SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 [ ] 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 AP PHARMA, INC. --------------- (FORMERLY KNOWN AS "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.) 123 Saginaw Drive, 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 April 30, 2001, the number of outstanding shares of the Company's common stock, par value $.01, was 20,278,474.
INDEX PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited): Condensed Consolidated Balance Sheets March 31, 2001 and December 31, 2000 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 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 6. Exhibits and Reports on Form 8-K Signatures
PART I. FINANCIAL INFORMATION --------------------- ITEM 1. Financial Statements (unaudited): -------------------------------- AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.") - --------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ------------------------------------------------- <TABLE> <CAPTION> March 31, 2001 December 31, 2000 -------------- ----------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,797,125 $ 6,493,336 Marketable securities 16,251,731 16,029,320 Trade accounts receivable, net 390,564 490,578 Receivables for royalties and license fees 1,022,687 1,200,554 Inventory 76,605 71,079 Advances to employees 18,979 34,018 Prepaid expenses and other 627,902 730,964 ---------- ---------- Total current assets 23,185,593 25,049,849 Property and equipment, net 1,731,139 1,795,313 Other long-term assets 151,000 151,000 ---------- ---------- Total assets $ 25,067,732 $ 26,996,162 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 185,039 $ 329,305 Accrued expenses 3,082,657 3,987,794 Taxes payable 237,398 255,358 Deferred revenue 404,907 390,201 ---------- ---------- Total current liabilities 3,910,001 4,962,658 Deferred revenue - long-term 857,093 874,250 ---------- ---------- Total liabilities 4,767,094 5,836,908 ---------- ---------- Shareholders' equity: Common stock and common stock warrants 86,364,601 86,102,083 Accumulated deficit (66,063,963) (64,942,829) ---------- ---------- Total shareholders' equity 20,300,638 21,159,254 ---------- ---------- Total liabilities and shareholders' equity $ 25,067,732 $ 26,996,162 ========== ========== <FN> See accompanying notes to condensed consolidated financial statements. </FN> </TABLE>
AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.") - --------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - ---------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2001 2000 ------ ------ <S> <C> <C> Royalties and license fees $ 675,262 $ 425,686 Product revenues 295,473 304,562 ---------- ---------- Total revenues 970,735 730,248 Cost of sales 93,320 124,443 Operating expenses: Research & development, net 1,378,230 553,884 Selling & marketing 124,427 129,243 General & administration 688,390 638,734 ---------- ---------- Total operating expenses 2,191,047 1,321,861 ---------- ---------- Operating loss (1,313,632) (716,056) Interest income 348,169 65,093 Interest expense -- 118,132 Other income, net 2,684 2,326 ---------- ---------- Loss before taxes (962,779) (766,769) Taxes -- 39,667 ---------- ---------- Loss from continuing operations (962,779) (806,436) (Loss) income from discontinued operations (158,355) 1,026,733 ---------- ---------- Net (loss) income $(1,121,134) $ 220,297 ========== ========== Basic and diluted (loss) income per common share: Loss from continuing operations $ (0.05) $ (0.04) ========== ========== Net (loss) income $ (0.06) $ 0.01 ========== ========== Weighted average common shares outstanding-basic 20,220,040 20,133,683 ========== ========== <FN> See accompanying notes to condensed consolidated financial statements. </FN> </TABLE>
AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.") - --------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------- <TABLE> <CAPTION> For the three months ended March 31, ------------------------------------ 2001 2000 ---------- ---------- <S> <C> <C> Net cash used in operating activities $(1,461,977) $ (63,411) Cash flows from investing activities: Purchases of property and equipment (33,514) (11,436) Purchases of marketable securities (6,054,883) -- Maturities of marketable securities 5,854,163 -- ---------- ---------- Net cash used in investing activities (234,234) (11,436) ---------- ---------- Cash flows from financing activities: Proceeds from the exercise of common stock options and warrants and issuance of restricted stock -- 120,000 Repayment of debt -- (211,392) ---------- ---------- Net cash provided by financing activities -- (91,392) ---------- ---------- Net increase (decrease) in cash and cash equivalents (1,696,211) (166,239) Cash and cash equivalents, beginning of the period 6,493,336 3,705,194 ---------- ---------- Cash and cash equivalents, end of the period $ 4,797,125 $ 3,538,955 ========== ========== Cash paid for interest $ -- $ 112,008 ========== ========== Non-cash investing activities: Change in unrealized appreciation of marketable securities $ 124,574 $ -- ========== ========== <FN> See accompanying notes to condensed consolidated financial statements. </FN> </TABLE>
AP PHARMA, INC. (FORMERLY KNOWN AS "ADVANCED POLYMER SYSTEMS, INC.") - --------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------- MARCH 31, 2001 AND DECEMBER 31, 2000 (UNAUDITED) - ------------------------------------------------ (1) Basis of Presentation --------------------- On May 9, 2001, the Company's shareholders approved a change in the Company name to AP Pharma, Inc. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of AP Pharma, Inc. (formerly known as "Advanced Polymer Systems, Inc.") and subsidiaries ("the Company" or "APP") as of March 31, 2001 and the results of their operations for the three months ended March 31, 2001 and 2000. These condensed consolidated statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K. 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. The Company considers all short-term investments in debt securities which have original maturities of less than three months at date of purchase to be cash equivalents. Investments which have original maturities longer than three months are classified as marketable securities in the accompanying balance sheets. Certain reclassifications have been made to the prior period financial statements to conform with the presentation in 2001. (2) Common Shares Outstanding and Earnings Per Share Information ------------------------------------------------------------ Common stock outstanding as of March 31, 2001 is as follows: Number of Shares ---------------- Common stock outstanding as of December 31, 2000 20,206,064 Shares issued to Directors after December 31, 2000 41,928 ---------- Total shares 20,247,992 ========== (3) Revenue Recognition ------------------- Licensing agreements that generally provide for the Company to receive periodic minimum payments, royalties, and/or non- refundable licenses fees typically allow customers to sell the Company's proprietary products in a specific field or territory. The license agreements provide for APP to earn future revenue through royalty payments. The license fees are non-refundable even if the agreements are terminated before their term. These license fees are amortized on a straight- line basis over the estimated life of the product to which they relate. (4) Comprehensive (Loss) Income --------------------------- Comprehensive (loss) income for the three months ended March 31, 2001 consists of the following: <TABLE> <CAPTION> Three Months Ended March 31, March 31, 2001 2000 -------- --------- <S> <C> <C> Net (loss) income $(1,121,134) $ 220,297 Unrealized holding gains arising during the period 124,574 -- ---------- ---------- Comprehensive (loss) income $ (996,560) $ 220,297 ========== ========== </TABLE> (5) Inventory --------- The major components of inventory are as follows: <TABLE> <CAPTION> March 31, 2001 December 31, 2000 -------------- ----------------- <S> <C> <C> Raw materials $ 43,308 $ 43,387 Finished goods 33,297 27,692 --------- --------- Total inventory $ 76,605 $ 71,079 ========= ========= </TABLE> (6) Discontinued Operations ----------------------- On July 25, 2000, the Company completed the sale of certain technology rights for topical pharmaceuticals and its cosmeceutical product lines and other assets ("cosmeceutical and toiletry business") to R.P. Scherer Corporation, a subsidiary of Cardinal Health, Inc. The Company received $25 million on closing and could receive up to an additional $26.5 million over the next three years relating to the performance milestones of the cosmeceutical and toiletry business. In accordance with Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the cosmeceutical and toiletry business is reported as a discontinued operation for all periods presented in the accompanying Condensed Consolidated Statements of Operations. Basic and diluted (loss) income per common share from discontinued operations was ($0.01) and $0.05 for the three months ended March 31, 2001 and 2000, respectively. (7) Legal Proceedings ----------------- In February 2000, Douglas Kligman and Albert Kligman filed a complaint against the Company in the U.S. District Court for the Eastern District of Pennsylvania. The complaint alleges that the plaintiffs entered into a partnership with the Company to pursue development and sales of a product developed by the plantiffs. The complaint states various claims, dissolution of partnership, implied-in-law contract and other claims. The complaint alleges damages in excess of $75,000, but otherwise makes no specific damage claim. The Company has denied liability and is vigorously defending the claims, basing its defense on the assertion that its rights to the product are governed by a binding license agreement that was executed in November 1995 and amended in September 1996 and that there are no partnership agreements entered into by the parties. The Company expects that the outcome of this legal proceeding will not have a material adverse effect on the consolidated financial statements.
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 March 31, 2001 and - ------------------------------------------------------------------- 2000 - ---- Except for statements of historical fact, the statements herein are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These include, among others, uncertainty associated with timely development, approval, launch and acceptance of new products, establishment of new corporate alliances, progress in research and development programs, and other risks described below or identified from time to time in the Company's Securities and Exchange Commission filings. The Company's revenues are derived principally from royalties, license fees, R&D fees and product sales. Under strategic alliance arrangements entered into with certain corporations, APS can receive non-refundable upfront fees, future milestone payments and royalties based on third party product sales. Until July 25, 2000, the Company manufactured and sold Microsponge(R) and Polytrap(R) delivery systems for use by customers in a variety of personal care and cosmetic products. On July 25, 2000, the Company completed the sale of certain technology rights for topical pharmaceuticals and its cosmeceutical product lines and other assets to R.P. Scherer Corporation, a subsidiary of Cardinal Health, Inc. Royalties and license fees for the first quarter of 2001 increased by 59% to $675,000 from $426,000 in the corresponding quarter of the prior year. This increase was primarily due to the launch of Carac(TM), a topical prescription treatment for actinic keratoses which received FDA marketing clearance in October 2000. It is being marketed by the Company's partner, Dermik Laboratories, an Aventis company. Product revenues relating to sales of analytical standards decreased by 3% to $295,000 from $304,000 in the corresponding quarter of the prior year. Gross profit on sales of analytical standards increased from 59% to 68% due mainly to sales mix as the year-ago quarter included higher sales of low-margin instruments. Research and development expense for the first quarter of 2001 increased by $824,000 to $1,378,000 due mainly to the cost of pre- clinical trials associated with the Company's bioerodible Biochronomer(TM) system for implantable or injectable applications. Selling and marketing expense relating to analytical standards for the first quarter of 2001 decreased by 4% to $124,000 from $129,000 due mainly to lower overhead allocations. General and administrative expense for the first quarter of 2001 increased by $50,000 to $688,000 due mainly to increased expenditures on investor relations and consultants. Interest income for the first quarter of 2001 increased by $283,000 to $348,000 due mainly to the receipt of $25 million in July 2000 as proceeds from the sale of the Company's cosmeceutical and toiletries product lines to R.P. Scherer Corporation. Interest expense for the first quarter of 2001 decreased from $118,000 to $0 due to the repayment of all outstanding debt on the receipt of the $25 million from R.P. Scherer. Loss or income from discontinued operations represents the net expense or contribution associated with the cosmeceutical product lines which were sold to R.P. Scherer. The expense of $158,000 in the first quarter of 2001 relates primarily to legal fees associated with the Kligman lawsuit. The income of $1,027,000 in the first quarter of 2000 represents the net contribution earned in the year- ago quarter. Capital Resources and Liquidity - ------------------------------- Total assets as of March 31, 2001 were $25,068,000 compared with $26,996,000 at December 31, 2000. Working capital decreased to $19,276,000 at March 31, 2001 from $20,087,000 at December 31, 2000. Cash, cash equivalents and marketable securities at March 31, 2001 decreased to $21,049,000 from $22,523,000 at December 31, 2000. During the first three months of 2001, the Company's operating activities used $1,462,000 of cash compared to $63,000 in the corresponding period of the prior year. The Company invested approximately $1,378,000 in product research and development in the first quarter of 2001. Accounts receivable, net of allowances, decreased to $391,000 at March 31, 2001 compared with $491,000 at December 31, 2000. Receivables from royalties and license fees decreased to $1,023,000 from $1,201,000. Capital expenditures for the quarter ended March 31, 2001 totaled $33,000 compared to $11,000 in the corresponding period of the prior year. In the current year, the Company has financed its operations, including technology and product research and development, from the proceeds from the sale of its cosmeceutical and toiletries product lines and certain technology rights to topical pharmaceuticals to R.P. Scherer, Inc. for $25 million in July 2000, the sale of analytical standard products, payments received under licensing agreements, and interest earned on short-term investments. Cash is being expended with regard to pre-clinical trials associated with the Company's bioerodible Biochronomer System for implantable and injectable pharmaceutical applications. The Company's existing cash and cash equivalents, marketable securities, collections of trade accounts receivable, together with interest income and other revenue-producing activities including royalties, license fees and R&D fees, 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 June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, which defers the implementation of SFAS 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (a) the changes in the fair value of the hedged asset or liability that are attributed to the hedged risk or (b) the earnings effect of hedged forecasted transactions. Adoption of this statement did not have a material effect on the Company's consolidated financial statements.
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. AP PHARMA, INC. (formerly known as "ADVANCED POLYMER SYSTEMS, INC.") Date: May 15, 2001 By: /S/ Michael O'Connell ----------------- ---------------------------- Michael O'Connell President and Chief Executive Officer Date: May 15, 2001 By: /S/ Gordon Sangster ----------------- ---------------------------- Gordon Sangster Chief Financial Officer