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, 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 April 30, 1997 the number of outstanding shares of the Company's common
stock, par value $.01, was 18,418,492.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets 3
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations 4
for the three months ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 5
for the three months ended March 31, 1997 and 1996
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
2
<PAGE>
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1997 1996
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,436,700 $ 5,394,509
Marketable securities 1,596,617 --
Trade accounts receivable, net 2,092,257 1,666,148
Inventory 2,707,728 2,085,073
Prepaid expenses and other 354,688 328,028
Receivable from/and assets held for sale 731,306 2,181,004
------------ ------------
Total current assets 12,919,296 11,654,762
Property and equipment, net 4,642,670 4,681,292
Deferred loan costs, net 551,142 616,958
Prepaid license fees 145,034 165,752
Intangible assets, including goodwill, net 1,209,261 1,265,801
Other assets 153,780 59,603
------------ ------------
$ 19,621,183 $ 18,444,168
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 809,029 $ 1,543,143
Accrued expenses 1,924,428 1,456,512
Accrued melanin purchase commitments 1,800,000 1,800,000
Accounts payable, Johnson & Johnson 359,872 814,509
Deferred revenues 2,225,000 750,000
Current portion - long-term debt 1,825,371 1,490,779
------------ ------------
Total current liabilities 8,943,700 7,854,943
Long-term debt 4,958,070 5,578,849
------------ ------------
Total liabilities 13,901,770 13,433,792
------------ ------------
Shareholders' equity:
Common stock and common stock warrants 76,881,495 76,591,381
Accumulated deficit (71,162,082) (71,581,005)
------------ ------------
Total shareholders' equity 5,719,413 5,010,376
------------ ------------
$ 19,621,183 $ 18,444,168
============ ============
See accompanying notes.
3
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
3 Months Ended 3 Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
Microsponge product and technology revenues $ 3,547,132 $ 1,448,745
Sales of consumer products -- 3,704,727
Milestone payment 1,500,000 --
------------ ------------
Total revenues 5,047,132 5,153,472
Cost of sales 1,491,515 3,304,806
Operating expenses:
Research & development 932,474 889,956
Selling, marketing & advertising 1,173,812 2,037,568
General & administration 843,294 670,021
------------ ------------
Total operating expenses 2,949,580 3,597,545
------------ ------------
Operating income (loss) 606,037 (1,748,879)
Interest income 79,300 38,956
Interest expense (271,392) (299,078)
Other income (expense) 4,978 (10,296)
------------ ------------
Net income (loss) $ 418,923 ($ 2,019,297)
============ ============
Net income (loss) per common share $ 0.02 ($ 0.12)
============ ============
Number of shares used in
computing per share amounts
(the 1997 and 1996 number of shares
include 1,286,824 and 0 shares,
respectively, relating to common
stock equivalents) 19,692,958 17,354,858
============ ============
See accompanying notes.
4
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1997 and 1996
(Unaudited)
March 31, 1997 March 31, 1996
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ 418,923 ($2,019,297)
Adjustments to reconcile net income (loss) to net
cash provided from (used in)
operating activities:
Depreciation and amortization 251,947 353,135
Change in allowance for doubtful accounts -- (1,308)
Provision for deferred compensation 45,000 --
Changes in operating assets and liabilities:
Trade accounts receivable (426,109) (1,699,365)
Inventory (622,655) 1,282,946
Prepaid expenses and other (26,660) 103,650
Deferred loan costs 65,816 16,961
Other assets (94,177) 68,875
Accounts payable and accrued expenses (750,835) (1,827,610)
Deferred revenue 1,475,000 --
----------- -----------
Net cash provided from (used in) operating
activities 336,250 (3,722,013)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (136,067) (61,225)
Purchase of marketable securities (1,596,617) (512,513)
Maturities and sales of marketable securities -- 506,396
Proceeds from assets held for sale 1,449,698 --
----------- -----------
Net cash used in investing activities (282,986) (67,342)
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of common stock options 275,114 730,309
Proceeds from note payable -- 500,000
Proceeds from long-term debt and warrants -- 150,000
Repayment of long-term debt (286,187) (192,389)
Proceeds from private placement,
net of offering costs -- 2,976,044
----------- -----------
Net cash (used in) provided from
financing activities (11,073) 4,163,964
----------- -----------
Net increase in cash and cash equivalents 42,191 374,609
Cash and cash equivalents, beginning of the
period 5,394,509 5,172,809
----------- -----------
Cash and cash equivalents, end of the period $ 5,436,700 $ 5,547,418
=========== ===========
Supplemental disclosure of non-cash financing transactions:
During the first quarter of 1996, the Company acquired all rights to the
Polytrap 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
<PAGE>
ADVANCED POLYMER SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 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 March 31, 1997 and the results of their
operations and their cash flows for the three months ended March 31,
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"), Advanced Consumer Products, Inc., 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
<PAGE>
(2) Common Shares Outstanding and per Share Information
Common stock outstanding as of March 31, 1997 is as follows:
Number of Shares
----------------
Common stock outstanding as of December 31, 1996 18,359,744
Options exercised after December 31, 1996 58,748
----------
Total shares 18,418,492
==========
In 1996, 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. In
1997, the number of shares used in calculating earnings per share
included the effect of common stock equivalents.
(3) New Accounting Standard
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.
(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:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials and work-in-process $ 668,257 $ 604,852
Finished goods 2,039,471 1,480,221
----------- ------------
Total inventory $ 2,707,728 $ 2,085,073
=========== ===========
7
<PAGE>
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, 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.
Revenues for the three months ended March 31, 1997 were $5,047,000 compared to
$5,153,000 in the corresponding quarter of the prior year. Microsponge product
and technology revenues were $3,547,000 in the first quarter of 1997 compared to
$1,449,000, an increase of $2,098,000 or 145% over the first quarter of the
prior year. This was due primarily to increased shipments of Microsponge systems
to manufacturers of personal care and cosmeceutical products, and up-front
technology revenues received from corporate partners.
The current quarter included a milestone payment of $1,500,000 from Ortho McNeil
Pharmaceutical Corporation ("Ortho"), a subsidiary of Johnson & Johnson, upon
the Company's receipt of marketing clearance for Retin-A(R) Micro(TM) from the
Food and Drug Administration (FDA). Retin-A Micro was launched in March 1997.
The first quarter of 1997 did not include revenues from sales of consumer
products which were licensed to
8
<PAGE>
the Lander Company effective January 1, 1997. Sales of consumer products in the
year-ago quarter were $3,705,000 which consisted of sales of products
subsequently licensed to the Lander Company and sales of suncare products.
Gross profit on product revenues for the quarter was $1,256,000 or 46% of
product revenues compared to $1,799,000 or 35% in the year-ago period reflecting
increased manufacturing volume and sales of higher margin products, primarily
proprietary cosmeceuticals.
Operating expenses decreased by $648,000 or 18%. Research and development
expense increased by $43,000 or 5% to $932,000. Selling, marketing and
advertising expense decreased by $864,000 or 42% to $1,174,000. This was
primarily due to the fact that the Company licensed its consumer products to
Lander Company effective January 1, 1997, thus avoiding the advertising
expenditure and variable selling expenses such as commission and freight
associated with promoting and distributing consumer products. This decrease is
expected to continue. General and administrative expense increased by $173,000
or 26% due primarily to higher professional fees.
Operating income of $606,000 represented an improvement of $2,355,000 over the
prior year's first quarter loss of $1,749,000. This was due primarily to the
milestone payment received from Ortho, up-front technology revenues, improved
margins on product sales and a significant reduction in operating expenses.
Interest income of $79,000 for the first quarter of 1997 was higher than the
prior year by $40,000 due mainly to higher cash and investment balances.
Interest expense for the quarter of $271,000 was lower than the year-ago quarter
by $28,000 due mainly to principal repayments.
The net income for the period was $419,000 compared to a net loss of $2,019,000
in the corresponding period of the prior year.
Capital Resources and Liquidity
Total assets as of March 31, 1997 were $19,621,000 compared with $18,444,000 at
December 31, 1996, and working capital increased to $3,976,000 from $3,800,000.
In the same period, cash, cash equivalents and marketable securities increased
to $7,033,000 from $5,395,000. During the first quarter, Company operations
provided $336,000 of cash. The Company invested approximately $932,000 in
product research and development and $1,174,000 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
consumer products,
9
<PAGE>
Microsponge delivery systems and analytical standard products; payments received
under licensing agreements; and interest earned on short-term investments.
In the first quarter of 1997, upon receipt of approval 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.
The Company's existing cash, cash equivalents and marketable securities,
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 Standard
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.
10
<PAGE>
PART II.
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27 Financial Data Schedules
(b) Reports on Form 8-K: None
11
<PAGE>
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 14, 1997 By: /s/ John J. Meakem, Jr.
------------- ------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: May 14, 1997 By: /s/ Michael O'Connell
------------- ----------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
Form 10-Q
ADVANCED POLYMER SYSTEMS, INC.
27 -Financial Data Schedules.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,436,700
<SECURITIES> 1,596,617
<RECEIVABLES> 2,092,257
<ALLOWANCES> 40,888
<INVENTORY> 2,707,728
<CURRENT-ASSETS> 12,919,296
<PP&E> 13,558,040
<DEPRECIATION> 8,915,370
<TOTAL-ASSETS> 19,621,183
<CURRENT-LIABILITIES> 8,943,700
<BONDS> 4,958,070
0
0
<COMMON> 184,185
<OTHER-SE> 5,535,228
<TOTAL-LIABILITY-AND-EQUITY> 19,621,183
<SALES> 2,455,132
<TOTAL-REVENUES> 5,047,132
<CGS> 1,491,515
<TOTAL-COSTS> 1,491,515
<OTHER-EXPENSES> 2,949,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271,392
<INCOME-PRETAX> 418,923
<INCOME-TAX> 0
<INCOME-CONTINUING> 418,923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418,923
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
