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, 1996
[ ] 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 October 31, 1996 the number of outstanding shares of the Company's common
stock, par value $.01, was 18,259,097.
INDEX
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets 3
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations 4
for the three months and nine months ended September 30, 1996
and 1995
Condensed Consolidated Statements of Cash Flows 5
for the nine months ended September 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 10
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $7,315,773 $5,172,809
Trade accounts receivable, net 3,054,837 2,436,815
Inventory 5,065,028 7,858,584
Prepaid expenses and other 932,829 1,001,672
----------- -----------
Total current assets 16,368,467 16,469,880
Property and equipment, net 4,840,660 5,027,034
Deferred loan costs, net 682,775 832,324
Prepaid license fees 200,225 303,638
Intangible assets, including goodwill, net 1,335,739 345,557
Other assets 60,603 103,809
----------- -----------
$23,488,469 $23,082,242
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,169,097 $3,240,807
Accrued expenses 1,914,857 1,819,541
Accrued melanin purchase commitments 600,000 600,000
Accounts payable, Johnson & Johnson 2,595,339 4,229,637
Deferred revenues 750,000 750,000
Notes payable 1,500,000 -
Current portion - long-term debt 1,156,863 853,987
----------- -----------
Total current liabilities 9,686,156 11,493,972
Long-term debt 6,193,220 6,354,969
----------- -----------
Total liabilities 15,879,376 17,848,941
----------- -----------
Shareholders' equity:
Common stock and common stock warrants 75,979,110 67,423,859
Unrealized gain on securities - 12,348
Accumulated deficit (68,370,017) (62,202,906)
----------- -----------
Total shareholders' equity 7,609,093 5,233,301
----------- -----------
$23,488,469 $23,082,242
=========== ===========
See accompanying notes.
3
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
3 Months Ended 9 Months Ended
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
Product revenues $4,090,530 $3,276,312 $14,497,522 $12,273,732
Licensing revenues 350,000 20,000 450,000 905,000
----------- ----------- ----------- -----------
Total revenues 4,440,530 3,296,312 14,947,522 13,178,732
Cost of sales 2,251,891 1,904,456 8,546,079 8,275,791
Research & development 990,300 941,017 2,864,099 2,855,538
Selling & marketing 1,294,439 1,191,543 4,050,457 3,552,233
Advertising & promotion 1,052,199 738,903 2,720,496 1,338,127
General & administration 739,165 713,915 2,243,055 2,244,758
----------- ----------- ----------- -----------
Total expenses 6,327,994 5,489,834 20,424,186 18,266,447
----------- ----------- ----------- -----------
Operating loss (1,887,464) (2,193,522) (5,476,664) (5,087,715)
Interest income 141,612 51,579 255,580 237,976
Interest expense (320,086) (71,420) (933,112) (204,180)
Other income (expense) (23,820) 214,534 (12,915) 203,101
----------- ----------- ----------- -----------
Net loss ($2,089,758) ($1,998,829) ($6,167,111) ($4,850,818)
============ ============ ============ ============
Loss per common share ($0.11) ($0.12) ($0.34) ($0.30)
============ ============ ============ ============
Weighted average common
shares outstanding 18,220,264 16,513,687 17,885,248 16,369,544
============ ============ ============ ============
See accompanying notes.
4
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(Unaudited)
September 30, 1996 September 30, 1995
------------------ ------------------
Cash flows from operating activities:
Net loss ($6,167,111) ($4,850,818)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,259,332 1,024,914
Change in allowance for doubtful accounts 2,089 (460)
Gain on sale of marketable securities - (234,323)
Accretion of marketable securities - (22,769)
Changes in operating assets and liabilities:
Trade accounts receivable (620,111) (2,174,487)
Inventory 2,793,556 (1,546,353)
Prepaid expenses and other 68,843 (118,311)
Other assets 22,200 (576,067)
Accounts payable and accrued expenses (3,010,692) 2,651,343
----------- -----------
Net cash used in operating activities (5,651,894) (5,847,331)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (561,647) (274,970)
Purchase of marketable securities (512,513) (1,958,891)
Purchase of U.S. government securities - (2,500,000)
Proceeds from sale of long-term marketable securities - 2,228,670
Maturities and sales of marketable securities 500,165 3,153,728
----------- -----------
Net cash provided from (used in) investing activities (573,995) 648,537
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of common stock options
and warrants 1,833,329 1,005,731
Proceeds from note payable 1,500,000 -
Proceeds from long-term debt and warrants 731,270 6,147,234
Repayment of long-term debt (590,143) -
Proceeds from private placements net of offering costs 4,894,397 1,384,027
----------- -----------
Net cash provided from financing activities 8,368,853 8,536,992
----------- -----------
Net increase in cash and cash equivalents 2,142,964 3,338,198
Cash and cash equivalents, beginning of the
period 5,172,809 2,741,994
----------- -----------
Cash and cash equivalents, end of the period $7,315,773 $6,080,192
=========== ===========
Supplemental disclosure of non-cash financing transactions:
During the first quarter of 1996, the Company acquired all rights to the
Polytrap(R) technology from Dow Corning Corporation in exchange for shares of
Common Stock valued at $1,200,000.
During the first quarter of 1996, the Company paid BioSource for the 1995
purchase commitment totalling $600,000 by issuing 94,000 shares of Common Stock.
In September, 1995, the Company offset its note payable to Dow Corning
Corporation ("DCC") against its receivable from DCC. This resulted in a decrease
in long-term debt, short-term debt and accounts receivable of $478,935, $100,000
and $578,935 respectively.
During the third quarter of 1995, the Company extinguished a debt through an
insubstance defeasance transaction by placing U.S. government securities in an
irrevocable trust to fund all future scheduled payments on the debt.
See accompanying notes.
5
ADVANCED POLYMER SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1996 and 1995
(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 of Advanced Polymer Systems, Inc. and subsidiaries
("the Company") as of September 30, 1996 and the results of their
operations for the three and nine months ended September 30, 1996 and
1995, and their cash flows for the nine months ended September 30,
1996 and 1995.
These condensed consolidated statements should be read in conjunction
with the Company's audited consolidated financial statements for the
years ended December 31, 1995, 1994 and 1993.
The condensed consolidated financial statements include the financial
statements of the Company and its subsidiaries, Premier, Inc.
("Premier"), Advanced Consumer Products, Inc., APS Analytical
Standards, 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 & Johnson. In addition, effective September 1995, the Company
licensed from Reckitt & Colman the exclusive U.S. rights to the
Neet(R) line of depilatory products. Sales of the two sunscreen
products and the depilatory product line 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.
Certain reclassifications have been made to the prior period financial
statements to conform with the presentation in 1996.
6
(2) Common Shares Outstanding and per Share Information
Common stock outstanding as of September 30, 1996 is as follows:
Number of Shares
----------------
Common stock outstanding as of December 31, 1995 17,026,666
Options exercised after December 31, 1995 292,736
Warrants exercised 66,337
Shares issued to Lander Company 356,761
Shares issued in debt financing arrangements 10,675
Shares issued for acquisition of all rights to the Polytrap
technology from Dow Corning 200,000
Shares issued to pay BioSource for the 1995 Melanin
commitment 94,000
Shares issued in Private Placement 201,922
----------
TOTAL SHARES 18,249,097
==========
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) Sale of Common Stock
In the first quarter of 1996, the Company formed a collaborative
agreement with the Lander Company under which the Company received
$2,976,000 in net proceeds from the sale of 356,761 shares of Common
Stock. In addition, the Company will receive licensing fees, research and
development funding and royalties on product sales in the future.
(4) Acquisition of All Rights to Polytrap Technology
In the first quarter of 1996, APS acquired all patents and rights to the
Polytrap technology from Dow Corning in exchange for 200,000 shares of
APS Common Stock. APS recorded intangible assets totalling $1,200,000
relating to this transaction. The intangible assets are being amortized
on a straight line basis over a period of approximately 10 years, which
is the remaining life of the main patent acquired.
7
(5) Private Placement
During the second quarter of 1996, APS received $1,946,475 net of
offering costs, through a private placement and sale of 201,922 shares of
common stock and 86,538 warrants exercisable over a three-year period.
The warrants are exercisable at the following prices:
Number of shares Exercise Price
---------------- --------------
28,846 $7.43
28,846 $9.90
28,846 $12.38
The private placement was pursuant to an agreement for the sale of up to
$5,000,000 of common stock and warrants, which can be initiated at the
Company's sole discretion.
(6) Notes Payable
During the first nine months of 1996, the Company received advances from
a supplier totalling $1,500,000, with an interest rate equal to the Prime
Rate. All principal and interest outstanding were paid in October 1996.
(7) Long-Term Debt
During the third quarter of 1996, APS received $581,270 from an existing
financing arrangement. The amount received was a deposit that was
previously offset against the outstanding loan balance and subsequently
refunded to APS upon satisfaction of certain conditions identified in the
financing agreement.
(8) Stockholders Rights Plan
On August 19, 1996, the Board of Directors approved a Shareholder Rights
Plan under which stockholders of record on September 3, 1996 received a
dividend of one Preferred Stock purchase right ("Rights") for each share
of Common Stock outstanding. The Rights are not generally exercisable
until 10 business days after a person or group acquires 20% or more of
the outstanding shares of Common Stock or announces a tender offer which
could result in a person or group beneficially owning 20% or more of the
outstanding shares of Common Stock (an "Acquisition"). Each Right, should
it become exercisable, will entitle the holder (other than acquirer) to
purchase Company Stock at a discount. The Board of Directors may
terminate the Rights Plan or, under certain circumstances, redeem the
Rights.
8
In the event of an Acquisition without the approval of the Board, each
Right will entitle the registered holder, other than an acquirer and
certain related parties, to buy at the Right's then current exercise
price a number of shares of Common Stock with a market value equal to
twice the exercise price.
In addition, if at the time when there was a 20% shareholder, the Company
were to be acquired by merger, shareholders with unexercised Rights could
purchase common stock of the acquirer with a value of twice the exercise
price of the Rights.
The Board may redeem the Right for $0.01 per Right at any time prior to
Acquisition. Unless earlier redeemed, the Rights will expire on August
19, 2006.
9
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, 1996 and 1995
To the extent that this report discusses financial projections, information or
expectations about our products or markets, or otherwise makes statements about
future events, such statements 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 and acceptance of new products, the costs associated with
new product introductions, establishment of new corporate alliances, progress in
research and development programs and other risks listed from time to time in
the Company's Securities and Exchange Commission filings.
Revenues for the three months ended September 30, 1996 were $4,441,000 compared
to $3,296,000 in the corresponding quarter of the prior year. This represented
product revenues of $4,091,000, an increase of $815,000 or 25%, and licensing
fees of $350,000, compared with $20,000 in the third quarter of the prior year.
The increase in product revenues was primarily attributable to increased
shipments of Microsponge(R) entrapments to manufacturers of personal care
products and a full quarter's sales of the Neet line of depilatory products
which was acquired from Reckitt and Colman in September 1995.
The increase in licensing fees is due to the receipt of initial upfront fees
from various companies on the signing of license and supply agreements for
products incorporating the Company's technology.
Gross profit on product revenues for the third quarter totaled $1,839,000, an
increase of $467,000 or 34% over the comparable period of the prior year. As a
percentage of product sales, gross profit was 45% in the third quarter compared
to 42% in the corresponding period of the prior year. This increase resulted
mainly from increased manufacturing efficiencies due to higher volume.
Operating expenses for the third quarter increased by $491,000 or 14% over the
prior year quarter. Selling and marketing expense increased by $103,000 or 9%
over the third quarter of the prior year due mainly to increased activities in
the ethical pharmaceutical and personal care fields.
10
Advertising and promotion expense increased by $313,000 or 42% due mainly to
print advertising for the Exact line of acne products and advertising for Neet
which was acquired late in the third quarter of 1995. Research and development
expense increased by $49,000 or 5% due mainly to an increase in filings of
patents and trademarks for new technologies and applications, both domestically
and internationally.
General and administrative expense was essentially flat between periods.
The operating loss for the third quarter of $1,888,000 represented an
improvement of $306,000 or 14% over the third quarter of the prior year.
Interest income for the three months ended September 30, 1996 increased by
$90,000 to $142,000 over the prior year third quarter due to higher average cash
balances. Interest expense increased by $249,000 to $320,000 over the prior
year's third quarter due to the debt financing completed at the end of the third
quarter of 1995. Other income/(expense) decreased by $238,000 due to the gain
recognized on the sale of securities executed as part of the insubstance
defeasance, also completed at the end of the third quarter of 1995.
The net loss for the three months ended September 30, 1996 was essentially flat
with the corresponding period of the prior year, as increased advertising and
interest expense was offset by higher gross profit.
Results of Operations for the Nine Months Ended September 30, 1996
Revenues for the nine months ended September 30, 1996 increased by $1,769,000 or
13% over the corresponding period of the prior year.
Product revenues increased by $2,224,000 or 18% due mainly to sales of the Neet
line of depilatory products which was acquired in September 1995, and increased
shipments of polymeric delivery systems to manufacturers of personal care and
toiletry products. These increases were partially offset by decreased sales of
the in-licensed Johnson & Johnson suncare and specialty products. Licensing
income decreased by $455,000 to $450,000 principally due to the significant
milestone payment received from Johnson & Johnson, Inc. in the third quarter of
the prior year on the filing of the NDA for Microsponge-entrapped tretinoin
which was partially offset by initial upfront fees received from new corporate
partners related to new products incorporating the Company's technology.
Gross profit on product revenues for the nine months ended September 30, 1996
increased by $1,954,000 or 49% over the corresponding period of the prior year.
As a percentage of product revenues, gross profit for the first nine months of
the year increased from 33% in 1995 to 41% in 1996 due to both increased
manufacturing efficiencies resulting from higher volume, and sales of higher
margin consumer products.
Operating expenses for the nine months ended September 30, 1996 increased by
$1,888,000 or 19% to $11,878,000. Research and development expense of $2,864,000
was approximately the same as the corresponding period of the prior year.
11
Selling and marketing expenses for the nine month period increased by $498,000
or 14% to $4,050,000 due mainly to increased activities in the ethical
dermatology and personal care fields. Advertising and promotion expense
increased by $1,382,000 or 103% to $2,720,000 due mainly to a sampling program
involving the Company's consumer products, television advertising for the Neet
line of depilatories and print advertising for the Exact line of acne
medications. General and administrative expense was flat compared with the
corresponding period of the prior year at $2,243,000.
The increase in operating expenses was partially offset by the increased gross
profit, resulting in an operating loss of $5,477,000, an increase of $389,000 or
8%.
Interest income for the nine months ended September 30, 1996 increased by
$18,000 or 7% to $256,000 over the corresponding period of the prior year due to
higher average cash balances. Interest expense for the nine month period
increased by $729,000 to $933,000 compared with the prior year period due to the
debt financing arranged in the second half of 1995. Other income/(expense)
decreased by $216,000 due mainly to the gain on sale of securities executed as
part of the insubstance defeasance in the third quarter of the prior year.
The net loss for the nine month period ended September 30, 1996 totaled
$6,167,000, an increase of $1,316,000 or 27% from the corresponding period of
the prior year.
Capital Resources and Liquidity
Total assets as of September 30, 1996 were $23,488,000 compared with $23,082,000
at December 31, 1995, and working capital increased to $6,682,000 from
$4,976,000. In the same period, cash and cash equivalents increased to
$7,316,000 from $5,173,000. During the first nine months of 1996, Company
operations used $5,652,000 of cash. The Company invested approximately
$2,864,000 in product research and development and $6,771,000 in selling,
marketing and promoting products.
The Company has financed its operations, including product research and
development and promotional activities, from amounts raised in debt and equity
financings; product sales; payments received under licensing agreements; and
interest earned on short-term investments.
In prior years, cash was expended with regard to Phase III clinical tests on
tretinoin entrapped in a Microsponge delivery system for the treatment of acne,
and on APS' melanin-Microsponge sun protectant product, together with related
research and development costs, all of which decreased substantially in 1995
following the filing of the respective NDAs. Additionally, the Company is
contractually obligated to purchase minimum annual quantities of melanin.
12
Failure to purchase the minimum quantities results in a mandatory annual payment
of $600,000 to its melanin supplier under "take or pay" provisions. The minimum
financial commitments not yet expensed by APS under the current agreements are
$600,000 per annum for each of the years in the two year period ending December
31, 1998, for an aggregate of $1,200,000.
In the second quarter of 1996, the Company entered into an agreement for the
sale of up to $5,000,000 of common stock and warrants, which can be initiated at
the Company's sole discretion. The Company initiated a drawdown of $2,000,000 in
May 1996 in return for 201,922 shares and 86,538 warrants exercisable over a
three year period. This, together with the Company's existing cash and cash
equivalents, collections of trade accounts receivable, interest income and other
revenue producing activities including milestone payments, are expected to be
sufficient to meet the Company's near-term cash requirements assuming no changes
to existing business plans.
During the third quarter of 1996, APS received $581,000 from an existing
financing arrangement. The amount received was a deposit that was previously
offset against the outstanding loan balance and subsequently refunded to APS
upon satisfaction of certain conditions identified in the financing agreement.
13
PART II.
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27 Financial Data Schedule
(b) Reports on Form 8-K: None
14
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: November 12, 1996 By: /s/ John J. Meakem, Jr.
------------------ ------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: November 12, 1996 By: /s/ Michael O'Connell
------------------ ----------------------
Michael O'Connell
Chief Financial Officer
15
EXHIBIT INDEX
Form 10-Q
ADVANCED POLYMER SYSTEMS, INC.
27 -Financial Data Schedule.
5
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
7,315,773
0
3,054,837
66,035
5,065,028
16,368,467
13,529,931
8,689,271
23,488,469
9,686,156
6,193,220
182,491
0
0
7,426,602
23,488,469
13,569,782
14,947,522
8,546,079
8,546,079
11,878,107
0
933,112
(6,167,111)
0
(6,167,111)
0
0
0
(6,167,111)
($0.34)
($0.34)
