<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 000-22347
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ASCENT PEDIATRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
- -------------------------------------------------- ----------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
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NONE
----
(Former name, former address, and
former fiscal year if changed since last report)
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 number of shares outstanding of the registrant's Common Stock,
par value $.00004 per share, as of August 6, 1998: 6,921,287.
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ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1 - Condensed Financial Statements
Condensed Balance Sheets..................................... 1
Condensed Statements of Operations........................... 2
Condensed Statements of Cash Flows........................... 3
Notes to Condensed Financial Statements...................... 4-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7-10
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds................ 11
Item 4 - Submission of Matters to a Vote of Security Holders ..... 11
Item 5 - Other Information........................................ 11-12
Item 6 - Exhibits and Reports on Form 8-K......................... 12
Signature.............................................................. 13
Exhibit Index.......................................................... 14
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 8,292,382 $ 11,700,612
Current marketable securities ................................. 500,300 2,527,900
Accounts receivable, net ...................................... 687,548 765,609
Inventory (Note 3) ............................................ 958,350 789,498
Other current assets .......................................... 385,628 124,874
------------ ------------
Total current assets ....................................... 10,824,208 15,908,493
Fixed assets, net .................................................. 787,310 759,563
Debt issue costs, net .............................................. 647,304 436,515
Intangibles, net ................................................... 10,873,058 11,215,506
Other assets ....................................................... 106,352 113,386
============ ============
Total assets ............................................... $ 23,238,232 $ 28,433,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................................. $ 850,377 $ 1,509,258
Accrued expenses .............................................. 1,306,772 1,157,379
Promissory note (Note 6) ...................................... -- 5,500,000
Subordinated secured notes, current portion (Note 6) .......... -- 3,500,000
------------ ------------
Total current liabilities .................................. 2,157,149 11,666,637
Subordinated notes (Note 6) ........................................ 8,656,652 1,252,068
------------ ------------
Total liabilities .......................................... 10,813,801 12,918,705
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
7,000 and 0 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively ........................ 70 --
Common stock, $.00004 par value; 60,000,000 shares authorized;
6,921,287 and 6,893,332 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively .......... 277 276
Additional paid-in capital .................................... 54,782,895 47,891,846
Accumulated deficit ........................................... (42,354,529) (32,378,480)
Unrealized (loss) gain on securities .......................... (4,282) 1,116
------------ ------------
Total stockholders' equity ................................. 12,424,431 15,514,758
============ ============
Total liabilities and stockholders' equity ................. $ 23,238,232 $ 28,433,463
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
1
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ASCENT PEDIATRICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product revenue .................................... $ 840,171 $ -- $ 2,154,220 $ --
Costs of sales ..................................... 429,923 -- 900,271 --
----------- ----------- ----------- -----------
Gross margin ....................................... 410,248 -- 1,253,949 --
Costs and expenses:
Selling, general and administrative .......... 3,854,521 1,378,686 7,702,678 2,351,512
Research and development ..................... 887,595 937,466 2,011,472 2,465,581
----------- ----------- ----------- -----------
Total costs and expenses ..................... 4,742,116 2,316,152 9,714,150 4,817,093
----------- ----------- ----------- -----------
Loss from operations ...................... (4,331,868) (2,316,152) (8,460,201) (4,817,093)
Interest income .................................... 58,441 168,312 217,263 241,057
Interest expense ................................... (1,197,632) (305,173) (1,668,945) (325,089)
Other income ....................................... -- -- -- 9,242
----------- ----------- ----------- -----------
Net loss .................................. (5,471,059) (2,453,013) (9,911,883) (4,891,883)
Accretion of preferred dividends ................... (64,167) -- (64,167) --
Accretion to redemption value of
preferred stock .............................. -- 27,735 -- 247,361
----------- ----------- ----------- -----------
Net loss to common stockholders ........... $(5,535,226) $(2,480,748) $(9,976,050) $(5,139,244)
=========== =========== =========== ===========
Basic and diluted net loss per common share ....... $ (0.80) $ (0.97) $ (1.44) $ (3.74)
=========== =========== =========== ===========
Weighted average shares outstanding ................ 6,921,176 2,551,752 6,915,795 1,374,953
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
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ASCENT PEDIATRICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows for operating activities:
Net loss ......................................................... $(9,911,883) $(4,891,883)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ................................ 947,444 84,166
Non-cash interest expense .................................... 1,377,071 315,091
Gain on sales of fixed assets ................................ -- (9,242)
Changes in operating assets and liabilities:
Accounts receivable ....................................... 78,061 --
Inventory ................................................. (168,852) --
Other assets .............................................. (253,720) (562,055)
Accounts payable .......................................... (658,881) 312,397
Accrued expenses .......................................... 85,226 165,998
----------- -----------
Net cash used for operating activities ................. (8,505,534) (4,585,528)
Cash flows used for investing activities:
Purchase of property and equipment ............................... (188,503) (314,305)
Proceeds from sale of marketable securities ...................... 2,022,202 --
Proceeds from sale of fixed assets ............................... -- 38,050
----------- -----------
Net cash used for investing activities ................. 1,833,699 (276,255)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs ........ 96,469 17,863,188
Proceeds from sale of preferred stock, net of issuance costs ..... 6,447,166 6,930,126
Proceeds from issuance of debt and related warrants .............. 9,000,000 7,000,000
Debt issue costs ................................................. (655,030) (594,565)
Repayment of subordinated secured notes .......................... (6,125,000) --
Payment of promissory note ....................................... (5,500,000) --
----------- -----------
Net cash provided by financing activities .............. 3,263,605 31,198,749
Net (decrease) increase in cash and cash equivalents .................. (3,408,230) 26,336,966
Cash and cash equivalents, beginning of period ........................ 11,700,612 2,085,743
=========== ===========
Cash and cash equivalents, end of period .............................. $ 8,292,382 $28,422,709
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 282,793 $ --
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 6
ASCENT PEDIATRICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. (the "Company") is a drug development and marketing
company focused exclusively on the pediatric market. Since its inception,
until July 9, 1997, the Company had operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business and to carrying on development activities. On July 10, 1997, the
Company closed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. ("Upsher-Smith"),
pursuant to an Asset Purchase Agreement dated as of March 25, 1997 (the
"Asset Purchase Agreement") between the Company and Upsher-Smith and
commenced sales of the Feverall line of products. The Company also commenced
sales of Pediamist nasal saline spray during the quarter ended December 31,
1997. On February 6, 1998, the Company entered into a four-year co-promotion
agreement with Bristol-Myers Squibb U.S. Pharmaceuticals Group
("Bristol-Myers Squibb") to exclusively promote Duricef(R) oral suspension
to pediatricians in the United States.
The Company has incurred net losses since inception and expects to incur
additional operating losses in the future as the Company continues its
product development programs, maintains its sales and marketing organization
and introduces its products to the market. The Company is subject to a
number of risks similar to other companies in the industry, including rapid
technological change, uncertainty of market acceptance of products,
uncertainty of regulatory approval, limited sales and marketing experience,
competition from substitute products and larger companies, customers'
reliance on third-party reimbursement, the need to obtain additional
financing, compliance with government regulations, protection of proprietary
technology, dependence on third-party manufacturers, distributors,
collaborators and limited suppliers, product liability, and dependence on
key individuals. These risks are set forth in more detail in "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors That May Affect Future Results" of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, which are expressly incorporated by reference herein.
2. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The interim
financial statements include, in the opinion of management, all adjustments
(consisting of normal and recurring adjustments) that are necessary for a
fair presentation of the results for the interim periods ended June 30, 1998
and 1997. The results for the interim periods presented are not necessarily
indicative of results to be expected in the full fiscal year.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
4
<PAGE> 7
3. INVENTORIES
Inventories are stated at the lower of cost or market using the first in,
first out (FIFO) method and consist of the following:
June 30, December 31,
1998 1997
-------- ------------
Raw materials................................ $436,822 $455,663
Work in process.............................. -- 35,110
Finished goods............................... 521,528 298,725
-------- --------
Total........................................ $958,350 $789,498
======== ========
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share," which specifies the computation, presentation
and disclosure requirements for net income (loss) per common share. Basic
net income (loss) per common share is computed based on the weighted average
number of common and common equivalent shares outstanding during the period.
Diluted net income (loss) per common share gives effect to all dilutive
potential common shares outstanding during the period. Under SFAS No. 128,
the computation of diluted earnings per share does not assume the issuance
of common shares that have an antidilutive effect on net income per common
share.
Options, warrants, preferred stock and debt to purchase or convert to
1,747,220 and 1,713,300 shares of common stock were outstanding for the
three and six months ended June 30, 1998, respectively, but were not
included in the computation of diluted net loss per common share. Options,
warrants, preferred stock and debt to purchase or convert to 4,266,245 and
4,516,314 shares of common stock were outstanding for the three and six
months ended June 30, 1997, respectively, but were not included in the
computation of diluted net loss per common share. These potentially dilutive
securities have not been included in the computation of diluted net loss per
common share because the Company is a loss position and, the inclusion of
such shares therefore, would be antidilutive.
Additionally, options and warrants to purchase 3,079,853 and 414,792 shares
of common stock were outstanding as of June 30, 1998 and 1997, respectively,
but were not included in the computation of diluted net loss per common
share because the options and warrants have exercise prices greater than the
average market price of the common shares and therefore, would be
antidilutive under the treasury stock method.
In accordance with Staff Accounting Bulletin 98 issued by the Securities and
Exchange Commission in February 1998, the Company restated loss per share
for prior periods without including certain awards of stock and warrants
issued within a one-year period prior to the initial filing of the initial
public offering of shares of the Company's common stock.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive income
are net income and all other non-owner changes in equity such as the change
in the unrealized gains and losses on certain marketable securities.
SFAS 130 requires that an enterprise: (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a balance sheet. SFAS 130 is effective for financial statements issued
for periods beginning after December 15, 1997 which for the Company is the
first quarter of 1998. Presentation of comprehensive income for earlier
periods provided for comparative purposes is required. Comprehensive income
for the three and six months ended June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net loss............................ $(5,471,059) $(2,453,013) $(9,911,883) $(4,891,883)
Unrealized gain on securities....... (7,160) -- (5,398) --
----------- ----------- ----------- -----------
Comprehensive loss.................. $(5,478,219) $(2,453,013) $(9,917,281) $(4,891,883)
----------- ----------- ----------- -----------
</TABLE>
5
<PAGE> 8
Recent Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. The Company has not assessed the impact of SOP 98-5 on
its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. The statement
requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
will adopt SFAS 133 by January 1, 2000. The Company is evaluating SFAS 133
to determine its impact on its financial statements.
5. CO-PROMOTION AGREEMENT
On February 6, 1998, the Company entered into a four-year co-promotion
agreement with Bristol-Myers Squibb to exclusively promote Duricef(R)
(cefadroxil monohydrate) oral suspension to pediatricians in the United
States. As compensation for the Company's co-promotional efforts,
Bristol-Myers Squibb has agreed to pay the Company a specified percentage of
net sales of the product attributed to pediatricians (as defined in the
agreement) on sales above a specified number of prescriptions for the
product. In addition, Bristol-Myers Squibb has agreed to reimburse the
Company for a specified amount of the Company's marketing costs during each
year of the agreement. Through June 30, 1998, the Company has not recorded
any revenue under this agreement.
6. 1998 FINANCING
On June 1, 1998, the Company issued and sold to funds affiliated with Furman
Selz Investments and BancBoston Ventures an aggregate of $7 million of
Series G convertible exchangeable preferred stock (the "Preferred Stock"),
$9 million of 8% seven-year subordinated notes (the "Subordinated Notes")
and seven-year warrants to purchase 2,116,958 shares of common stock for an
aggregate purchase price of $16 million (the "1998 Financing"). The
$9 million of Subordinated Notes issued and sold was allocated to the fair
value of the Subordinated Notes and the fair value of the warrants.
Accordingly the Subordinated Notes will be accreted as interest expense to
the maturity amount over the term of the Subordinated Notes. Amounts
allocated to the warrants was included in additional paid in capital. The
Preferred Stock is convertible into common stock at a price of $4.75 per
share, which was above the fair market value of the Company's common stock
at June 1, 1998, and the warrants are exercisable at a price of $4.75 per
share. The Preferred Stock is entitled to cumulative annual dividends equal
to 8% (subject to adjustment) of the liquidation preference of such stock
($1,000), payable semiannually in June and December of each year, commencing
December 1998, and may be exchanged for 8% seven-year convertible
subordinated notes (the "Convertible Notes") having an aggregate principal
amount equal to the aggregate liquidation preference of the Preferred Stock
solely at the option of the Company any time within seven years of issuance
of the Preferred Stock. The Subordinated Notes and Convertible Notes (when
and if issued upon exchange of the Preferred Stock) (collectively, the "1998
Notes") bear interest at a rate of 8% per annum, payable semiannually in
June and December of each year, commencing December 1998. Forty percent of
the interest due on the Subordinated Notes and fifty percent of the
dividends due on the Preferred Stock (or the interest due on the Convertible
Notes if issued upon exchange of the Preferred Stock) in each of December
1998, June 1999, December 1999 and June 2000 may be deferred by the Company
for a period of three years. In the event of a change in control
6
<PAGE> 9
or unaffiliated merger of the Company, the Company may redeem the Preferred
Stock (or the Convertible Notes issuable upon exchange of the Preferred
Stock) at a price equal to the liquidation preference on such stock ($1,000)
plus accrued and unpaid dividends, although the Company will be required to
issue new Common Stock purchase warrants in connection with such redemption.
In the event of a change of control or unaffiliated merger of the Company,
the holders of the 1998 Notes may require the Company to redeem the 1998
Notes at a price equal to the unpaid principal plus accrued and unpaid
interest on such notes. In connection with the investment, a representative
of Furman Selz Investments was added to the Company's Board of Directors.
Immediately upon the closing of the 1998 Financing, the Company used $5.3
million of the $14.7 million of net proceeds of the 1998 Financing (after
fees and expenses) to repay outstanding subordinated secured notes.
7. SUBSEQUENT EVENTS
Primsol
On August 4, 1998, the United States Food and Drug Administration ("FDA")
notified the Company that, in connection with the FDA's review of the
Company's New Drug Application ("NDA") for the 50mg/5ml formulation of
Primsol trimethoprim solution, the FDA would require the Company to conduct
a non-controlled pre-approval clinical safety study of the 50mg/5ml
formulation of Primsol in 300 pediatric patients. In light of the
anticipated costs and time involved in conducting such a study, the Company
is considering submitting to the FDA a revised formulation of the 50mg/5ml
formulation of Primsol which will not contain an inactive ingredient
contained in the current formulation. The Company believes that the
presence of this inactive ingredient in the current formulation caused the
FDA to require the additional study. The Company believes that it could
complete the revised formulation and submit a new NDA to the FDA by the end
of 1998.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a drug development and marketing company focused exclusively on
the pediatric market. The Company commenced operations in March 1989 and prior
to the quarter ended September 30, 1997 had been engaged primarily in developing
its products and product candidates and in organizational efforts, including
recruiting scientific and management personnel and raising capital. The Company
introduced its first product, Feverall, during the quarter ended September 30,
1997 and its second product, Pediamist, during the quarter ended December 31,
1997. During the quarter ended March 31, 1998, the Company began marketing
Duricef(R) (cefadroxil monohydrate) oral suspension to pediatricians in the
United States pursuant to a four-year co-promotion agreement with Bristol-Myers
Squibb.
The Company has incurred net losses since its inception and expects to incur
additional operating losses at least through the next fiscal year as it
continues its product development programs, maintains its sales and marketing
organization and introduces products to the market. The Company expects
cumulative losses to increase over this period. The Company has incurred a
deficit accumulated since inception through June 30, 1998 of $42,355,000.
7
<PAGE> 10
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 Compared with Three and Six Months
Ended June 30, 1997.
Revenue and Cost of Sales. The Company had net revenue for the three and six
months ended June 30, 1998 of $840,000 and $2,154,000, respectively, compared
with no revenue in the comparable prior year periods. Revenue was primarily due
to the sales of Feverall products. Cost of sales was $430,000 and $900,000 for
the three and six months ended June 30, 1998, respectively, compared with no
cost of sales for the comparable prior year periods. Cost of sales was primarily
attributable to the manufacturing cost associated with the production of the
Feverall and Pediamist products and net realizable value adjustments to
inventory.
Selling, General and Administrative. The Company incurred selling, general and
administrative expenses for the three and six months ended June 30, 1998 of
$3,855,000 and $7,703,000, respectively, as compared to $1,379,000 and
$2,352,000 for the comparable periods in 1997. Selling expenses increased in the
three and six months ended June 30, 1998 by $1,529,000 and $3,859,000,
respectively, primarily as a result of (i) increased personnel expenses
associated with the hiring of the Company's field sales organization and (ii)
increased marketing expenditures associated with the introduction of the
Company's first two product offerings, Feverall and Pediamist. General and
administrative expenses increased in the three and six months ended June 30,
1998 by $948,000 and $1,492,000, respectively, primarily as a result of (i)
increased amortization expenses associated with capitalized debt issuance costs
and the intangible assets resulting from the Feverall acquisition and (ii)
increased insurance expenses related to product liability, automobile and
directors' and officers' liability insurance.
Research and Development. The Company incurred research and development expenses
for the three and six months ended June 30, 1998 of $888,000 and $2,011,000,
respectively, as compared to $937,000 and $2,466,000 for the comparable periods
in 1997. The decrease primarily reflects clinical trials for the Company's
Feverall ER acetaminophen beaded product conducted during the first half of
1997.
Interest. For the three and six months ended June 30, 1998, the Company had
interest income of $58,000 and $217,000 respectively, as compared to $168,000
and $241,000 for the comparable prior year periods. The decreases in both
periods were primarily attributable to a decrease in funds available for
investment. For the three and six months ended June 30, 1998, the Company had
interest expense of $1,198,000 and $1,669,000 respectively, or an increase of
$892,000 and $1,344,000, respectively, over the comparable prior year periods.
The increase was primarily the result of (i) the full quarter effect of both
cash and non-cash interest accrued and accreted for certain subordinated secured
notes and (ii) the acceleration of accretion to full value of the notes repaid
during the three months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
private sales of capital stock, subordinated secured notes and related common
stock purchase warrants and an initial public offering of shares of common
stock. In addition, in the second half of 1997, the Company began shipping its
first two products, Feverall acetaminophen suppositories and Pediamist nasal
spray. As of June 30, 1998, the Company had raised approximately $33,570,000
(net of issuance costs) from the sales of preferred stock and related warrants,
approximately $14,749,000 (net of issuance costs) from the issuance of
subordinated secured notes and related warrants and approximately $17,529,000
(net of issuance costs) from the initial public offering of 2,240,000 shares of
common stock.
8
<PAGE> 11
On July 10, 1997, the Company closed the acquisition of the Feverall line of
acetaminophen suppositories from Upsher-Smith for a purchase price of
$11,905,000. The Company issued a promissory note for $5.5 million as partial
payment for the purchase price, which promissory note was paid in full on
February 20, 1998.
In January and June 1997, the Company issued an aggregate of $7 million of
subordinated secured notes, resulting in net proceeds to the Company of
$6,404,000, which was recorded as a liability of $4,494,000 with $2,506,000 to
be accreted as interest expense over the term of the notes. On June 1, 1998, the
Company paid in full the remaining principal and interest due of approximately
$5,250,000 and $130,000, respectively.
On June 1, 1998, the Company issued and sold to funds affiliated with Furman
Selz Investments and BancBoston Ventures an aggregate of $7 million of Series G
convertible exchangeable preferred stock (the "Preferred Stock"), $9 million of
8% seven-year subordinated notes (the "Subordinated Notes") and seven-year
warrants to purchase 2,116,958 shares of common stock for an aggregate purchase
price of $16 million (the "1998 Financing"). The $9 million of Subordinated
Notes issued and sold was allocated to the fair value of the Subordinated Notes
and the fair value of the warrants. Accordingly the Subordinated Notes will be
accreted as interest expense to the maturity amount over the term of the
Subordinated Notes. Amounts allocated to the warrants was included in additional
paid in capital. The Preferred Stock is convertible into common stock at a price
of $4.75 per share, which was above the fair market value of the Company's
common stock at June 1, 1998, and the warrants are exercisable at a price of
$4.75 per share. The Preferred Stock is entitled to cumulative annual dividends
equal to 8% (subject to adjustment) of the liquidation preference of such stock
($1,000), payable semiannually in June and December of each year, commencing
December 1998, and may be exchanged for 8% seven-year convertible subordinated
notes (the "Convertible Notes") having an aggregate principal amount equal to
the aggregate liquidation preference of the Preferred Stock solely at the option
of the Company any time within seven years of issuance of the Preferred Stock.
The Subordinated Notes and Convertible Notes (when and if issued upon exchange
of the Preferred Stock) (collectively, the "1998 Notes") bear interest at a rate
of 8% per annum, payable semiannually in June and December of each year,
commencing December 1998. Forty percent of the interest due on the Subordinated
Notes and fifty percent of the dividends due on the Preferred Stock (or the
interest due on the Convertible Notes if issued upon exchange of the Preferred
Stock) in each of December 1998, June 1999, December 1999 and June 2000 may be
deferred by the Company for a period of three years. In the event of a change in
control or unaffiliated merger of the Company, the Company may redeem the
Preferred Stock (or the Convertible Notes issuable upon exchange of the
Preferred Stock) at a price equal to the liquidation preference on such stock
($1,000) plus accrued and unpaid dividends, although the Company will be
required to issue new Common Stock purchase warrants in connection with such
redemption. In the event of a change of control or unaffiliated merger of the
Company, the holders of the 1998 Notes may require the Company to redeem the
1998 Notes at a price equal to the unpaid principal plus accrued and unpaid
interest on such notes. In connection with the investment, a representative of
Furman Selz Investments was added to the Company's Board of Directors. The
Company has used a portion of the net proceeds, after fees and expense, of $14.7
million to repay the $5.3 million in subordinated secured notes and intends to
use the balance for working capital.
The Company's future capital requirements will depend on many factors, including
the costs and margins on such sales and success of its commercialization
activities and arrangements, particularly the level of product sales, continued
progress in its product development programs, the magnitude of these programs,
the results of pre-clinical studies and clinical trials, the time and cost
involved in obtaining regulatory approvals, the cost involved in filing,
prosecuting, enforcing and defending patent claims, competing technological and
market developments, and the ability of the Company to maintain and in the
future, expand its sales and marketing capability and product development,
manufacturing and marketing relationships. The Company's business strategy
requires a significant commitment of funds to conduct clinical testing of
potential products, to pursue regulatory approval of such products and maintain
sales and marketing capabilities and manufacturing relationships necessary to
bring such products to market. The Company has no committed external sources of
capital. The Company expects, based on its current
9
<PAGE> 12
operating plan, that its existing capital and internally generated funds should
be adequate to satisfy its capital requirements through the end of the first
quarter of 1999. Substantial additional funds may be required from external
sources to support the Company's operations beyond that time, and there can be
no assurance that additional funds will be available, or, if available, that
such funds will be available on acceptable terms.
The Company is aware of the issues that many computer systems will face as the
millenium ("Year 2000") approaches. The Company does not expect the cost of the
effort to install Year 2000 compliant software to be material. In addition, the
Company believes that the Year 2000 issue will not pose significant operational
problems. However, Year 2000 issues could have a significant impact on the
Company's business, financial condition and results of operations if
modifications cannot be completed on a timely basis, unforeseen needs or
problems arise, or if the systems operated by suppliers, collaborative partners
or licensees are not Year 2000 compliant.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. The Company has not assessed the impact of SOP 98-5 on its
financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1,
2000. The Company is evaluating SFAS 133 to determine its impact on its
financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward looking statements.
For this purpose any statements herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth in "Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations Certain Factors That May Affect Future Results" of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 1, 1998, the Company issued and sold an aggregate of $7 million of
Series G convertible exchangeable preferred stock, $9 million of 8% seven-year
subordinated notes and seven-year warrants to purchase 2,116,958 shares of
common stock to five entities for an aggregate purchase price of $16 million.
These issuances were conducted pursuant to Rule 506 promulgated under the
Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 10, 1998, the
following proposals were adopted by the vote specified below:
(a) Election of Class I Directors
Withheld
For Authority
--------- ---------
Raymond F. Baddour, Sc.D. 4,383,096 11,750
Michael J.F. Du Cros 4,383,196 11,650
Lee J. Schroeder 4,390,296 4,550
In addition, the following directors' terms in office continued after the
Annual Meeting: Alan R. Fox, Robert E. Baldini, Emmett Clemente, Ph.D.,
Andre Lamotte, Sc.D., Thomas W. Janes, and Terrence McGuire. On June 1,
1998, Thomas W. Janes resigned as director and was replaced by James
Luikart, a representative of Furman Selz Investments.
(b) Amendment to the Company's 1992 Equity Incentive Plan
For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
2,910,840 735,338 7,160 741,508
(c) Ratification of Selection of Independent Auditors
For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
4,390,844 2,100 1,902 0
ITEM 5. OTHER INFORMATION
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), for inclusion
in the Company's proxy materials for its 1999 Annual Meeting of Stockholders
(the "1999 Annual Meeting") must be received by the Secretary of the Company at
the principal offices of the Company no later that January 6, 1999.
11
<PAGE> 14
In addition, the Company's by-laws require that the Company be given advance
notice of stockholder nominations for election to the Company's Board of
Directors and of other matters (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must be made
in writing and delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Company at the principal offices of the
Company, and received not less than 60 days nor more that 90 days prior to the
1999 Annual Meeting; provided however, that if less that 70 days' notice or
prior public disclosure of the date of the meeting is given to stockholders,
such nomination or other proposal shall have been mailed or delivered to the
Secretary not later that the close of business on the 10th day following the
date on which the notice of the meeting was mailed or such public disclosure
made, whichever occurs first. The 1999 Annual Meeting is currently expected to
be held on June 9, 1999. Assuming that this date does not change, in order to
comply with the time periods set forth in the Company's by-laws, appropriate
notice would need to be provided no earlier than March 11, 1999 and no later
than April 10, 1999. The advance notice provisions of the Company's by-laws
supercede the notice requirements contained in recent amendments to Rule 14a-4
under the Exchange Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See exhibit index on page 14 for a list of the exhibits filed as part
of this Quarterly Report on Form 10-Q, which exhibit index is
incorporated herein by reference.
(b) Reports on Form 8-K.
On June 2, 1998, the Company filed a Current Report on Form 8-K dated
June 1, 1998 with the Securities and Exchange Commission announcing
the issuance and sale by the Company of an aggregate of $7 million of
Series G convertible exchangeable preferred stock, $9 million of 8%
seven-year subordinated notes and seven-year warrants to purchase
2,116,958 shares of common stock of the Company.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASCENT PEDIATRICS, INC.
Date: August 14, 1998 By: /s/ JOHN G. BERNARDI
------------------------------------------
John G. Bernardi, Vice-President-Finance
and Treasurer (Principal Financial Officer)
13
<PAGE> 16
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
99(1) Pages 28 through 35 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 as
filed with the SEC (which is not deemed filed except
to the extent that portions thereof are expressly
incorporated by reference herein)
(1) Incorporated by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998 filed with the Securities and Exchange Commission on May 15,
1998.
14
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