1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
-------------
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
----- -----
Commission file Number 0-16109
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ADVANCED POLYMER SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3696 Haven Avenue, Redwood City, CA 94063
-----------------------------------------
(Address of principal executive offices)
(415) 366-2626
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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
--- ---
At July 31, 1996 the number of outstanding shares of the Company's common stock,
par value $.01, was 18,190,848.
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INDEX
PART I. FINANCIAL INFORMATION
Page No.
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ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations 4
for the three months and six months ended June 30, 1996
and 1995
Condensed Consolidated Statements of Cash Flows 5
for the six months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 9
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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3
ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 7,533,456 $ 5,172,809
Trade accounts receivable, net ............... 4,339,453 2,436,815
Inventory .................................... 5,432,409 7,858,584
Prepaid expenses and other ................... 905,488 1,001,672
------------ ------------
Total current assets ................ 18,210,806 16,469,880
Property and equipment, net .................. 4,739,404 5,027,034
Deferred loan costs, net ..................... 748,591 832,324
Prepaid license fees ......................... 234,698 303,638
Intangible assets, including goodwill, net ... 1,405,679 345,557
Other assets ................................. 60,453 103,809
------------ ------------
$ 25,399,631 $ 23,082,242
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 1,225,350 $ 3,240,807
Accrued expenses ............................. 2,402,840 1,819,541
Accrued melanin purchase commitments ......... -- 600,000
Accounts payable, Johnson & Johnson .......... 3,360,466 4,229,637
Deferred revenues ............................ 750,000 750,000
Notes payable ................................ 1,250,000 --
Current portion - long-term debt ............. 1,059,075 853,987
------------ ------------
Total current liabilities ........... 10,047,731 11,493,972
Long-term debt ................................... 5,909,778 6,354,969
------------ ------------
Total liabilities ................... 15,957,509 17,848,941
------------ ------------
Shareholders' equity:
Common stock and common stock warrants ....... 75,716,172 67,423,859
Unrealized gain on securities ................ 6,208 12,348
Accumulated deficit .......................... (66,280,258) (62,202,906)
------------ ------------
Total shareholders' equity .......... 9,442,122 5,233,301
------------ ------------
$ 25,399,631 $ 23,082,242
============ ============
See accompanying notes.
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
3 Months Ended 6 Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
Product revenues $ 5,303,520 $ 4,711,201 $10,406,992 $ 8,997,420
Licensing/consulting
revenues 50,000 30,000 100,000 885,000
----------- ----------- ----------- -----------
Total revenues 5,353,520 4,741,201 10,506,992 9,882,420
Cost of sales 2,989,382 3,348,289 6,294,188 6,371,335
Research & development 983,843 983,292 1,873,799 1,914,521
Selling & marketing 1,315,337 1,256,449 2,756,018 2,360,690
Advertising & promotion 1,071,410 326,061 1,668,297 599,224
General & administration 833,870 784,237 1,503,891 1,530,843
----------- ----------- ----------- -----------
Total expenses 7,193,842 6,698,328 14,096,193 12,776,613
----------- ----------- ----------- -----------
Operating loss (1,840,322) (1,957,127) (3,589,201) (2,894,193)
Interest income 75,012 88,413 113,968 186,397
Interest expense (313,948) (66,580) (613,026) (132,760)
Other income (expense) 21,201 (7,090) 10,905 (11,433)
----------- ----------- ----------- -----------
Net loss $(2,058,057) $(1,942,384) $(4,077,354) $(2,851,989)
=========== =========== =========== ===========
Loss per common share $ (0.11) $ (0.12) $ (0.23) $ (0.17)
=========== =========== =========== ===========
Weighted average common
shares outstanding 18,080,623 16,415,732 17,717,740 16,297,473
=========== =========== =========== ===========
See accompanying notes.
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ADVANCED POLYMER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
June 30, 1996 June 30, 1995
------------- -------------
Cash flows from operating activities:
Net loss $(4,077,354) $(2,851,989)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 840,257 578,970
Change in allowance for doubtful accounts (4,106) (412)
Accretion of marketable securities -- (75,802)
Changes in operating assets and liabilities:
Trade accounts receivable (1,898,532) (2,777,291)
Inventory 2,426,175 (1,445,683)
Prepaid expenses and other 96,184 68,934
Other assets 22,352 (82,532)
Accounts payable and accrued expenses (2,301,329) 3,408,146
----------- -----------
Net cash used in operating activities (4,896,353) (3,177,659)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (211,547) (251,932)
Purchase of marketable securities (512,513) (1,958,891)
Maturities and sales of marketable securities 506,374 3,248,691
----------- -----------
Net cash provided from (used in) investing activities (217,686) 1,037,868
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of common stock options
and warrants 1,561,769 338,644
Proceeds from note payable 1,250,000 --
Proceeds from long-term debt 150,000 --
Repayment of long-term debt (390,103) (146,049)
Proceeds from private placements of equity securities, net 4,903,020 1,384,026
----------- -----------
Net cash provided from financing activities 7,474,686 1,576,621
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,360,647 (563,170)
Cash and cash equivalents, beginning of the
period 5,172,809 2,741,994
----------- -----------
Cash and cash equivalents, end of the period $ 7,533,456 $ 2,178,824
=========== ===========
Supplemental disclosure of non-cash financing transactions:
During the first quarter of 1996, the Company acquired all rights to the
Polytrap(R) technology from Dow Corning Corporation in exchange for
shares of Common Stock valued at $1,200,000.
During the first quarter of 1996, the Company paid BioSource for the 1995
purchase commitment totalling $600,000 by issuing 94,000 shares of Common
Stock.
See accompanying notes.
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ADVANCED POLYMER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial
position of Advanced Polymer Systems, Inc. and subsidiaries ("the Company")
as of June 30, 1996 and the results of their operations for the three and
six months ended June 30, 1996 and 1995, and their cash flows for the six
months ended June 30, 1996 and 1995.
These condensed consolidated statements should be read in conjunction with
the Company's audited consolidated financial statements for the years ended
December 31, 1995, 1994 and 1993.
The condensed consolidated financial statements include the financial
statements of the Company and its subsidiaries, Premier, Inc. ("Premier"),
Advanced Consumer Products, Inc., APS Analytical Standards, Inc., and APS
Joint Venture Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
The business of Premier, the Company's marketing and distribution
subsidiary, is highly seasonal in that it markets and distributes sunscreen
products under an exclusive distribution agreement with Johnson & Johnson.
In addition, effective September 1995, the Company licensed from Reckitt &
Colman the exclusive U.S. rights to the Neet(R) line of depilatory
products. Sales of the two sunscreen products and the depilatory product
line are heavily weighted to the first two quarters of the calendar year,
so the results of operations for the interim periods are not necessarily
indicative of the results for the full year.
The Company considers all short-term investments which have original
maturities of less than three months to be cash equivalents.
Certain reclassifications have been made to the prior period financial
statements to conform with the presentation in 1996.
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(2) COMMON SHARES OUTSTANDING AND PER SHARE INFORMATION
Common stock outstanding as of June 30, 1996 is as follows:
Number of Shares
----------------
Common stock outstanding as of December 31, 1995 17,026,666
Options exercised after December 31, 1995 229,154
Warrants exercised 66,337
Shares issued to Lander Company 356,761
Shares issued in debt financing arrangements 10,675
Shares issued for acquisition of all rights to the Polytrap
technology from Dow Corning 200,000
Shares issued to pay BioSource for the 1995 Melanin
commitment 94,000
Shares issued in Private Placement 201,922
----------
TOTAL SHARES 18,185,515
==========
Per share information is based on the weighted average number of shares of
common stock outstanding, as adjusted during each of the periods. Stock
options and warrants (common stock equivalents) are not included in the
calculations as their inclusion would be anti-dilutive.
(3) SALE OF COMMON STOCK
In the first quarter of 1996, the Company formed a collaborative agreement
with the Lander Company under which the Company received $2,976,000 in net
proceeds from the sale of 356,761 shares of Common Stock. In addition, the
Company will receive licensing fees, research and development funding and
royalties on product sales in the future.
(4) ACQUISITION OF ALL RIGHTS TO POLYTRAP TECHNOLOGY
In the first quarter of 1996, APS acquired all patents and rights to the
Polytrap technology from Dow Corning in exchange for 200,000 shares of APS
Common Stock. APS recorded intangible assets totalling $1,200,000 relating
to this transaction. The intangible assets are being amortized on a
straight line basis over a period of approximately 10 years, which is the
remaining life of the main patent acquired.
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(5) PRIVATE PLACEMENT
During the second quarter of 1996, APS received $1,946,475 net of offering
costs, through a private placement and sale of 201,922 shares of common
stock and 86,538 warrants exercisable over a three-year period. The
warrants are exercisable at the following prices:
Number of shares Exercise Price
---------------- --------------
28,846 $7.43
28,846 $9.90
28,846 $12.38
The private placement was pursuant to an agreement for the sale of up to
$5,000,000 of common stock and warrants, which can be initiated at the
Company's sole discretion.
(6) NOTES PAYABLE
During the first half of 1996, the Company received advances from a
supplier totalling $1,250,000, with an interest rate equal to the Prime
Rate. Interest and principal are due in October 1996.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(ALL DOLLAR AMOUNTS ROUNDED TO THE NEAREST THOUSAND)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
To the extent that this report discusses financial projections, information or
expectations about our products or markets, or otherwise makes statements about
future events, such statements are forward-looking and are subject to a number
of risks and uncertainties that could cause actual results to differ materially
from the statements made. These include, among others, uncertainty associated
with timely approval and acceptance of new products, the costs associated with
new product introductions, establishment of new corporate alliances, progress
in research and development programs and other risks listed from time to time
in the Company's Securities and Exchange Commission filings.
Revenues for the three months ended June 30, 1996 were $5,354,000 compared to
$4,741,000 in the corresponding period of the prior year. This represented
product revenues of $5,304,000, an increase of $592,000 or 13% from the second
quarter of the prior year, and licensing revenues of $50,000.
The increase in product revenues is partly attributable to revenues derived from
polymer supply which included a year-to-date catch-up payment of $750,000
relating to minimum purchase requirements and royalties regarding product
previously supplied to Scott Paper Company. This product line was recently
acquired by Kimberly-Clark Tissue Company and subsequently sold to Procter &
Gamble. Increased revenues also were attributed to sales of Neet(R) depilatories
which were licensed from Reckitt and Colman in the third quarter of 1995. These
increases were partially offset by decreased sales of the in-licensed Johnson &
Johnson suncare product lines.
Gross profit on product revenues for the second quarter increased to $2,314,000
or 44% from $1,363,000 or 33% in the corresponding period of the prior year.
This was due primarily to the payment from Kimberly-Clark referred to above and
the sales mix of higher margin consumer products.
Research and development expense for the second quarter was flat with the
corresponding period of the prior year at $983,000.
Selling and marketing expense increased by $59,000 or 5% to $1,315,000 due
mainly to the commencement of marketing and distribution of polymeric delivery
systems directly to manufacturers of cosmetics and personal care products. This
business was acquired from Dow Corning in the first quarter of 1996.
Advertising and promotion expense increased by $745,000 or 229% to $1,071,000
due primarily to a sampling program and advertising related to the Neet line of
depilatories which was licensed in the third quarter of 1995, and print
advertising for the Exact line of acne medications.
General and administrative expense increased by $50,000 or 6% over the second
quarter of the prior year due mainly to increased spending on a variety of
outside services.
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The operating loss for the second quarter of $1,840,000 represented an
improvement of $117,000 or 6% from the corresponding quarter of the prior year.
Interest expense increased for the second quarter by $247,000 or 372% to
$314,000 due primarily to the debt financing arranged by the Company in the
second half of the prior year.
The net loss for the second quarter of $2,058,000 represented an increase of
$116,000 or 6% from the corresponding period in the prior year due mainly to
the increase in interest expense.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues for the six months ended June 30, 1996 amounted to $10,507,000, an
increase of $625,000 or 6% over the corresponding period of the prior year.
Product revenues increased by $1,410,000 or 16% to $10,407,000. This was due
mainly to increased sales of consumer products, primarily sales of the Neet line
of depilatories, partially offset by decreased sales of the in-licensed Johnson
& Johnson suncare products. The payment of $750,000 relating to minimum purchase
requirements and royalties regarding product previously supplied to Scott Paper
Company also contributed to the increase in revenues. In the first half of 1996,
licensing revenues decreased from $885,000 to $100,000 due mainly to the receipt
in the first half of the prior year of a milestone payment of $1,500,000 from
Johnson & Johnson's Ortho Pharmaceutical Corporation, of which half was
recognized as revenues.
Gross profit on product revenues for the six months ended June 30, 1996
increased by $1,487,000 or 57% over the corresponding period of the prior year
due mainly to improved sales mix of higher margin consumer products and the
payment from Kimberly-Clark referred to above.
Research and development expense was essentially flat for the first six months
of 1996 compared to the corresponding period of the prior year, decreasing by
$41,000 or 2% to $1,874,000. Selling and marketing expense increased by $395,000
or 17% due mainly to the commencement of marketing and distribution for the
polymer supply shipments to manufacturers of cosmetics and personal care
products in the business acquired from Dow Corning in the first quarter of 1996.
Advertising and promotion expense increased by $1,069,000 or 178% due mainly to
a sampling program and advertising for the Neet line of depilatories, and print
advertising for the Exact line of acne medications.
General and administrative expense was essentially flat decreasing by $27,000 or
2% to $1,504,000.
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The operating loss for the first six months of 1996 increased by $695,000 or
24% due mainly to the increased advertising and promotion expense.
Interest expense increased by $480,000 or 362% to $613,000 due primarily to the
debt financing arranged by the Company in the second half of 1995.
The net loss for the six months ended June 30, 1996 totalled $4,077,000 compared
to $2,852,000 in the corresponding period of the prior year.
CAPITAL RESOURCES AND LIQUIDITY
Total assets as of June 30, 1996 were $25,400,000 compared with $23,082,000 at
December 31, 1995, and working capital increased to $8,163,000 from $4,976,000.
In the same period, cash and cash equivalents increased to $7,533,000 from
$5,173,000. During the first six months of 1996, Company operations used
$4,896,000 of cash. The Company invested approximately $1,874,000 in product
research and development and $4,424,000 in selling, marketing and promoting
products.
The Company has financed its operations, including product research and
development and promotional activities, from amounts raised in debt and equity
financings; product sales; payments received under licensing agreements; and
interest earned on short-term investments.
In prior years, cash was expended with regard to Phase III clinical tests on
tretinoin entrapped in a Microsponge(R) delivery system for the treatment of
acne, and on APS' melanin-Microsponge sun protectant product, together with
related research and development costs, all of which decreased substantially in
1995 following the filing of the respective NDAs. Additionally, the Company is
contractually obligated to purchase minimum annual quantities of melanin.
Failure to purchase the minimum quantities results in a mandatory annual payment
of $600,000 to its melanin supplier under "take or pay" provisions. The minimum
financial commitments not yet expensed by APS under the current agreements are
$600,000 per annum for each of the years in the two year period ending December
31, 1998, for an aggregate of $1,200,000.
In the second quarter of 1996, the Company entered into an agreement for the
sale of up to $5,000,000 of common stock and warrants, which can be initiated at
the Company's sole discretion. The Company initiated a drawdown of $2,000,000 in
May 1996 in return for 201,922 shares and 86,538 warrants exercisable over a
three year period. This, together with the Company's existing cash and cash
equivalents, collections of trade accounts receivable, interest income and other
revenue producing activities including milestone payments, are expected to be
sufficient to meet the Company's near-term cash requirements assuming no changes
to existing business plans.
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PART II.
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual shareholders' meeting was held on June 5, 1996,
at which an amendment to the Company's 1992 Stock Plan to increase
the number of shares by 750,000 was approved with 10,802,397 votes
for the amendment and 2,436,538 votes withheld. In addition, the
following directors were re-elected:
Votes Votes
For Withheld
--- --------
Mr. John J. Meakem, Jr., 13,175,600 63,335
Chairman of the Board
Dr. Carl Ehmann 12,134,596 1,104,339
Dr. Jorge Heller 12,137,066 1,101,869
Mrs. Helen Leong 13,171,320 67,615
Mr. Peter Riepenhausen 13,175,200 63,735
Mr. Toby Rosenblatt 13,174,750 64,185
Mr. Gregory Turnbull 13,175,150 63,785
Mr. Dennis Winger 13,174,950 63,985
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27 Financial Data Schedules
(b) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
Date: August 12, 1996 By: /s/ John J. Meakem, Jr.
---------------- ------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: August 12, 1996 By: /s/ Michael O'Connell
---------------- ----------------------
Michael O'Connell
Chief Financial Officer
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EXHIBIT INDEX
Form 10-Q
ADVANCED POLYMER SYSTEMS, INC.
27 -Financial Data Schedules.
5
1
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
7,533,456
0
4,339,453
107,134
5,432,409
18,210,806
13,179,831
8,440,427
25,399,631
10,047,731
5,909,778
0
0
181,855
9,260,267
25,399,631
9,564,251
10,506,992
6,294,188
6,294,188
7,802,005
14,359
613,026
(4,077,354)
0
(4,077,354)
0
0
0
(4,077,354)
(0.23)
(0.23)
