<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 1995
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2875566
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3696 HAVEN AVENUE, REDWOOD CITY, CA 94063
(Address of principal executive offices)
(415) 366-2626
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At April 30, 1995 the number of outstanding shares of the Company's common
stock, par value $.01, was 16,404,399.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Page No.
<TABLE>
<S> <C> <C>
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets 3
March 31, 1995 and December 31, 1994
Condensed Consolidated Statements of Operations 4
for the three months ended March 31, 1995 and 1994
Condensed Consolidated Statements of Cash Flows 5
for the three months ended March 31, 1995 and 1994
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 8
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
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ADVANCED POLYMER SYSTEMS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS March 31, 1995 December 31, 1994
- ------ -------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,239,414 $ 2,741,994
Marketable securities 1,277,715 1,775,502
Pledged marketable securities 2,063,610 1,945,620
Trade accounts receivable, net 3,362,574 1,887,388
Inventory 8,979,804 7,002,026
Prepaid expenses and other 978,914 1,032,173
----------- ------------
Total current assets 20,902,031 16,384,703
Property and equipment, net 5,060,156 5,106,525
Assets held for sale 923,436 923,436
Prepaid license fees 583,775 627,544
Goodwill, net 308,193 348,393
Other assets 122,818 117,561
----------- ------------
$27,900,409 $ 23,508,162
=========== ============
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Current Liabilities:
Accounts payable $ 3,302,592 $ 2,584,161
Accrued expenses 1,865,307 2,388,793
Accounts payable, Johnson & Johnson 6,294,996 3,570,525
Deferred revenues 750,000 0
Current portion - long-term debt 2,200,000 2,200,000
----------- ------------
Total current liabilities 14,412,895 10,743,479
Long-term debt 947,635 978,935
----------- ------------
Total liabilities 15,360,530 11,722,414
Shareholders' equity:
Common stock and common stock warrants 66,103,863 64,516,958
Unrealized gain on securities 189,997 113,166
Accumulated deficit (53,753,981) (52,844,376)
----------- ------------
Total shareholders' equity 12,539,879 11,785,748
----------- ------------
$27,900,409 $ 23,508,162
=========== ============
</TABLE>
See accompanying notes.
3
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
<S> <C> <C>
Product revenues $4,286,219 $ 5,008,138
Licensing revenues 855,000 88,000
---------- -----------
Total revenues 5,141,219 5,096,138
Cost of sales 3,023,046 3,470,880
---------- -----------
Gross profit 2,118,173 1,625,258
Research & development 931,229 1,298,833
Selling & marketing 1,104,241 1,014,960
Advertising & promotion 273,163 482,581
General & administration 746,606 657,017
---------- -----------
Total expenses 3,055,239 3,453,391
---------- -----------
Operating loss (937,066) (1,828,133)
Interest Income 97,984 65,038
Interest expense (66,180) (70,448)
Other income (expense) (33) 73
---------- -----------
Loss before taxes (905,295) (1,833,470)
Income tax expense 4,310 15,803
---------- -----------
Net loss ($909,605) ($1,849,273)
========== ===========
Loss per common share ($0.06) ($0.13)
========== ===========
Weighted average common
shares outstanding 16,179,214 13,890,604
========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($909,604) ($1,849,273)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 288,022 276,748
Change in allowance for doubtful accounts 2,205 17,738
Gain on sale of equipment 0 (68)
Accretion of marketable securities (41,159) (36,434)
Changes in operating assets and liabilities:
Trade accounts receivable (1,446,008) (1,548,142)
Inventory (1,977,778) (779,300)
Prepaid license fees 34,467 (103,476)
Other assets 16,897 78,126
Current liabilities 3,669,417 3,425,552
---------- -----------
Net cash used in operating activities (363,541) (518,529)
---------- -----------
Cash flows from investing activities:
Purchases of fixed assets, net of disposals (192,429) (171,184)
Change in marketable securities 497,787 6,267
Repayment of long-term debt (31,300) (52,505)
---------- -----------
Net cash provided from (used in) investing activities 274,058 (217,422)
---------- -----------
Cash flows from financing activities:
Proceeds from the exercise of common stock
options, net of shares retired 211,644 1,775,046
Proceeds from private placement, net of offering costs 1,375,261 0
---------- -----------
Net cash provided from financing activities 1,586,905 1,775,046
---------- -----------
Net increase in cash and cash equivalents 1,497,422 1,039,095
Cash and cash equivalents, beginning of the
period 2,741,994 1,792,637
----------- -----------
Cash and cash equivalents, end of the period $4,239,416 $ 2,831,732
========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
ADVANCED POLYMER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1994
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial
position as of March 31, 1995, the results of operations for the three
months ended March 31, 1995 and 1994, and changes in cash for the three
months ended March 31, 1995 and 1994.
These condensed consolidated statements should be read in conjunction with
the Company's audited consolidated financial statements for the years ended
December 31, 1994, 1993 and 1992.
The condensed consolidated financial statements include the financial
statements of the Company (APS) and its subsidiaries, Premier, Inc.
("Premier"), Advanced Consumer Products, Inc., and APS Joint Venture
Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
The business of Premier, the Company's marketing and distribution
subsidiary, is highly seasonal in that it markets and distributes sunscreen
products under an exclusive distribution agreement with Johnson and
Johnson. Sales of these products are heavily weighted to the first two
quarters of the calendar year, so the results of operations for the interim
periods are not necessarily indicative of the results for the full year.
The Company considers all short-term investments which have original
maturities of less than three months to be cash equivalents. Investments
which have original maturities longer than three months are classified as
marketable securities in the accompanying balance sheets.
6
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Certain reclassifications have been made to the prior year financial
statements to conform with the presentation in 1995.
(2) COMMON SHARES OUTSTANDING AND PER SHARE INFORMATION
Common stock outstanding as of March 31, 1995 is as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
Common stock outstanding as of December 31, 1994 16,043,121
Options exercised after December 31, 1994 51,000
Shares issued in private placement 310,278
----------
TOTAL SHARES 16,404,399
==========
</TABLE>
Per share information is based on the weighted average number of shares of
common stock outstanding, as adjusted during each of the periods. Stock
options and warrants (common stock equivalents) are not included in the
calculations as their inclusion would be anti-dilutive.
(3) PRIVATE PLACEMENT
During the first quarter of 1995, APS received $1,375,261 net of offering
costs through a previously announced private placement and sale of 310,278
shares of common stock and 310,278 warrants exercisable over a three-year
period at an exercise price of $5.32 per share. The private placement was
pursuant to an agreement made in 1994 for the sale of up to $8 million of
common stock and warrants in six installments beginning June 1994 and
ending September 29, 1995. In accordance with the private placement
agreement, the Company has sold $6 million of common stock and warrants as
of March 30, 1995. The remaining two optional installments in June and
September 1995 totalling $2 million of Common Stock and warrants will not
be sold by the Company.
7
<PAGE> 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 MARCH 31, 1995 AND 1994
Revenues for the three months ended March 31, 1995 totalled $5,141,000 compared
to $5,096,000 in the corresponding period of the prior year. This represented
product revenues of $4,286,000 and licensing revenues of $855,000 compared to
product revenues of $5,008,000 and licensing revenues of $88,000 in the first
quarter of the prior year.
The decline in product revenues was primarily attributable to reduced sales of
Sundown(R) suncare products (down $1,495,000 or 51%) marketed on behalf of
Johnson & Johnson, Inc. (J&J). This decline was part of a planned strategy to
manage customer ordering and prevent post-season returns. This was partially
offset by a 48% increase in sales of Microsponge(R) delivery systems,
principally to Dow Corning for supply to manufacturers of cosmetics and personal
care products, and an increase of 47% in revenues from other consumer products.
These included shipments of two lines of consumer products incorporating the
Microsponge delivery system technology each of which grew by 18% over the first
quarter of the prior year: Take-Off(R) make-up remover cloths reintroduced in
the fourth quarter of 1994 incorporating the Microsponge technology and the
Exact(R) line of acne products.
Licensing revenues increased from $88,000 in the first quarter of 1994 to
$855,000, primarily due to the receipt of a milestone payment of $1,500,000 from
Ortho Pharmaceutical Corporation (Ortho). This was received on the filing of
the Company's New Drug Application (NDA) for the microsponge-entrapped tretinoin
acne treatment which will be marketed by Ortho upon FDA approval. Half of this
amount was recognized as income and half was treated as deferred royalty income,
under the terms of the agreement with Ortho.
Gross profit for the first quarter was $2,118,000 or 41% of sales, compared to
$1,625,000 or 32% of sales in the year-ago period. Excluding the license fees,
which benefit revenues without any corresponding cost of sales, gross profit for
the first quarter was consistent with the prior year.
Research and development expense decreased by $367,000 or 28% to $931,000 from
the year-ago first quarter. This anticipated decrease primarily relates to
reduced spending on now-completed clinical studies for the two New Drug
Applications (NDAs) which the Company has filed. The second filing relating to
the Company's tretinoin-based prescription acne treatment was submitted in
February 1995.
8
<PAGE> 9
Selling and marketing expense increased by $89,000 or 9% to $1,104,000. This
increase primarily represented expenses associated with the establishment of
the Company's ethical pharmaceutical marketing effort, partially offset by
continued overhead reduction in the consumer products division.
Advertising and promotion expense decreased by $210,000 or 43% to $273,000 as
the Company maintained its focus on cost-efficient point-of-sale advertising
for Exact(R) and Take-off(R), having established a market presence for both
products.
General and administrative expense increased by $89,000 or 14% to $746,000 due
mainly to increased insurance costs.
Interest income increased by $33,000 or 51% to $98,000 due to higher cash
balances during the quarter. Interest expense was essentially flat.
The net loss for the first quarter of $910,000 represents a 51% improvement
over the net loss of $1,849,000 incurred in the first quarter of the prior
year, due mainly to the receipt of the milestone payment on the filing of the
NDA and the decrease in research and development expense.
CAPITAL RESOURCES AND LIQUIDITY
Total assets as of March 31, 1995 were $27,900,000 compared with $23,508,000 at
December 31, 1994. Working capital increased to $6,490,000 from $5,642,000 at
December 31, 1994. In the same period, cash equivalents and marketable
securities increased to $5,517,000 from $4,518,000. During the first quarter
of 1995, Company operations used $364,000 of cash.
The Company has financed its operations, including product research and
development, from amounts raised in equity financings; the sale of consumer
products, Microsponge delivery systems and analytical standard products;
payments received under licensing agreements; and interest earned on short-term
investments. The Company raised $16,636,000 in equity financings in 1992 and
received an additional $10,492,000 in 1994 and the first quarter of 1995 from
two private placements.
On March 31, 1995, the Company had $5,517,000 in cash, cash equivalents and
short-term marketable securities. The Company's primary investment objectives
for these assets are the preservation of capital and the maintenance of a high
degree of liquidity.
Cash has been expended with regard to Phase III clinical tests of tretinoin
entrapped in a Microsponge delivery system for the treatment of acne, and of
ProZone, APS' Melanosponge product, together with related research and
developments costs, all of which should decrease substantially in 1995
as the respective NDAs have been filed.
9
<PAGE> 10
Additionally, the Company is contractually obligated to purchase minimum annual
quantities of melanin. Failure to purchase the minimum quantities in 1995
would result in a mandatory payment of $600,000 to its melanin supplier under
"take or pay" provisions.
In February 1995, the Company received a milestone payment of $1,500,000 from
Ortho Pharmaceutical Corporation upon the filing of its NDA on the tretinoin
acne treatment. Additionally, under the terms of one of the private placements
arranged in 1994, the Company received net proceeds of $1,375,000 in March 1995.
The Company's existing cash, cash equivalents and short-term marketable
securities, collections of trade accounts receivable, together with interest
income and other revenue producing activities, are expected to be sufficient to
meet the Company's near-term cash requirements assuming no changes to existing
business plans. The Company is currently exploring a number of opportunities
to generate additional cash to sustain and develop the business, including
sales of idle assets, refinancing of existing debt, joint ventures, licensing
opportunities and equity financings.
If the Company is unsuccessful in its efforts to raise additional cash,
operating costs will have to be significantly reduced in the near term.
10
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PART II.
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
11
<PAGE> 12
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: May 12, 1995 By: /s/ John J. Meakem, Jr.
------------ -------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: May 12, 1995 By: /s/ Michael O'Connell
------------ -------------------------
Michael O'Connell
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 4,239,414
<SECURITIES> 1,277,715
<RECEIVABLES> 3,458,061
<ALLOWANCES> 95,487
<INVENTORY> 8,979,804
<CURRENT-ASSETS> 20,902,031
<PP&E> 13,182,860
<DEPRECIATION> 7,199,268
<TOTAL-ASSETS> 27,900,409
<CURRENT-LIABILITIES> 14,412,895
<BONDS> 0
<COMMON> 164,044
0
0
<OTHER-SE> 12,375,835
<TOTAL-LIABILITY-AND-EQUITY> 27,900,409
<SALES> 3,941,391
<TOTAL-REVENUES> 5,141,219
<CGS> 2,924,346
<TOTAL-COSTS> 3,023,046
<OTHER-EXPENSES> 3,026,283
<LOSS-PROVISION> 28,923
<INTEREST-EXPENSE> (31,804)
<INCOME-PRETAX> (905,295)
<INCOME-TAX> 4,310
<INCOME-CONTINUING> (909,605)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (909,605)
<EPS-PRIMARY> ($0.06)
<EPS-DILUTED> ($0.06)
</TABLE>
