1
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, 1995
/ / 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
ADVANCED POLYMER SYSTEMS, 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.)
3696 Haven Avenue, Redwood City, CA 94063
(Address of principal executive offices)
(415) 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 July 31, 1995 the number of outstanding shares of the Company's
common stock, par value $.01, was 16,464,420.
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INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets 3
June 30, 1995 and December 31, 1994
Condensed Consolidated Statements of Operations 4
for the three and six months ended June 30, 1995
and 1994
Condensed Consolidated Statements of Cash Flows 5
for the six months ended June 30, 1995 and 1994
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 8
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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3
ADVANCED POLYMER SYSTEMS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS June 30, 1995 December 31, 1994
- ------ ------------- -----------------
Current assets:
Cash and cash equivalents $ 2,178,824 $ 2,741,994
Marketable securities 487,560 1,775,502
Pledged marketable securities 2,217,750 1,945,620
Trade accounts receivable, net 4,696,474 1,887,388
Inventory 8,447,709 7,002,026
Prepaid expenses and other 1,046,795 1,032,173
------------ ------------
Total current assets 19,075,112 16,384,703
Property and equipment, net 4,877,934 5,106,525
Assets held for sale 923,436 923,436
Prepaid license fees 539,308 627,544
Goodwill, net 267,994 348,393
Other assets 155,343 117,561
------------ ------------
$ 25,839,127 $ 23,508,162
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current Liabilities:
Accounts payable $ 3,465,407 $ 2,584,161
Accrued expenses 1,843,808 2,388,793
Accounts payable, Johnson & Johnson 5,992,409 3,570,525
Deferred revenues 750,000 0
Current portion - long-term debt 2,100,000 2,200,000
------------ ------------
Total current liabilities 14,151,624 10,743,479
Long-term debt 832,886 978,935
------------ ------------
Total liabilities 14,984,510 11,722,414
Shareholders' equity:
Common stock and common stock warrants 66,239,628 64,516,958
Unrealized gain on securities 311,354 113,166
Accumulated deficit (55,696,365) (52,844,376)
------------ ------------
Total shareholders' equity 10,854,617 11,785,748
------------ ------------
$ 25,839,127 $ 23,508,162
============ ============
See accompanying notes.
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended
June 30, 1995 June 30, 1994 June 30, 1995 June 30, 1994
------------- ------------- ------------- -------------
Product revenues $4,711,201 $3,830,332 $8,997,420 $8,838,471
Licensing revenues 30,000 545,403 885,000 633,402
----------- ----------- ----------- -----------
Total revenues 4,741,201 4,375,735 9,882,420 9,471,873
Cost of sales 3,348,289 3,070,903 6,371,335 6,541,783
----------- ----------- ----------- -----------
Gross profit 1,392,912 1,304,832 3,511,085 2,930,090
Research & development 983,292 1,875,156 1,914,521 3,173,989
Selling & marketing 1,256,449 993,060 2,360,690 2,008,020
Advertising & promotion 326,061 433,150 599,224 915,731
General & administration 784,237 731,057 1,530,843 1,388,074
----------- ----------- ----------- -----------
Total expenses 3,350,039 4,032,423 6,405,278 7,485,814
----------- ----------- ----------- -----------
Operating loss (1,957,127) (2,727,591) (2,894,193) (4,555,724)
Interest Income 88,413 82,997 186,397 148,035
Interest expense (66,580) (71,180) (132,760) (141,628)
Other expense (714) (6,240) (747) (6,167)
----------- ----------- ----------- -----------
Loss before taxes (1,936,008) (2,722,014) (2,841,303) (4,555,484)
Income tax expense 6,376 9,862 10,686 25,665
----------- ----------- ----------- -----------
Net loss ($1,942,384) ($2,731,876) ($2,851,989) ($4,581,149)
=========== =========== =========== ===========
Loss per common share ($0.12) ($0.18) ($0.17) ($0.32)
=========== =========== =========== ===========
Weighted average common
shares outstanding 16,415,732 14,866,756 16,297,473 14,378,680
=========== =========== =========== ===========
See accompanying notes.
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
June 30, 1995 June 30, 1994
------------- -------------
Cash flows from operating activities:
Net loss ($2,851,989) ($4,581,149)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 578,970 553,746
Change in allowance for doubtful accounts (412) (8,264)
Gain on sale of equipment 0 (488)
Accretion of marketable securities (75,802) (73,650)
Changes in operating assets and liabilities:
Trade accounts receivable (2,777,291) (2,488,587)
Inventory (1,445,683) 1,244,975
Prepaid license fees 68,934 55,122
Other assets (82,532) (17,260)
Current liabilities 3,408,146 2,179,053
----------- -----------
Net cash used in operating activities (3,177,659) (3,136,502)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets, net of disposals (251,932) (321,133)
Change in marketable securities 1,289,800 1,018,609
Repayment of long-term debt (146,049) (212,464)
----------- -----------
Net cash provided from investing activities 891,819 485,012
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of common stock
options, net of shares retired 338,644 1,764,035
Proceeds from private placement, net of offering costs 1,384,026 6,346,530
----------- -----------
Net cash provided from financing activities 1,722,670 8,110,565
----------- -----------
Net increase (decrease) in cash and cash equivalents (563,170) 5,459,075
Cash and cash equivalents, beginning of the
period 2,741,994 1,792,637
----------- -----------
Cash and cash equivalents, end of the period $2,178,824 $7,251,712
=========== ===========
See accompanying notes.
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ADVANCED POLYMER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
(UNAUDITED)
(1) BASIS OF PRESENTATION
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 as of June 30, 1995, the results of operations for the three and
six months ended June 30, 1995 and 1994, and changes in cash for the six
months ended June 30, 1995 and 1994.
These condensed consolidated statements should be read in conjunction
with the Company's audited consolidated financial statements for the
years ended December 31, 1994, 1993 and 1992.
The condensed consolidated financial statements include the financial
statements of the Company (APS) and its subsidiaries, Premier, Inc.
(Premier), Advanced Consumer Products, Inc., and APS Joint Venture
Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
The business of Premier, the Company's marketing and distribution
subsidiary, is highly seasonal in that it markets and distributes
sunscreen products under an exclusive distribution agreement with Johnson
and Johnson. Sales of these products are heavily weighted to the first
two quarters of the calendar year, so the results of operations for the
interim periods are not necessarily indicative of the results for the
full year.
The Company considers all short-term investments which have original
maturities of less than three months 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 year financial
statements to conform with the presentation in 1995.
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(2) COMMON SHARES OUTSTANDING AND PER SHARE INFORMATION
Common stock outstanding as of June 30, 1995 is as follows:
Number of Shares
----------------
Common stock outstanding as of December 31, 1994 16,043,121
Options exercised after December 31, 1994 84,000
Shares issued in private placement 310,278
----------
TOTAL SHARES 16,437,399
==========
Per share information is based on the weighted average number of shares
of common stock outstanding, as adjusted during each of the periods.
Stock options and warrants (common stock equivalents) are not included in
the calculations as their inclusion would be anti-dilutive.
(3) PRIVATE PLACEMENT
During the first quarter of 1995, APS received $1,375,261 net of offering
costs through a previously announced private placement and sale of
310,278 shares of common stock and 310,278 warrants exercisable over a
three-year period at an exercise price of $5.32 per share. The private
placement was pursuant to an agreement made in 1994 for the sale of up to
$8 million of common stock and warrants in six installments beginning
June 1994 and ending September 29, 1995. In accordance with the private
placement agreement, the Company has sold $6 million of common stock and
warrants as of March 30, 1995. The remaining two optional installments
in June and September 1995 totalling $2 million of Common Stock and
warrants will not be sold by the Company.
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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 JUNE 30, 1995 AND 1994
Revenues for the three months ended June 30, 1995 were $4,741,000 compared to
$4,376,000 in the corresponding period of the prior year. This represented
product revenues of $4,711,000, an increase of $881,000 or 23% from the second
quarter of the prior year, and licensing revenues of $30,000, a decrease of
$515,000 or 94% from the prior year's second quarter.
The increase in product revenues is primarily attributable to an increase of
57% in products which incorporate Company-produced delivery systems. In this
category, sales of the Exact(R) line of acne products increased by 26%,
Take-Off make-up remover cloths/facial cleansers increased by 30% and shipments
to customers of the Company's alliance with Dow Corning increased by 64% over
the corresponding period in the prior year.
This was partially offset by a slight net decrease in sales of other products
which do not incorporate Microsponge(R) delivery systems, being principally the
suncare products which are in-licensed from Johnson & Johnson, Inc.
Licensing revenues decreased to $30,000 from $545,000. The second quarter of
the prior year included $500,000 received from J&J which was recognized under
the percentage-of-completion method to offset the expense of clinical studies
which have now been completed.
Gross profit for the second quarter was $1,393,000 compared to $1,305,000 in
the same period of the prior year, an increase of 7%. As a percentage of
product revenues, gross profit increased to 29% from 20% in the year-ago
quarter. This was due primarily to increased volume and overhead absorption in
the Company's manufacturing facility and improved sales mix of higher margin
consumer products.
Operating expense in total decreased by $682,000 or 17% to $3,350,000.
Research and development expense decreased by $892,000 or 48% to $983,000 as
anticipated due to the reduced spending on now-completed clinical studies for
the two New Drug Applications (NDAs) which the Company has filed.
Selling and marketing expense increased by $263,000 or 27% to $1,256,000. This
is primarily due to the establishment of the Company's ethical pharmaceutical
marketing effort, as well as increased distribution costs associated with
the higher sales levels.
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Advertising and promotion expense decreased by $107,000 or 25% to $326,000 as
the Company maintained its focus on cost-efficient point-of-sale advertising.
General and administrative expense increased by $53,000 or 7% to $784,000 due
mainly to increased insurance costs.
Interest income and expense were essentially flat for the quarter.
The net loss for the second quarter of $1,942,000 represents an improvement of
$789,000 or 29% over the year-ago quarter, resulting primarily from the
improved sales mix and the substantial reduction in R&D expense.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Revenues for the six months ended June 30, 1995 totalled $9,882,000, an
increase of $411,000 or 4% over the corresponding period of the prior year.
Product revenues increased by $159,000 or 2% to $8,997,000 while licensing
revenues increased by $252,000 or 40% to $885,000. The increase in product
sales is primarily due to an increase in revenues from polymer supply shipments
to the Dow Corning alliance of $781,000 or 102% for supply to manufacturers of
cosmetics and personal care products and an increase in revenues from consumer
products other than suncare of $759,000 or 48%. Of this increase in consumer
products, sales of the Exact(R) acne product line increased by 23% and sales of
Microsponge(R) enhanced Take-Off make-up remover cloths increased by 24% over
the year-ago period. This was offset by an anticipated decrease in shipments
of the in-licensed J&J suncare products of $1,767,000 or 35%. This decrease
was primarily the result of a planned strategy to better manage customer
order levels and reduce post-season returns.
Licensing revenues increased by $252,000 or 40% to $885,000. This was due to
the receipt of a milestone payment of $1,500,000 from J&J on the filing of the
NDA on Microsponge-entrapped tretinoin, half of which was recognized as
revenues. This was offset by revenue of $500,000 recognized in the first half
of the prior year under the percentage-of-completion method for now-completed
clinical trials.
Gross profit for the first half of 1995 of $3,511,000 represented an increase
of $581,000 or 20% over the corresponding period of the prior year. This was
primarily due to increased volume and overhead absorption in the Company's
manufacturing facility, in conjunction with increased sales of higher margin
consumer products.
Research and development expense decreased by $1,259,000 or 40% to $1,915,000
for the first six months of 1995 due to substantially reduced expenses related
to clinical studies.
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Selling and marketing expense increased by $353,000 or 18% to $2,361,000 due to
variable expenses associated with the higher sales volume and the establishment
of the Company's ethical pharmaceutical marketing effort. Advertising and
promotion expense decreased by $317,000 or 35% to $599,000 due to a shift to
more cost efficient point-of-sale advertising.
General and administrative expense increased by $143,000 or 10% due principally
to higher insurance costs.
Interest income increased to $186,000 from $148,000 due to higher average cash
balances and higher interest rates. Interest expense was essentially flat.
The operating loss for the first six months of 1995 of $2,852,000 showed an
improvement of $1,729,000 or 38% over the corresponding period of the prior
year.
CAPITAL RESOURCES AND LIQUIDITY
Total assets as of June 30, 1995 were $25,839,000 compared with $23,508,000 at
December 31, 1994. Working capital decreased to $4,924,000 from $5,642,000 at
December 31, 1994. In the same period, cash equivalents and marketable
securities decreased to $2,666,000 from $4,517,000. During the first six
months of 1995, Company operations used $3,178,000 of cash.
The Company has financed its operations, including product research and
development, from amounts raised in equity financings; the sale of consumer
products, Microsponge delivery systems and analytical standard products;
payments received under licensing agreements; and interest earned on short-term
investments. The Company raised $16,636,000 in equity financings in 1992 and
received an additional $10,492,000 in 1994 and the first quarter of 1995 from
two private placements.
On June 30, 1995, the Company had $2,666,000 in cash, cash equivalents and
short-term marketable securities. The Company's primary investment objectives
for these assets are the preservation of capital and the maintenance of a high
degree of liquidity. The Company is currently planning to execute various
proposals to generate additional cash to sustain and develop the business,
including sale of idle assets, refinancing of existing debt, joint ventures,
licensing opportunities and debt financing.
Cash has been expended with regard to Phase III clinical tests of tretinoin
entrapped in a Microsponge delivery system for the treatment of acne, and of
ProZone, APS' Melanosponge product, together with related research and
developments costs, all of which have decreased substantially in 1995 as the
respective NDAs have been filed.
Additionally, the Company is contractually obligated to purchase minimum
quantities of melanin. Failure to purchase the minimum quantities in 1995 would
result in a mandatory payment of $600,000 to its melanin supplier under "take
or pay" provisions.
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The Company's existing cash, cash equivalents and short-term marketable
securities, collections of trade accounts receivable, together with interest
income and other revenue producing activities, are expected to be sufficient to
meet the Company's near-term cash requirements assuming no changes to existing
business plans.
If the Company is unsuccessful in its efforts to raise additional cash,
operating costs will have to be significantly reduced in the near term.
PART II.
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
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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.
ADVANCED POLYMER SYSTEMS, INC.
Date: August 11, 1995 By: /s/ John J. Meakem, Jr.
-------------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: August 11, 1995 By: /s/ Michael O'Connell
-------------------------------
Michael O'Connell
Chief Financial Officer
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1
6-MOS
DEC-31-1995
JAN-01-1995
JUN-30-1995
2,178,824
487,560
4,753,864
57,390
8,447,709
19,075,112
13,242,363
7,440,993
25,839,127
14,151,624
0
164,374
0
0
10,690,243
25,839,127
8,351,915
9,882,420
6,178,884
6,371,335
6,406,025
0
132,760
(2,841,303)
10,686
(2,851,989)
0
0
0
(2,851,989)
($0.17)
($0.17)
