Business Context and Reporting Period
This Form 10-Q covers A.P. Pharma, Inc. for the quarterly and nine-month periods ended September 30, 2001. The company operates primarily through licensing agreements, royalty collections, and the sale of analytical standards. A significant portion of the company's recent financial history involves the July 2000 sale of its cosmeceutical and toiletry business to RP Scherer Corporation, which is reported as a discontinued operation.
Key Financial Metrics
Revenue and Profitability
- Total Revenues (9 months 2001): $2,939,579 (up from $2,485,849 in 2000).
- Royalties (9 months 2001): $2,100,194 (up 32% year-over-year).
- Product Revenues (9 months 2001): $839,385 (down 6% year-over-year).
- Operating Loss (9 months 2001): $(4,767,823) compared to $(2,552,971) in 2000.
- Net Income/Loss (9 months 2001): $(827,367). This contrasts with a net income of $10,144,387 in the prior year, which included a significant gain from discontinued operations.
- Net Income/Loss (3 months 2001): $1,491,241, driven by a $3,000,000 gain on disposition of discontinued operations.
Liquidity and Balance Sheet
- Cash and Cash Equivalents: $2,627,477 (down from $6,493,336 at year-end 2000).
- Marketable Securities: $16,619,456.
- Total Assets: $24,774,331.
- Total Liabilities: $3,990,708.
- Working Capital: $19,808,000 (Current Assets $22,949,280 less Current Liabilities $3,141,390).
- Debt: No outstanding debt as of September 30, 2001.
Cash Flow
- Net Cash Used in Operating Activities (9 months 2001): $(4,294,427).
- Net Cash Used in Investing Activities (9 months 2001): $(623,066).
- Net Cash Provided by Financing Activities (9 months 2001): $1,051,634 (primarily proceeds from disposal of discontinued operations).
Material Changes vs. Prior Period
- Revenue Growth: Royalty revenue increased significantly due to the launch of Carac(TM), a topical prescription treatment for actinic keratoses, by marketing partner Dermik Laboratories.
- R&D Expenses: Research and development expenses surged 151% in the third quarter and 124% for the nine months ended September 30, 2001. This increase is attributed to pre-clinical trials and scale-up manufacturing for the Biochronomer(TM) system in preparation for an Investigational New Drug (IND) filing.
- Discontinued Operations: The company recognized a $3,000,000 net gain on the disposition of discontinued operations in the current quarter, representing earnout income from the 2000 sale of its cosmeceutical business. This gain turned a continuing operations loss into a net profit for the quarter.
- Interest Income: Interest income increased 104% for the nine-month period due to interest earned on the $25 million proceeds received from the 2000 asset sale.
Outlook, Risks, and Management Commentary
- Outlook: Management expects existing cash, marketable securities, and revenue streams to be sufficient to meet working capital requirements for the foreseeable future, assuming no changes to business plans.
- Key Development: The company is focusing on the Biochronomer(TM) system for implantable and injectable pharmaceutical applications, specifically targeting a treatment for post-surgical pain. An IND filing is anticipated later in the year.
- Risks: Forward-looking statements are subject to risks regarding timely regulatory approval, product launch acceptance, and the success of R&D programs.
- Legal Proceedings: A lawsuit filed in February 2000 by Douglas Kligman and Albert Kligman regarding a partnership dispute was resolved on September 28, 2001, with a summary judgment granted in favor of A.P. Pharma, Inc.
- Accounting Changes: The company adopted SFAS No. 141 and SFAS No. 142 regarding business combinations and goodwill, though no material effect is expected on current financial statements.
Investor Verification Checklist
- Verify the status and timeline of the Investigational New Drug (IND) application for the Biochronomer(TM) system.
- Confirm the sustainability of royalty revenue from Carac(TM) and the terms of the agreement with Dermik Laboratories.
- Review the remaining earnout potential from the 2000 sale of the cosmeceutical business to RP Scherer Corporation.
- Monitor cash burn rate relative to the $19.2 million in liquid assets (cash and marketable securities) given the high R&D spend.
- Assess the impact of the resolved Kligman litigation on future operational or financial liabilities.