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, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission file Number 0-16109
A.P. PHARMA, INC.
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(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
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(Address of principal executive offices)
(650) 366-2626
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(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
--- ---
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X ]
---- ----
At April 30, 2004, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,744,735.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements:
---------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
- ----------------------------------------------------
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 2,400 $ 97
Marketable securities 5,344 9,387
Accounts receivable, net 1,466 1,340
Prepaid expenses and other 421 434
------ ------
Total current assets 9,631 11,258
Property and equipment, net 1,349 1,430
Other long-term assets 287 467
------ ------
Total assets $ 11,267 $ 13,155
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,201 $ 476
Accrued expenses 1,052 1,173
Accrued disposition costs 76 53
Deferred revenue 190 190
------ ------
Total current liabilities 2,519 1,892
------ ------
Stockholders' equity:
Common stock 86,936 86,844
Accumulated deficit (78,197) (75,598)
Accumulated other comprehensive
income 9 17
------ ------
Total stockholders' equity 8,748 11,263
------ ------
Total liabilities and stockholders'
equity $ 11,267 $ 13,155
====== ======
See accompanying notes to condensed consolidated financial
statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
(in thousands except per share amounts)
- ---------------------------------------
Three Months Ended March 31,
----------------------------
2004 2003
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Royalties $ 1,154 $ 1,032
Contract revenues 26 74
------ ------
Total revenues 1,180 1,106
Operating expenses:
Research & development 3,035 2,202
General & administrative 724 778
------ ------
Total operating expenses 3,759 2,980
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Operating loss (2,579) (1,874)
Interest income, net 31 77
Other income (expense), net (2) (1)
------ ------
Loss from continuing operations (2,550) (1,798)
Loss from discontinued operations (50) (54)
Gain on disposition of
discontinued operations 1 1,886
------ ------
Net income (loss) $(2,599) $ 34
====== ======
Basic earnings (loss) per share:
Loss from continuing operations $ (0.12) $ (0.09)
====== ======
Net income (loss) $ (0.13) $ *
====== ======
Diluted earnings (loss) per share:
Loss from continuing operations $ (0.12) $ (0.09)
====== ======
Net income (loss) $ (0.13) $ *
====== ======
Weighted average common shares
outstanding-basic 20,653 20,475
====== ======
Weighted average common shares
outstanding-diluted 20,653 20,516
====== ======
* Less than $0.01 per share.
See accompanying notes to condensed consolidated financial statements.
A.P. PHARMA, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands
- ------------------------------------------------------------------------
except for share amounts)
- -------------------------
Three Months Ended March 31,
----------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income (loss) $(2,599) $ 34
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Loss from discontinued operations 50 54
Gain on disposition of discontinued
operations (1) (1,886)
Gain on sale of marketable
securities (2) --
Depreciation and amortization 92 117
Recovery of doubtful accounts and
note receivable -- (8)
Stock and stock option
compensation awards to non-
employees 6 28
Amortization of premium/discount
and accretion of marketable
securities (43) (23)
Loss on retirements of property
and equipment 6 8
Changes in operating assets and
liabilities:
Accounts receivable (145) (46)
Prepaid expenses and other
current assets 13 73
Other long-term assets 180 (292)
Accounts payable 725 (86)
Accrued expenses (121) 447
------ ------
Net cash used in continuing
operating activities (1,839) (1,580)
Net cash used in discontinued
operations (26) (211)
Cash flows from investing activities:
Proceeds from disposition of
discontinued operations 19 2,149
Purchases of property and equipment (18) (26)
Purchases of marketable securities (1,295) (2,836)
Maturities of marketable securities 5,376 2,854
------ ------
Net cash provided by investing
activities 4,082 2,141
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Cash flows from financing activities:
Proceeds from the exercise of stock
options 86 --
------ ------
Net cash proceeds provided by
financing activities 86 --
Net increase in cash and cash
equivalents 2,303 350
Cash and cash equivalents, beginning
of the period 97 3,282
------ ------
Cash and cash equivalents, end
of the period $ 2,400 $ 3,632
====== ======
See accompanying notes to condensed consolidated financial statements.
A.P. PHARMA, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MARCH 31, 2004 and 2003 (UNAUDITED)
- -----------------------------------
(1) Basis of Presentation
---------------------
A.P. Pharma, Inc. ("APP", the "Company", "we". "our", or "us")
is developing patented polymer-based delivery systems to
enhance the safety and effectiveness of pharmaceutical
compounds. Projects are currently conducted under feasibility
and development arrangements with pharmaceutical and
biotechnology companies. New products and technologies under
development include bioerodible polymers for injectable and
implantable drug delivery.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in
the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the
opinion of management, all adjustments of a normal recurring
nature considered necessary for a fair presentation have been
included. Operating results for the three months ended March
31, 2004 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2004. The
condensed consolidated balance sheet as of December 31, 2003
has been derived from the audited financial statements as of
that date. For further information, refer to the consolidated
financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2003.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiary, APS
Analytical Standards, Inc through the date of sale (February
13, 2003). All significant intercompany balances and
transactions have been eliminated in consolidation.
Critical Accounting Policies
- ----------------------------
We believe there have been no significant changes in our
critical accounting policies during the three months ended
March 31, 2004 compared to those previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2003
filed with the SEC on March 26, 2004.
Use of Estimates
- ----------------
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in our financial statements and
accompanying notes. Estimates were made relating to useful
lives of fixed assets, valuation allowances, impairment of
assets and accruals. Actual results could differ materially
from those estimates.
Revenue Recognition
- -------------------
Our revenue arrangements with multiple deliverables are divided
into separate units of accounting if certain criteria are met,
including whether the delivered item has stand-alone value to
the customer and whether there is objective and reliable
evidence of the fair value of the undelivered items. The
consideration we receive is allocated among the separate units
based on their respective fair values, and the applicable
revenue recognition criteria are considered separately for each
of the separate units. Advance payments received in excess of
amounts earned are classified as deferred revenue until earned.
* Royalties
Royalties from licenses are based on third-party sales of
licensed products or technologies and recorded as earned in
accordance with contract terms when third-party results can
be reliably determined and collectibility is reasonably
assured.
Generally, contractually required minimum royalties are
recorded ratably throughout the contractual period.
Royalties in excess of minimum royalties are recognized as
earned when the related product is shipped to the end
customer by our licensees based on information provided to
us by our licensees.
* License Fees
We have licensing agreements that generally provide for
periodic minimum payments, royalties, and/or non-refundable
license fees. These licensing agreements typically require
a non-refundable license fee and allow our partners to sell
our proprietary products in a defined field or territory for
a defined period. The license agreements provide for APP to
earn future revenue through royalty payments. These non-
refundable license fees are initially reported as deferred
revenues and recognized as revenues over the estimated life
of the product to which they relate as we have continuing
involvement with licensees until the related product is
discontinued or the related patents expire, whichever is
earlier. Revenue recognized from deferred license fees is
classified as license fees in the accompanying consolidated
statements of operations. License fees received in
connection with arrangements where we have no continuing
involvement are recognized as license fees when the amounts
are received or when collectibility is assured, whichever is
earlier. No such fees were recorded during the three months
ended March 31, 2004.
A milestone payment is a payment made by a third party or
corporate partner to us upon the achievement of a
predetermined milestone as defined in a legally binding
contract. Milestone payments are recognized as license fees
when the milestone event has occurred and we have completed
all milestone related services such that the milestone
payment is currently due and is non-refundable. No such
fees were recorded during the three months ended March 31,
2004.
* Contract Revenues
Contract revenues also relate to research and development
arrangements that generally provide for the company to
invoice research and development fees based on full-time
equivalent hours for each project. Revenues from these
arrangements are recognized as the related development costs
are incurred. These revenues approximate the costs
incurred.
Cash Equivalents and Short-term Investments
- -------------------------------------------
We consider 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.
Accrued Disposition Costs
- -------------------------
Costs relating to disposal of discontinued operations are
reported as accrued disposition costs in the accompanying
balance sheets. Accrued disposition costs include severance
costs and gross profit guarantees.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
equivalents, short-term investments and trade accounts
receivable. We invest excess cash in a variety of high grade
short-term, interest-bearing securities. This diversification
of risk is consistent with our policy to ensure safety of
principal and to maintain liquidity.
Approximately 79% of the receivables were concentrated with two
customers in the pharmaceutical industry as of March 31, 2004.
To reduce credit risk, we perform ongoing credit evaluations of
our customers' financial conditions. We do not generally
require collateral for customers with accounts receivable
balances.
Segment and Geographic Information
- ----------------------------------
Our operations are confined to a single business segment, the
design and commercialization of polymer technologies for
pharmaceutical and other applications. Substantially all of
our revenues are derived from domestic customers.
Stock-Based Compensation
- ------------------------
We have elected to account for stock-based compensation related
to employees using the intrinsic value method. Accordingly,
except for stock options issued to non-employees and restricted
stock awards to employees and directors, no compensation cost
has been recognized for our stock option plans and stock
purchase plan. Compensation related to options granted to non-
employees is periodically remeasured as earned.
In accordance with FAS No. 123, "Accounting for Stock-Based
Compensation," as amended by FAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," we have
provided, below, the pro forma disclosures of the effect on net
income (loss) and net earnings (loss) per share as if FAS No.
123 had been applied in measuring compensation expense for all
periods presented.
Three Months Ended
March 31,
------------------
2004 2003
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(In thousands, except per
share amounts)
Net earnings (loss), as reported $(2,599) $ 34
Deduct:
Stock-based employee
compensation expense
determined under FAS 123 (104) (132)
------ ------
Pro forma net loss $(2,703) $ (98)
====== ======
Basic earnings (loss) per
share as reported $ (0.13) $ *
====== ======
Basic pro forma loss per
share $ (0.13) $ **
====== ======
Diluted earnings (loss) per
share as reported $ (0.13) $ *
====== ======
Diluted pro forma loss per
share $ (0.13) $ **
====== ======
* Less than $0.01 per share.
** Less than $(0.01) per share.
Fair values of awards granted under the stock option plans and
employee stock purchase plan were estimated at grant or
purchase dates using Black-Scholes option pricing model. For
pro forma disclosure, the estimated fair value of the options
is amortized to expense over the vesting period of the options
using the straight line method. The multiple option approach
is used to value the purchase rights granted under the employee
stock purchase plan. We used the following assumptions:
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Expected life in years (from
vesting date):
Stock options 5 5
Employee stock purchase plan 1.5 - 2 1.5 - 2
Discount rate:
Stock options 2.8% 3.8%
Employee stock purchase plan 1.47 - 1.82 1.7 - 3.2
Volatility
Stock options 65% 102%
Employee stock purchase plan 65% - 68% 68% - 69%
Expected dividend yield 0% 0%
Reclassifications
- -----------------
Certain immaterial amounts in the prior year financial
statements have been reclassified to conform with the current
year presentation.
(2) Earnings (Loss) Per Share Information
-------------------------------------
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the total of weighted-average
number of common shares outstanding and dilutive potential
common shares outstanding.
The following table sets forth the computation of our basic and
diluted earnings (loss) per share (in thousands, except per
share amounts):
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Loss from continuing operations $ (2,550) $ (1,798)
======= =======
Net income (loss) (2,599) 34
======= =======
Shares calculation:
Weighted average shares
outstanding - basic 20,653 20,475
Effect of dilutive securities:
Stock options, employee stock
purchase plan and stock to be
issued to directors -- 41
------- -------
Weighted average shares
outstanding - diluted 20,653 20,516
======= =======
Basic earnings (loss) per share:
Loss from continuing operations $ (0.12) $ (0.09)
======= =======
Net income (loss) $ (0.13) $ *
======= =======
Diluted earnings (loss) per share:
Loss from continuing operations $ (0.12) $ (0.09)
======= =======
Net income (loss) $ (0.13) $ *
======= =======
* Less than $0.01 per share.
The following stock options were outstanding during the periods
presented, but were not included in the computation of diluted
earnings (loss) per share since inclusion of these potentially
dilutive securities would have been anti-dilutive for the
periods presented (in thousands, except exercise prices):
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Number outstanding 2,197 2,929
Range of exercise prices $1.00 - $10.25 $1.01 - $10.25
(3) Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) for the three months ended March
31, 2004 and March 31, 2003 consists of the following (in
thousands):
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Net income (loss) $(2,599) $ 34
Unrealized losses on
available-for-sale securities (8) (8)
------ ------
Comprehensive income (loss) $(2,607) $ 26
====== ======
(4) Commitments
-----------
In March 2004 we renegotiated the lease for our facilities.
The following is our operating lease commitment as of March 31,
2004.
Twelve Months Minimum
Ending March 31, Payments
---------------- --------
2005 $ 316
2006 444
2007 453
2008 463
2009 475
Thereafter 995
-----
Total $3,146
=====
(5) Discontinued Operations
-----------------------
We completed the sale of certain assets of our Analytical
Standards division as well as certain technology rights for our
topical pharmaceutical and cosmeceutical product lines and
other assets ("cosmeceutical and toiletry business") in
February 2003 and July 2000, respectively.
The Analytical Standards division and cosmeceutical and
toiletry business are reported as discontinued operations for
all periods presented in the accompanying Condensed
Consolidated Statements of Operations.
Loss from discontinued operations represents the income (loss)
attributable to our Analytical Standards division that was sold
to GFS Chemicals on February 13, 2003, and changes in estimates
for our cosmeceutical and toiletry business that was sold to RP
Scherer on July 25, 2000, as follows (in thousands):
For the Three Months Ended
March 31,
--------------------------
2004 2003
---- ----
Analytical Standards Division
- -----------------------------
Income from Analytical Standards
division $ -- $ 9
---- ----
-- 9
Cosmeceutical and Toiletry Business
- -----------------------------------
Recovery of doubtful accounts
receivable -- 4
Change in estimates for gross
profit guarantees (50) (67)
----- ---
(50) (63)
----- ---
Total loss from discontinued
operations $ (50) $(54)
===== ===
Basic and diluted loss per common share from discontinued
operations excluding the gain on sale of the Analytical
Standards and cosmeceutical product lines were less than
($0.01) per share for the three months ended March 31, 2004 and
2003, respectively.
Gain on disposition of discontinued operations in the
accompanying Consolidated Statement of Operations for the three
months ended March 31, 2003 represents the gain on the sale of
certain assets of our Analytical Standards division in February
2003.
As of March 31, 2004, net assets relating to the discontinued
operations include trade receivables of $119,000. Liabilities
related to the discontinued operation in the amount of $76,000
include severance costs and accruals for gross profit
guarantees. These liabilities are reported as accrued
disposition costs in the accompanying consolidated balance
sheets.
Cash used in discounted operations primarily relates to
payments of severance costs to former employees who were
terminated as a result of the sale of the Analytical Standards
division.
Analytical Standards Division
- -----------------------------
On February 13, 2003, we completed the sale of our Analytical
Standards division to GFS Chemicals, Inc. ("GFS"), a privately
held company based in Columbus, Ohio. In this transaction, we
received $2.1 million on closing and are entitled to receive
royalties on sales of Analytical Standards products for a
period of five years at rates ranging from 5% to 15%. The net
present value of the guaranteed minimum royalties is included
in the gain on disposition of discontinued operations.
Royalties in excess of the guaranteed minimum royalties are
included in the gain on disposition of discontinued operations
when they are realized in accordance with our revenue
recognition policy. We recorded additional royalties of
$20,000 as income for the 3 months ended March 31, 2004.
As a result of the sale of the Analytical Standards division,
we recorded severance charges of $210,000 for the year ended
December 31, 2003 as a partial offset to the gain on
disposition of the Analytical Standards division. In the three
months ended March 31, 2004 a reduction to the estimated
severance charges of $19,000 was recorded. Approximately
$184,000 of these severance charges has been paid through March
31, 2004.
Cosmeceutical and Toiletry Business
- -----------------------------------
On July 25, 2000, we completed the sale of certain technology
rights for our topical pharmaceuticals and cosmeceutical
product lines and other assets ("cosmeceutical and toiletry
business") to RP Scherer Corporation, a subsidiary of Cardinal
Health, Inc. We received $25 million at closing and were
entitled to receive further earnout amounts for the subsequent
three years up to a maximum of $26.5 million, the amounts of
which were dependent on the performance of the business sold.
During the first two years of the earnout period, we received
an aggregate of $3.8 million. No earnout income was received
or reported for the third and final earnout year.
Under the terms of the agreement with RP Scherer, we guaranteed
a minimum gross profit percentage on RP Scherer's combined
sales of products to Ortho Neutrogena and Dermik ("Gross Profit
Guaranty"). The guaranty period commenced on July 1, 2000 and
ends on the earlier of July 1, 2010 or the end of two
consecutive guaranty periods where the combined gross profit on
sales to Ortho and Dermik equals or exceeds the guaranteed
gross profit. Payments for the Gross Profit Guaranty
aggregated $404,000 for the first three guaranty years. We
expect the annual Gross Profit Guaranty payments to range from
approximately $100,000 to $150,000 for the remainder of the
guaranty period. As there is no minimum amount of Gross Profit
Guaranty due, no accrual for the guaranty is estimable for
future years.
(6) Subsequent Events
-----------------
On May 5, 2004, we announced our filing of a shelf registration
statement with the Securities and Exchange Commission covering
up to $15,000,000 of our common stock. The specific terms of
this offering under the shelf registration will be established
at the time of such offering.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
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 our Securities and Exchange
Commission filings.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the amounts reported in our financial statements and accompanying
notes. On an ongoing basis, we evaluate our estimates including
those related to the useful lives of fixed assets, valuation
allowances, impairment of assets, accrued clinical and preclinical
expenses and contingencies. Actual results could differ materially
from those estimates.
We believe there have been no significant changes in our critical
accounting policies during the three months ended March 31, 2004 as
compared to what was previously disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2003 filed with the SEC on
March 26, 2004. For a description of our critical accounting
policies, please refer to our 2003 Annual Report on Form 10-K.
On March 31, 2003, the Financial Accounting Standards Board ("FASB")
issued an exposure draft of proposed statement titled Share-Based
Payment, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's
equity instruments or that may be settled by the issuance of such
equity instruments. The proposed statement would eliminate the
ability to account for share-based compensation transactions using
APB Opinion No. 25, Accounting for Stock Issued to Employees, and
generally would require instead that such transactions be accounted
for using a fair-value-based method. We currently apply the
recognition and measurement principles of APB Opinion No. 25. Under
this opinion, no stock-based employee compensation expense is
charged for options that were granted at an exercise price that was
equal to the market value of the underlying common stock on the date
of grant. Pro forma information regarding net income and earnings
per share is required to be disclosed in the footnotes to our
financial statements by Statement of Financial Accounting Standards
("SFAS") No. 123, as amended by SFAS No. 148, as if we had accounted
for our employee stock options under the fair value method to that
statement. The FASB will invite public comment regarding its
proposed statement before issuing a final pronouncement, which is
expected later this year. As the proposed statement currently
stands, it would become effective with our fiscal quarter ended
March 31, 2005. We monitor progress at the FASB and other
developments with respect to the general issue of stock-based
incentive compensation. In the future, should we expense the value
of stock-based incentive compensation, either out of choice or due
to new requirements issued by the FASB, and/or decide to alter our
current employee compensation programs to provide other benefits in
place of incentive stock options, we may have to recognize
substantially more compensation expense. This may have an adverse
impact on our results of operations.
Results of Operations for the Three Months Ended March 31, 2004 and
- -------------------------------------------------------------------
2003
- ----
Our revenues are derived principally from royalties and contract
revenues. Under strategic alliance arrangements entered into with
certain corporations, we can receive non-refundable upfront fees,
milestone payments and royalties based on third party product sales.
Royalties for the first quarter of 2004 increased by $122,000 to
$1,154,000 from $1,032,000 in the corresponding quarter of the prior
year. This increase was due mainly to increased sales of Retin-A
Micro(R). We expect royalty revenue to continue to increase in
2004.
Contract revenues decreased by $48,000 from $74,000 to $26,000 as a
result of fewer collaborative research and development arrangements.
Additionally, our feasibility studies frequently experience a period
of inactivity while initial results are being evaluated by our
collaborators.
Research and development expense for the first quarter of 2004
increased by $833,000 from $2,202,000 to $3,035,000 due mainly to
the cost of Phase 2 clinical trials of APF112 for the treatment of
post-surgical pain as well as preclinical studies of APF530 for the
treatment of chemotherapy-induced nausea and vomiting. We expect
research and development expense to continue at this level during
the second quarter of 2004 while we are conducting human clinical
trials for our two product candidates, APF112 and APF530.
General and administrative expense for the first quarter of 2004
decreased by $54,000 from $778,000 to $724,000 due to decreased
investor relations, rent and depreciation costs, netted with an
increase in consultant and professional fees. We expect general and
administrative expense to remain essentially flat through the end of
the year.
Interest income for the first quarter of 2004 decreased by $46,000
to $31,000 from $77,000 due to lower interest rates earned on lower
average cash balances.
Loss from discontinued operations represents the net contribution
(loss) attributable to the Analytical Standards division which was
sold to GFS Chemicals, Inc. in February 2003 and the cosmeceutical
and toiletries product lines which were sold to RP Scherer
Corporation in July 2000. Net loss from discontinued operations
totaled $50,000 for the three months ended March 31, 2004, compared
with a net loss of $54,000 in the three months ended March 31, 2003.
Gain on disposition of discontinued operations of $1,886,000 for the
three months ended March 31, 2003 relates to the sale of the
Analytical Standards division on February 13, 2003 to GFS Chemicals,
Inc., a private company based in Columbus, Ohio. We received
$2,149,000 million in cash on the closing date and are entitled to
receive royalties on sales varying from 5% to 15% for five years
following the closing, with guaranteed minimum annual royalty
payments.
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities decreased by
$1,740,000 to $7,744,000 at March 31, 2004 from $9,484,000 at
December 31, 2003 due to cash used in operating activities.
Net cash used in continuing operating activities for the three
months ended March 31, 2004 and 2003 was $1,839,000 and $1,580,000,
respectively. The increase in net cash used in operating activities
was mainly due to increased clinical and preclinical study costs.
Net cash provided by investing activities for the three months ended
March 31, 2004 and 2003 was $4,082,000 and $2,141,000, respectively.
The increase in the cash provided by investing activities was
primarily due to the maturities of $5,376,000 of marketable
securities, partially offset by the purchases of $1,295,000 of
marketable securities. The proceeds received from disposition of
discontinued operations received in the three months ended March 31,
2004 of $19,000 relates to the royalties in excess of the guaranteed
minimum royalties received from GFS Chemicals compared to $2,149,000
for the three months ended March 31, 2003 which relates to the
proceeds received following the sale of our Analytical Standards
division.
We have funded our operations, including technology and product
research and development, primarily through royalties received on
sales of Retin-A Micro and Carac, income from collaborative research
and development fees, the proceeds received from the sales of our
Analytical Standards division and our cosmeceutical and toiletry
business, and interest earned on short-term investments. Unless we
agree on appropriate terms with a collaborator or partner, our
existing cash and cash equivalents, marketable securities,
collections of accounts receivable, together with interest income
and other revenue-producing activities including royalties, license
and option fees and research and development fees, may not be
sufficient to meet our cash needs for the next year at the current
planned expenditure levels. We will seek additional financing
within this timeline through debt or equity financing, the sale of
certain assets and technology rights, collaborative arrangements
with prospective partners or other arrangements.
On May 5, 2004, we announced our filing of a shelf registration
statement with the Securities and Exchange Commission which covered
up to $15,000,000 of our common stock. If we decide to seek
financing through this shelf offering, the specific terms will be
established at that time.
Our future capital requirements will depend on numerous factors
including, among others, royalties from sales of products of third
party licensees; our ability to enter into collaborative research
and development and licensing agreements; progress of product
candidates in preclinical and clinical trials; investment in new
research and development programs; time required to gain regulatory
approvals; resources that we devote to self-funded products;
potential acquisitions of technology, product candidates or
businesses; and the costs of defending or prosecuting any patent
opposition or litigation necessary to protect our proprietary
technology.
We may be unable to raise sufficient additional capital when we need
it or to raise capital on favorable terms. The sale of equity or
convertible debt securities in the future may be dilutive to our
stockholders, and debt-financing arrangements may require us to
pledge certain assets and enter into covenants that could restrict
certain business activities or our ability to incur further
indebtedness and may contain other terms that are not favorable to
us or our stockholders. If we are unable to obtain adequate funds on
reasonable terms, we may be required to curtail operations
significantly or to obtain funds by entering into financing, supply
or collaboration agreements on unattractive terms.
In March 2004 we renegotiated the lease for our facilities. The
following is a summary of fixed payments related to certain
contractual obligations as of March 31, 2004 (in thousands):
Less More
than 2 to 3 4 to 5 than
Total 1 year years years 5 years
----- ------ ------ ------ -------
Operating Leases $3,146 $316 $897 $938 $995
----- --- --- --- ---
Total $3,146 $316 $897 $938 $995
===== === === === ===
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
----------------------------------------------------------
Since December 31, 2003, there have been no material changes in the
Company's market risk exposure.
ITEM 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures: We carried
out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operations
of our disclosure controls and procedures pursuant to Rule 13a-15(e)
and 15(d)-15(e) of the Exchange Act. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2004, the end of period covered by this report,
our disclosure controls and procedures were effective at the
reasonable assurance level to alert them in a timely manner to
material information relating to the Company required to be included
in our Exchange Act filings.
(b) Changes in internal controls: During the quarter ended March
31, 2004, there have been no significant changes in our internal
control over financial reporting that materially affected, or are
reasonable likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
On October 22, 2003, Tristrata Technology, Inc. (Tristrata)
filed an amended complaint joining A.P. Pharma, Inc. and other
companies as defendants in Tristrata's action first filed July 12,
2002 against Cardinal Health, Inc. and others in the Federal
District Court of Delaware. Tristrata's complaint alleges
infringement of patents pertaining to alpha-hydroxy acids used in
cosmetics. A.P. Pharma answered Tristrata's amended complaint on
December 22, 2003. A.P. Pharma is vigorously defending this action.
At this early stage of the proceedings we cannot state the amount,
if any, which might be recovered by Tristrata from A.P. Pharma. In
our opinion, this litigation should not have a material effect on
our results of operations or financial condition.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10-Y Amendment to lease agreement dated March 29, 2004.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rules 13A-15(e) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rules 13A-15(e) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 12, 2004, the Company furnished a press release current
report on Form 8-K reporting the earnings for the fourth quarter of
2003.
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.
A.P. PHARMA, INC.
Date: May 14, 2004 By: /S/ Michael O'Connell
----------------- ----------------------------
Michael O'Connell
President and Chief
Executive Officer
Date: May 14, 2004 By: /S/ Gordon Sangster
----------------- ----------------------------
Gordon Sangster
Chief Financial Officer
Exhibit 10-Y
AMENDMENT TO LEASE AGREEMENT
This Amendment to Lease ("Amendment") is entered into, and
dated for reference purposes, as of March 29, 2004 (the "Execution
Date") by and between METROPOLITAN LIFE INSURANCE COMPANY, a New
York corporation ("Metropolitan"), as Landlord ("Landlord"), and
A.P. PHARMA, INC., a Delaware corporation, ("A.P. Pharma"), which
was formerly named Advanced Polymer Systems, a Delaware
corporation), as Tenant ("Tenant"), with reference to the following
facts ("Recitals"):
A. Metropolitan and A.P. Pharma are parties to that certain
written Lease, dated as of November 7, 1997, for Premises comprising
part of the Building, which current street address of the Premises
remains 123 Saginaw Drive, Redwood City, California 94063, all as
more particularly described in such Lease (the "Existing Lease").
B. Tenant and Landlord desire to provide for a modification
and extension of the Term, new rental rate applicable thereto and
such other modifications and amendments of the Existing Lease as
more particularly set forth below.
NOW, THEREFORE, in consideration of the foregoing, and of the
mutual covenants set forth herein and of other good and valuable
consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Scope of Amendment; Defined Terms; Tenant Name
Change.
(a) Except as expressly provided in this Amendment, the
Existing Lease shall remain in full force and effect. Should any
inconsistency arise between this Amendment and the Existing Lease as
to the specific matters which are the subject of this Amendment, the
terms and conditions of this Amendment shall control. The term
"Lease" as used herein and in the Existing Lease shall refer to the
Existing Lease as modified by this Amendment. All capitalized terms
used in this Amendment and not defined herein shall have the
meanings set forth in the Existing Lease unless the context clearly
requires otherwise.
(b) Tenant represents, warrants and agrees that: (i) it has
amended its Articles of Incorporation to change its name from
Advanced Polymer Systems to A.P. Pharma, Inc., which is its name as
of the Execution Date; (ii) Tenant's legal entity remains the same
and was not otherwise changed; (iii) A.P. Pharma is the Tenant under
the Existing Lease, is bound by all obligations of the Tenant under
the Existing Lease and holds all right, title and interest of the
Tenant under the Existing Lease; (iv) Tenant's Federal Employer
Identification Number has not changed and remains 94-2875566.
Tenant's obligations with respect to the representations, warranties
and agreements under this Section survive the expiration or sooner
termination of the Term of this Lease.
Section 2. Modification and Extension of Term. Landlord
and Tenant acknowledge and agree that, before giving effect to this
Amendment, pursuant to the Existing Lease, the Expiration Date of
the Term of the Existing Lease is November 14, 2004.
Notwithstanding any provision of the Existing Lease to the contrary,
the Existing Lease is hereby amended to provide that the Expiration
Date of the Term of the Existing Lease shall be March 31, 2004
instead of November 14, 2004, and then this Lease shall continue for
a term (the "Extended Term") beginning on April 1, 2004 (the
"Extended Term Commencement Date") and expiring on March 31, 2011
(hereafter, the "Expiration Date" with respect to the Extended
Term), unless sooner terminated pursuant to the terms of the Lease.
Provided however, in the event that this Amendment is not executed
by both Tenant and Landlord on or before April 1, 2004, then the
Extended Term Commencement Date shall instead be the day after the
date on which both Tenant and Landlord have executed this Amendment,
the Expiration Date of the Term of the Existing Lease shall instead
be the date of such execution, and the Expiration Date of the
Extended Term shall remain March 31, 2011. Landlord and Tenant
acknowledge and agree that this Amendment provides all rights and
obligations of the parties with respect to extension of the current
Term, whether or not in accordance with any other provisions, if
any, of the Existing Lease regarding renewal or extension, and any
such provisions, options or rights for renewal or extension provided
in the Existing Lease are hereby deleted as of the Execution Date,
and without limiting the generality of the foregoing, the Option to
Extend in the Rider of the Existing Lease is hereby deleted.
Section 3. Base Annual Rent. Notwithstanding any provision of
the Existing Lease to the contrary, Tenant and Landlord agree that
Basic Annual Rent and Monthly Installments thereof due and payable
(in the manner required under the Lease for Monthly Installments of
Basic Annual Rent) by Tenant for the Extended Term shall be as set
forth follows:
(a) For the Extended Term, Item 3 of the Basic Lease
Provisions and Paragraph 2(a) of the Existing Lease are hereby
amended to provide that the Initial Basic Annual Rent applicable to
the first year of the Extended Term shall be Four Hundred Twenty-two
Thousand Two Hundred Eighty-five and 40/100 Dollars ($422,285.40)
(i.e., $16.20 NNN per square foot of Rentable Area annually).
(b) For the Extended Term, Item 4 of the Basic Lease
Provisions and Paragraph 2(a) of the Existing Lease are hereby
amended to provide that the Initial Monthly Rental Installments
applicable to the first year of the Extended Term shall be Thirty-
five Thousand One Hundred Ninety and 45/100 ($35,190.45) per month
(i.e., $1.35 NNN per square foot of Rentable Area per month).
(c) For the Extended Term, Item 5 of the Basic Lease
Provisions and Paragraph 2(a) of the Existing Lease are hereby
amended to provide that the Rent Adjustment Date(s) are the
respective anniversaries of the Extended Term Commencement Date set
forth in the table below with corresponding new Basic Annual Rent
and Monthly Rental Installments effective until the next Rent
Adjustment Date:
Monthly
Rent Adjustment Basic Annual Monthly Rental Rate/RSF
Date Rent NNN Installment NNN NNN
- --------------- ------------ --------------- --------
1st Anniversary $434,797.56 $36,233.13 $1.39
2nd Anniversary $447,309.72 $37,275.81 $1.43
3rd Anniversary $462,949.92 $38,579.16 $1.48
4th Anniversary $475,462.08 $39,621.84 $1.52
5th Anniversary $491,102.28 $40,925.19 $1.57
6th Anniversary $503,614.44 $41,967.87 $1.61
Section 4. Project & Tenant's Project Share. Notwithstanding
any provision of the Existing Lease to the contrary, including
without limitation, Paragraphs 1(a) and 3(a), and Item 6 of the
Basic Lease Provisions, Phase III ceased to be part of the Project,
and as of the Execution Date, the Project consists of Phase I and
Phase II with a total of 301,824 rentable square feet, and Tenant's
Project Share is agreed to be 8.64%.
Section 5. Condition of Premises. Notwithstanding any
provision of the Existing Lease to the contrary, Tenant acknowledges
and agrees that: (1) Tenant has been in occupancy of the Premises
since 1997; (2) Tenant has investigated the condition of the
Premises to the extent Tenant desires to do so; (3) Tenant is
leasing the Premises in its "As Is" condition; (4) no representation
regarding the condition of the Premises has been made by or on
behalf of Landlord; (5) in connection with this Amendment, Landlord
has no obligation to remodel or to make any repairs, alterations or
improvements in connection with this Amendment, or to provide Tenant
any allowance therefor; and (5) all alterations, additions or
improvements in connection with this Amendment or hereafter shall be
in accordance with Paragraph 7 of the Existing Lease and Tenant
shall pay a fee to Landlord ("Construction Administration Fee") in
connection with Landlord's review of plans and specifications and
monitoring construction performed by Tenant, which shall not exceed
two percent (2%) of the contract amount for the design and
construction.
Section 6. Rights & Responsibilities of Landlord Re Certain
HVAC Units. Notwithstanding any provision of the Existing Lease to
the contrary, including, without limitation, Sections 6(a) and (b),
and Section3(c)(18), if and to the extent that replacement of the
Original HVAC Units (defined below) or components thereof is
necessary and would constitute a capital expenditure, Landlord
(rather than Tenant) shall cause such replacement to be made and
Tenant shall pay 100% of the portion of the amortized cost of such
capital expenditures allocable to the remainder of the Extended
Term, calculated using an amortization period equal to the useful
life of the HVAC unit or component, as applicable, together with a
return on capital at the rate of ten percent (10%) per annum. For
purposes hereof, "Original HVAC Units" shall mean those HVAC units
owned by Landlord which exclusively serve the Premises and which
were in place when the Premises was originally delivered to Tenant.
Section 7. Amendment & Reduction of the Security Deposit.
Provided that (a) all Rent due and owing under the Lease (as
modified by this Amendment) has been paid in full; and (b) Tenant is
not, on the Extended Term Commencement Date, in default under the
Existing Lease beyond any applicable notice and grace period; then:
(i) the cash Security Deposit required under Paragraph 4 of the
Lease and Item 10 of the Basic Lease Provisions shall be reduced
from One Hundred Fifty Thousand Dollars ($150,000.00) to Seventy-
five Thousand Dollars ($75,000.00) and Landlord shall apply the
unapplied outstanding balance of the Security Deposit then held by
Landlord in excess of the reduced amount as a credit against the
next payments of Rent due and owing under the Lease on and after the
Extended Term Commencement Date.
Section 8. Change of Address for Copies of Notices to Landlord.
The current addresses for notices to be sent to Landlord pursuant to
Paragraph 23 of the Existing Lease are modified as follows:
Metropolitan Life Insurance Company
c/o Seaport Centre Property Manager
701 Chesapeake Drive
Redwood City, California 94063
Attention: Property Manager
with copies to the following:
Metropolitan Life Insurance Company
400 South El Camino Real, Suite 800
San Mateo, CA 94402
Attention: EIM Manager, Real Estate Investments
and
Metropolitan Life Insurance Company
400 South El Camino Real, Suite 800
San Mateo, CA 94402
Attention: Associate General Counsel
Section 9. Time of Essence. Without limiting the generality of
any other provision of the Existing Lease, time is of the essence to
each and every term and condition of this Amendment.
Section 10. Brokers. Tenant represents that no broker,
agent or person has represented, dealt with or had discussions with
it in connection with this Amendment transaction other than Tom
Driscoll and Jon Mackey of Cornish & Carey Commercial ("Tenant's
Broker") and that no broker, agent or person except Tenant's Broker
has brought about this Amendment transaction. Tenant hereby
indemnifies and agrees to protect, defend and hold Landlord harmless
from and against all claims, losses, damages, liability, costs and
expenses (including, without limitation, attorneys' fees and
expenses) by any broker, agent or other person (except Landlord's
Broker) claiming a commission or other form of compensation by
virtue of alleged representation of, or dealings or discussions
with, Tenant with respect to the transaction contemplated by this
Amendment, except for a commission payable to Tenant's Broker to the
extent provided for in a separate written agreement between Tenant's
Broker and Landlord's Broker (defined below). The term "Landlord's
Broker" shall mean Howard Dallmar and Roderick Shepard of Cornish &
Carey Commercial, and Tenant shall not be responsible for payment of
any commission to Landlord's Broker. The provisions of this Section
shall survive the expiration or earlier termination of the Amendment
or the Lease. Landlord hereby agrees to pay such commission, if
any, to which Landlord's Broker is entitled in connection with the
subject matter of this Amendment pursuant to Landlord's separate
written agreement with Landlord's Broker, and agrees that Tenant is
not obligated to pay or fund any amount to Landlord's Broker. The
provisions of this Section shall survive the expiration or earlier
termination of the Amendment or the Lease.
Section 11. Attorneys' Fees. Each party to this Amendment
shall bear its own attorneys' fees and costs incurred in connection
with the discussions preceding, negotiations for and documentation
of this Amendment. In the event any party brings any suit or other
proceeding with respect to the subject matter or enforcement of this
Amendment or the Lease, the prevailing party (as determined by the
court, agency or other authority before which such suit or
proceeding is commenced) shall, in addition to such other relief as
may be awarded, be entitled to recover attorneys' fees, expenses and
costs of investigation as actually incurred, including court costs,
expert witness fees, costs and expenses of investigation, and all
attorneys' fees, costs and expenses in any such suit or proceeding
(including in any action or participation in or in connection with
any case or proceeding under the Bankruptcy Code, 11 United States
Code Sections 101 et seq., or any successor statutes, in
establishing or enforcing the right to indemnification, in appellate
proceedings, or in connection with the enforcement or collection of
any judgment obtained in any such suit or proceeding).
Section 12. Effect of Headings. The titles or headings of
the various parts or sections hereof are intended solely for
convenience and are not intended and shall not be deemed to or in
any way be used to modify, explain or place any construction upon
any of the provisions of this Amendment.
Section 13. Entire Agreement; Amendment. This Amendment
taken together with the Existing Lease, together with all exhibits,
schedules, riders and addenda to each, constitutes the full and
complete agreement and understanding between the parties hereto and
shall supersede all prior communications, representations,
understandings or agreements, if any, whether oral or written,
concerning the subject matter contained in this Amendment and the
Existing Lease, as so amended, and no provision of the Lease as so
amended may be modified, amended, waived or discharged, in whole or
in part, except by a written instrument executed by all of the
parties hereto.
Section 14. Authority. Each person executing this
Amendment represents and warrants that he or she is duly authorized
and empowered to execute it, and does so as the act of and on behalf
of the party indicated below.
Section 15. Counterparts. This Amendment may be executed
in duplicates or counterparts, or both, and such duplicates or
counterparts together shall constitute but one original of the
Amendment. The parties contemplate that they may be executing
counterparts of this Amendment transmitted by facsimile and agree
and intend that a signature by facsimile machine shall bind the
party so signing with the same effect as though the signature were
an original signature. Each duplicate and counterpart shall be
equally admissible in evidence, and each original shall fully bind
each party who has executed it.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first set forth above.
TENANT: A.P. PHARMA, INC.,
a Delaware corporation
By: /S/ Gordon Sangster
--------------------
Print Name: Gordon Sangster
----------------
Title: Chief Financial Officer
------------------------
LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: /S/ Jon R. Redman
-------------------
Print Name: Jon R. Redman
--------------
Title: Director
---------
Exhibit 31.1 SECTION 302 CERTIFICATIONS -------------------------- Certifications: I, Michael O'Connell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of A.P. Pharma, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial report which could reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2004 /s/ Michael O'Connell - --------------------- Michael O'Connell President and Chief Executive Officer
Exhibit 31.2 SECTION 302 CERTIFICATIONS -------------------------- Certifications: I, Gordon Sangster, certify that: 1. I have reviewed this quarterly report on Form 10-Q of A.P. Pharma, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial report which could reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2004 /s/ Gordon Sangster - ------------------- Gordon Sangster Chief Financial Officer
Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED - ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - --------------------------------------------------------- In connection with the Quarterly Report of A.P. Pharma, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael O'Connell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael O'Connell - --------------------- Michael O'Connell, Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED - ------------------------------------------------------------ PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - --------------------------------------------------------- In connection with the Quarterly Report of A.P. Pharma, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gordon Sangster, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Gordon Sangster - ------------------- Gordon Sangster, Chief Financial Officer