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 June 30, 2005
[ ] 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 [X ] No [ ]
---- ----
At July 31, 2005, the number of outstanding shares of the Company's
common stock, par value $.01, was 25,212,797.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Balance Sheets
June 30, 2005 and December 31, 2004
Condensed Statements of Operations
for the three and six months ended June 30, 2005 and 2004
Condensed Statements of Cash Flows
for the six months ended June 30, 2005 and 2004
Notes to Condensed 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 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements:
---------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED BALANCE SHEETS (in thousands)
- ---------------------------------------
June 30, 2005 December 31, 2004
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(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 1,972 $ 3,110
Marketable securities 7,775 10,486
Accounts receivable, net 1,393 1,506
Prepaid expenses and other 439 394
------ ------
Total current assets 11,579 15,496
Property and equipment, net 1,115 1,235
Other long-term assets 177 283
------ ------
Total assets $ 12,871 $ 17,014
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 626 $ 697
Accrued research and development
project costs 906 1,318
Accrued expenses 677 685
Accrued disposition costs 221 160
------ ------
Total current liabilities 2,430 2,860
------ ------
Stockholders' equity:
Common stock 99,137 98,989
Accumulated deficit (88,683) (84,819)
Accumulated other comprehensive
loss (13) (16)
------ ------
Total stockholders' equity 10,441 14,154
------ ------
Total liabilities and stockholders'
equity $ 12,871 $ 17,014
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------
(in thousands, except per share amounts)
- ---------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
Royalties $ 1,187 $ 1,103 $ 2,469 $ 2,257
Contract revenues 63 181 142 206
------ ------ ------ ------
Total revenues 1,250 1,284 2,611 2,463
Operating expenses:
Research & development 3,078 2,905 4,900 5,919
General & administrative 823 820 1,672 1,566
------ ------ ------ ------
Total operating expenses 3,901 3,725 6,572 7,485
------ ------ ------ ------
Operating loss (2,651) (2,441) (3,961) (5,022)
Interest income, net 74 24 146 56
Other income, net 13 25 1 23
------ ------ ------ ------
Loss from continuing operations (2,564) (2,392) (3,814) (4,943)
Loss from discontinued operations (44) (52) (50) (101)
------ ------ ------ ------
Net loss $(2,608) $(2,444) $(3,864) $(5,044)
====== ====== ====== ======
Basic and diluted loss per share:
Loss from continuing operations $ (0.10) $ (0.11) $ (0.15) $ (0.24)
====== ====== ====== ======
Net loss $ (0.10) $ (0.12) $ (0.15) $ (0.24)
====== ====== ====== ======
Weighted average common shares
outstanding-basic and diluted 25,107 21,048 25,073 20,850
====== ====== ====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands,
- -------------------------------------------------------------------------
except for share amounts)
- -------------------------
Six months ended June 30,
-------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net loss $ (3,864) $ (5,044)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Loss from discontinued operations 50 101
Loss on sale of marketable
securities (2) (2)
Depreciation and amortization 190 186
Recovery of doubtful accounts and
note receivable -- (10)
Stock and stock option
compensation awards to non-
employees 64 69
Restricted stock awards 8 --
Amortization of premium/discount
and accretion of marketable
securities (21) (42)
Loss on retirements of property
and equipment -- 6
Changes in operating assets and
liabilities:
Accounts receivable 68 (7)
Prepaid expenses and other
current assets (45) (18)
Other long-term assets 108 185
Accounts payable (71) (102)
Accrued expenses (420) (18)
Deferred revenue -- (14)
------ ------
Net cash used in continuing
operating activities (3,935) (4,710)
Net cash received from
discontinued operations 54 35
Cash flows from investing activities:
Purchases of property and equipment (69) (129)
Purchases of marketable securities (6,803) (8,224)
Maturities of marketable securities 7,364 2,860
Sales of marketable securities 2,176 3,933
------ ------
Net cash (used in) provided by
investing activities 2,668 (1,560)
Cash flows from financing activities:
Proceeds on issuance of common
stock, net of issuance cost -- 11,756
Proceeds from the exercise of stock
options 21 149
Proceeds from issuance of shares under
Employee Stock Purchase Plan 53 46
Proceeds from issuance of restricted
stock 1 --
------ ------
Net cash proceeds provided by
financing activities 75 11,951
Net increase (decrease) in cash and
cash equivalents (1,138) 5,716
Cash and cash equivalents, beginning
of the period 3,110 97
------ ------
Cash and cash equivalents, end
of the period $ 1,972 $ 5,813
====== ======
See accompanying notes to condensed consolidated financial statements.
A.P. PHARMA, INC.
- -----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
JUNE 30, 2005 and 2004 (UNAUDITED)
- ----------------------------------
(1) Basis of Presentation
---------------------
A.P. Pharma, Inc. (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 financial statements have been prepared in accordance
with U.S. generally accepted accounting principles 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 U.S.
generally accepted accounting principles 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 and six months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2005 or any other period. The condensed
balance sheet as of December 31, 2004 has been derived from the
audited financial statements as of that date but it does not
include all of the information and notes required by accounting
principles generally accepted in the United States for complete
financial statements. For further information, refer to the
financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2004.
Critical Accounting Policies
- ----------------------------
We believe there have been no significant changes in our
critical accounting policies during the six months ended June
30, 2005 compared to those previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2004 filed
with the SEC on March 15, 2005.
Use of Estimates
- ----------------
The preparation of our financial statements in conformity with
U.S. generally accepted accounting principles 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 element has stand-alone value
to the customer and whether there is objective and reliable
evidence of the fair value of the undelivered elements. 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 the
Company 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 six months ended June 30, 2005.
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 six months ended June 30,
2005.
* 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 of three months or longer 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 90% of the receivables were concentrated with two
customers in the pharmaceutical industry as of June 30, 2005.
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
loss and net loss per share as if FAS No. 123 had been applied
in measuring compensation expense for all periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
Net loss, as reported $(2,608) $(2,444) $(3,864) $(5,044)
Deduct:
Stock-based employee
compensation expense
determined under FAS 123 (75) (102) (159) (206)
------ ------ ------ ------
Pro forma net loss $(2,683) $(2,546) $(4,023) $(5,250)
====== ====== ====== ======
Basic and diluted loss per
share as reported $ (0.10) $ (0.12) $ (0.15) $ (0.24)
====== ====== ====== ======
Basic and diluted pro forma
loss per share $ (0.11) $ (0.12) $ (0.16) $ (0.25)
====== ====== ====== ======
Fair values of awards granted under the stock option plans and
employee stock purchase plan were estimated at grant or
purchase dates using the 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 Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
Expected life in years (from
vesting date):
Stock options 5 5 5 5
Employee stock purchase plan 1.5 - 2 1.5 - 2 1.5 - 2 1.5 - 2
Interest rate:
Stock options 3.7% 3.8% 4% 3.1%
Employee stock purchase plan 1.47 - 3.63% 1.47 - 2.32% 1.47 - 3.63% 1.47 - 2.32%
Volatility:
Stock options 78% 63% 78% 64%
Employee stock purchase plan 65 - 111% 65 - 68% 65 - 111% 65 - 68%
Expected dividend yield: 0% 0% 0% 0%
Reclassifications
- -----------------
Certain amounts in the prior year financial statements have
been reclassified to conform with the current year
presentation. Patent legal expenses in the prior year have
been reclassified from research and development expense to
general and administrative expense.
(2) Loss Per Share Information
--------------------------
Basic loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding. Because
the Company is in a net loss position for the three and six
months ended June 30, 2005 and 2004, diluted loss per share is
also calculated using the weighted average number of common
shares outstanding and excludes the effects of options which
are antidilutive.
(3) Comprehensive Loss
------------------
Comprehensive loss for the three and six months ended June 30,
2005 and 2004 consists of the following (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
Net loss $(2,608) $(2,444) $(3,864) $(5,044)
Unrealized gains (losses) on
available-for-sale securities -- (11) 3 (19)
----- ------ ------ ------
Comprehensive loss $(2,608) $(2,455) $(3,861) $(5,063)
====== ====== ====== ======
(4) Stockholders' Equity
--------------------
During the six months ended June 30, 2005, 178,341 shares of
common stock were issued primarily through the purchase of
shares under the Employee Stock Purchase Plan, the exercise of
stock options by employees and for the payment of directors'
fees. Additionally, in May 2005, shareholders approved the
increase in shares reserved for issuance under the 2002 Stock
Incentive Plan and 1997 Employee Stock Purchase Plan by 400,000
and 150,000, respectively.
(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 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 For the Six
Months Ended Months Ended
June 30, June 30,
------------- ------------
2005 2004 2005 2004
---- ---- ---- ----
Analytical Standards Division
- -----------------------------
Royalties earned in excess of
minimum amount recorded $ 1 $ 1 $ 13 $ 2
Cosmeceutical and Toiletry Business
- -----------------------------------
Change in estimates for gross
profit guarantees (45) (53) (63) (103)
---- ---- ---- ----
Total loss from discontinued
operations $ (44) $ (52) $ (50) $(101)
==== ==== ==== ====
Basic and diluted loss per common share from discontinued
operations were less than $0.01 per share for the six months
ended June 30, 2005 and 2004, respectively.
Liabilities related to the discontinued operations in the
amount of $221,000 include severance costs and accruals for
gross profit guarantees. These liabilities are reported as
accrued disposition costs in the accompanying consolidated
balance sheets.
Cash provided by discontinued operations primarily relates to
royalty payments received from GFS Chemicals for the sale of
certain products.
Below is a summary of activity for liabilities related to the
discontinued operations for the six months ended June 30, 2005
(in thousands):
Accrual at December 31, 2004 $160
Additional accrual for gross
profit guarantee 63
Payment under severance agreement (2)
---
Accrual at June 30, 2005 $221
===
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 U.S.
generally accepted accounting principles 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 six months ended June 30, 2005
compared to those previously disclosed in our Annual Report on Form
10-K for the year ended December 31, 2004 filed with the SEC on
March 15, 2005. For a description of our critical accounting
policies, please refer to our 2004 Annual Report on Form 10-K.
In April 2005, the SEC announced a new rule that amends the
compliance dates for Financial Accounting Standards Board's
Statement No. 123R ("SFAS 123R") to the beginning of the next fiscal
year beginning after June 15, 2005. SFAS 123R requires all share-
based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their
fair values beginning with the first annual period after June 15,
2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. We are required to adopt SFAS
123R in the year beginning January 1, 2006. Under SFAS 123R, we
must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of
adoption. The transition methods include modified - prospective and
modified - retroactive adoption options. Under the modified -
retroactive option, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be recorded
for all unvested stock options and restricted stock at the beginning
of the first quarter of adoption of SFAS 123R, while the retroactive
method would record compensation expense for all unvested stock
options and restricted stock beginning with the first period
restated.
We are evaluating the requirements of SFAS 123R and expect that the
adoption of SFAS 123R will have a material impact on our results of
operations and earnings per share. We have not yet determined the
method of adoption or the effect of adopting SFAS 123R, and have not
determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
Results of Operations for the Three and Six Months Ended June 30,
- -----------------------------------------------------------------
2005 and 2004
- -------------
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 second quarter of 2005 increased by $84,000 to
$1,187,000 from $1,103,000 in the corresponding quarter of the prior
year and increased in the first six months of 2005 by $212,000 to
$2,469,000 from $2,257,000 in the first six months of 2004. These
increases in royalties were due to increased sales of Retin-A
Micro(R) and Carac (R) by our marketing partners, Johnson & Johnson
and Sanofi-Aventis, respectively. We expect royalty revenue to
continue to increase in 2005.
Contract revenues, which are derived from work performed under
collaborative research and development arrangements, decreased by
$118,000 from $181,000 to $63,000 in the second quarter of 2005 and
decreased by $64,000 from $206,000 to $142,000 for the first six
months of 2005. The amount of contract revenues varies from period
to period depending on the level of activity requested of us by our
collaborators. Therefore we can not predict the amount of contract
revenues in future periods.
Research and development expense for the second quarter of 2005
increased by $173,000 from $2,905,000 to $3,078,000 due mainly to
expenditures during the quarter on the initiation of a Phase 2 human
clinical trial for APF530, our product candidate for the prevention
of acute and delayed chemotherapy-induced nausea and vomiting. An
IND was filed in the first quarter of 2005 for APF530. Research and
development expense for the six months ended June 30, 2005 decreased
by $1,019,000 from $5,919,000 to $4,900,000 due to expenditures in
the year-ago period on a Phase 2 clinical trial for APF112 for the
treatment of post-surgical pain. We expect research and development
expense to increase in the second half of 2005 as we complete our
phase 2 clinical program for APF530 and initiate a Phase 3 clinical
trial in the fourth quarter of 2005.
General and administrative expense increased for the second quarter
of 2005 by $3,000 from $820,000 to $823,000 and for the six months
ended June 30, 2005 by $106,000 from $1,566,000 to $1,672,000 due
primarily to consulting fees. We expect general and administrative
expense for the second half of 2005 to remain relatively constant
with the first half of the year.
Interest income increased for the second quarter of 2005 by $50,000
to $76,000 from $26,000 and for the six months ended June 30, 2005
by $91,000 from $58,000 to $149,000, due to higher interest rates
earned on higher average cash and marketable securities balances.
Loss from discontinued operations represents the net loss
attributable to the Analytical Standards division which was sold to
GFS Chemicals, Inc. in February 2003 and the cosmeceutical and
toiletries business which was sold to RP Scherer Corporation in July
2000. Net loss from discontinued operations totaled $44,000 for the
three months ended June 30, 2005, compared with a net loss of
$52,000 in the three months ended June 30, 2004. For the six months
ended June 30, 2005, net loss from discontinued operations decreased
by $51,000 to $50,000 from $101,000 in the year-ago period.
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities decreased by
$3,849,000 to $9,747,000 at June 30, 2005 from $13,596,000 at
December 31, 2004 due to cash used in operating activities.
Net cash used in continuing operating activities for the six months
ended June 30, 2005 and 2004 was $3,935,000 and $4,710,000,
respectively. The decrease in net cash used in operating activities
from 2004 to 2005 was mainly due to decreased clinical and
preclinical study costs.
Net cash provided by investing activities for the six months ended
June 30, 2005 was $2,668,000 compared with net cash used in
investing activities of $1,560,000 in the six months ended June 30,
2004. The increase in the cash provided by investing activities
from December 31, 2004 to June 30, 2005 was primarily due to the
maturities of $7,364,000 of marketable securities and sales of
marketable securities of $2,176,000, partially offset by the
purchases of $6,803,000 of marketable securities.
To date, we have financed 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, the sale of common stock in
June 2004, and interest earned on short-term investments. 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, are expected to
be sufficient to meet our cash needs through the first quarter of
2006. We are seeking additional financing through collaborative
agreements, debt financing, equity financing, the sale of certain
assets and technology rights or other arrangements.
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.
If our capital resources are unable to meet our capital
requirements, we will have to raise additional funds. 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.
Below is a summary of fixed payments related to certain contractual
obligations (in thousands). This table excludes amounts already
recorded on our balance sheet as current liabilities at June 30,
2005.
Less More
than 2 to 3 4 to 5 than
Total 1 year years years 5 years
----- ------ ------ ------ -------
Operating Leases $2,762 $469 $942 $973 $378
----- --- --- --- ---
Total $2,762 $469 $942 $973 $378
===== === === === ===
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
----------------------------------------------------------
Since December 31, 2004, 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 June 30, 2005, 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 June 30,
2005, there have been no significant changes in our internal control
over financial reporting that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
-----------------
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's annual shareholder's meeting was held on May 25, 2005, at
which the following proposal was approved:
Proposal I: Election of the following directors:
Votes For Votes Withheld
--------- --------------
Paul Goddard
Chairman of the Board 23,175,560 98,035
Stephen Drury 23,188,525 85,070
Michael O'Connell 23,113,614 159,981
Peter Riepenhausen 23,133,490 140,105
Toby Rosenblatt 23,056,428 217,167
Gregory Turnbull 23,135,125 138,470
Dennis Winger 23,182,945 89,650
Robert Zerbe 23,186,395 87,200
Proposal II: To amend the Company's 1997 Employee Stock Purchase Plan
to increase by 150,000 the number of shares of common stock reserved
for issuance under the Plan.
Votes For Votes Against Abstain Votes Withheld
--------- ------------- ------- --------------
8,582,313 1,098,280 61,504 13,531,498
Proposal III: To amend the Company's 2002 Equity Incentive Plan to
increase by 400,000 the number of shares of common stock reserved
for issuance under the Plan.
Votes For Votes Against Abstain Votes Withheld
--------- ------------- ------- --------------
7,004,306 2,678,407 59,384 13,531,498
Proposal IV: To approve Ernst & Young LLP as A.P. Pharma's
independent public accountants.
Votes For Votes Against Abstain
--------- ------------- -------
23,173,195 61,020 39,380
ITEM 6. Exhibits
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.
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: August 8, 2005 By: /S/ Michael O'Connell
----------------- ----------------------------
Michael O'Connell
President and Chief
Executive Officer
Date: August 8, 2005 By: /S/ Gordon Sangster
----------------- ----------------------------
Gordon Sangster
Chief Financial Officer
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-
15(f)) 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) Designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles.
c) 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
d) 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 reasonably 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 reporting which could be reasonably 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: August 8, 2005
/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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-
15(f)) 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) Designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles.
c) 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
d) 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 reasonably 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 reporting which could be reasonably 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: August 8, 2005
/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 June 30, 2005 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 June 30, 2005 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
