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, 1997
[ ] 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)
(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, 1997, the number of outstanding shares of the Company's
common stock, par value $.01, was 19,106,372.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30,
1997 and 1996
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 (unaudited):
--------------------------------
BALANCE SHEETS (UNAUDITED)
- --------------------------
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,543,868 $ 5,394,509
Trade accounts receivable, net 3,165,362 1,666,148
Inventory 2,661,188 2,085,073
Prepaid expenses and other 458,426 328,028
Assets held for sale -- 2,181,004
---------- ----------
Total current assets 14,828,844 11,654,762
Property and equipment, net 5,418,848 4,681,292
Deferred loan costs, net 419,510 616,958
Prepaid license fees 103,598 165,752
Intangible assets, including
goodwill, net 1,522,906 1,265,801
Other assets 150,180 59,603
---------- ----------
$22,443,886 $18,444,168
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,269,942 $ 1,543,143
Accrued expenses 2,157,326 1,456,512
Accrued melanin purchase
commitments 1,800,000 1,800,000
Accounts payable, Johnson & Johnson 271,140 814,509
Deferred revenues 2,250,000 750,000
Current portion - long-term debt 2,496,655 1,490,779
---------- ----------
Total current liabilities 10,245,063 7,854,943
Long-term debt 3,696,565 5,578,849
---------- ----------
Total liabilities 13,941,628 13,433,792
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 80,691,341 76,591,381
Accumulated deficit (72,189,083) (71,581,005)
---------- ----------
Total shareholders' equity 8,502,258 5,010,376
---------- ----------
$22,443,886 $18,444,168
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ----------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Microsponge product
and technology revenues $ 4,136,606 $ 2,174,089 $12,183,254 $ 5,680,354
Sales of consumer products -- 2,266,441 -- 9,267,168
Milestone payment -- -- 1,500,000 --
---------- ---------- ---------- ----------
Total revenues 4,136,606 4,440,530 13,683,254 14,947,522
Cost of sales 1,757,132 2,251,891 5,200,826 8,546,079
Operating expenses:
Research & development 915,361 990,300 2,748,652 2,864,099
Selling, marketing & advertising 873,450 2,346,638 2,996,331 6,770,953
General & administration 818,826 739,165 2,731,825 2,243,056
---------- ---------- ---------- ----------
Total operating expenses 2,607,637 4,076,103 8,476,808 11,878,108
---------- ---------- ---------- ----------
Operating (loss) income (228,163) (1,887,464) 5,620 (5,476,665)
Interest income 100,579 141,612 260,106 255,580
Interest expense (260,705) (320,086) (800,959) (933,112)
Other expense (6,978) (23,820) (72,845) (12,915)
---------- ---------- ---------- ----------
Net loss $ (395,267) $(2,089,758) $ (608,078) $(6,167,112)
========== ========== ========== ==========
Loss per common share $ (0.02) $ (0.11) $ (0.03) $ (0.34)
========== ========== ========== ==========
Weighted average common shares
outstanding 18,895,691 18,220,264 18,626,475 17,885,248
========== ========== ========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the nine months ended September 30,
---------------------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net loss $ (608,078) $(6,167,112)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 725,224 1,061,255
Provision for obsolescence of
inventory 165,000 --
Provision for deferred compensation 171,757 --
Changes in operating assets and
liabilities:
Trade accounts receivable (1,499,214) (618,022)
Inventory (741,115) 2,793,556
Prepaid expenses and other (115,398) 68,843
Deferred loan costs 197,448 198,078
Other assets (490,577) 22,200
Accounts payable and accrued expenses (205,756) (3,010,692)
Deferred revenue 1,500,000 --
--------- ---------
Net cash used in operating activities (900,709) (5,651,894)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets (1,257,731) (561,647)
Purchase of marketable securities (1,596,617) (512,513)
Maturities and sales of marketable
securities 1,596,617 500,165
Proceeds from assets held for sale 2,181,004 --
--------- ---------
Net cash provided from (used in)
investing activities 923,273 (573,995)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 4,003,203 1,833,329
Proceeds from note payable -- 1,500,000
Proceeds from long-term debt an
warrants -- 731,270
Repayment of long-term debt (876,408) (590,143)
Proceeds from private placement,
net of offering costs -- 4,894,397
--------- ---------
Net cash provided from financing
activities 3,126,795 8,368,853
--------- ---------
Net increase in cash and cash
equivalents 3,149,359 2,142,964
Cash and cash equivalents, beginning
of the period 5,394,509 5,172,809
--------- ---------
Cash and cash equivalents, end
of the period $ 8,543,868 $ 7,315,773
========= =========
Supplemental disclosure of non-cash investing and 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 200,000 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.
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
SEPTEMBER 30, 1997 AND 1996 (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" or "APS")
as of September 30, 1997 and the results of their operations for
the three and nine months ended September 30, 1997 and 1996, and
their cash flows for the nine months ended September 30, 1997 and
1996.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the years ended December 31, 1996, 1995 and 1994.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiaries,
Premier, Inc. ("Premier") and APS Analytical Standards, Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Effective January 1997, as part of the Company's long-term
strategic plan to move away from the direct marketing of consumer
products, APS licensed its consumer products to Lander Company.
The Company is no longer generating revenues from sales of these
products, but is receiving revenues from royalties on product
sales and the supply of Microsponge(R) systems incorporated into
various products. Prior year results include the sales of
consumer products and related selling, marketing and distribution
expenses.
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 1997.
(2) Common Shares Outstanding and per Share Information
---------------------------------------------------
Common stock outstanding as of September 30, 1997 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1996 18,359,744
Warrants exercised after December 31, 1996 593,380
Options exercised after December 31, 1996 148,498
----------
Total shares 19,101,622
==========
The number of shares used in calculating earnings per share was
the weighted average number of shares of common stock
outstanding. Common stock equivalents were not considered since
they were anti-dilutive.
(3) New Accounting Standards
------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128), which will be effective for financial
statements for periods ending after December 15, 1997, including
interim periods, and establishes standards for computing and
presenting earnings per share. Earlier application is not
permitted. In its consolidated financial statements for the year
ending December 31, 1997, the Company will make the required
disclosures of basic and diluted earnings per share. All prior
period earnings per share data will be restated by the Company
upon adoption of SFAS 128.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS 130) which will be effective for
financial statements for periods beginning after December 15,
1997, and establishes standards for reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. Earlier application is permitted.
The Company will make the required reporting of comprehensive
income in its consolidated financial statements for the first
quarter ending March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of a Business Enterprise" (SFAS 131) which will be
effective for financial statements beginning after December 15,
1997, and establishes standards for disclosures about segments of
an enterprise. Earlier application is encouraged. In its
consolidated financial statements for the year December 31, 1998,
the Company will make the required disclosures.
(4) Milestone Payment
-----------------
In February 1997, upon receipt of marketing clearance from the
Food and Drug Administration ("FDA") to market Retin-A(R)
Micro(TM) (tretinoin gel) 0.1% - microsphere for the treatment of
acne, APS received $3,000,000 from Ortho McNeil Pharmaceutical
Corporation, a subsidiary of Johnson & Johnson. One half of the
amount received was a milestone payment which was recognized as
revenues in the first quarter of 1997 and the other half was
prepaid royalties which was recorded as deferred revenue.
(5) Inventory
---------
The major components of inventory are as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
Raw materials and work-
in-process $1,021,207 $ 604,852
Finished goods 1,639,981 1,480,221
--------- ---------
Total inventory $2,661,188 $2,085,073
========= =========
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, 1997
- -------------------------------------------------------------------
and 1996
- --------
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 product sales,
license fees and royalties. The Company is currently manufacturing
and selling Microsponge(R) delivery systems for use by customers in
almost 100 different personal care and cosmetic products. Under
strategic alliance arrangements entered into with certain
multinational corporations, APS generally receives an initial cash
infusion, future milestone payments, royalties based on third party
product sales and revenues from the supply of Microsponge systems.
These strategic alliances are intended to provide the Company with the
marketing expertise and/or financial strength of other companies. In
this respect, the Company's periodic financial results are dependent
upon the degree of success of current collaborations and the Company's
ability to negotiate acceptable collaborative agreements in the
future.
Microsponge product and technology revenues were $4,137,000 in the
third quarter of 1997 compared to $2,174,000, an increase of
$1,963,000 or 90% over the third quarter of the prior year. This was
primarily attributable to increased shipments of Microsponge systems
to manufacturers of personal care and cosmeceutical products,
resulting from the launches of new products in the second quarter of
1997 by the Company's marketing partners. These included Retin-
A(R)Micro(TM) by Ortho Dermatological for which the Company received
FDA marketing clearance in February 1997, ANEW Retinol Recovery
Complex PM Treatment which is marketed by Avon and TxSystems(TM) AFIRM
retinol formulation and B-LIFT peel kits which are marketed by Medicis
Pharmaceutical. The third quarter 1997 revenues also included up-
front technology revenues and increased shipments to Procter and
Gamble in preparation for the launch of their new adult wipes product,
which will be marketed under the brand name Attends(R).
The third quarter of the prior year included sales of $2,266,000 from
consumer products which are no longer directly marketed by the
company.
Gross profit on product and technology revenues for the third quarter
of 1997 was $2,379,000 or 58% compared to $2,189,000 or 49% in the
corresponding period of the prior year. The increase is principally
due to increased sales of higher margin proprietary cosmeceutical
products.
Operating expenses for the third quarter of 1997 decreased by
$1,468,000 or 36% compared to the same period of the prior year.
Selling, marketing and advertising expense decreased by $1,473,000 or
63% principally due to the advertising and variable selling costs
associated with consumer products which the company no longer directly
markets. Research and development expense decreased by $75,000 or 8%
due mainly to a reallocation of resources as more products which
incorporate the Company's technologies are being commercialized.
General and administrative expenses increased by $80,000 or 11% due
mainly to a variety of outside services.
The 1997 third quarter operating loss of $228,000 represented an
improvement of $1,659,000 or 88% from the corresponding quarter of the
prior year. This was primarily the result of the improvement in gross
margins and the significant reduction in selling, marketing and
advertising expense.
Interest expense, net decreased by $18,000 or 10% compared to the same
period of the prior year due mainly to principal debt repayments.
The net loss for the period of $395,000 represented an improvement of
$1,694,000 over the corresponding period of the prior year.
Results of Operations for the Nine Months Ended September 30, 1997
- ------------------------------------------------------------------
and 1996
- --------
Microsponge product and technology revenues for the nine months ended
September 30, 1997 increased by $6,503,000 or 114% to $12,183,000
compared to the corresponding period of the prior year. This increase
was due mainly to up-front technology revenues received from certain
corporate partners and increased shipments of Microsponge systems due
to the launches of new products incorporating the Company's
proprietary technology which were licensed by three key marketing
partners -- Retin-A(R) Micro(TM) by Ortho Dermatological for which the
Company received FDA marketing clearance in February 1997, ANEW(R)
Retinol Recovery Complex PM Treatment which is marketed by Avon, Inc.,
and TxSystems(TM) AFIRM(TM) retinol formulation and B-LIFT peel kits
which are marketed by Medicis Pharmaceutical. Also included in
revenues in the first nine months of 1997 was a milestone payment of
$1,500,000, representing half of the $3,000,000 received from Ortho
Dermatological on the FDA marketing clearance of Retin-A(R) Micro(TM).
The remaining $1,500,000 was prepaid royalties which was recorded as
deferred revenue.
The first nine months of 1996 included revenues of $9,267,000 relating
to sales of consumer products which are no longer marketed by the
Company.
Gross profit on product and technology revenues for the first nine
months of 1997 was $6,982,000 or 57% compared with $6,401,000 or 43%
in the corresponding period of the prior year. This was due primarily
to increased sales of higher margin proprietary cosmeceutical
products, up-front technology revenues, and increased manufacturing
volume.
Operating expenses for the first nine months of 1997 decreased by
$3,401,000 or 29%. This was due primarily to a reduction in selling,
marketing and advertising expense of $3,775,000 or 56% to $2,996,000.
This decrease was mainly due to the fact the Company licensed its
consumer products to Lander Company in January 1997 and discontinued
sales of in-licensed suncare products, thus avoiding the high cost of
advertising and distributing consumer products.
Research and development expense decreased by $115,000 or 4% to
$2,749,000. This was due mainly to a reallocation of resources as the
Company's proprietary technologies are being increasingly
commercialized and the fact that the year-ago period included FDA
filing fees for Retin-A(R) Micro(TM) for which the Company received
marketing clearance in February 1997. These decreases were partially
offset by increased spending in the first nine months of 1997 on
clinical studies and patent protection for products which have been
both newly licensed and internally developed.
General and administrative expense for the first nine months of 1997
increased by $489,000 or 22% over the year-ago period due mainly to a
variety of outside services.
Interest income for the first nine months of 1997 was essentially flat
compared to the corresponding period of the prior year. Interest
expense for the same period of $801,000 decreased by $132,000 or 14%
due to principal repayments.
The net loss for the first nine months of 1997 of $608,000 represented
an improvement of $5,559,000 or 90% over the corresponding period of
the prior year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of September 30, 1997 were $22,444,000 compared with
$18,444,000 at December 31, 1996, and working capital increased to
$4,584,000 from $3,800,000. In the same period, cash and cash
equivalents increased to $8,544,000 from $5,395,000. During the first
nine months, the Company's operating activities used $901,000 of cash.
This principally related to an increase in inventory and receivables
as a result of the launches of new products by corporate partners.
The Company invested approximately $2,749,000 in product research and
development and $2,996,000 in selling and marketing the Company's
products and technologies.
Capital expenditures for the nine months ended September 30, 1997
totaled $1,258,000 compared to $562,000 in the same period of the
prior year. The increase in capital expenditures is mainly due to
capital projects that will increase capacity in the Company's
manufacturing facility in Lafayette, Louisiana, which is necessary in
order to meet anticipated higher volume requirements. This plant
expansion project is expected to be completed by July, 1998.
The Company has financed its operations, including product research
and development, from amounts raised in debt and equity financings,
the sale of Microsponge delivery systems, consumer products and
analytical standard products; payments received under licensing
agreements; and interest earned on short-term investments.
In February of 1997, upon receipt of marketing clearance from the FDA
to market Retin-A Micro (tretinoin gel) microsphere for the treatment
of acne, APS received $3,000,000 from Ortho McNeil Pharmaceutical of
which one half was a milestone payment which was recognized as revenue
in the first quarter of 1997 and half was prepaid royalties which was
recorded as deferred revenue.
During the first nine months of 1997, approximately 593,000 warrants
which had been issued in conjunction with a 1994 private placement
were exercised. The Company received approximately $3,300,000 from
the exercise of these warrants.
The Company's existing cash and cash equivalents, collections of trade
accounts receivable, together with interest income and other revenue
producing activities including licensing fees and milestone payments,
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 February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128), which will be effective for financial statements
for periods ending after December 15, 1997, including interim periods,
and establishes standards for computing and presenting earnings per
share. Earlier application is not permitted. In its consolidated
financial statements for the year ending December 31, 1997, the
Company will make the required disclosures of basic and diluted
earnings per share. All prior period earnings per share data will be
restated by the Company upon adoption of SFAS 128.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS 130) which will be effective for financial
statements for periods beginning after December 15, 1997, and
establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Earlier application is permitted. The Company will make
the required reporting of comprehensive income in its consolidated
financial statements for the first quarter ending March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of a Business Enterprise" (SFAS 131) which will be effective
for financial statements beginning after December 15, 1997, and
establishes standards for disclosures about segments of an enterprise.
Earlier application is encouraged. In its consolidated financial
statements for the year December 31, 1998, the Company will make the
required disclosures.
PART II. OTHER INFOMRATION
-----------------
ITEM 1. Legal Proceedings
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the 9 months
ended September 30, 1997.
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, 1997 By: /s/ John J. Meakem, Jr.
------------------- -------------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: November 12, 1997 By: /s/ Michael O'Connell
------------------- -------------------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
EXHIBIT INDEX
Form 10-Q
EXHIBIT DESCRIPTION
27 Financial Data Schedule
5
