<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 SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 000-22347
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ASCENT PEDIATRICS, INC.
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(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
--------------
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 November 3, 1998: 6,975,921.
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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
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K....................... 13
Signature.............................................................. 14
Exhibit Index.......................................................... 15
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................................................. $ 5,722,354 $ 11,700,612
Current marketable securities ......................................................... -- 2,527,900
Accounts receivable, net .............................................................. 813,057 765,609
Inventories (Note 3) .................................................................. 728,093 789,498
Other current assets .................................................................. 328,780 124,874
------------ ------------
Total current assets .............................................................. 7,592,284 15,908,493
Fixed assets, net .......................................................................... 779,955 759,563
Debt issue costs, net ...................................................................... 629,835 436,515
Intangibles, net ........................................................................... 10,698,423 11,215,506
Other assets ............................................................................... 98,948 113,386
------------ ------------
Total assets ......................................................................... $ 19,799,445 $ 28,433,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ...................................................................... $ 840,011 $ 1,509,258
Accrued expenses ...................................................................... 1,923,867 1,157,379
Promissory note (Note 6) .............................................................. -- 5,500,000
Subordinated secured notes, current portion (Note 6) .................................. -- 3,500,000
------------ ------------
Total current liabilities ......................................................... 2,763,878 11,666,637
Subordinated notes (Note 6) ................................................................ 8,669,063 1,252,068
------------ ------------
Total liabilities ................................................................. 11,432,941 12,918,705
Stockholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
7,000 and 0 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively (liquidation
preference of $7,000,000) ........................................................... 70 --
Common stock, $.00004 par value; 60,000,000 shares authorized; 6,967,421
and 6,893,332 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively ................................................. 278 276
Additional paid-in capital ............................................................ 54,851,622 47,891,846
Accumulated deficit ................................................................... (46,485,466) (32,378,480)
Unrealized gain on securities ......................................................... -- 1,116
------------ ------------
Total stockholders' equity ........................................................ 8,366,504 15,514,758
------------ ------------
Total liabilities and stockholders' equity ........................................ $ 19,799,445 $ 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ................................................ $ 1,001,494 $ 932,650 $ 3,155,714 $ 932,650
Costs of sales ......................................... 508,668 404,000 1,575,605 404,000
------------ ------------ ------------ ------------
Gross margin ........................................... 492,826 528,650 1,580,109 528,650
Costs and expenses:
Selling, general and administrative .............. 3,569,116 2,068,354 10,780,265 4,419,866
Research and development ......................... 773,119 992,370 2,784,585 3,457,893
------------ ------------ ------------ ------------
Total costs and expenses ......................... 4,342,235 3,060,724 13,564,850 7,877,759
------------ ------------ ------------ ------------
Loss from operations ......................... (3,849,409) (2,532,074) (11,984,741) (7,349,109)
Interest income ........................................ 103,383 285,599 320,646 526,656
Interest expense ....................................... (192,411) (507,944) (1,019,760) (833,033)
Other income ........................................... -- -- -- 9,242
------------ ------------ ------------ ------------
Net loss before extraordinary item ........... (3,938,437) (2,754,419) (12,683,855) (7,646,244)
Extraordinary item-debt redemption (Note 6), net of
applicable taxes of $0 ........................... -- -- (1,166,463) --
------------ ------------ ------------ ------------
Net loss ..................................... (3,938,437) (2,754,419) (13,850,318) (7,646,244)
Accretion of preferred dividends ....................... (192,501) -- (256,668) --
Accretion to redemption value of
preferred stock .................................. -- -- -- 247,361
------------ ------------ ------------ ------------
Net loss to common stockholders .............. $ (4,130,938) $ (2,754,419) $(14,106,986) $ (7,893,605)
============ ============ ============ ============
Results per common share:
Historical - basic and diluted:
Net loss before extraordinary item ........... $ (0.57) $ (0.40) $ (1.83) $ (2.38)
============ ============ ============ ============
Extraordinary item ........................... $ -- $ -- $ (0.17) $ --
============ ============ ============ ============
Net loss ..................................... $ (0.57) $ (0.40) $ (2.00) $ (2.38)
============ ============ ============ ============
Net loss to common stockholders .............. $ (0.59) $ (0.40) $ (2.04) $ (2.46)
============ ============ ============ ============
Weighted average shares outstanding .................... 6,952,377 6,893,045 6,927,989 3,214,317
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
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ASCENT PEDIATRICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows for operating activities:
Net loss ........................................................................ $(13,850,318) $ (7,646,244)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization .............................................. 1,238,779 378,573
Non-cash interest expense .................................................. 547,884 774,700
Non-cash extraordinary item ................................................ 841,596 --
Gain on sale of fixed assets ............................................... -- (9,242)
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (47,448) (517,859)
Inventory ................................................................ 61,405 (528,144)
Other assets ............................................................. (189,468) (493,372)
Accounts payable ......................................................... (669,246) 184,991
Accrued expenses ......................................................... 509,820 449,786
------------ ------------
Net cash used for operating activities ................................... (11,556,996) (7,406,811)
Cash flows used for investing activities:
Purchase of property and equipment .............................................. (274,217) (418,332)
Proceeds from sale of marketable securities ..................................... 2,526,784 --
Proceeds from sale of fixed assets .............................................. -- 38,050
Payments related to acquisition ................................................. -- (5,743,998)
------------ ------------
Net cash provided by (used for) investing activities ..................... 2,252,567 (6,124,280)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs ....................... 175,600 17,532,508
Proceeds from sale of preferred stock, net of issuance costs .................... 6,436,763 6,922,319
Proceeds from issuance of debt .................................................. 8,652,515 4,494,260
Proceeds from issuance of debt related warrants ................................. 347,485 2,505,740
Debt issue costs ................................................................ (661,192) (596,040)
Repayment of subordinated secured notes ......................................... (6,125,000) --
Payment of promissory note ...................................................... (5,500,000) --
------------ ------------
Net cash provided by financing activities ................................ 3,326,171 30,858,787
Net (decrease) increase in cash and cash equivalents ................................. (5,978,258) 17,327,696
Cash and cash equivalents, beginning of period ....................................... 11,700,612 2,085,743
------------ ------------
Cash and cash equivalents, end of period ............................................. $ 5,722,354 $ 19,413,439
============ ============
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. From its inception
through 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, co-promotion arrangements 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 is 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 September 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. Certain prior period items have been
reclassified to conform with the current quarter presentation.
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.
Intangible assets consist of goodwill, patents, trademarks, and a
manufacturing agreement and are being amortized using the straight-line
method over useful lives of fifteen to twenty years. The Company
periodically reviews the propriety of carrying amounts of its intangible
assets as well as the
4
<PAGE> 7
amortization periods to determine whether current events and circumstances
warrant adjustment to the carrying value or estimated useful lives. This
evaluation compares the expected future cash flows against the net book
values of related intangible assets. If the evaluation indicates an
impairment in value, the unrealizable intangible asset values are charges
to operations.
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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials................................. $305,614 $455,663
Work in process............................... 50,297 35,110
Finished goods................................ 372,182 298,725
-------- ---------
Total......................................... $728,093 $789,498
======== ========
</TABLE>
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
2,039,656 and 1,822,085 shares of common stock were outstanding for the
three and nine months ended September 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 1,878,714 and
3,637,114 shares of common stock were outstanding for the three and nine
months ended September 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 in a loss position and,
the inclusion of such shares therefore, would be antidilutive.
Additionally, options and warrants to purchase 3,026,665 and 875,476 shares
of common stock were outstanding as of September 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 No. 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.
5
<PAGE> 8
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 loss for the
three and nine months ended September 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net loss.................................... $ (3,938,437) $ (2,754,419) $ (13,850,318) $ (7,646,244)
Unrealized gain on securities............... 4,282 -- (1,116) --
------------ ------------ ------------- ------------
Comprehensive loss.......................... $ (3,934,155) $ (2,754,419) $ (13,851,434) $ (7,646,244)
============ ============ ============= ============
</TABLE>
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 does not believe that SOP 98-5 will have
a significant impact 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 does not
believe that SFAS 133 will have a significant impact on its financial
statement disclosures.
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 September 30, 1998, the Company has recorded
$22,283 in revenue under this agreement.
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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 of $8,652,515 and the
fair value of the warrants of $347,485. Accordingly the Subordinated Notes
will be accreted from $8,652,515 to the maturity amount of $9,000,000 as
interest expense 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
also 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. As a result of the early repayment
of subordinated secured notes, the Company accelerated the accretion of the
discount of $842,000. In addition, $325,000 of unamortized debt issue costs
were written off. These two items have been recorded as extraordinary
items.
7. 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, after discussions with the FDA, has determined to submit to the
FDA a revised formulation of the 50mg/5ml formulation of Primsol that will
not contain an inactive ingredient contained in the existing formulation.
On September 22, 1998, the FDA notified the Company that it has agreed that
an amendment to the Company's Primsol NDA to be filed for the new
formulation of Primsol will not require additional clinical studies.
7
<PAGE> 10
8. STOCK OPTION REPRICING
On September 4, 1998, the Board of Directors of the Company, upon
recommendation of the Compensation Committee of the Board of Directors,
authorized the Company to offer to grant to each employee who held an
outstanding stock option granted under the Company's 1992 Equity Incentive
Plan, as amended (the "Plan"), during the period commencing on June 1, 1997
and ending on June 10, 1998 with an exercise price greater than $3.75 per
share (collectively, the "Old Options"), a new stock option (collectively,
the "New Options") under the Plan, in exchange for the cancellation of each
such Old Option. Each such New Option would (i) have an exercise price of
$3.75 per share, (ii) be exercisable for the same number of shares of the
Company's common stock covered by the outstanding unexercised portion of
the Old Option cancelled in exchange therefor and (iii) have a vesting
schedule that is based on the vesting schedule of the Old Option it
replaces except that each installment covered by the Old Option would vest
on the date six months after the date specified in the Old Option and that
any part of the Old Option which is currently exercisable would remain
exercisable and not be subject to such six month adjustment. Based on this
offer, the Company granted to employees New Options to purchase an
aggregate of 556,200 shares of Common Stock, at an exercise price of $3.75
per share in exchange for and upon cancellation of Old Options to purchase
an aggregate of 556,200 shares of Common Stock with a weighted average
exercise price of $6.99 per share.
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 "Duricef Agreement").
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 an
accumulated deficit since inception through September 30, 1998 of $46,485,000.
RESULTS OF OPERATIONS
Three and Nine Months Ended Sept. 30, 1998 Compared with Three and
Nine Months Ended Sept. 30, 1997.
Revenue. The Company had net revenue for the three and nine months ended
September 30, 1998 of $1,001,000 and $3,156,000, respectively, compared with
revenue of $933,000 in the comparable prior year periods. The increase in
revenue of $68,000 for the three months ended September 30, 1998 as compared
with the three months ended September 30, 1997 was primarily due to sales of
Pediamist nasal saline spray, which was not introduced until the fourth quarter
of 1997 and revenues under the Duricef Agreement. The increase in revenue of
$2,223,000 for the nine months ended September 30, 1998 as compared with the
nine months ended September 30, 1997 was primarily due to
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<PAGE> 11
(i) the sales of Feverall products, which were not introduced until the third
quarter of 1997, (ii) the sales of Pediamist nasal saline spray, and (iii)
revenue under the Duricef agreement.
Cost of Sales. Cost of sales was $509,000 and $1,576,000 for the three and nine
months ended September 30, 1998, respectively, compared with $404,000 for each
of the comparable prior year periods. The increase in cost of sales of $105,000
for the three months ended September 30, 1998 as compared with the three months
ended September 30, 1997 was primarily attributable to $65,000 for the
manufacturing cost associated with the production of the Feverall and Pediamist
products and net realizable value adjustments for material carried in inventory
for one of the Company's products in development. In addition, during the
current quarter the Company's margin was affected by a marketing program that
included greater than customary discounts. The increase in cost of sales of
$1,172,000 for the nine months ended September 30, 1998 as compared with the
nine months ended September 30, 1997 was primarily attributable to (i) $783,000
for the manufacturing cost associated with the production of the Feverall and
Pediamist products, (ii) net realizable value adjustments for material carried
in inventory for one of the Company's products in development, and (iii) the of
amortization of $167,000 for the Feverall manufacturing agreement.
Selling, General and Administrative. The Company incurred selling, general and
administrative expenses for the three and nine months ended September 30, 1998
of $3,569,000 and $10,780,000, respectively, as compared to $2,068,000 and
$4,420,000 for the comparable periods in 1997.
Selling expenses were $2,242,000 and $7,149,000 for the three and nine months
ended September 30, 1998, respectively, compared with $1,350,000 and $2,399,000
for the comparable prior year periods. The increase of $892,000 for the three
months ended September 30, 1998 as compared with the three months ended
September 30, 1997 was primarily a result of (i) increased personnel expenses of
approximately $1,174,000 associated with the hiring of the Company's field sales
organization and (ii) decreased distribution and marketing expenses of $220,000
due to a corporate marketing program that was run during 1997 and was not
repeated in 1998. The increase of $4,750,000 for the nine months ended September
30, 1998 as compared with the nine months ended September 30, 1997 was primarily
a result of (i) increased personnel expenses of approximately $4,429,000
associated with the hiring of the Company's field sales organization, and (ii)
increased marketing and distribution expenses of $411,000 associated with the
introduction of the Company's first two product offerings, Feverall and
Pediamist.
General and administrative expenses were $1,327,000 and $3,631,000 for the three
and nine months ended September 30, 1998, respectively, compared with $718,000
and $2,021,000 for the comparable prior year periods. The increase of $609,000
for the three months ended September 30, 1998 as compared with the three months
ended September 30, 1997 was primarily a result of (i) increased support
personnel costs of $315,000 associated with the initial commercialization of the
company's first two products, and (ii) increased legal, accounting and investor
relations costs of $53,000 associated with being a public company. The increase
of $1,610,000 for the nine months ended September 30, 1998 as compared with the
nine months ended September 30, 1997 was primarily a result of (i) increased
amortization expenses for intangible assets of $204,000 related to the Feverall
acquisition, (ii) increased amortization expenses for debt issue costs of
$46,000, (iii) increased support personnel cost of $431,000 associated with the
initial commercialization of the company's first two products, (iv) increased
legal, accounting and investor relations costs of $222,000 associated with being
a publicly-traded company, and (v) increased insurance expenses of $180,000
related to product liability, automobile and directors' and officers' liability
insurance.
Research and Development. Research and development expenses were $773,000 and
$2,785,000 for the three and nine months ended September 30, 1998, respectively,
compared with $992,000 and $3,458,000 for the comparable prior year periods. The
decreases of $219,000 and $673,000 for the three and nine months ended September
30, 1998, respectively, primarily reflected the costs of clinical trials for the
Company's Feverall ER acetaminophen beaded product which were conducted during
the first nine months of 1997.
9
<PAGE> 12
Interest. Interest income was $103,000 and $321,000 for the three and nine
months ended September 30, 1998, respectively, as compared to $286,000 and
$527,000 for the comparable prior year periods. The decreases of $183,000 and
$206,000 for the three and nine months ended September 30, 1998, respectively,
were primarily attributable to a decrease in funds available for investment.
Interest expense was $192,000 and $1,861,000 for the three and nine months ended
September 30, 1998, respectively, as compared to $508,000 and $833,000 for the
comparable prior year periods. The decrease of $316,000 for the three months
ended September 30, 1998 as compared with the three months ended September 30,
1997 was primarily the result of a lower interest rate on the current
subordinated notes as compared to the notes outstanding during the prior year.
The increase of $1,028,000 for the nine months ended September 30, 1998 as
compared with the nine months ended September 30, 1997 was primarily a result of
acceleration of $842,000 of accretion to full value of the notes repaid in June
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 from an initial public offering of shares of common
stock. As of September 30, 1998, the Company had raised approximately
$33,560,000 (net of issuance costs) from the sales of preferred stock and
related warrants, approximately $14,743,000 (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. The Company has also financed its operations
through internally generated funds. In the second half of 1997, the Company
began shipping its first two products, Feverall acetaminophen suppositories and
Pediamist nasal saline spray and in March 1998 began promoting Duricef(R)
pursuant to the Duricef Agreement.
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
of $8,652,515 and the fair value of the warrants of $347,485. Accordingly, the
Subordinated Notes will be accreted from $8,652,515 to the maturity amount of
$9,000,000 as interest expense 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
10
<PAGE> 13
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 also 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.
As a result of the early repayment of subordinated secured notes, the Company
accelerated the accretion of the discount of $842,000. In addition, $325,000 of
unamortized debt issue costs were written off.
The Company's future capital requirements will depend on many factors, including
the costs and margins on sales of its products and the 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, the ability of the Company to maintain
and in the future, expand its sales and marketing capability and product
development, manufacturing and marketing relationships and the ability of the
Company to enter into and to maintain co-promotion agreements. 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 expects, based on its
current operating plan, that its existing capital and internally generated funds
should be adequate to satisfy its capital requirements through the middle of the
first quarter of 1999. Substantial additional funds will 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 seeking additional equity or debt financing to fund future
operations depending on the terms on which such financing may be available. The
Company also is seeking additional collaborative or commercialization
arrangements with third parties in order to fund future operations. There can
be no assurance that such financing or other arrangements will be available, or
if available, that they will be available on acceptable terms. The Company has
no committed external sources of capital. If the Company is unable to obtain
necessary additional funds, it would be required to delay, scale back or
eliminate one or more of its product development programs or product
commercialization efforts, obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own or significantly scale back or terminate
operations.
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 does not believe that SOP 98-5 will have a
significant impact 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.
11
<PAGE> 14
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 does
not believe that SFAS 133 will have a significant impact on its financial
statement disclosures.
IMPACT OF YEAR 2000 ISSUES
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Following
December 31, 1999, the Company's computer equipment and software that is time
sensitive, including equipment with embedded technology such as telephone
systems and facsimile machines, may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to engage in normal business activities.
The Company is in the process of assessing its computer systems, software and
operations infrastructure, including systems being developed to improve business
functionality, to identify computer hardware, software and process control
systems that are not Y2K compliant. To this end, during the third quarter of
fiscal 1998, the Company established an internal Y2K task force, comprised of
employees and members of management, for the purpose of evaluating the Y2K
compliance of its existing computer systems, software and operations
infrastructure and any Y2K issues of third parties of business importance to the
Company. The goal of the Company's Y2K task force is to minimize any disruptions
to the Company's business which could result from the Y2K problem and to
minimize liabilities which the Company might incur as a result of such
disruptions. The Company currently anticipates that its Y2K assessment efforts
will be completed by March 31, 1999.
The Company has also initiated communications with its significant suppliers and
service providers and certain strategic customers to determine the extent to
which such suppliers, providers or customers will be affected by any significant
Y2K issues. Although, as of November 1, 1998, the Company has not received a
significant number of responses to its inquiries, the Company believes that
these communications will permit the Company to determine the extent to which
the Company may be affected by the failure of these third parties to address
their own Y2K issues and may facilitate the coordination of Y2K solutions
between the Company and these third parties. There can be no guarantee, however,
that third parties of business importance to the Company will successfully and
timely evaluate and address their own Y2K issues. The failure of any of these
third parties to achieve Y2K compliance in a timely fashion could have a
material adverse effect on the Company's business, financial position, results
of operations or cash flows.
The costs of the Company's Y2K compliance efforts are being funded with cash
flows from operations. Although the Company has not completed the Y2K assessment
of its computer systems and software, based upon its assessment efforts to date,
the Company does not anticipate that the costs of becoming Y2K compliant will
have a material adverse effect upon the Company's business, financial position,
results of operations or cash flows. The Company does not expect that the costs
of replacing or modifying the computer equipment and software will be
substantially different, in the aggregate, from the normal, recurring costs
incurred by the Company for systems development, implementation and maintenance
in the ordinary course of business. In this regard, in the ordinary course of
replacing computer equipment and software, the Company attempts to obtain
replacements that are Y2K compliant. For example, the Company recently upgraded
its financial accounting software and received written representations that the
system was Y2K compliant. As of September 30, 1998, additional costs incurred by
the Company for the replacement of computer equipment and software that was not
Y2K compliant (i.e. the costs incurred in excess of the costs that would have
been incurred by the Company in the ordinary course of replacing computer
equipment and software) was less than $1,000. The Company expects to incur total
costs of less than $25,000 to become Y2K compliant.
The Company does not presently believe that the Y2K issue will pose significant
operational problems for the Company. However, if all Y2K issues are not
properly identified, or assessment, remediation and testing are
12
<PAGE> 15
not effected timely with respect to Y2K problems that are identified, there can
be no assurance that the Y2K issue will not have a material adverse effect on
the Company's business, financial position, results of operations or cash flows
or adversely affect the Company's relationships with customers, suppliers or
others.
The Company has not yet developed a contingency plan for dealing with the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from failure by the Company and certain third
parties to achieve Y2K compliance on a timely basis. The Company currently plans
to complete its analysis of the problems and costs associated with the failure
to achieve Y2K compliance and to establish a contingency plan in the event of
such failure by December 31, 1999.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates as of the date of this Quarterly Report,
which are based on numerous assumptions as to future events. There can be no
assurance that these estimates will prove accurate, and actual results could
differ materially from those estimated if these assumptions prove inaccurate.
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.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
See the Exhibit Index on Page 15 for a list of 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
None.
13
<PAGE> 16
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: November 16, 1998 By: /s/ JOHN G. BERNARDI
------------------------------------------
John G. Bernardi, Vice-President-Finance
and Treasurer (Principal Financial Officer)
14
<PAGE> 17
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 fiscal 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 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.
15
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