets," and requires the discontinuance of
goodwill amortization. In addition, FAS 142 includes
provisions regarding the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the
testing for impairment of existing goodwill and other
intangibles out of previously reported goodwill and other
intangibles. FAS 142 is required to be applied for fiscal
years beginning after December 15, 2001, with certain early
adoption permitted. Adoption of this statement did not have a
material effect on the Company's financial condition or results
of operations.
In August 2001, the FASB issued FAS 143, "Accounting for Asset
Retirement Obligations" (FAS 143). FAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
retirement costs. Adoption of this statement did not have a
material effect on the Company's financial condition or results
of operations.
In October 2001, the FASB issued FAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144), which
supersedes FAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS
121). FAS 144 addresses financial accounting and reporting for
the impairmment of long-lived assets and for long-lived assets
to be disposed of. However, FAS 144 retains the fundamental
provisions of FAS 121 for: 1) recognition and measurement of
the impairment of long-lived assets to be held and used; and 2)
measurement of long-lived assets to be disposed of by sale.
FAS 144 is effective for fiscal years beginning after December
15, 2001. Adoption of this statement did not have a material
effect on the Company's financial condition or results of
operations.
(2) Net Loss Per Share Information
------------------------------
Basic loss per share is calculated using the weighted average
number of common shares outstanding. Because the Company is in
a net loss position for the three months ended March 31, 2002
and 2001, diluted earnings per share is also calculated using
the weighted average number of common shares outstanding and
excludes the effects of options, warrants and convertible
securities which are antidilutive.
(3) Comprehensive Loss
------------------
Comprehensive losses for the three months ended March 31, 2002
and March 31, 2001 consist of the following:
Three Months Ended
March 31, March 31,
2002 2001
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Net loss $(1,005,884) $(1,121,134)
Unrealized (losses) gains
on marketable securities (124,054) 124,574
---------- ----------
Comprehensive loss $(1,129,938) $ (996,560)
========== ==========
(4) Inventory
---------
The major components of inventory are as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Raw materials $ 25,139 $ 27,284
Finished goods 24,891 33,283
--------- ---------
Total inventory $ 50,030 $ 60,567
========= =========
(5) 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 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 per share from discontinued operations
was $0.00 and ($0.01) for the three months ended March 31, 2002
and 2001, respectively.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
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 preparation of the Company's financial statements in conformity
with accounting principles generally accepted in the United States
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 and accruals.
Actual results could differ materially from those estimates. The
items in the Company's financial statements requiring significant
estimates and judgments are as follows:
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
- -------------------
Product revenues are recorded upon shipment of products when four
basic criteria are met: 1) persuasive evidence of an arrangement
exists, 2) delivery has occurred or services have been rendered, 3)
the fee is fixed and determinable, and 4) collectibility is
reasonably assured. Determination of criteria 3 and 4 are based on
management's judgments regarding the fixed nature of the fees
charged for products delivered and the collectibility of those fees.
Should changes in conditions cause management to determine these
criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
The Company has licensing agreements that generally provide for the
Company to receive periodic minimum payments, royalties, milestone
payments and/or non-refundable license fees. These licensing
agreements typically require a non-refundable license fee and allow
partners to sell the Company's proprietary products in a defined
field or territory for a defined period. The license agreements
provide for APP 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 the Company has continuing
involvement with licensees until the related product is
discontinued. Revenue recognized from deferred license fees is
classified as contract revenues in the accompanying condensed
consolidated statements of operations. License fees received in
connection with arrangements where the Company has no continuing
involvement are recognized as revenue when the amounts are received
or when collectibility is assured, whichever is earlier.
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 customer by the Company's licensees based on
information received by the Company from its licensees.
A milestone payment is a payment made by a third party or corporate
partner to the Company upon the achievement of a predetermined
milestone as defined in a legally binding contract. Milestone
payments are recognized as revenue when the milestone event has
occurred and the Company has completed all milestone related
services such that the milestone payment is currently due and is
non-refundable.
Contract revenues from research and development arrangements are
recognized as the related research and development costs are
incurred.
Results of Operations for the Three Months Ended March 31, 2002 and
- -------------------------------------------------------------------
2001
- ----
The Company's revenues are derived principally from royalties,
license fees, contract revenues 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. 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.
Royalties for the first quarter of 2002 increased by 39% or $253,000
from $650,000 in the corresponding quarter in the prior year. This
increase was due mainly to increased sales of Retin-A Micro(R), a
prescription acne treatment which is marketed by Ortho Neutrogena, a
Johnson and Johnson company, and increased sales of Carac(TM) for
the treatment of actinic keratoses by the Company's marketing
partner Dermik Laboratories, an Aventis company.
Product revenues for the first quarter of 2002 relating to sales of
analytical standards products decreased by $10,000 or 3% to $286,000
from $296,000 in the first quarter of the prior year.
Gross profit margin on sales of analytical standards decreased from
68% to 60% due to sales mix, as the first quarter of the current
year included higher sales of low-margin instruments.
Research and development expense for the first quarter of 2002
increased by $118,000 to $1,497,000 due mainly to increased
headcount and related expenses as the Company undertook a variety of
new product development activities and the initiation of Phase I
clinical trials on the Company's first product candidate, APF112,
for the treatment of post-surgical pain, partially offset by
expenses related to scale-up clinical batches of GMP polymer in the
year-ago quarter. Research and development expense is expected to
increase in 2002 as the Company's lead product candidate, APF112,
for the treatment of post-surgical pain entered human clinical
studies in 2002.
Selling and marketing expense for the first quarter of 2002
increased by $2,000 or 2% to $127,000. Selling and marketing
expense is expected to remain essentially unchanged in 2002.
General and administrative expense for the first quarter of 2002
increased by $22,000 or 3% from $688,000 to $710,000, due mainly to
the addition of the business development function in May 2001.
General and administrative expense is expected to increase only
moderately in 2002, primarily due to increased investor relations
activities.
Interest income for the first quarter of 2002 decreased by $162,000
or 47% to $186,000 from $348,000 due to lower interest rates earned
on lower average cash balances.
The loss from discontinued operations in the first quarter of the
prior year related to legal fees associated with the Kligman
lawsuit, which was settled in favor of the Company in 2001.
Capital Resources and Liquidity
- -------------------------------
Total assets as of March 31, 2002 were $21,692,000 compared with
$23,507,000 at December 31, 2001. Cash, cash equivalents and
marketable securities decreased by $1,453,000 to $18,041,000 at
March 31, 2002 from $19,494,000 at December 31, 2001.
Net cash used in operating activities for the three months ended
March 31, 2002 and 2001 was $1,322,000 and $1,462,000, respectively.
The decrease in net cash used in operating activities was due to
lower payments of accrued disposition costs. In the first three
months of the prior year, cash used in operating activities included
severance and retention payments to employees that were part of the
cosmeceutical and toiletry business that was sold to RP Scherer in
July 2000.
The Company has financed its operations, including technology and
product research and development, from royalties on Retin-A Micro
and Carac, proceeds from the sale of the cosmeceutical and toiletry
business to RP Scherer, the sales of analytical standards products,
interest earned on short-term investments and research and
development fees received from corporate collaborators.
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 and option fees and research and development
fees, are expected to be sufficient to meet the Company's cash needs
for at least two years, assuming no changes to business plans.
The Company's future capital requirements will depend on numerous
factors including, among others, royalties from sales of products of
third party licensees; the Company's 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 the Company devotes to
self-funded products; the Company's ability to obtain and retain
funding from third parties under collaborative agreements; potential
acquisitions of technology, product candidates or businesses; and
the costs of defending or prosecuting any patent opposition or
litigation necessary to protect the Company's proprietary
technology.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the FASB issued FAS 141, "Business Combinations" (FAS
141). FAS 141 supersedes APB 16, "Business Combinations," and FAS
38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." FAS 141 requires the purchase method of accounting
for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. FAS 141 also includes
guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed
after June 30, 2001.
In July 2001, the FASB issued FAS 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 142 supersedes APB 17,
"Intangible Assets," and requires the discontinuance of goodwill
amortization. In addition, FAS 142 includes provisions regarding
the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of
existing goodwill and other intangibles out of previously reported
goodwill and other intangibles. FAS 142 is required to be applied
for fiscal years beginning after December 15, 2001, with certain
early adoption permitted. Adoption of this statement did not have a
material effect on the Company's financial condition or results of
operations.
In August 2001, the FASB issued FAS 143, "Accounting for Asset
Retirement Obligations" (FAS 143). FAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
retirement costs. Adoption of this statement did not have a
material effect on the Company's financial condition or results of
operations.
In October 2001, the FASB issued FAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144), which
supersedes FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). FAS
144 addresses financial accounting and reporting for the impairmment
of long-lived assets and for long-lived assets to be disposed of.
However, FAS 144 retains the fundamental provisions of FAS 121 for:
1) recognition and measurement of the impairment of long-lived
assets to be held and used; and 2) measurement of long-lived assets
to be disposed of by sale. FAS 144 is effective for fiscal years
beginning after December 15, 2001. Adoption of this statement did
not have a material effect on the Company's financial condition or
results of operations.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
----------------------------------------------------------
The Company's exposure to market rate risk for changes in interest
rates relates primarily to its investment portfolio. APP does not
use derivative financial instruments. The Company manages its
interest rate risk by maintaining an investment portfolio primarily
consisting of debt instruments of high credit quality and relatively
short average maturities. The Company also manages its interest
rate risk by maintaining sufficient cash and cash equivalents such
that it is typically able to hold its investments to maturity.
Notwithstanding its efforts to manage interest rate risks, there can
be no assurances that it will be adequately protected against the
risks associated with interest rate fluctuations.
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
None.
ITEM 6. Exhibits and Reports on Form 8-K
None.
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 13, 2002 By: /S/ Michael O'Connell
----------------- ----------------------------
Michael O'Connell
President and Chief
Executive Officer
Date: May 13, 2002 By: /S/ Gordon Sangster
----------------- ----------------------------
Gordon Sangster
Chief Financial Officer