SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL & TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003 or
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
123 Saginaw Drive, Redwood City, California 94063
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 366-2626
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock ($.01 par value)
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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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X ]
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The aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant as of June 30, 2003, was $25,311,335. (1)
As of February 29, 2004, 20,641,924 shares of registrant's Common Stock, $.01
par value, were outstanding.
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(1)Excludes 5,401,377 shares held by directors, officers and shareholders
whose ownership exceeds 5% of the outstanding shares at June 30, 2003.
Exclusion of such shares should not be construed as indicating that the
holders thereof possess the power, directly or indirectly, to direct the
management or policies of the registrant, or that such person is controlled
by or under common control with the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Form
10-K
Document Part
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Definitive Proxy Statement to be used
in connection with the 2004 Annual Meeting
of Stockholders. III
TABLE OF CONTENTS
PART I
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for the Registrant's Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Principal Accountant Fees and Services
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Signatures
Certifications
PART I
Item 1. BUSINESS
INTRODUCTION-FORWARD LOOKING STATEMENTS
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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 progress in research and
development programs, timely development, approval, launch and acceptance of
new products, establishment of new corporate alliances and other factors
described below under the headings "APP Technology", "Products",
"Manufacturing", "Marketing", "Government Regulation", "Patents and Trade
Secrets" and "Competition". In addition, such risks and uncertainties also
include the matters discussed under Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 below.
COMPANY OVERVIEW
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In this Annual Report on Form 10-K, the "Company", "A.P. Pharma", "APP",
"we", "us", and "our", refer to A.P. Pharma, Inc.
We are a specialty pharmaceutical company focused on the development of
pharmaceutical products utilizing our proprietary polymer-based drug delivery
systems. Our focus is the development and commercialization of bioerodible
injectable and implantable systems under the trade name Biochronomer(TM).
Our business strategy is twofold:
- - to develop selected proprietary products, funding them through the
preliminary phases of regulatory review before entering into partnerships to
share costs and to earn a share of future profits; and
- - to license our proprietary technologies to corporate partners after the
successful completion of reimbursed feasibility studies to earn research and
development fees, licensing fees, milestone payments and royalties.
Initial targeted areas of application for our drug delivery technologies
include pain management; anti-nausea, anti-inflammatory, anti-infective,
oncology and ophthalmology applications; device coatings and DNA delivery.
Product development programs are primarily funded by royalties from topical
prescription products currently marketed by our pharmaceutical partners,
Johnson & Johnson and Aventis, proceeds from the divestiture of our
cosmeceutical and toiletry product lines in July 2000, fees we receive from
collaborative partners, and proceeds from the sale of our Analytical
Standards business in February 2003.
Bioerodible polymers are of increasing interest within the pharmaceutical and
biotechnology community for use in both drug delivery applications and as
devices. We have made substantial progress in developing bioerodible
polymers that potentially represent a significant improvement over existing
drug delivery systems. A major point of difference with other delivery
systems is that our polymers have been specifically designed as drug delivery
systems and are versatile. Over one hundred in vivo and in vitro studies
have been completed to advance understanding of this innovative drug delivery
technology. Importantly, the initial toxicology data indicate that the
technology is safe for use in humans. Studies demonstrate complete and
controlled bioerosion of the polymers. Erosion times can be varied from
hours to days, weeks or months and mechanical properties can be adjusted to
produce materials as diverse as injectable gels, coatings, strands, wafers,
films or microspheres. In addition, the manufacturing is reproducible, has
been scaled up and the polymers are stable, provided they are stored under
appropriate anhydrous conditions. In studies, the polymers were observed to
erode to completion and, once the drug was released, no polymer remained. In
addition, the polymers bioerode with low acidity, thus potentially allowing
the delivery of sensitive proteins and DNA.
Our first Biochronomer product candidate is APF112 for the treatment of post-
surgical pain. APF112 incorporates the well-known analgesic mepivacaine in
our Biochronomer system. It is designed to provide 24 to 36 hours of post-
surgical pain relief and to minimize the use of morphine-like drugs (opioids)
which are used extensively in post-surgical pain management. Opioids are
associated with a wide range of side effects, such as nausea, sedation,
dizziness, constipation, vomiting, urinary retention, and in some situations,
life-threatening respiratory depression. We completed Phase 1 human clinical
trials for APF112 in 2002. However, the U.S. Food and Drug Administration
(FDA) expressed concerns about mild-to-moderate irritation observed during
preclinical studies. After discussions with FDA officials, we modified our
formulation to minimize the potential for irritation and then initiated more
extensive preclinical studies to demonstrate that any irritation is
reversible. In August 2003, we announced that the FDA had given us clearance
to initiate Phase 2 clinical trials. Our initial target is pain management
following inguinal hernia repair. The first part of the trial was an open-
label study which was successfully completed. Results of the Part 1 study
indicate that the pharmacokinetic measurements demonstrated meaningful levels
of mepivacaine over a three day period consistent with observations made in
preclinical studies with APF112. No severe or serious adverse events were
reported and wound healing in all patients was observed to be normal over a
30-day follow-up period. The second part of the Phase 2 trial is a blinded
study involving 90 patients and compares two doses of APF112 with the current
standard treatment for post-surgical pain. The endpoints for the trial will
include a visual analog score of pain intensity, the standard means of
measuring pain, and patient reduction in opioid pain medication. We believe
that more than 20 million surgical procedures are performed annually in the
U.S. which could benefit from this product.
Our second product candidate is APF530 for the prevention of nausea and
vomiting following chemotherapy or surgery. We expect to commence human
clinical trials in the second quarter of 2004.
We have also entered into fee-paying feasibility studies with several
companies to develop a variety of products using our Biochronomer(TM)
delivery systems. These products are being developed in the areas of
vaccines, ophthalmology, device coatings and DNA delivery. In general, these
research and development arrangements provide for us to receive research and
development fees from our collaborators. Three of these development programs
have moved into in vivo testing and, if they are concluded successfully,
could lead to licensing agreements under which a partner would pay for
development costs and we would receive a license fee, research and
development fees, milestone payments and a royalty upon a product's marketing
clearance and commercialization.
In February 1997, we received FDA marketing clearance for our first
pharmaceutical product based on the original patented Microsponge(R)
technology, Retin-A Micro(R), which was licensed to Ortho Neutrogena, a
member of the Johnson & Johnson family of companies. This product was
launched in the United States in March 1997. Retin-A Micro was also launched
in Canada in the third quarter of 2001 and Phase 3 clinical trials were
completed in Europe in 2002. In May 2002, the FDA granted marketing
clearance for a new low-dose formulation of Retin-A Micro, which was launched
in the U.S. in July 2002.
We licensed to Dermik Laboratories, an Aventis company, a Microsponge-based
formulation incorporating 5-fluorouracil (5-FU) for the treatment of actinic
keratoses, a precancerous skin condition. The product was launched in the
first quarter of 2001 under the brand name Carac(TM). This product has a
number of advantages over other topical therapies, including less irritation
with shorter duration of therapy and reduced dosage frequency.
Until July 2000, we engaged in the development, manufacturing, and out-
licensing of the aforementioned topical pharmaceutical products as well as a
variety of cosmeceutical and toiletry products. In July 2000, we sold our
cosmeceutical and toiletry product lines, together with certain technology
rights to topical pharmaceuticals, to RP Scherer, a subsidiary of Cardinal
Health. We received $25 million at closing and were entitled to receive
further annual earnout amounts for the subsequent three years, the amounts of
which were dependent on the performance of the product lines sold. We
recorded approximately $3 million at the end of the first earnout period
ending June 30, 2001, which represents earnout payments received of $3.6
million less reserves for certain indemnification claims allowable under the
sale agreement, and approximately $200,000 for the second earnout period
ending June 30,2002. No earnout income was received for the third and final
earnout period. Under the sale agreement, we retained the rights to our
topical prescription products, which are marketed by our corporate partners,
Johnson & Johnson and Aventis, and on which we continue to receive royalties.
In February 2003, we sold the assets of our wholly-owned subsidiary, APS
Analytical Standards, Inc., to GFS Chemicals of Columbus, Ohio, for $2.1
million in cash and the right to receive royalties for the next five years.
The Company, founded in February 1983 as a California corporation under the
name AMCO Polymerics, Inc., changed its name to Advanced Polymer Systems,
Inc. in 1984 and was reincorporated in Delaware in 1987. The name was
changed to A.P. Pharma, Inc. in May 2001 to reflect the new pharmaceutical
focus of the Company.
APP TECHNOLOGY
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We have made significant investment and progress in the development of
bioerodible drug delivery systems. Specifically, we have developed two
families of polymers, each with unique attributes. The first family is known
collectively as poly(ortho esters) under the trade name Biochronomer(TM);
polymers in the second family are known collectively as block copolymers of
poly(ortho esters) and poly(ethylene glycol) under the trade name
Bioerodimer(TM). The two polymer families are covered by US patent
5,968,543, issued October 19, 1999 and US patent 5,939,453, issued August 17,
1999. Both are broad composition of matter patents. A number of other
patent applications have been filed.
The Biochronomer polymer is a poly(ortho ester) whose production is highly
reproducible and kilo quantities of polymer have been produced according to
Good Manufacturing Practices (GMP).
Current product development work takes advantage of the versatility of these
materials, and is exemplified by forms that range from injectable gels into
which drugs can be incorporated by a simple mixing procedure, to solid
devices that can be fabricated at temperatures low enough to allow the
incorporation of materials such as proteins that require mild fabrication
conditions.
Our primary focus has been on advancing our Biochronomer technology, which is
designed to release drugs at selected implantation sites such as at the site
of a surgical procedure, under the skin, in joints, in the eye, or in muscle
tissue. Key benefits of this technology include the ability to fabricate the
poly(ortho ester) polymers into a variety of drug delivery forms as diverse
as wafers, strands, microspheres and injectable gels to enable various means
of administration into the body. Also under development are device
applications. Because both mechanical properties and erosion rates can be
controlled, these polymers are emerging as promising materials for device
coatings that could be useful in cardiovascular applications such as stent
coatings.
PRODUCTS
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Ethical Pharmaceutical Products
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We define ethical pharmaceutical products as prescription products that are
promoted primarily through the medical profession. We are developing several
pharmaceutical product candidates that will require marketing clearance from
the FDA before they can be sold in the United States. We believe that the
benefits offered by our delivery systems will create valuable product
differentiation and commercial advantages in large, profitable markets.
Results from various preclinical and initial clinical studies reaffirm that
this technology offers the potential to maintain or improve therapeutic
efficacy and to reduce adverse drug side effects.
The following ethical dermatological products incorporating the Microsponge
technology have already been developed and commercialized:
Retin-A Micro: In February 1997, we received FDA marketing clearance for
Microsponge-entrapped tretinoin for improved acne treatment. Tretinoin has
been marketed in the United States by Ortho Neutrogena (formerly Ortho
Dermatological), a Johnson & Johnson ("J&J") subsidiary, under the brand name
RETIN-A(R) since 1971. It has proven to be a highly effective topical acne
medication. However, skin irritation among sensitive individuals can limit
patient compliance with the prescribed therapy. We developed a new
formulation of Retin-A containing Microsponge-entrapped tretinoin for acne
treatment which was licensed to J&J. This patent-protected approach to drug
delivery reduces the potentially irritating side effects of tretinoin. Ortho
Dermatological began marketing this product in March 1997 under the brand
name Retin-A(R) Micro (TM). Additionally, Ortho received FDA marketing
clearance in the United States for a second Retin-A Micro formulation, a low-
dose version, and launched the product in July 2002. Our formulation patents
on these products continue until 2016.
Ortho launched this product in Canada during 2001 and has completed Phase 3
clinical trials in Europe.
Carac: In the fourth quarter of 2000, Dermik Laboratories, an Aventis
company, received U.S. marketing clearance for an APP-developed formulation
containing Microsponge-entrapped 5-fluorouracil (5-FU) for the treatment of
actinic keratoses. This product was launched under the trade name Carac(TM)
in the first quarter of 2001. We receive royalties based on the sales of
this product over the life of the applicable patents. In September 2003, a
new formulation patent was issued by the U.S. Patent and Trademark office
(USPTO) extending patent coverage for this use of our Microsponge formulation
until 2021.
Products Under Development
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Our efforts in pharmaceutical markets include additional applications using
our Biochronomer technology that are under development, as noted below.
The first product candidate that incorporates the Biochronomer(TM) delivery
system targets the management of pain in patients following surgery. Initial
clinical studies are being conducted in surgeries for inguinal hernia repair.
Upon demonstration of efficacy in treating post-surgical pain, we believe
that there will be substantial potential for this product, as there are
approximately 20 million surgical procedures performed annually in the U.S.
for which the product could potentially be utilized.
The treatment goal is to provide 24 to 36 hours of localized post-surgical
pain relief by delivering the drug mepivacaine directly to the surgical site.
Mepivacaine is a well-known drug for localized pain relief, and it has an
extensive safety protocol. APF112 is designed to prolong the anesthetic
effect of mepivacaine and thus to minimize or eliminate the use of opioids
(morphine-like drugs) which are currently used in the majority of surgical
procedures as a means of managing post-operative pain despite unpleasant side
effects - nausea, disorientation, sedation, constipation, vomiting, urinary
retention and, in some situations, life-threatening respiratory depression.
Other Products
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Analytical Standards. We initially developed microspheres (precursors to the
Microsponge system) for use as a testing standard for gauging the purity of
municipal drinking water.
In February 2003, we announced the sale of the assets of this subsidiary to
GFS Chemicals, Inc. of Columbus, Ohio for $2.1 million in cash and the right
to receive royalties for five years at rates ranging from 5% to 15% of sales
of analytical standards products.
MARKETING
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A key part of our business strategy is to form collaborations with
pharmaceutical partners. We have therefore negotiated fee-paying feasibility
agreements with several pharmaceutical and biotechnology companies for the
development of prescription products incorporating the Biochronomer delivery
system.
In general, we grant limited marketing exclusivity in defined markets for
defined periods to our partners. However, after development is completed and
a partner commercializes a formulated product utilizing our delivery systems,
we can exert only limited influence over the manner and extent of our
partner's marketing efforts.
Our key marketing relationships currently involve only the Microsponge
delivery system for prescription products and are as follows:
Johnson & Johnson Inc. In May 1992, we entered into a development and
license agreement with Ortho-McNeil Pharmaceutical Corporation, (a subsidiary
of J&J ("Ortho")) related to tretinoin-based products incorporating our
Microsponge technology. As part of the agreement, certain license fees and
milestone payments were paid to us by Ortho. The license fees provided Ortho
with exclusive distribution or license rights for all Ortho tretinoin
products utilizing our Microsponge system. Ortho's exclusivity will continue
as long as annual minimum royalty payments are made, governed by the life of
the applicable patents owned by us through 2016.
In February 1997, we received FDA marketing clearance for the first product
covered by this agreement, Microsponge-entrapped tretinoin. This product has
been marketed by Ortho since March 1997 as Retin-A(R) Micro. We received a
payment of $3,000,000 from Ortho upon receipt of the FDA approval, of which
half is a milestone payment that was recognized as revenue in 1997 and half
as prepaid royalties which were recorded as deferred revenues. Ortho pays us
a royalty on product sales. In accordance with the licensing agreement, 25%
of the royalties we earn is applied against deferred revenues after certain
annual minimum royalty payments are met. Should these minimums not be
achieved, Ortho would lose its exclusivity and we would regain marketing
rights to the retinoid products.
Dermik. In March 1992, we restructured our 1989 joint venture agreement with
Dermik, an Aventis company. As part of the agreement Aventis received
certain exclusive marketing rights for the U.S. Product applications include
a 5-FU treatment for actinic keratoses (precancerous skin lesions). In the
fourth quarter of 1999, Dermik filed an NDA for this product and expanded its
agreement with us to cover two additional indications, in return for
milestone payments and royalties upon successful development. We received
$500,000 on execution of this amendment representing a milestone payment of
$250,000 and prepaid royalties of $250,000. In the fourth quarter of 2000
Dermik received FDA marketing clearance for the product, which was launched
under the trade name Carac(TM) in the first quarter of 2001 and we received a
milestone payment of $50,000. In 2002, we recognized the prepaid royalties
as revenues because Dermik decided not to pursue the two additional
applications covered by the 1999 amendment and the rights reverted to us.
Dermik's exclusivity relating to Carac will continue as long as annual
minimum royalty payments are made, governed by the life of the applicable
patents. In September 2003, we received a notice of allowance from the USPTO
extending patent coverage for this use of our Microsponge formulation until
2021.
GOVERNMENT REGULATION
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Ethical Products
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In order to clinically test, produce and sell products for human therapeutic
use, mandatory procedures and safety evaluations established by the FDA and
comparable agencies in foreign countries must be followed. The procedure for
seeking and obtaining the required governmental clearances for a new
therapeutic product includes preclinical animal testing to determine safety
and efficacy, followed by human clinical testing. This can take many years
and require substantial expenditures. In the case of third party agreements,
we expect that our corporate partners will partially fund the testing and the
approval process with guidance from us. We intend to seek the necessary
regulatory approvals for our proprietary products as they are being
developed.
PATENTS AND TRADE SECRETS
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As part of our strategy to protect our current products and to provide a
foundation for future products, we have filed a number of United States
patent applications on inventions relating to specific products, product
groups, and processing technology. We have also filed foreign patent
applications on our polymer technology with the European Union, Japan,
Australia, South Africa, Canada, Korea and Taiwan. We have a total of 15
issued United States patents and an additional 88 issued foreign patents.
Currently, we have 29 pending patent applications worldwide. The patents on
the Microsponge(R) system expire between October 2009 and September 2021.
The patents on the bioerodible systems expire between January 2016 and
November 2021.
Although we believe the bases for these patents and patent applications are
sound, they are untested, and there is no assurance that they will not be
successfully challenged. There can be no assurance that any patent
previously issued will be of commercial value, that any patent applications
will result in issued patents of commercial value, or that our technology
will not be held to infringe patents held by others.
We rely on unpatented trade secrets and know-how to protect certain aspects
of our production technologies. Our employees, consultants, advisors and
corporate partners have entered into confidentiality agreements with us.
These agreements, however, may not necessarily provide meaningful protection
for our trade secrets or proprietary know-how in the event of unauthorized
use or disclosure. In addition, others may obtain access to, or
independently develop, these trade secrets or know-how.
COMPETITION
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In the development of bioerodible poly(ortho esters) for implantation
applications, there is competition from a number of other bioerodible
systems, especially polymers based on lactic and glycolic acid and to a
lesser extent, polyanhydrides. We believe that our proprietary bioerodible
Biochronomer(TM) polymers have a number of important advantages. Among these
are ease of manufacturing, ability to control both erosion times and
mechanical properties, the simultaneous drug delivery and erosion process,
resulting in complete polymer disappearance when all the drug has been
delivered. Also, the polymer bioerodes with low acidity, thus potentially
allowing the delivery of sensitive proteins and DNA.
The attribute of the second family of bioerodible polymers, the block
copolymers of poly(ortho esters) and poly(ethylene glycols), named
Bioerodimer, is that a hydrophobic (water-repelling) bioerodible segment can
be connected to a water-soluble segment. There are other such polymers, but
we believe that our proprietary material is superior because the hydrophobic
poly(ortho ester) segment can greatly increase the efficiency of drug
entrapment making transport to tumors much more effective.
HUMAN RESOURCES
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As of February 29, 2004, we had 36 full-time employees, 6 of whom hold PhDs.
There were 27 employees engaged in research and development and quality
control, and 9 working in finance, business development, human resources and
administration.
We consider our relations with employees to be satisfactory. None of our
employees is covered by a collective bargaining agreement.
AVAILABLE INFORMATION
- ---------------------
We make available free of charge on or through our Internet website our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to those reports as soon as reasonably
practicable after they are electronically filed with, or furnished to, the
Securities and Exchange Commission. Our Internet website address is
"www.appharma.com".
Item 2. PROPERTIES
We lease 26,067 square feet of laboratory, office and warehouse space in
Redwood City, California. The annual rent expense for the Redwood City
facility is approximately $641,000.
We occupied a production facility and warehouse in Lafayette, Louisiana that
was sold to RP Scherer in July 2000. The construction of the facility in
1986 was financed primarily by 15-year, tax-exempt industrial development
bonds. In 1995, we extinguished the bond liability through an "in-substance
defeasance" transaction by placing United States government securities in an
irrevocable trust to fund all future interest and principal payments. The
defeased debt balance outstanding of $2,500,000 as of December 31, 2003 will
be repaid on January 25, 2005 using the proceeds from the maturities of the
United States government securities held in the irrevocable trust.
Our existing research and development and administrative facilities are not
yet being used at full capacity and management believes that these facilities
are adequate and suitable for current and anticipated needs.
Item 3. 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 infringment of patents pertaining to alpha-hydroxyacids 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, Inc. In our opinion, this
litigation should not have a material effect on our results of operations or
financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of the Company's common stock trade on the NASDAQ National Market,
under the symbol APPA. As of February 29, 2004, there were 453 holders of
record of the Company's common stock.
The Company has never paid cash dividends and does not anticipate paying cash
dividends in the foreseeable future. The following table sets forth for the
fiscal periods indicated, the range of high and low sales prices for the
Company's common stock on the NASDAQ National Market System.
2003 High Low 2002 High Low
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First Quarter $1.18 $0.84 First Quarter $2.90 $2.08
Second Quarter 1.96 1.00 Second Quarter 2.65 1.93
Third Quarter 2.45 1.38 Third Quarter 2.20 1.15
Fourth Quarter 3.15 2.02 Fourth Quarter 1.50 0.61
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
For the Years Ended and as of
December 31, 2003 2002 2001 2000 1999
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Consolidated Statements of Operations Data
- ------------------------------------------
Royalties $ 4,502 $ 4,026 $ 3,227 $ 2,081 $2,025
Contract revenues 346 407 38 122 362
License fees -- 237 -- -- 1,100
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Total revenues 4,848 4,670 3,265 2,203 3,487
Expenses
Research and development 8,660 6,699 7,348 3,713 2,471
General and administrative 2,800 3,024 3,247 2,869 2,946
Interest and other income and
expense, net 404 658 1,192 546 (371)
------ ----- ------ ----- -----
Loss from continuing
operations (6,208) (4,395) (6,138) (3,833) (2,301)
Income (loss) from
discontinued operations(1) (57) 401 624 1,238 4,673
Gain on disposition of
discontinued operations(2) 1,902 216 3,000 11,147 --
----- ----- ------ ------ -----
Net income (loss) $(4,363) $(3,778) $(2,514) $ 8,552 $2,372
===== ===== ====== ====== =====
Basic income (loss) per
common share:
Loss from continuing
operations $ (0.30) $ (0.22) $ (0.30) $(0.19) $(0.11)
Net income (loss) $ (0.21) $ (0.19) $ (0.12) $ 0.42 $ 0.12
Diluted income (loss) per
common share:
Loss from continuing
operations $ (0.30) $ (0.22) $ (0.30) $(0.19) $(0.11)
Net income (loss) $ (0.21) $ (0.19) $ (0.12) $ 0.42 $ 0.12
Weighted average common
shares outstanding - basic 20,553 20,409 20,276 20,179 20,079
Weighted average common
shares outstanding - diluted 20,553 20,409 20,276 20,213 20,252
(1) Income (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 the income (loss) attributable to our
cosmeceutical and toiletries business that was sold to RP Scherer on July 25,
2000.
(2) Gain on disposition of discontinued operations in 2000 represents the
gain on the sale of our cosmeceutical and toiletries business to RP Scherer
on July 25, 2000, and in 2001 and 2002 represents the annual earnout income
received from RP Scherer based on the performance of the business sold. The
gain on disposition of discontinued operations in 2003 represents the gain on
sale of our Analytical Standards division to GFS Chemicals on February 13,
2003.
Consolidated Balance Sheet Data
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December 31,
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2003 2002 2001 2000 1999
------- ------- ------ ----- ------
Working capital $ 9,366 $13,989 $18,092 $20,111 $13,221
Total assets 13,155 17,781 23,483 26,964 19,265
Long-term debt, excluding
current portion -- -- -- -- 2,409
Stockholders' equity 11,263 15,459 19,173 21,159 12,036
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. The items in our financial statements
requiring significant estimates and judgments are as follows:
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
---------
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 customer by our
licensees based on information that we receive from our licensees.
* License Fees
------------
We have licensing agreements that generally provide for us to receive
periodic minimum payments, royalties, and/or non-refundable license fees.
These licensing agreements typically require a non-refundable license fee and
allow partners to sell our proprietary products in a defined field or
territory for a defined period. The license agreements provide for us 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 when the amounts are received or when collectibility is assured,
whichever is earlier.
A milestone payment is a payment made to us by a third party or corporate
partner 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.
* Contract Revenues
-----------------
Generally, contract revenues relate to research and development arrangements
that generally provide for our 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.
Clinical Trial Accruals
- -----------------------
Our expenses related to clinical trials are based on estimates of the
services received and efforts expended pursuant to contracts with multiple
research institutions and clinical research organizations that conduct and
manage clinical trials on our behalf. Since the invoicing related to these
services does not always coincide with our financial statement close process,
we must estimate the level of services performed and fees incurred in
determining the accrued clinical trial costs. The financial terms of these
agreements are subject to negotiation and variation from contract to contract
and may result in uneven payment flows. Payments under the contracts depend
on factors such as the successful enrollment of patients or achievement of
certain events or the completion of portions of the clinical trial or similar
conditions. Expenses related to clinical trials generally are accrued based
on the level of patient enrollment and activity according to the protocol.
We monitor patient enrollment levels and related activity to the extent
possible and adjust our estimates accordingly. Over the next year our
clinical trials on APF112 could significantly increase our research and
development expenditures.
Results of Operations for the years ended December 31, 2003, 2002 and
- ---------------------------------------------------------------------
2001
- ----
The following sets forth the consolidated statement of operations data and
percentage changes as compared to the prior year (dollar amounts are
presented in thousands):
For the Year Ended December 31, Annual % Change
------------------------------- ---------------
2003 2002 2001 03/02 02/01
---- ---- ---- ----- -----
Royalties $4,502 $4,026 $3,227 12% 25%
Contract revenues 346 407 38 (15%) 971%
License fees -- 237 -- (100%) N/A
----- ----- -----
Total revenues 4,848 4,670 3,265 4% 43%
Expenses
Research and development 8,660 6,699 7,348 29% (9%)
General and
administrative 2,800 3,024 3,247 (7%) (7%)
Our revenues are derived principally from royalties, contract revenues and to
a lesser extent, license fees. Under strategic alliance arrangements entered
into with certain corporations, we may receive non-refundable upfront fees,
milestone payments and royalties based on third party product sales.
The increase in royalties in 2003 from 2002 of $476,000 or 12%, to $4,502,000
related to a 21% increase in royalties earned on sales of Retin-A(R) Micro by
Ortho Neutrogena, a Johnson and Johnson company, partially offset by a
decrease in royalties earned on sales of Carac(TM) a topical prescription
treatment for actinic keratoses that was launched in the first quarter of
2001 by our marketing partner, Dermik Laboratories, an Aventis company. The
increase in sales of Retin-A Micro was due primarily to the launch of a new
low-dose formulation in July 2002 after FDA marketing clearance. Royalties
increased in 2002 from 2001 by $799,000 or 25% due to a 29% increase in
royalties earned on sales of Carac by Dermik Laboratories. Also, royalties on
sales of Retin-A(R) Micro by Ortho Neutrogena, increased by 23% in 2002 over
the prior year following the launch of the new low-dose formulation in July
2002. Royalty income is expected to increase in 2004 assuming that sales for
both underlying product lines increase and that prices are not eroded.
Contract revenues decreased by $61,000 or 15% in 2003 compared with 2002 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.
Contract revenues increased in 2002 by $369,000 from 2001 due to the
initiation of new feasibility studies with corporate collaborators during
2002.
License fees recognized in 2002 are attributed to the forfeiture by a partner
of certain rights to proprietary Microsponge(R) formulation which resulted in
the full recognition of the related unamortized deferred revenue balance of
$237,000. No license fees were recognized in either 2003 or 2001.
Research and development expense increased in 2003 compared to 2002 by
$1,961,000, or 29% to $8,660,000 due mainly to the initiation of Phase 2
clinical trials of APF112, our product candidate for post-surgical pain
management which incorporates our Biochronomer(TM) drug delivery system. In
addition, costs associated with the manufacturing of GMP product for human
clinical trials was incurred during 2003. Research and development expense
for 2002 compared to 2001 decreased by $649,000, or 9% to $6,699,000, due
mainly to the delayed entry into Phase 2 clinical trials of APF112. This
compares with higher expenses incurred in the prior year related to
preparation for the filing of an Investigational New Drug Application (IND),
together with the costs associated with the manufacture of GMP materials for
use in clinical trials. Research and development expense is expected to
increase in 2004 as we complete Phase 2 clinical trials for APF112 and
initiate human clinical testing on APF530.
The scope and magnitude of future research and development expenses are
difficult to predict at this time given the number of studies that will need
to be conducted for any of our potential products. In general,
biopharmaceutical development involves a series of steps, beginning with
identification of a potential target, and includes proof of concept in
animals and Phase 1, 2 and 3 clinical studies in humans. Each step of this
process is typically more expensive than the previous one, so success in
development results in increasing expenditures. Our research and development
expenses currently include costs for scientific personnel, animal studies,
human clinical trials, supplies, equipment, consultants, patent filings,
overhead allocation and sponsored research at academic and research
institutions.
Products in Development
- -----------------------
We have a number of product candidates in various stages of development. The
following table sets forth the current opportunities for our own portfolio of
product candidates, the compound selected, the delivery time and the status.
Assuming successful completion of Phase 2 studies, the Company contemplates
entering into development and marketing agreements for these product
candidates.
CURRENT OPPORTUNITIES
Product Market Delivery
Portfolio Drug Size Duration Status
- --------- ---- ------ -------- ------
APF112 - Acute Mepivacaine $2 billion Short-term Phase 2
pain relief
(surgical/
orthopedic)
APF530 - Anti- Granisetron $2 billion Short-term Pre-IND
nausea (chemo-
therapy/surgical)
APF328 - Anti- Meloxicam $1.5 billion Medium-term Pre-IND
inflammatory
(surgical/
orthopedic)
APF505 - Anti- Meloxicam $3.5 billion Long-term Pre-IND
inflammatory
(osteoarthritis)
In addition, several feasibility studies are ongoing with corporate
collaborators in the areas of ophthalmology, device coating and immune
stimulation.
The major components of research and development expenses for 2003, 2002 and
2001 were as follows (in thousands):
2003 2002 2001
------ ------ ------
Internal research and
development costs $5,108 $4,827 $4,167
External polymer
development, clinical
and preclinical
programs 3,552 1,872 3,181
----- ----- -----
$8,660 $6,699 $7,348
===== ===== =====
Internal general research and development costs include employee salaries and
benefits, laboratory supplies, depreciation, professional fees and allocation
of overhead. External polymer development on clinical and preclinical
programs includes expenditures on technology and product development,
preclinical and clinical evaluation, regulatory and toxicology consultants,
and polymer manufacturing, all of which are performed on our behalf by third
parties.
General and administrative expense decreased in 2003 by $224,000 or 7% from
2002 due mainly to decreased investor relations, depreciation and travel and
entertainment expense, partially offset by higher professional fees. General
and administrative expense includes salaries and related expenses,
professional fees, directors' fees, investor relations costs, insurance
expense and overhead allocation. General and administrative expense decreased
in 2002 by $223,000 or 7% from 2001 due mainly to decreased professional fees
and a provision for a doubtful note receivable recorded in 2001 partially
offset by higher investor relations expenses. General and administrative
expense is expected to remain constant in 2004.
General and administrative expenses in 2001 included an allowance for
doubtful accounts of $417,000 relating to a note receivable arising from our
sale of certain proprietary rights to a consumer product in 1999. As
payments on the note were not received on a timely basis and we determined
collectibility was no longer assured, an allowance was recorded against the
note. In 2002, an additional allowance of $20,000 was recorded on the
remaining outstanding balance.
Interest and other income and expense consist primarily of income earned on
cash, cash equivalents and marketable securities. Interest income decreased
in 2003 by $339,000 compared to 2002 and decreased in 2002 by $515,000
compared to 2001 due mainly to reduced interest rates on reduced cash
balances.
On February 13, 2003, we completed the sale of certain assets 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 15% to 5%. The net present value of the guaranteed minimum royalties is
included in the gain on disposition of discontinued operations.
On July 25, 2000, we completed the sale of certain technology rights for our
topical pharmaceutical and cosmeceutical product lines and associated assets
("cosmeceutical and toiletry business") to RP Scherer Corporation, a
subsidiary of Cardinal Health, Inc. We received $25 million on 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.
Income (loss) from discontinued operations represents the income attributable
to our Analytical Standards division through the date of sale and the net
contribution (loss) attributable to our cosmeceutical and toiletries product
lines which were sold in July 2000. For the year 2003, the net loss from
discontinued operations relating to changes in estimates totaled $65,000,
compared with the net income from discontinued operations relating to changes
in estimates of $172,000 in 2002 and $415,000 in 2001.
The gain on disposition of discontinued operations recorded in 2003 of
$1,902,000 relates to the gain on the sale of our Analytical Standards
division compared with $216,000 and $3,000,000 in 2002 and 2001,
respectively, which relate to the net earnout income resulting from the sale
of our cosmeceutical product lines in 2000.
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities decreased by $4,637,000 to
$9,484,000 at December 31, 2003 from $14,121,000 at December 31, 2002.
Net cash used in operating activities for the years ended December 31, 2003,
2002 and 2001 was $6,525,000, $5,134,000 and $6,495,000, respectively. Net
cash used in operating activities relates primarily to funding net losses
excluding the gain on disposition of discontinued operations and changes in
deferred revenue offset by depreciation. The increase in net cash used in
operating activities for 2003 was primarily due to increased research and
development expenses resulting from the initiation of the Phase 2 human
clinical studies for APF112, our product candidate for the treatment of post-
surgical pain.
Net cash provided by investing activities for the years ended December 31,
2003, 2002 and 2001 was $3,257,000, $4,723,000 and $3,554,000. The proceeds
received in 2003 of $2,142,000 related to the sale of our Analytical
Standards division compared to proceeds of $216,000 and $3,602,000 in 2002
and 2001, respectively, which relate primarily to the earnout income received
from RP Scherer.
Our financing activities provided us with $83,000, $75,000 and $66,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. The net cash
provided by financing activities in 2003, 2002 and 2001 was primarily related
to proceeds from issuances of shares under the Employee Stock Purchase Plan.
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, 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 for at least the next year. It is possible that we
will seek additional financing within this timeline through debt or equity
financing, the sale of certain assets and technology rights, collaborative
arrangements 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 December 31, 2003.
Total 1 year 2 years 3 years
----- ------ ------- -------
Operating Leases(1) $621 $602 $ 12 $ 7
--- --- --- ---
Total $621 $602 $ 12 $ 7
=== === === ===
(1) See Note 7 "Commitments" in the Notes to Consolidated Financial Statement
of Part II, Item 8 of this Form 10-K for more information.
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. Combined
payments for the Gross Profit Guaranty totaled $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.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the presentation in 2003.
The operations and related assets of the Analytical Standards division were
reclassified to discontinued operations and assets held for sale,
respectively, in the statements of operations and cash flows for the years
ended December 31, 2002, and 2001 and in the balance sheets as of December
31, 2002.
Off-Balance-Sheet Arrangements
- ------------------------------
As of December 31, 2003, we did not have any off-balance-sheet arrangements,
as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
- --------------------------------
In November 2002, the FASB issued Interpretation No. 45 (or FIN 45),
"Guarantor's Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including residual
value guarantees issued in conjunction with operating lease agreements. It
also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair value of the obligation it
assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The adoption of the disclosure requirements in November 2002 and
the recognition requirements in January 2003 of FIN 45 did not have a
material impact on our results of operations or financial position.
In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-
21 addresses certain aspects of the accounting by a company for arrangements
under which it will perform multiple revenue-generating activities. EITF
Issue No. 00-21 addresses when and how an arrangement involving multiple
deliverables should be divided into separate units of accounting. EITF Issue
No. 00-21 provides guidance with respect to the effect of certain customer
rights due to company nonperformance on the recognition of revenue allocated
to delivered units of accounting. EITF Issue No. 00-21 also addresses the
impact on the measurement and/or allocation of arrangement consideration of
customer cancellation provisions and consideration that varies as a result of
future actions of the customer or the company. Finally, EITF Issue No. 00-21
provides guidance with respect to the recognition of the cost of certain
deliverables that are excluded from the revenue accounting for an
arrangement. The provisions of EITF Issue No. 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
These provisions which we adopted on July 1, 2003 did not have a material
impact on our results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to
a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
The provisions of FIN 46 apply immediately to variable interest entities
created before January 31, 2003 and no later than the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. We do not
have variable interest entities and as such the adoption of FIN 46 did not
have a material impact on our results of operations and financial position.
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
Our business is subject to various risks, including those described below.
You should carefully consider these risk factors, together with all of the
other information included in this Form 10-K. Any of these risks could
materially adversely affect our business, operating results and financial
condition.
OUR BIOERODIBLE DRUG DELIVERY SYSTEM BUSINESS IS AT AN EARLY STAGE OF
DEVELOPMENT.
Our bioerodible drug delivery system business is at an early stage of
development. Our ability to produce bioerodible drug delivery systems that
progress to and through clinical trials is subject to, among other things:
- success with our research and development efforts;
- selection of appropriate therapeutic compounds for delivery;
- the required regulatory approval.
Successful development of delivery systems will require significant
preclinical and clinical testing prior to regulatory approval in the United
States and elsewhere. In addition, we will need to determine whether any
potential products can be manufactured in commercial quantities at an
acceptable cost. Our efforts may not result in a product that can be
marketed. Because of the significant scientific, regulatory and commercial
milestones that must be reached for any of our research programs to be
successful, any program may be abandoned, even after significant resources
have been expended.
WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND TO DEVELOP OUR
PRODUCTS AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING ON FAVORABLE TERMS
IN THE FUTURE IS UNCERTAIN.
We will require additional capital resources in order to conduct our
operations and develop our products. While we estimate that our existing
capital resources, royalty income and interest income will be sufficient to
fund our current level of operations for at least the next year based on
current business plans, we cannot guarantee that this will be the case. The
timing and degree of any future capital requirements will depend on many
factors, including:
- continued scientific progress in our research and development programs;
- the magnitude and scope of our research and development programs;
- our ability to establish and maintain strategic collaborations or
partnerships for research, development, clinical testing, manufacturing and
marketing;
- our progress with preclinical and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims.
We intend to acquire additional funding through strategic collaborations, in
the form of license fees, research and development fees and milestone
payments. In the event that additional funds are obtained through
arrangements with collaborative partners, these arrangements may require us
to relinquish rights to some of our technologies, product candidates or
products that we would otherwise seek to develop and commercialize ourselves.
If sufficient funding is not available, we may be required to delay, reduce
the scope of or eliminate one or more of our research or development
programs, each of which could have a material adverse effect on our business.
IF WE ARE UNABLE TO RECRUIT AND RETAIN SKILLED EMPLOYEES, WE MAY NOT BE ABLE
TO ACHIEVE OUR OBJECTIVES.
Retaining our current employees and recruiting qualified scientific personnel
to perform future research and development work will be critical to our
success. Competition is intense for experienced scientists, and we may not
be able to retain or recruit sufficient skilled personnel to allow us to
pursue collaborations and develop our products and core technologies to the
extent otherwise possible.
WE ARE RELIANT ON SINGLE SOURCE THIRD PARTY CONTRACTORS FOR THE MANUFACTURE
AND PRODUCTION OF RAW MATERIALS AND PRODUCT CANDIDATES.
We currently, and for the foreseeable future will, rely upon outside
contractors to manufacture, supply and package for us key intermediates,
active pharmaceutical ingredients and formulated drug product for our product
candidates. Our current dependence upon others for the manufacture of our
raw materials and product candidates and our anticipated dependence upon
others for the manufacture of any products that we may develop, may adversely
affect our ability to develop our product candidates in a timely manner and
may adversely affect future profit margins and our ability to commercialize
any products that we may develop on a timely and competitive basis.
ENTRY INTO CLINICAL TRIALS WITH ONE OR MORE PRODUCTS MAY NOT RESULT IN ANY
COMMERCIALLY VIABLE PRODUCTS.
We do not expect to generate any significant revenues from product sales for
a period of several years. We may never generate revenues from product sales
or become profitable because of a variety of risks inherent in our business,
including risks that:
- clinical trials may not demonstrate the safety and efficacy of our
products;
- completion of clinical trials may be delayed, or costs of clinical trials
may exceed anticipated amounts;
- we may not be able to obtain regulatory approval of our products, or may
experience delays in obtaining such approvals;
- we and our licensees may not be able to successfully market our products.
BECAUSE WE OR OUR COLLABORATORS MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR
PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT
WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS.
Federal, state and local governments in the United States and governments in
other countries have significant regulations in place that govern many of our
activities. The preclinical testing and clinical trials of the products that
we develop ourselves or that our collaborators develop are subject to
government regulation and may prevent us from creating commercially viable
products from our discoveries. In addition, the sale by us or our
collaborators of any commercially viable product will be subject to
government regulation from several standpoints, including the processes of:
- manufacturing;
- advertising and promoting;
- selling and marketing;
- labeling; and
- distributing.
We may not obtain regulatory approval for the products we develop and our
collaborators may not obtain regulatory approval for the products they
develop. Regulatory approval may also entail limitations on the indicated
uses of a proposed product.
The regulatory process, particularly for biopharmaceutical products like
ours, is uncertain, can take many years and requires the expenditure of
substantial resources. Any product that we or our collaborative partners
develop must receive all relevant regulatory agency approvals or clearances,
if any, before it may be marketed in the United States or other countries.
In particular, human pharmaceutical therapeutic products are subject to
rigorous preclinical and clinical testing and other requirements by the Food
and Drug Administration in the United States and similar health authorities
in foreign countries. The regulatory process, which includes extensive
preclinical testing and clinical trials of each product in order to establish
its safety and efficacy, is uncertain, can take many years and requires the
expenditure of substantial resources.
Data obtained from preclinical and clinical activities is susceptible to
varying interpretations that could delay, limit or prevent regulatory agency
approvals or clearances. In addition, delays or rejections may be
encountered as a result of changes in regulatory agency policy during the
period of product development and/or the period of review of any application
for regulatory agency approval or clearance for a product. Delays in
obtaining regulatory agency approvals or clearances could:
- significantly harm the marketing of any products that we or our
collaborators develop;
- impose costly procedures upon our activities or the activities of our
collaborators;
- diminish any competitive advantages that we or our collaborative partners
may attain; or
- adversely affect our ability to receive royalties and generate revenues
and profits.
In addition, the marketing and manufacturing of drugs and biological products
are subject to continuing FDA review, and later discovery of previously
unknown problems with a product, its manufacture or its marketing may result
in the FDA requiring further clinical research or restrictions on the product
or the manufacturer, including withdrawal of the product from the market.
WE DEPEND ON OUR COLLABORATORS TO HELP US COMPLETE THE PROCESS OF DEVELOPING
AND TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE
PRODUCTS MAY BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE
UNSUCCESSFUL.
Our strategy for the development, clinical testing and commercialization of
our products requires entering into collaborations with corporate partners,
licensors, licensees and others. We are dependent upon the subsequent
success of these other parties in performing their respective
responsibilities and the cooperation of our partners. Our collaborators may
not cooperate with us or perform their obligations under our agreements with
them. We cannot control the amount and timing of our collaborators'
resources that will be devoted to our research activities related to our
collaborative agreements with them. Our collaborators may choose to pursue
existing or alternative technologies in preference to those being developed
in collaboration with us.
Under agreements with collaborators, we may rely significantly on them, among
other activities, to:
- fund research and development activities with us;
- pay us fees upon the achievement of milestones; and
- market with us any commercial products that result from our
collaborations.
OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC
ADVISORS AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY
WITHIN OUR CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS.
We have relationships with scientific advisors at academic and other
institutions, some of whom conduct research at our request. These scientific
advisors are not our employees and may have commitments to, or consulting or
advisory contracts with, other entities that may limit their availability to
us. We have limited control over the activities of these advisors and,
except as otherwise required by our collaboration and consulting agreements,
can expect only limited amounts of their time to be dedicated to our
activities. If our scientific advisors are unable or refuse to contribute to
the development of any of our potential discoveries, our ability to generate
significant advances in our technologies will be significantly harmed.
THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND
DEVELOP PRODUCTS.
Our future success depends to a significant extent on the skills, experience
and efforts of our executive officers and key members of our scientific
staff. We may be unable to retain our current personnel or attract or
assimilate other highly qualified management and scientific personnel in the
future. The loss of any or all of these individuals could harm our business
and might significantly delay or prevent the achievement of research,
development or business objectives.
WE FACE INTENSE COMPETITION FROM OTHER COMPANIES.
Most or all of the products we could develop or commercialize will face
competition from different therapeutic agents intended for treatment of the
same indications or from other products incorporating drug delivery
technologies. The competition potentially includes all of the pharmaceutical
companies in the world. Many of these pharmaceutical companies have more
financial resources, technical staff and manufacturing and marketing
capabilities than we do. To the extent that we develop or market products
incorporating drugs that are off-patent, or are being developed by multiple
companies, we will face competition from other companies developing and
marketing similar products.
Pharmaceutical companies are increasingly using advertising, including
direct-to-consumer advertising, in marketing their products. The costs of
such advertising are very high and are increasing. It may be difficult for
our company to compete with larger companies investing greater resources in
these marketing activities.
Other pharmaceutical companies are aggressively seeking to obtain new
products by licensing products or technology from other companies. We will
be competing to license or acquire products or technology with companies with
far greater financial and other resources.
INABILITY TO OBTAIN SPECIAL MATERIALS COULD SLOW DOWN OUR RESEARCH AND
DEVELOPMENT PROCESS.
Some of the critical materials and components used in our developed products
are sourced from a single supplier. An interruption in supply of a key
material could significantly delay our research and development process.
Special materials must often be manufactured for the first time for use in
drug delivery systems, or materials may be used in the systems in a manner
different from their customary commercial uses. The quality of materials can
be critical to the performance of a drug delivery system, so a reliable
source of a consistent supply of materials is important. Materials or
components needed for our drug delivery systems may be difficult to obtain on
commercially reasonable terms, particularly when relatively small quantities
are required, or if the materials traditionally have not been used in
pharmaceutical products.
PATENTS AND OTHER INTELLECTUAL PROPERTY PROTECTION MAY BE DIFFICULT TO OBTAIN
OR INEFFECTIVE.
Patent protection generally has been important in the pharmaceutical
industry. Our existing patents may not cover future products, additional
patents may not be issued, and current patents or patents issued in the
future may not provide meaningful protection or prove to be of commercial
benefit.
In the United States, patents are granted for specified periods of time.
Some of our earlier patents have expired, or will expire, over the next
several years.
Other companies may successfully challenge our patents in the future. Others
may also challenge the validity or enforceability of our patents in
litigation. If any challenge is successful, other companies may then be able
to use the invention covered by the patent without payment. In addition, if
other companies are able to obtain patents that cover any of our technologies
or products, we may be subject to liability for damages and our activities
could be blocked by legal action unless we can obtain licenses to those
patents.
In addition, we utilize significant unpatented proprietary technology and
rely on unpatented trade secrets and proprietary know-how to protect certain
aspects of our products and technologies and the methods used to manufacture
them. Other companies have or may develop similar technology which will
compete with our technology.
OUR ROYALTY REVENUES COULD DECLINE.
Our royalty revenues in future periods could vary significantly. Major
factors which could have an effect on our royalty revenues include, but are
not limited to:
- our partners' decisions about amounts and timing of advertising support
for Retin-A Micro and Carac.
- our partners' decisions about other promotion and marketing support for
Retin-A Micro and Carac.
- the timing of approvals for new product applications both in the United
States and abroad.
- the expiration or invalidation of patents.
- decreases in licensees' sales of product due to competition, manufacturing
difficulties or other factors that affect sales of product, including
regulatory restrictions on the advertising of pharmaceutical products.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments. We manage our interest rate risk by maintaining an investment
portfolio primarily consisting of debt instruments of high credit quality and
relatively short average maturities. We also manage our interest rate risk
by maintaining sufficient cash and cash equivalents such that we are
typically able to hold our investments to maturity. At December 31, 2003 and
2002, respectively, our cash equivalents and marketable securities include
corporate and other debt securities as follows: (in thousands)
December 31,
-------------------------
2003 2002
---- ----
Available-for-sale:
Effective maturity of less than
3 months $ 14 $ 2,826
Due after 3 months and less than
1 year 8,665 5,618
Due after 1 year and less than
2 years 721 5,221
------ ------
Total Available for Sale
$ 9,400 $13,665
====== ======
Notwithstanding our efforts to manage interest rate risks, there can be no
assurances that we will be adequately protected against the risks associated
with interest rate fluctuations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A.P. Pharma, Inc.
Consolidated Balance Sheets
(in thousands except par value and shares)
- ------------------------------------------
December 31,
-------------------------
2003 2002
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 97 $ 3,282
Marketable securities 9,387 10,839
Accounts receivable less allowance
for doubtful account of $0 and $28
at December 31, 2003 and 2002,
respectively 1,340 1,340
Prepaid expenses and other current
assets, less allowance for doubtful
note receivable of $413 and $437 at
December 31, 2003 and 2002,
respectively 434 280
Assets held for sale -- 225
------- -------
Total current assets 11,258 15,966
Property and equipment, net 1,430 1,626
Other long-term assets 467 189
------- -------
Total Assets $ 13,155 $ 17,781
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 476 $ 268
Accrued expenses 1,173 945
Accrued disposition costs 53 514
Deferred revenue 190 250
------- -------
Total current liabilities 1,892 1,977
Deferred revenue - long-term -- 345
------- -------
Commitments and Contingencies
(Note 7)
Stockholders' Equity:
Preferred stock, 2,500,000 shares
authorized; none issued or
outstanding at December 31,
2003 and 2002 -- --
Common stock, $.01 par value,
50,000,000 shares authorized;
20,641,924 and 20,467,440 issued
and outstanding at December 31,
2003 and 2002, respectively 206 205
Additional paid-in capital 86,638 86,413
Accumulated deficit (75,598) (71,235)
Accumulated other comprehensive
income 17 76
------- -------
Total Stockholders' Equity 11,263 15,459
------- -------
Total Liabilities and Stockholders'
Equity $ 13,155 $ 17,781
======= =======
See accompanying notes to consolidated financial statements.
A.P. Pharma, Inc.
Consolidated Statements of Operations
(in thousands except per share data)
- -------------------------------------
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues
Royalties $ 4,502 $ 4,026 $ 3,227
Contract revenues 346 407 38
License fees -- 237 --
------ ------ ------
Total revenues 4,848 4,670 3,265
Expenses
Research and development 8,660 6,699 7,348
General and administrative 2,800 3,024 3,247
------ ------ ------
Operating loss (6,612) (5,053) (7,330)
------ ------ ------
Interest income 251 590 1,105
Other income, net 153 68 87
------ ----- ------
Loss from continuing operations (6,208) (4,395) (6,138)
Income (loss) from discontinued
operations (57) 401 624
Gain on disposition of discontinued
operations, net of taxes 1,902 216 3,000
------ ------ ------
Net loss $(4,363) $(3,778) $(2,514)
====== ====== ======
Basic and diluted loss per share:
Loss from continuing operations $ (0.30) $ (0.22) $ (0.30)
====== ====== ======
Net loss $ (0.21) $ (0.19) $ (0.12)
====== ====== ======
Weighted average common shares
outstanding - basic and diluted 20,553 20,409 20,276
====== ====== ======
See accompanying notes to consolidated financial statements.
A.P. Pharma, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(in thousands)
- -------------------------------------------------------------------------------
For the Year Ended December 31, 2003, 2002 and 2001
Accumulated
Other
Additional Compre-
Common Stock Deferred Paid-In Accumulated hensive Stockholders'
Shares Amount Compensation Capital Deficit Income Equity
---------- -------- --------- ----------- ----------- ------------ ------------
Balance, December
31, 2000 20,206 $202 $ (80) $85,901 $(64,943) $ 79 $21,159
Comprehensive
loss:
Net loss -- -- -- -- (2,514) -- (2,514)
Net unrealized
gain on
marketable
securities -- -- -- -- -- 159 159
------
Comprehensive
loss (2,355)
------
Fair value of common
stock issued
to directors
for services and
restricted stock
awards 115 1 -- 211 -- -- 212
Expense associated
with stock options
granted to non-
employees -- -- -- 11 -- -- 11
Amortization of
restricted stock -- -- 80 -- -- -- 80
Common stock issued
to employees under
the Employee Stock
Purchase Plan 36 -- -- 65 -- -- 65
------ --- ---- ------ ------- ---- ------
Balance, December
31, 2001 20,357 $203 $ -- $86,188 $(67,457) $ 238 $19,172
Comprehensive
loss:
Net loss -- -- -- -- (3,778) -- (3,778)
Net unrealized
loss on
marketable
securities -- -- -- -- -- (162) (162)
------
Comprehensive
loss (3,940)
------
Fair value of
common stock
issued to
directors
for services and
restricted stock
awards 47 1 -- 129 -- -- 130
Expenses associated
with stock options
granted to
non-employees -- -- -- 22 -- -- 22
Common stock issued
to employees under
the Employee Stock
Purchase Plan 63 1 -- 74 -- -- 75
------ --- ---- ------ ------- ---- ------
Balance, December
31, 2002 20,467 $205 $ -- $86,413 $(71,235) $ 76 $15,459
====== === ==== ====== ======= ==== ======
Comprehensive
loss:
Net loss -- -- -- -- (4,363) -- (4,363)
Net unrealized
loss on
marketable
securities -- -- -- -- -- (59) (59)
------
Comprehensive
loss (4,422)
------
Common stock
issued upon
exercise of
stock options 14 -- -- 22 -- -- 22
Fair value of
common stock
issued to
directors
for services 86 1 -- 112 -- -- 113
Expenses associated
with stock options
granted to
non-employees -- -- -- 30 -- -- 30
Common stock issued
to employees under
the Employee Stock
Purchase Plan 75 -- -- 61 -- -- 61
------ --- ---- ------ ------- ---- ------
Balance, December
31, 2003 20,642 206 -- 86,638 (75,598) 17 11,263
====== === ==== ====== ======= ==== ======
See accompanying notes to consolidated financial statements.
A.P. Pharma, Inc.
Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------
For the Year Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (4,363) $ (3,778) $ (2,514)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss (income) from discontinued operations 57 (401) (624)
Gain on disposition of discontinued
operations (1,902) (216) (3,000)
Allowance for claims relating to sale
of discontinued operations -- -- (712)
Gain on sale of marketable securities (1) (81) (84)
Depreciation and amortization 432 449 390
Provision for (recovery of) note receivable (24) 66 418
Stock-based compensation awards to
non-employees 143 119 189
Restricted stock awards -- 33 113
Amortization of premium/discount and
accretion of marketable securities 28 22 171
Loss on retirements and disposals of fixed
assets 16 3 4
Changes in operating assets and liabilities:
Accounts receivable -- (53) 243
Advances to officers and employees -- -- 34
Prepaid expenses and other (130) 254 263
Other long-term assets (278) 26 (64)
Accounts payable 208 (54) 25
Accrued expenses 228 (464) (184)
Deferred revenue (405) (505) (164)
------ ------- ------
Net cash used in continuing operating
activities (5,991) (4,580) (5,496)
Cash used in discontinued operations (534) (554) (999)
------ ------- -------
Net cash used in operating activities (6,525) (5,134) (6,495)
------ ------- -------
Cash flows from investing activities:
Proceeds from disposition of discontinued
operations 2,142 216 3,602
Purchases of property and equipment (251) (428) (273)
Purchases of marketable securities (6,712) (12,563) (16,410)
Maturities of marketable securities 8,078 17,498 16,635
------ ------- -------
Net cash provided by investing activities 3,257 4,723 3,554
------ ------- -------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options 22 -- --
Proceeds from issuance of shares under
the Employee Stock Purchase Plan 61 75 66
------ ------- -------
Net cash provided by financing activities 83 75 66
------ ------- -------
Net decrease in cash and cash
equivalents (3,185) (336) (2,875)
Cash and cash equivalents at the beginning
of the year 3,282 3,618 6,493
------ ------ -------
Cash and cash equivalents at the end of
the year $ 97 $ 3,282 $ 3,618
====== ====== ======
Supplemental Cash Flow Data:
Cash paid for taxes $ 9 $ 13 $ 27
====== ======= ======
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------
Note 1 Business
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.
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. As a result of this transaction, our
Consolidated Statements of Operations reflect the receipt of certain earnout
payments and the payment of certain contractual obligations in the gain from
disposition of discounted operations (see Note 10).
On February 13, 2003, we completed the sale of our Analytical Standard
division to GFS Chemicals, Inc. ("GFS"), a privately held company based in
Columbus, Ohio. In this transaction, we received $2.1 million and are
entitled to receive royalties on sales of Analytical Standards products of
15% for the first year, 10% for the second through fourth years, and 5% for
the fifth year. The net present value of the guaranteed minimum royalties is
included in the gain on disposition of discontinued operations (see Note 10).
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
The condensed consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiary, APS Analytical
Standards, Inc. (Analytical Standards) through the date of sale (February 13,
2003). All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash Equivalents and Marketable Securities
- ------------------------------------------
For purposes of the Consolidated Statements of Cash Flows and Consolidated
Balance Sheets, we consider all short-term investments that have original
maturities of less than three months to be cash equivalents. Investments
with effective maturities longer than three months are classified as
marketable securitites. Investments consist primarily of commercial paper,
bankers acceptances, master notes and corporate debt securities. We have
classified all our investments in certain debt and equity securities as
"available-for-sale", and therefore are recorded at fair value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses and declines in fair value that are deemed
to be other-than-temporary are reflected in earnings. The cost of securities
sold is based on the specific identification method.
Financial Instruments
- ---------------------
The carrying values of the Company's financial instruments, including
marketable securities, accounts receivable and accrued liabilities,
approximate their respective fair values.
Allowance for Note Receivable
- -----------------------------
An allowance was recorded for a note receivable at such time as management
determined that collection was not reasonably assured. Interest income under
the terms of note receivable agreement is recorded when cash is received or
collectiblity is reasonably assured. The note receivable, net of the related
reserve, is included in prepaid expenses and other current assets in the
accompanying balance sheet.
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows: equipment and machinery, 3 to 5 years;
furniture and fixtures, 5 years; and leasehold improvements, over the shorter
of the respective lease terms or the respective useful lives of the leasehold
improvements.
Long-Lived Assets
- -----------------
As circumstances dictate, we evaluate whether changes have occurred that
would require revision of the remaining estimated lives of recorded long-
lived assets or that render those assets impaired. Recoverability of assets
to be held and used is determined by comparing the undiscounted net cash
flows of long-lived assets to their respective carrying values. If such
assets are considered to be impaired, the amount of impairment to be
recognized is measured based on the projected discounted cash flows using an
appropriate discount rate.
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 (see Note 9
"Stockholders' Equity").
2003 2002 2001
----------- ----------- ---------
Net loss - as reported $(4,363) $(3,778) $(2,514)
Deduct:
Stock-based employee
compensation expense
determined under FAS 123 (397) (601) (696)
------- ------ ------
Net loss - pro-forma $(4,760) $(4,379) $(3,210)
====== ====== ======
Basic and diluted net
loss per common share
- as reported $ (0.21) $ (0.19) $ (0.12)
Basic and diluted net
loss per common share
- pro-forma $ (0.23) $ (0.21) $ (0.16)
Use of Estimates
- ----------------
The preparation of 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 the
consolidated 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 year ended
December 31, 2003.
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 year ended December 31,
2003.
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.
Research and Development
- ------------------------
Research and development consists of costs incurred for Company-sponsored and
collaborative research and development expenses. These costs consist
primarily of employee salaries and other personnel-related expenses,
professional fees, facility-related espenses, lab consumables, polymer
development manufacturing, clinical and pre-clinical related services
performed by clinical research organizations, research institutions and other
outside service providers.
The initiation of APF112 clinical trials have had, and will continue to have,
a significant effect on the Company's research and development expenses.
Expenses related to clinical trials generally are accrued based on the level
of patient enrollment and activity according to the protocol. The Company
monitors patient enrollemnt level and related activity to the extent possible
and adjusts estimates accordingly.
Research and development expenses under collaborative agreements approximate
the revenue recognized, excluding milestone and up-front payments received
under such arrangements.
Net Loss Per Share
- -------------------------
Basic and diluted net loss per share is computed based on the weighted-
average number of common shares outstanding. Diluted net loss per share is
not presented separately as the Company is in a net loss position and
including potentially dilutive securities in the net loss per share
computation would be anti-dilutive. See Note 9 "Net Loss Per Share".
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 maintain
liquidity.
Approximately 80% and 79% of the receivables were concentrated with two
customers in the pharmaceutical industry as of December 31, 2003 and 2002,
respectively. Approximately 93%, 91% and 100% of total revenue were
concentrated with two customers for the years ended December 31, 2003, 2002
and 2001. 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 customers
within the United States.
Recent Accounting Pronouncements
- --------------------------------
In November 2002, the FASB issued Interpretation No. 45 (or FIN 45),
"Guarantor's Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including residual
value guarantees issued in conjunction with operating lease agreements. It
also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair value of the obligation it
assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The adoption of the disclosure requirements in November 2002 and
the recognition requirements in January 2003 of FIN 45 did not have a
material impact on our results of operations or financial position.
In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-
21 addresses certain aspects of the accounting by a company for arrangements
under which it will perform multiple revenue-generating activities. EITF
Issue No. 00-21 addresses when and how an arrangement involving multiple
deliverables should be divided into separate units of accounting. EITF Issue
No. 00-21 provides guidance with respect to the effect of certain customer
rights due to company nonperformance on the recognition of revenue allocated
to delivered units of accounting. EITF Issue No. 00-21 also addresses the
impact on the measurement and/or allocation of arrangement consideration of
customer cancellation provisions and consideration that varies as a result of
future actions of the customer or the company. Finally, EITF Issue No. 00-21
provides guidance with respect to the recognition of the cost of certain
deliverables that are excluded from the revenue accounting for an
arrangement. The provisions of EITF Issue No. 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
The adoption of EITF Issue No. 00-21 did not have a significant impact on our
results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to
a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
The consoidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. We do not
have any variable interest entities and, as such, the adoption of FIN 46 did
not have a material impact on our results of operations and financial
position.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the presentation in 2003.
The operations and related assets of the Analytical Standards division were
reclassified to discontinued operations and assets held for sale,
respectively, in the statements of operations and cash flows for the years
ended December 31, 2002 and 2001 and in the balance sheet as of December 31,
2002.
Note 3 Cash Equivalents and Marketable Securities
We consider all of our investments in debt and equity securities as
available-for-sale and, accordingly, we have recorded these investments at
fair value. Realized gains totaled $1,000, $81,000 and $84,000 for the years
ended December 31, 2003, 2002 and 2001, respectively. There were no realized
losses for the years ended December 31, 2003, 2002 and 2001.
At December 31, 2003 and 2002, the amortized cost and estimated market value
of investments in debt securities and cash are set forth in the tables below:
December 31, 2003
(in thousands)
------------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Market Value
------ ---------- ---------- ------------
Available-for-sale:
Corporate debt
securities $3,354 $10 $-- $3,364
Asset-backed
securities 2,006 6 -- 2,012
Government debt
securities 2,015 2 (1) 2,016
Other debt securities 2,008 -- -- 2,008
----- -- -- -----
Total available-for-
sale 9,383 18 (1) 9,400
Cash 84 -- -- 84
----- -- -- -----
Totals $9,467 $18 $(1) $9,484
===== == == =====
December 31, 2002
(in thousands)
------------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Market Value
------ ---------- ---------- ------------
Available-for-sale:
Corporate debt
securities $ 3,755 $ 14 $ (1) $ 3,768
Asset-backed
securities 2,355 44 -- 2,399
Government debt
securities 3,282 17 -- 3,299
Other debt securities 4,197 2 -- 4,199
------ --- --- ------
Total available-for-
sale 13,589 77 (1) 13,665
Cash 456 -- -- 456
------ --- --- ------
Totals $14,045 $ 77 $ (1) $14,121
====== === === ======
The table below summarizes fair value disclosures at December 31 (in
thousands):
2003 2002
----------------------- ----------------------
Fair Fair
Cost Value Cost Value
---- ---------- --------- ----------
Cash $ 84 $ 84 $ 456 $ 456
Cash equivalents 14 14 2,826 2,826
Marketable securities 9,369 9,386 10,763 10,839
------ ------ ------ ------
Totals $ 9,467 $ 9,484 $14,045 $14,121
====== ====== ====== ======
The cost and estimated fair value of available-for-sale debt securities as of
December 31, 2003, by contractual maturity, consisted of the following (in
thousands):
Estimated
Cost Market Value
----------- ------------
Available-for-sale:
Due in one year or less $8,663 $8,679
Due after one or more
years 720 721
----- -----
Total available-for
sale 9,383 9,400
Cash 84 84
----- -----
Totals $9,467 $9,484
====== ======
Note 4 Property and Equipment
Property and equipment consist of the following:
December 31,
(in thousands)
---------------------------
2003 2002
---------- ----------
Leasehold improvements