SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission file Number 0-16109
A.P. PHARMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
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(Address of principal executive offices)
(650) 366-2626
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes [ X ] No [ ]
---- ----
At April 30, 2005, the number of outstanding shares of the Company's
common stock, par value $.01, was 25,180,950.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Balance Sheets
March 31, 2005 and December 31, 2004
Condensed Statements of Operations
for the three months ended March 31, 2005 and 2004
Condensed Statements of Cash Flows
for the three months ended March 31, 2005 and 2004
Notes to Condensed Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements:
---------------------
A.P. PHARMA, INC.
- -----------------
CONDENSED BALANCE SHEETS (in thousands)
- ----------------------------------------
March 31, 2005 December 31, 2004
-------------- -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 354 $ 3,110
Marketable securities 11,426 10,486
Accounts receivable, net 1,435 1,506
Prepaid expenses and other 308 394
------ ------
Total current assets 13,523 15,496
Property and equipment, net 1,167 1,235
Other long-term assets 209 283
------ ------
Total assets $ 14,899 $ 17,014
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 553 $ 697
Accrued expenses 625 685
Accrued research and development
project costs 601 1,318
Accrued disposition costs 177 160
------ ------
Total current liabilities 1,956 2,860
------ ------
Stockholders' equity:
Common stock 99,031 98,989
Accumulated deficit (86,075) (84,819)
Accumulated other comprehensive
loss (13) (16)
------ ------
Total stockholders' equity 12,943 14,154
------ ------
Total liabilities and stockholders'
equity $ 14,899 $ 17,014
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------
(in thousands, except per share amounts)
- ---------------------------------------
Three Months Ended March 31,
----------------------------
2005 2004
------ ------
Royalties $ 1,282 $ 1,154
Contract revenues 78 26
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Total revenues 1,360 1,180
Operating expenses:
Research & development 1,822 3,013
General & administrative 849 746
------ ------
Total operating expenses 2,671 3,759
------ ------
Operating loss (1,311) (2,579)
Interest income, net 72 31
Other expense, net (11) (2)
------ ------
Loss from continuing operations (1,250) (2,550)
Loss from discontinued
operations (6) (49)
------ ------
Net loss $(1,256) $(2,599)
====== ======
Basic and diluted earnings (loss)
per share:
Loss from continuing operations $ (0.05) $ (0.12)
====== ======
Net loss $ (0.05) $ (0.13)
====== ======
Weighted average common shares
outstanding-basic and diluted 25,046 20,653
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands,
- ------------------------------------------------------------
except for share amounts)
- -------------------------
Three Months Ended March 31,
----------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net loss $(1,256) $(2,599)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Loss from discontinued
operations 6 49
Loss (gain) on sale of marketable
securities 12 (2)
Depreciation and amortization 94 92
Stock-based compensation to non-
employees 29 6
Restricted stock awards to employees 1 --
Amortization of premium/discount
and accretion of marketable
securities (1) (43)
Loss on retirements of property
and equipment -- 6
Changes in operating assets and
liabilities:
Accounts receivable 59 (145)
Prepaid expenses and other
current assets 86 13
Other long-term assets 74 180
Accounts payable (144) 725
Accrued research and development
project costs (717) (180)
Accrued expenses (60) 59
------ ------
Net cash used in continuing
operating activities (1,817) (1,839)
Net cash provided by (used in)
discontinued operations 23 (26)
Cash flows from investing activities:
Proceeds from disposition of
discontinued operations -- 19
Purchases of property and equipment (26) (18)
Purchases of marketable securities (5,156) (1,295)
Maturities of marketable securities 3,808 3,957
Sales of marketable securities 400 1,419
------ ------
Net cash provided by (used in)
investing activities (974) 4,082
------ ------
Cash flows from financing activities:
Proceeds from the exercise of stock
options 11 86
Proceeds from issuance of restricted
stock 1 --
------ ------
Net cash proceeds provided by
financing activities 12 86
Net increase (decrease) in cash
and cash equivalents (2,756) 2,303
Cash and cash equivalents, beginning
of the period 3,110 97
------ ------
Cash and cash equivalents, end
of the period $ 354 $ 2,400
====== ======
See accompanying notes to condensed financial statements.
A.P. PHARMA, INC.
- -----------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
MARCH 31, 2005 and 2004 (UNAUDITED)
- -----------------------------------
(1) Basis of Presentation
---------------------
A.P. Pharma, Inc. ("APP", the "Company", "we", "our", or "us")
is developing patented polymer-based delivery systems to
enhance the safety and effectiveness of pharmaceutical
compounds. Projects are currently conducted under feasibility
and development arrangements with pharmaceutical and
biotechnology companies. New products and technologies under
development include bioerodible polymers for injectable and
implantable drug delivery.
In the opinion of management, the accompanying unaudited
condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q
and Article 10 of regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments of a
normal recurring nature considered necessary for a fair
presentation have been included. Operating results for the
three months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2005 or any other period. The condensed
balance sheet as of December 31, 2004 has been derived from the
audited financial statements as of that date. For further
information, refer to the financial statements and notes
thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2004.
Critical Accounting Policies
- ----------------------------
We believe there have been no significant changes in our
critical accounting policies during the three months ended
March 31, 2005 compared to those previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2004
filed with the SEC on March 15, 2005.
Use of Estimates
- ----------------
The preparation of our financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in our financial statements and accompanying
notes. Estimates were made relating to useful lives of fixed
assets, valuation allowances, impairment of assets and
accruals. Actual results could differ materially from those
estimates. An estimate made for clinical study costs which was
included in the financial statements as of December 31, 2004
was reduced by $110,000 in the first quarter of 2005 on the
receipt of more accurate information during the first quarter
of 2005.
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 statements of
operations. License fees received in connection with
arrangements where we have no continuing involvement are
recognized as license fees when the amounts are received or
when collectibility is assured, whichever is earlier. No
such fees were recorded during the three months ended March
31, 2005 and 2004.
A milestone payment is a payment made by a third party or
corporate partner to us upon the achievement of a
predetermined milestone as defined in a legally binding
contract. Milestone payments are recognized as license fees
when the milestone event has occurred and we have completed
all milestone related services such that the milestone
payment is currently due and is non-refundable. No such
fees were recorded during the three months ended March 31,
2005 and 2004.
* Contract Revenues
Contract revenues also relate to research and development
arrangements that generally provide for the company to
invoice research and development fees based on full-time
equivalent hours for each project. Revenues from these
arrangements are recognized as the related development costs
are incurred. These revenues approximate the costs
incurred.
Cash Equivalents and Short-term Investments
- -------------------------------------------
We consider all short-term investments in debt securities which
have original maturities of less than three months at date of
purchase to be cash equivalents. Investments which have
original maturities of three months and longer are classified
as marketable securities in the accompanying balance sheets.
Accrued Disposition Costs
- -------------------------
Costs relating to disposal of discontinued operations are
reported as accrued disposition costs in the accompanying
balance sheets. Accrued disposition costs include severance
costs and gross profit guarantees.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
equivalents, short-term investments and trade accounts
receivable. We invest excess cash in a variety of high grade
short-term, interest-bearing securities. This diversification
of risk is consistent with our policy to ensure safety of
principal and to maintain liquidity.
Approximately 89% of the receivables were concentrated with two
customers in the pharmaceutical industry as of March 31, 2005.
To reduce credit risk, we perform ongoing credit evaluations of
our customers' financial conditions. We do not generally
require collateral for customers with accounts receivable
balances.
Segment and Geographic Information
- ----------------------------------
Our operations are confined to a single business segment, the
design and commercialization of polymer technologies for
pharmaceutical and other applications. Substantially all of
our revenues are derived from domestic customers.
Stock-Based Compensation
- ------------------------
We have elected to account for stock-based compensation related
to employees using the intrinsic value method. Accordingly,
except for stock options issued to non-employees and restricted
stock awards to employees and directors, no compensation cost
has been recognized for our employee stock option plans and
stock purchase plan. Compensation related to options granted
to non-employees is periodically remeasured as earned.
In accordance with FAS No. 123, "Accounting for Stock-Based
Compensation," as amended by FAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," we have
provided, below, the pro forma disclosures of the effect on net
loss and net loss per share as if FAS No. 123 had been applied
in measuring compensation expense for all periods presented.
Three Months Ended
March 31,
------------------
2005 2004
------------ -----------
(In thousands, except per
share amounts)
Net loss, as reported $(1,256) $(2,599)
Deduct:
Stock-based employee
compensation expense
determined under FAS 123 (84) (104)
------ ------
Pro forma net loss $(1,340) $(2,703)
====== ======
Basic and diluted loss per
share as reported $ (0.05) $ (0.13)
====== ======
Basic and diluted pro forma
loss per share $ (0.05) $ (0.13)
====== ======
Fair values of awards granted under the stock option plans and
employee stock purchase plan were estimated at grant or
purchase dates using the Black-Scholes option pricing model.
For pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period of the
options using the straight line method. The multiple option
approach is used to value the purchase rights granted under the
employee stock purchase plan. We used the following
assumptions:
Three Months Ended
March 31,
------------------
2005 2004
---- ----
Expected life in years (from
vesting date):
Stock options 5 5
Employee stock purchase plan 1.5 - 2 1.5 - 2
Discount rate:
Stock options 4.2% 2.8%
Employee stock purchase plan 1.47% - 2.6% 1.47% - 1.82%
Volatility
Stock options 79% 65%
Employee stock purchase plan 65% - 147% 65% - 68%
Expected dividend yield 0% 0%
In April 2005, the SEC announced a new rule that amends the
compliance dates for Financial Accounting Standards Board's
Statement No. 123R ("SFAS 123R") to the beginning of the next
fiscal year beginning after June 15, 2005. SFAS 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first
annual period after June 15, 2005, with early adoption
encouraged. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial
statement recognition. We are required to adopt SFAS 123R in
the year beginning January 1, 2006. Under SFAS 123R, we must
determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date
of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R, while the
retroactive method would record compensation expense for all
unvested stock options and restricted stock beginning with the
first period restated.
We are evaluating the requirements of SFAS 123R and expect that
the adoption of SFAS 123R may have a material impact on our
results of operations and earnings per share. We have not yet
determined the method of adoption or the effect of adopting
SFAS 123R, and have not determined whether the adoption will
result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
Reclassifications
- -----------------
Certain amounts in the prior year financial statements have
been reclassified to conform with the current year
presentation. Patent legal expenses in the prior year have been
reclassified from research and development expense to general
and administrative expense.
(2) Loss Per Share Information
-------------------------------------
Basic loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding. Because
the Company is in a net loss position for the three months
ended March 31, 2005 and 2004, diluted loss per share is also
calculated using the weighted average number of common shares
outstanding and excludes the effect of options which are anti-
dilutive.
(3) Comprehensive Loss
---------------------------
Comprehensive loss for the three months ended March 31, 2005
and March 31, 2004 consists of the following (in thousands):
Three Months Ended
March 31,
------------------
2005 2004
---- ----
Net loss $(1,256) $(2,599)
Unrealized gains (losses) on
available-for-sale securities 3 (8)
------ ------
Comprehensive loss $(1,253) $(2,607)
====== ======
(4) Stockholders' Equity
--------------------
During the three months ended March 31, 2005, 81,473 shares of
common stock were issued through the exercise of stock options and
issuance of restricted stock.
(5) Discontinued Operations
-----------------------
We completed the sale of certain assets of our Analytical
Standards division as well as certain technology rights for our
topical pharmaceutical and cosmeceutical product lines and
other assets ("cosmeceutical and toiletry business") in
February 2003 and July 2000, respectively.
The Analytical Standards division and cosmeceutical and
toiletry business are reported as discontinued operations for
all periods presented in the accompanying Condensed Statements
of Operations.
Loss from discontinued operations represents the income (loss)
attributable to our Analytical Standards division that was sold
to GFS Chemicals on February 13, 2003, and changes in estimates
for our cosmeceutical and toiletry business that was sold to RP
Scherer on July 25, 2000, as follows (in thousands):
For the Three Months Ended
March 31,
--------------------------
2005 2004
---- ----
Analytical Standards Division
- -----------------------------
Royalties earned in excess of
minimum amount recorded $ 12 $ 20
Change in estimate of severance -- (19)
---- ----
12 1
Cosmeceutical and Toiletry Business
- -----------------------------------
Change in estimates for gross
profit guarantees (18) (50)
---- ----
Total loss from discontinued
operations $ (6) $ (49)
==== ====
Basic and diluted loss per common share from discontinued
operations were less than $0.01 per share for the three months
ended March 31, 2005 and 2004, respectively.
Liabilities related to the discontinued operations in the
amount of $177,000 at March 31, 2005 include severance costs
and accruals for gross profit guarantees. These liabilities
are reported as accrued disposition costs in the accompanying
consolidated balance sheets.
Cash provided by discontinued operations primarily relates to
royalty payments received from GFS Chemical for the sale of
certain products.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially
from the statements made. These include, among others, uncertainty
associated with timely development, approval, launch and acceptance
of new products, establishment of new corporate alliances, progress
in research and development programs, and other risks described
below or identified from time to time in our Securities and Exchange
Commission filings.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in our
financial statements and accompanying notes. On an ongoing basis,
we evaluate our estimates including those related to the useful
lives of fixed assets, valuation allowances, impairment of assets,
accrued clinical and preclinical expenses and contingencies. Actual
results could differ materially from those estimates. An estimate
made for clinical study costs which was included in the financial
statements as of December 31, 2004 was reduced by $110,000 in the
first quarter of 2005 on the receipt of more accurate information
during the first quarter of 2005.
We believe there have been no significant changes in our critical
accounting policies during the three months ended March 31, 2005
compared to those previously disclosed in our Annual Report on Form
10-K for the year ended December 31, 2004 filed with the SEC on
March 15, 2005. For a description of our critical accounting
policies, please refer to our 2004 Annual Report on Form 10-K.
In April 2005, the SEC announced a new rule that amends the
compliance dates for Financial Accounting Standards Board's
Statement No. 123R ("SFAS 123R") to the beginning of the next fiscal
year beginning after June 15, 2005. SFAS 123R requires all share-
based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their
fair values beginning with the first annual period after June 15,
2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. We are required to adopt SFAS
123R in the year beginning January 1, 2006. Under SFAS 123R, we
must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of
adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option, prior
periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested
stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS 123R, while the retroactive method would
record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated.
We are evaluating the requirements of SFAS 123R and expect that the
adoption of SFAS 123R may have a material impact on our results of
operations and earnings per share. We have not yet determined the
method of adoption or the effect of adopting SFAS 123R, and have not
determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
Results of Operations for the Three Months Ended March 31, 2005 and
- -------------------------------------------------------------------
2004
- ----
Our revenues are derived principally from royalties and contract
revenues. 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.
Royalties for the first quarter of 2005 increased by $128,000 to
$1,282,000 from $1,154,000 in the corresponding quarter of the prior
year. This increase in royalties was due to increased sales of
Retin-A Micro(R) and Carac(R) by our marketing partners, Johnson &
Johnson and Sanofi-Aventis, respectively. We expect royalty revenue
to continue to increase in 2005.
Contract revenues increased by $52,000 from $26,000 to $78,000 as a
result of work performed under a collaborative research and
development arrangement. The amount of contract revenues varies
from quarter to quarter depending on the level of activity requested
of us by our collaborators. It is not possible to forecast the
amount of contract revenues in future periods.
Research and development expense for the first quarter of 2005
decreased by $1,191,000 from $3,013,000 to $1,822,000 due mainly to
reduced expenditures on human clinical trials during the quarter.
An IND was filed in the first quarter of 2005 for APF530, our
product candidate for the prevention of chemotherapy-induced nausea
and vomiting. A Phase 2 clinical trial program using APF530 was
initiated in April. In the first quarter of the prior year, we were
incurring expenses for preclinical studies relating to APF530 and
for our Phase 2 clinical trial using APF112 for the treatment of
post-surgical pain. We expect research and development expense to
increase in the second quarter of 2005 as we conduct our Phase 2
clinical program for APF530.
General and administrative expense for the first quarter of 2005
increased by $103,000 from $746,000 to $849,000 due primarily to
increased legal and consulting fees. We expect general and
administrative expense to increase slightly through the end of the
year compared to 2004.
Interest income for the first quarter of 2005 increased by $41,000
to $72,000 from $31,000 due to higher interest rates earned on
higher average cash and marketable securities balances.
Loss from discontinued operations represents the net loss
attributable to the Analytical Standards division which was sold to
GFS Chemicals, Inc. in February 2003 and the cosmeceutical and
toiletries business which was sold to RP Scherer Corporation in July
2000. Net loss from discontinued operations totaled $6,000 for the
three months ended March 31, 2005, compared with a net loss of
$49,000 in the three months ended March 31, 2004.
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities decreased by
$1,816,000 to $11,780,000 at March 31, 2005 from $13,596,000 at
December 31, 2004 due to cash used in operating activities.
Net cash used in continuing operating activities for the three
months ended March 31, 2005 and 2004 was $1,817,000 and $1,839,000,
respectively. The decrease in net cash used in operating activities
was mainly due to decreased clinical and preclinical study costs.
Net cash used in investing activities for the three months ended
March 31, 2005 was $974,000 compared with net cash provided by
investing activities of $4,082,000 in the three months ended March
31, 2004. The increase in the cash used in investing activities was
primarily due to the purchases of $5,156,000 of marketable
securities partially offset by the maturities of $3,808,000 of
marketable securities.
To date, we have financed our operations including technology and
product research and development, primarily through royalties
received on sales of Retin-A Micro and Carac, income from
collaborative research and development fees, the proceeds received
from the sales of our Analytical Standards division and our
cosmeceutical and toiletry business, the sale of common stock in
June 2004, and interest earned on short-term investments. Our
existing cash and cash equivalents, marketable securities,
collections of accounts receivable, together with interest income
and other revenue-producing activities including royalties, license
and option fees and research and development fees, are expected to
be sufficient to meet our cash needs for at least the next year. We
will seek additional financing within this timeline through
collaborative agreements, debt financing, equity financing, the sale
of certain assets and technology rights or other arrangements.
Our future capital requirements will depend on numerous factors
including, among others, royalties from sales of products of third
party licensees; our ability to enter into collaborative research
and development and licensing agreements; progress of product
candidates in preclinical and clinical trials; investment in new
research and development programs; time required to gain regulatory
approvals; resources that we devote to self-funded products;
potential acquisitions of technology, product candidates or
businesses; and the costs of defending or prosecuting any patent
opposition or litigation necessary to protect our proprietary
technology.
If our capital resources are unable to meet our capital
requirements, we will have to raise additional funds. We may be
unable to raise sufficient additional capital when we need it or to
raise capital on favorable terms. The sale of equity or convertible
debt securities in the future may be dilutive to our stockholders,
and debt financing arrangements may require us to pledge certain
assets and enter into covenants that could restrict certain business
activities or our ability to incur further indebtedness and may
contain other terms that are not favorable to us or our
stockholders. If we are unable to obtain adequate funds on
reasonable terms, we may be required to curtail operations
significantly or to obtain funds by entering into financing, supply
or collaboration agreements on unattractive terms.
Less More
than 2 to 3 4 to 5 than
Total 1 year years years 5 years
----- ------ ------ ------ -------
Operating Leases $2,871 $466 $935 $966 $504
--- --- --- --- ---
Total $2,871 $466 $935 $966 $504
=== === === === ===
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
----------------------------------------------------------
Since December 31, 2004, there have been no material changes in the
Company's market risk exposure.
ITEM 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures: We carried
out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operations
of our disclosure controls and procedures pursuant to Rule 13a-15(e)
and 15(d)-15(e) of the Exchange Act. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2005, the end of period covered by this report,
our disclosure controls and procedures were effective at the
reasonable assurance level to alert them in a timely manner to
material information relating to the Company required to be included
in our Exchange Act filings.
(b) Changes in internal controls: During the quarter ended March
31, 2005, there have been no significant changes in our internal
control over financial reporting that materially affected, or are
reasonable likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
On October 22, 2003, Tristrata Technology, Inc. (Tristrata)
filed an amended complaint joining A.P. Pharma, Inc. and other
companies as defendants in Tristrata's action first filed July 12,
2002 against Cardinal Health, Inc. and others in the Federal
District Court of Delaware. Tristrata's complaint alleged
infringement of patents pertaining to alpha-hydroxyacids used in
cosmetics. On January 19, 2005 the parties agreed to final
dismissal of all claims and counterclaims in the lawsuit resulting
in no judgement against A.P. Pharma.
ITEM 6. Exhibits
(a) Exhibits
Exhibit 10-Y Amendment to lease agreement dated March 29, 2004.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Rules 13A-15(e) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Rules 13A-15(e) Promulgated under the Securities Exchange Act of 1934
as amended.
Exhibit 32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
A.P. PHARMA, INC.
Date: May 10, 2005 By: /S/Michael O'Connell
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Michael O'Connell
President and Chief
Executive Officer
Date: May 10, 2005 By: /S/Gordon Sangster
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Gordon Sangster
Chief Financial Officer