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, 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)
(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, 1997 the number of outstanding shares of the Company's common stock,
par value $.01, was 18,784,832.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations 4
for the three months and six months ended June 30,
1997 and 1996
Condensed Consolidated Statements of Cash Flows 5
for the six months ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 9
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,449,934 $ 5,394,509
Trade accounts receivable, net 3,259,074 1,666,148
Inventory 2,618,969 2,085,073
Prepaid expenses and other 456,054 328,028
Assets held for sale -- 2,181,004
------------ ------------
Total current assets 13,784,031 11,654,762
Property and equipment, net 4,929,715 4,681,292
Deferred loan costs, net 485,326 616,958
Prepaid license fees 124,316 165,752
Intangible assets, including goodwill, net 1,568,271 1,265,801
Other assets 147,780 59,603
------------ ------------
$ 21,039,439 $ 18,444,168
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 918,249 $ 1,543,143
Accrued expenses 2,292,879 1,456,512
Accrued melanin purchase commitments 1,800,000 1,800,000
Accounts payable, Johnson & Johnson 320,707 814,509
Deferred revenues 2,250,000 750,000
Current portion - long-term debt 2,160,655 1,490,779
------------ ------------
Total current liabilities 9,742,490 7,854,943
Long-term debt 4,330,705 5,578,849
------------ ------------
Total liabilities 14,073,195 13,433,792
------------ ------------
Shareholders' equity:
Common stock and common stock warrants 78,760,061 76,591,381
Accumulated deficit (71,793,817) (71,581,005)
------------ ------------
Total shareholders' equity 6,966,244 5,010,376
------------ ------------
$ 21,039,439 $ 18,444,168
============ ============
See accompanying notes.
3
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
Microsponge product
and technology revenues $ 4,499,516 $ 2,057,520 $ 8,046,648 $ 3,506,265
Sales of consumer products -- 3,296,000 -- 7,000,727
Milestone payment -- -- 1,500,000 --
------------ ------------ ------------ ------------
Total revenues 4,499,516 5,353,520 9,546,648 10,506,992
Cost of sales 1,952,179 2,989,382 3,443,694 6,294,188
Operating expenses:
Research & development 900,817 983,843 1,833,291 1,873,799
Selling, marketing & advertising 949,069 2,386,747 2,122,881 4,424,315
General & administration 1,069,705 833,870 1,912,999 1,503,891
------------ ------------ ------------ ------------
Total operating expenses 2,919,591 4,204,460 5,869,171 7,802,005
------------ ------------ ------------ ------------
Operating income (loss) (372,254) (1,840,322) 233,783 (3,589,201)
Interest income 80,227 75,012 159,527 113,968
Interest expense (268,862) (313,948) (540,254) (613,026)
Other income (expense) (70,845) 21,201 (65,867) 10,905
------------ ------------ ------------ ------------
Net loss ($ 631,734) ($ 2,058,057) ($ 212,811) ($ 4,077,354)
============ ============ ============ ============
Net loss per common share ($ 0.03) ($ 0.11) ($ 0.01) ($ 0.23)
============ ============ ============ ============
Weighted average common shares
outstanding 18,577,599 18,080,623 18,491,867 17,717,740
============ ============ ============ ============
See accompanying notes.
4
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(Unaudited)
June 30, 1997 June 30, 1996
------------- -------------
Cash flows from operating activities:
Net loss ($ 212,811) ($4,077,354)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 487,413 707,997
Change in allowance for doubtful accounts -- (4,106)
Provision for obsolescence of inventory 120,000 --
Provision for deferred compensation 126,757 --
Changes in operating assets and liabilities:
Trade accounts receivable (1,592,926) (1,898,532)
Inventory (653,896) 2,426,175
Prepaid expenses and other (98,026) 96,184
Deferred loan costs 131,632 83,731
Other assets (488,176) 70,881
Accounts payable and accrued expenses (342,329) (2,301,329)
Deferred revenue 1,500,000 --
----------- -----------
Net cash used in operating activities (1,022,362) (4,896,353)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (596,872) (211,547)
Purchase of marketable securities (1,596,617) (512,513)
Maturities and sales of marketable securities 1,596,617 506,374
Proceeds from assets held for sale 2,181,004 --
----------- -----------
Net cash provided from (used in) investing activities 1,584,132 (217,686)
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of common stock options
and warrants 2,071,923 1,561,769
Proceeds from note payable -- 1,250,000
Proceeds from long-term debt and warrants -- 150,000
Repayment of long-term debt (578,268) (390,103)
Proceeds from private placement, net of offering costs -- 4,903,020
----------- -----------
Net cash provided from financing activities 1,493,655 7,474,686
----------- -----------
Net increase in cash and cash equivalents 2,055,425 2,360,647
Cash and cash equivalents, beginning of the
period 5,394,509 5,172,809
----------- -----------
Cash and cash equivalents, end of the period $ 7,449,934 $ 7,533,456
=========== ===========
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 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.
5
ADVANCED POLYMER SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
June 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 June 30, 1997 and the results of their
operations for the three and six months ended June 30, 1997 and 1996, and
their cash flows for the six months ended June 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.
6
(2) Common Shares Outstanding and per Share Information
Common stock outstanding as of June 30, 1997 is as follows:
Number of Shares
----------------
Common stock outstanding as of December 31, 1996 18,359,744
Warrants exercised 294,314
Options exercised after December 31, 1996 91,597
----------
Total shares 18,745,655
==========
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 antidilutive.
(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.
7
(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:
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials and work-in-process $ 739,485 $ 604,852
Finished goods 1,879,484 1,480,221
---------- ----------
Total inventory $2,618,969 $2,085,073
========== ==========
8
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, 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 for the second quarter of 1997 of
$4,500,000 represented an increase of $2,442,000 or 119% over the corresponding
quarter of the prior year. This increase was due primarily 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 marketing clearance from the U.S.
Food and Drug Administration (FDA) in February 1997, ANEW(R) Retinol Recovery
Complex PM Treatment which is marketed by Avon, Inc., and TxSystems(TM)
AFIRM(TM) retinol formulation which is marketed by Medicis. Continued growth in
other segments of the Company's business also contributed to the sales increase.
The second quarter of the prior year included $3,296,000 from sales of consumer
products which are no longer marketed by the Company.
9
Gross profit on product and technology revenues for the second quarter was
$2,547,000 or 57% compared to $2,364,000 or 44% in the corresponding quarter of
the prior year due primarily to increased sales of higher margin proprietary
cosmeceutical products and increased manufacturing volume.
Operating expenses for the second quarter of 1997 decreased by $1,285,000 or 31%
compared to the corresponding quarter in the prior year. This was due primarily
to the decrease in selling, marketing and advertising expense by $1,438,000 to
$949,000 which relates to the fact that the Company no longer directly markets
consumer products, thus avoiding the associated advertising and variable selling
expenses. Research and development expense decreased by $83,000 or 8% due mainly
to a reallocation of resources as more products which incorporate the Company's
technologies are being commercialized. This was partially offset by increased
spending on clinical studies on Vitamin K and a new family of bioerodible
polymers which are under review by potential partners.
General and administrative expense increased by $236,000 or 28% to $1,070,000
due mainly to certain non-recurring expenses incurred with outside consultants.
The operating loss for the second quarter of 1997 of $372,000 represented an
improvement of $1,468,000 or 80% 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 income for the second quarter of 1997 increased slightly by $5,000 or
7% to $80,000 reflecting higher average cash balances. Interest expense
decreased by $45,000 or 14% to $269,000 due mainly to principal repayments.
The net loss for the period of $632,000 represented an improvement of $1,426,000
or 69% over the corresponding period of the prior year.
Results of Operations for the Six Months Ended June 30, 1997 and 1996
Microsponge product and technology revenues for the six months ended June 30,
1997 increased by $4,540,000 or 129% to $8,047,000 compared to the corresponding
quarter of the prior year. This increase was due mainly 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 which is marketed by Medicis. Also
included in revenues in the first half of 1997 was a milestone payment of
$1,500,000, representing half of the $3,000,000
10
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 half of 1996 included revenues of $7,000,000 relating to sales of
consumer products which are no longer marketed by the Company.
Gross profit on product and technology revenues for the first six months of 1997
of $4,603,000 or 57% compared with $4,213,000 or 40% in the corresponding period
of the prior year. This was due primarily to increased sales of higher margin
proprietary cosmeceutical products and increased manufacturing volume.
Operating expenses for the first six months of 1997 decreased by $1,933,000 or
25%. This was due primarily to a reduction in selling, marketing and advertising
expense of $2,301,000 or 52% to $2,123,000. 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 $41,000 or 2% to $1,833,000. 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 six 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 half of 1997 increased by
$409,000 or 27% over the year-ago period due mainly to a variety of
non-recurring outside services.
Interest income for the first six months of 1997 was $159,000, an increase of
$46,000 or 40%, due mainly to higher average cash balances. Interest expense for
the same period of $540,000 decreased by $73,000 or 12% due to principal
repayments.
The net loss for the first six months of 1997 of $213,000 represented an
improvement of $3,865,000 or 95% over the corresponding period of the prior
year.
Capital Resources and Liquidity
Total assets as of June 30, 1997 were $21,039,000 compared with $18,444,000 at
December 31, 1996, and working capital increased to $4,042,000 from $3,800,000.
In the same period, cash and cash equivalents increased to $7,450,000 from
$5,395,000. During the first six months, the Company's operating activities used
$1,022,000 of cash. This principally related to an increase in inventory and
receivables as a result of the
11
launches of new products by corporate partners. The Company invested
approximately $1,833,000 in product research and development and $2,123,000 in
selling and marketing the Company's products and technologies.
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 the first six months 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.
In June 1997, approximately 300,000 warrants which had been issued in
conjunction with a 1994 private placement were exercised. The Company received
approximately $1,650,000 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.
12
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.
13
PART II.
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual shareholder's meeting was held on June
18, 1997, at which the following proposals were approved:
Proposal I: Election of the following Directors:
Votes Votes
For Withheld
--- --------
John J. Meakem, Jr. 16,612,705 125,741
Chairman of the Board
Carl Ehmann 16,619,306 119,140
Jorge Heller 16,613,676 124,770
Peter Riepenhausen 16,615,306 123,140
Toby Rosenblatt 16,613,946 124,500
Gregory Turnbull 16,616,356 122,090
Charles Anthony Wainwright 16,594,081 144,365
Dennis Winger 16,620,006 110,040
Proposal II: To approve an amendment to the Company's 1992
Stock Option Plan to limit the number of shares with respect
to which options may be granted to no more than 250,000
shares to any one participant in any one-year period.
Votes For Votes Against Abstentions & Broker Non Votes
--------- ------------- ------------------------------
16,277,765 278,837 181,844
Proposal III: To approve the Company's 1997 Employee Stock
Purchase Plan covering 400,000 shares issuable under the
Plan.
Votes For Votes Against Abstentions & Broker Non Votes
--------- ------------- ------------------------------
14,383,855 2,174,142 180,449
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27 Financial Data Schedules
(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: August 12, 1997 By: /s/ John J. Meakem, Jr.
---------------- ------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: August 12, 1997 By: /s/ Michael O'Connell
---------------- ----------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
15
EXHIBIT INDEX
Form 10-Q
ADVANCED POLYMER SYSTEMS, INC.
27 -Financial Data Schedules.
5
1
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
7,449,934
0
3,259,074
34,351
2,618,969
13,784,031
14,018,846
9,089,130
21,039,439
9,742,490
4,330,705
0
0
187,456
6,778,788
21,039,439
6,500,901
9,546,648
3,443,694
3,443,694
5,869,171
0
540,254
(212,811)
0
(212,811)
0
0
0
(212,811)
(0.01)
(0.01)
