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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, 1999
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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
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(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
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None
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(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 Issuer's common stock:
As of August 5, 1999, there were 9,593,403 depositary shares outstanding, each
depositary share evidencing one share of common stock, $.00004 par value per
share, and represented by a depositary receipt.
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ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
PAGE
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Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
Unaudited Condensed Balance Sheets ........................... 1
Unaudited Condensed Statements of Operations ................. 2
Unaudited Statements of Comprehensive Loss ................... 2
Unaudited Condensed Statements of Cash Flows ................. 3
Notes to Unaudited Condensed Financial Statements ............ 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.. 18
Part II. Other Information
Item 5 - Other Information .......................................... 18
Item 6 - Exhibits and Reports on Form 8-k ........................... 18
Signature ................................................................... 19
Exhibit Index ............................................................... 20
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PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ......................................... $ 2,061,134 $ 2,171,777
Accounts receivable, net .......................................... 1,386,363 918,307
Inventory ......................................................... 868,308 919,785
Other current assets .............................................. 363,828 274,983
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Total current assets ......................................... 4,679,633 4,284,852
Fixed assets, net ................................................... 672,130 730,894
Debt issue costs, net ............................................... 1,632,599 606,092
Intangibles, net .................................................... 10,187,307 10,523,789
Other assets ........................................................ 57,641 155,303
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Total assets ................................................. $ 17,229,310 $ 16,300,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable .................................................. $ 2,981,957 $ 1,510,193
Accrued expenses .................................................. 3,043,109 2,206,025
Short term notes payable .......................................... 2,000,000 --
Other current liabilities ......................................... 248,642 100,218
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Total current liabilities .................................... 8,273,708 3,816,436
Subordinated secured notes .......................................... 12,706,296 8,681,474
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Total liabilities ............................................ 20,980,004 12,497,910
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 5,000,000 shares authorized;
7,000 shares, designated as Series G convertible exchangeable
preferred stock, issued and outstanding at June 30, 1999 and
December 31, 1998 (liquidation preference of $7,000,000) ........ 6,461,251 6,461,251
Common stock, $.00004 par value; 60,000,000 shares authorized;
7,026,445 and 6,975,921 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively ............... 280 279
Additional paid-in capital ........................................ 47,636,259 47,951,271
Accumulated deficit ............................................... (57,848,484) (50,609,781)
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Total stockholders' equity (deficit) ......................... (3,750,694) 3,803,020
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Total liabilities and stockholders' equity (deficit) ......... $ 17,229,310 $ 16,300,930
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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<TABLE>
<CAPTION>
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Product revenue, net ................................. $ 505,459 $ 840,171 $ 1,746,858 $ 2,154,220
Co-promotional revenue ............................... 1,235,000 -- 1,850,000 --
----------- ----------- ------------ ------------
Total net revenue .................................... 1,740,459 840,171 3,596,858 2,154,220
Costs and expenses
Cost of product sales .............................. 320,003 538,494 901,427 1,111,343
Selling, general and administrative ................ 3,727,177 3,209,968 7,640,752 6,751,803
Research and development ........................... 988,654 1,098,710 1,821,647 2,426,408
----------- ----------- ------------ ------------
Total costs and expenses ........................... 5,035,834 4,847,172 10,363,826 10,289,554
Loss from operations ............................. (3,295,375) (4,007,001) (6,766,968) (8,135,334)
Interest income ...................................... 15,832 58,441 41,729 217,263
Interest expense ..................................... (282,375) (356,036) (513,464) (827,349)
----------- ----------- ------------ ------------
Net loss before extraordinary items .............. (3,561,918) (4,304,596) (7,238,703) (8,745,420)
Extraordinary items - loss on early
extinguishment of debt ............................. -- 1,166,463 -- 1,166,463
----------- ----------- ------------ ------------
Net loss ......................................... (3,561,918) (5,471,059) (7,238,703) (9,911,883)
Preferred stock dividend ............................. 199,402 64,167 391,903 64,167
----------- ----------- ------------ ------------
Net loss to common stockholders .................. $(3,761,320) $(5,535,226) $ (7,630,606) $ (9,976,050)
=========== =========== ============ ============
Results per common share:
Historical - basic and diluted:
Net loss before extraordinary items .............. $ (0.51) $ (0.62) $ (1.03) $ (1.26)
=========== =========== ============ ============
Extraordinary items .............................. $ -- $ (0.17) $ -- $ (0.17)
=========== =========== ============ ============
Net loss ......................................... $ (0.51) $ (0.79) $ (1.03) $ (1.43)
=========== =========== ============ ============
Preferred stock dividend ......................... $ (0.03) $ (0.01) $ (0.06) $ (0.01)
=========== =========== ============ ============
Net loss to common stockholders .................. $ (0.54) $ (0.80) $ (1.09) $ (1.44)
=========== =========== ============ ============
Weighted average shares outstanding - basic
and diluted ........................................ 7,026,445 6,921,176 7,018,676 6,915,930
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF COMPREHENSIVE LOSS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net loss ............................................. $(3,561,918) $(5,471,059) $(7,238,703) $(9,911,883)
Unrealized gain on securities ........................ -- (7,160) -- (5,398)
----------- ----------- ------------ ------------
Comprehensive loss ................................... $(3,561,918) $(5,478,219) $(7,238,703) $(9,917,281)
=========== =========== ============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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<TABLE>
<CAPTION>
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
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1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................... $(7,238,703) $ (9,911,883)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .......................................... 566,237 622,577
Non-cash interest expense .............................................. 24,822 535,476
Non-cash extraordinary items ........................................... -- 1,166,463
Provision for bad debts ................................................ -- 74,476
Changes in operating assets and liabilities:
Accounts receivable .................................................. (479,874) 79,871
Inventory ............................................................ 63,617 (245,137)
Other assets ......................................................... (54,942) (253,720)
Accounts payable ..................................................... 1,471,766 (658,881)
Accrued expenses ..................................................... 445,179 43,784
Other current liabilities ............................................ 148,424 41,442
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Net cash used in operating activities .............................. (5,053,474) (8,505,532)
Cash flows from investing activities:
Purchase of property and equipment ......................................... (121,139) (188,503)
Proceeds from sale of marketable securities ................................ -- 2,022,202
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Net cash (used in) provided by investing activities ................ (121,139) 1,833,699
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs .............. 76,893 96,467
Proceeds from issuance of preferred stock, net of issuance costs ........... -- 6,447,166
Proceeds from issuance of debt ............................................. 4,000,000 8,652,515
Proceeds from issuance of debt related warrants ............................ -- 347,485
Proceeds from issuance of short term debt .................................. 2,000,000 --
Cash paid for debt issue costs ............................................. (1,012,923) (655,030)
Repayment of debt .......................................................... -- (6,125,000)
Repayment of promissory note ............................................... -- (5,500,000)
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Net cash provided by financing activities .......................... 5,063,970 3,263,603
Net decrease in cash and cash equivalents .................................... (110,643) (3,408,230)
Cash and cash equivalents, beginning of period ............................... 2,171,777 11,700,612
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Cash and cash equivalents, end of period ..................................... $ 2,061,134 $ 8,292,382
=========== ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), formerly Ascent
Pharmaceuticals, Inc., incorporated in Delaware on March 16, 1989, is a drug
development and marketing company focused exclusively on the pediatric market.
Since its inception, until July 9, 1997, the Company 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 completed 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 subsequently commenced
sales of the Feverall line of products. In October 1997, the Company also
commenced sales of Pediamist nasal saline spray. During March 1998, the Company
began marketing Duricef(R) (cefadroxil monohydrate) to pediatricians in the
United States pursuant to a co-promotion agreement with Bristol-Myers Squibb
U.S. Pharmaceuticals Group. The Company terminated this co-promotion agreement
effective December 31, 1998. During February 1999, the Company began marketing
Omnicef(R) (cefdinir) oral suspension and capsules to pediatricians in the
United States pursuant to a promotion agreement with Warner-Lambert Company.
During May 1999, the Company began marketing Pediotic(R) (a combination
corticosteroid/antibiotic) to pediatricians in the United States pursuant to a
co-promotion agreement with King Pharmaceuticals, Inc.
The Company has incurred net losses since its inception and expects to
incur additional operating losses in the future as the Company continues its
product development programs, builds 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 uncertainty of
regulatory approval, rapid technological change, uncertainty of market
acceptance of products, 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.
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 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, 1999 and
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1998. 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 current period presentation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
Options, warrants, preferred stock and debt to purchase or convert to
4,150,141 and 1,714,633 shares of common stock outstanding as of June 30, 1999
and 1998, respectively, were not 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.
Similarly, options and warrants to purchase or convert to 3,602,990 and
3,074,853 shares of common stock outstanding as of June 30, 1999 and 1998,
respectively, 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.
4. 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,
1999 1998
-------- --------
Raw materials .................... $326,984 $248,434
Work in process .................. 64,335 --
Finished goods ................... 476,989 671,351
-------- --------
Total ....................... $868,308 $919,785
======== ========
5. INTANGIBLE ASSETS
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
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 sum of the future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company shall recognize an impairment loss as a charge to operations. If
impaired, the intangible would be written down to the present value of estimated
expected future cash flows using a discount rate commensurate with the risk
involved. Impairment of
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goodwill, if any, is measured periodically on the basis of whether anticipated
undiscounted operating cash flows generated by the acquired businesses will
recover the recorded net goodwill balances over the remaining amortization
period.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
June 30, December 31,
1999 1998
---------- ----------
Employee compensation expenses .... $ 837,926 $ 762,664
Advertising expenses .............. 35,103 183,509
Legal and accounting expenses ..... 115,503 114,441
Selling fees and chargebacks ...... 183,799 254,632
Interest payable .................. 664,234 208,862
Preferred stock dividend .......... 698,718 306,815
Other ............................. 507,826 375,102
---------- ----------
Total .................... $3,043,109 $2,206,025
========== ==========
7. ALPHARMA STRATEGIC ALLIANCE
On February 16, 1999, the Company entered into a series of agreements with
Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD Inc. ("Alpharma").
This strategic alliance contemplates a number of transactions, including a loan
agreement under which Alpharma will loan Ascent up to $40.0 million from time to
time, $12.0 million of which may be used for general corporate purposes and
$28.0 million of which may only be used for specified projects and acquisitions
intended to enhance the Company's growth. In addition, the Company will obtain a
call option to acquire all of its outstanding common stock and assign the option
to Alpharma, thereby giving Alpharma the option, exercisable in 2002, to
purchase all of the Company's common stock then outstanding at a purchase price
to be determined by a formula based on the Company's 2001 earnings. On February
19, 1999, the Company borrowed $4.0 million from Alpharma under the loan
agreement and issued Alpharma a 7.5% convertible subordinated note in the
principal amount of up to $40.0 million. The principal terms of the Alpharma
note are set forth below.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at a
rate of 7.5% per annum. Interest is due and payable quarterly, in arrears on the
last day of each calendar quarter. If the call option terminates or expires, the
Company does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, the Company will repay the
outstanding principal amount under the note over a 15 month period commencing
March 30, 2004 and ending June 30, 2005.
PREPAYMENT. On or before June 30, 2001, the Company may repay all or a
portion of the outstanding principal amount due under the note. The Company may
re-borrow any repaid amounts on or before December 31, 2001. At any time after
the expiration or termination of the call option and on or before December 31,
2002, the Company may prepay all of the outstanding principal amount under the
note, together with any accrued and unpaid interest, if it also pays a
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conversion termination fee equal to 25% of the principal amount of the note
outstanding as of December 31, 2001. The Company may not otherwise prepay the
note. Following a change in control of the Company, Alpharma may require the
Company to repay all outstanding principal and interest under the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into common stock of the Company on one occasion
after a change in control of the Company and at any time after December 31, 2002
at a conversion price of $7.125 per share (subject to adjustment). After January
1, 2003 and on or before February 28, 2003, Alpharma may cause the Company to
borrow all remaining amounts available under the loan agreement (increasing the
principal amount of the note to $40.0 million), but only if Alpharma converts
all of the principal amount of the note into common stock of the Company within
three business days after the increase.
ALPHARMA SUPPLEMENTAL AGREEMENT. On July 1, 1999, the Company entered into
a supplemental agreement with Alpharma amending the terms of the loan agreement
and the other strategic alliance agreements between the Company and Alpharma.
Under the supplemental agreement, the Company agreed to certain additional
restrictions on its ability to borrow additional funds under the loan agreement,
including a prohibition, prior to the approval and commercial launch of both the
Company's Primsol and Orapred products, on the use of any funds for any purpose
other than normal operating expenses and expenses relating to such products as
set forth in the Company's internal operating plan, as updated from time to
time. In addition, the Company may only use the additional $8.0 million
allocated for general corporate purposes under the loan agreement for the
purposes set forth in the Company's internal operating plan, as updated from
time to time, and may only use the $28.0 million allocated for acquisitions and
research and development projects for those acquisitions and projects that are
approved by a newly-formed screening committee comprised of two nominees of
Ascent, one nominee of Alpharma and one nominee of ING Furman Selz. This
screening committee was established for the purpose of approving any changes to
the Company's internal operating plan involving materially increased
expenditures and reviewing and approving acquisitions of companies, products or
product lines or rights to sell a product or product line and research and
development projects. The Company's two representatives on the screening
committee together have one vote, and the representatives of Alpharma and ING
Furman Selz each have one vote. The screening committee must act by unanimous
approval prior to the approval and commercial launch of the Company's Primsol
and Orapred products and by majority approval following the approval and
commercial launch of these products.
CONSUMMATION OF STRATEGIC ALLIANCE. On July 23, 1999, following the
approval by the Company's stockholders of certain resolutions relating to the
strategic alliance with Alpharma, the Company consummated its strategic alliance
with Alpharma. In connection with the closing, the Company borrowed an
additional $1.5 million from Alpharma under the loan agreement and increased the
outstanding principal on the existing note to $5.5 million. In addition, the
Company consummated a merger with a wholly-owned subsidiary whereby the Company
obtained a call option to acquire all of its outstanding common stock and
assigned the option to Alpharma.
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SERIES G AMENDMENT. In connection with the Company's strategic alliance with
Alpharma, on February 16, 1999, the Company entered into a second amendment to
the May 1998 Series G Purchase Agreement, providing for, among other things, (a)
the Company's agreement to exercise its right to exchange all outstanding shares
of Series G preferred stock for convertible subordinated notes in accordance
with the terms of the Series G preferred stock, (b) subject to stockholder
approval, the reduction in the exercise price of warrants to purchase 2,116,958
shares of common stock of the Company from $4.75 per share to $3.00 per share
and the agreement of the Series G purchasers to exercise these warrants, (c) the
issuance and sale to the Series G purchasers of an aggregate of 300,000 shares
of common stock of the Company at a price of $3.00 per share and (d) the
cancellation of approximately $7.25 million of principal under the subordinated
notes held by the Series G purchasers to pay the exercise price of the warrants
and the purchase price of the additional 300,000 shares of common stock. In
addition, the Company entered into an amendment to a financial advisory services
fee agreement with ING Furman Selz whereby the Company agreed to issue 150,000
shares of common stock to ING Furman Selz in lieu of the payment of certain
financial advisory fees. On July 23, 1999, following the approval by the
Company's stockholders of the reduction in the exercise price of the warrants
and the issuance of the additional shares of common stock to the Series G
purchasers and ING Furman Selz, and in connection with the consummation of the
Company's strategic alliance with Alpharma, the Company and the Series G
purchasers consummated the transactions contemplated above.
DEBT ISSUE COSTS. In connection with the Company's strategic alliance with
Alpharma, the Company had incurred $1,077,000 in legal, accounting and
consulting fees as of June 30, 1999. These fees have been capitalized on the
balance sheet as debt issue costs and are being amortized over the life of the
debt.
8. ING FURMAN SELZ LOAN ARRANGEMENT
On June 30, 1999, the Company issued and sold 7.5% demand promissory notes
in the principal amount of $2.0 million to funds affiliated with ING Furman
Selz. On July 1, 1999, the Company and the Series G purchasers entered into a
third amendment to the May 1998 securities purchase agreement under which funds
affiliated with ING Furman Selz agreed to loan the Company up to $4.0 million.
Upon executing the third amendment, the Company issued 7.5% convertible
subordinated notes in the aggregate principle amount of up to $4.0 million and
warrants to purchase 300,000 shares of Ascent common stock at an exercise price
of $3.00 per share to the funds affiliated with ING Furman Selz and cancelled
the $2.0 million of 7.5% demand promissory notes issued on June 30, 1999. The
obligation of the funds affiliated with ING Furman Selz to loan the Company the
remaining $2.0 million is subject to the fulfillment to their reasonable
satisfaction or the waiver by the funds of conditions, including that Ascent has
or expects to have a stockholders' deficit reflected on the balance sheet
(calculated in a manner that treats as equity any amounts outstanding under the
8% subordinated notes and the 7.5% convertible subordinated notes and any
amounts outstanding under any debt
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securities issued upon exchange of the Series G preferred stock) and either the
requested loan from the funds affiliated with ING Furman Selz will prevent or
eliminate such stockholders' deficit or Alpharma agrees in writing that it will
not deny Ascent's next borrowing request under the Alpharma loan agreement
because of such stockholders' deficit.
The Company has agreed that, if it borrows any portion of the additional
$2.0 million, it will issue additional warrants to purchase shares of Ascent
common stock to the funds affiliated with ING Furman Selz. The warrants will be
exercisable for a number of shares of Ascent common stock equal to 1.5 shares
for each additional $10.00 borrowed. All of the warrants the Company will issue
under the third amendment will have an exercise price of $3.00 per share and
will expire on July 1, 2006.
The 7.5% convertible subordinated notes expire on July 1, 2004 and are
convertible into shares of Ascent common stock at a conversion price of $3.00
per share in accordance with the terms of the May 1998 securities purchase
agreement, as amended. Interest on these notes is due and payable quarterly, in
arrears, on the last day of each calendar quarter, and the outstanding principle
on the notes is payable in full on July 1, 2004.
9. PEDIOTIC
In April 1999, the Company entered into a one-year co-promotion agreement
with King Pharmaceuticals, Inc., to begin marketing, in May 1999, Pediotic(R) (a
combination corticosteroid/antibiotic) to pediatricians in the United States. As
compensation for the Company's co-promotional efforts, King Pharmaceuticals has
agreed to pay the Company a base fee with incremental revenue based on achieving
certain goals above a specified amount. In the current period, the Company has
recognized $313,000 as revenue earned from this agreement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Ascent is a drug development and marketing company focused exclusively on
the pediatric market. Ascent commenced operations in March 1989 and prior to the
quarter ended September
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30, 1997 was engaged primarily in developing its products and product candidates
and in organizational efforts, including recruiting scientific and management
personnel and raising capital. Ascent introduced its first product, Feverall
acetaminophen suppositories, during the quarter ended September 30, 1997 and its
second product, Pediamist nasal saline spray, during the quarter ended December
31, 1997. During the quarter ended March 31, 1998, the Company began marketing
Duricef(R) (cefadroxil monohydrate) to pediatricians in the United States
pursuant to a co-promotion agreement with Bristol-Myers Squibb U.S.
Pharmaceuticals Group. The Company terminated this co-promotion agreement
effective December 31, 1998. During the quarter ended March 31, 1999, Ascent
began marketing Omnicef(R) (cefdinir) oral suspension and capsules to
pediatricians in the United States pursuant to a promotion agreement with
Warner-Lambert Company. During the quarter ended June 30, 1999, the Company
began marketing Pediotic(R) (a combination corticosteroid/antibiotic) to
pediatricians in the United States pursuant to a co-promotion agreement with
King Pharmaceuticals, Inc.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least through the first half of 2000 as it
continues its product development programs, maintains its sales and marketing
organization and introduces products to the market. Ascent expects cumulative
losses to increase over this period. Ascent has incurred a deficit from
inception through June 30, 1999 of $57,848,000.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 1998
REVENUE: Ascent had total net revenue of $1,740,000 and $3,597,000 for the
three and six months ended June 30, 1999, respectively, compared with total net
revenue of $840,000 and $2,154,000 for the three and six months ended June 30,
1998, respectively. The increase in revenue of $900,000 for the three months
ended June 30, 1999 was primarily attributable to co-promotional revenue of
$1,235,000 due to the signing of a second co-promotion agreement during April
1999 offset by a decrease of $338,000 in Feverall(R) revenue due to lower sales
volume. The increase in revenue of $1,443,000 for the six months ended June 30,
1999 was primarily attributable to co-promotional revenue of $1,850,000 due to
the signing of two co-promotion agreements this year offset by a decrease of
$434,000 in Feverall(R) revenue due to lower sales volume.
COST OF PRODUCT SALES: Cost of product sales was $320,000 and $901,000 for
the three and six months ended June 30, 1999, respectively, compared with
$538,000 and $1,111,000 for the three and six months ended June 30, 1998,
respectively. The decrease in cost of product sales of $218,000 for the three
months ended June 30, 1999 was primarily the result of (i) a decrease of
approximately $80,000 for the manufacturing cost associated with the production
of the Feverall(R) due to a decrease in sales volume, (ii) a decrease of
approximately $61,000 in manufacturing personnel costs due to a decrease in
headcount, (iii) a decrease of approximately $67,000 in inventory net realizable
value adjustments, and (iv) a decrease in raw material standard costs variances
of $16,000. The decrease in cost of product sales of $210,000 for the six months
ended June 30, 1999 was primarily the result of (i) a decrease of approximately
$24,000 for the manufacturing
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cost associated with the production of the Feverall(R) due to a decrease in
sales volume, (ii) a decrease of approximately $127,000 in manufacturing
personnel costs due a reduction in headcount, (iii) a decrease of approximately
$58,000 in inventory net realizable value adjustments, and (iv) a decrease in
raw material standard costs variances of $13,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling,
general and administrative expenses of $3,727,000 and $7,641,000 for the three
and six months ended June 30, 1999, respectively, compared with $3,210,000 and
$6,752,000 for the three and six months ended June 30, 1998, respectively.
Selling and marketing expenses were $2,814,000 and $5,878,000 for the three
and six months ended June 30, 1999, respectively, compared with expenses of
$2,313,000 and $5,026,000 for the three and six months ended June 30, 1998,
respectively. The increase in selling and marketing expenses of $501,000 for the
three months ended June 30, 1999 was primarily the result of an increase of
$552,000 in personnel costs due to an increased number of sales representatives
in order to increase the sales force's geographic coverage and to better meet
the requirements of the Company's two co-promotion agreements. This was offset
by a decrease in consulting expenses of $68,000 associated with the Company's
election not to renew consulting arrangements that were in effect during the
second quarter of 1998. The increase in selling and marketing expenses of
$852,000 for the six months ended June 30, 1999 was primarily the result of an
increase of $1,101,000 in personnel costs due to an increased number of sales
representatives. This was offset by (i) a decrease in consulting expenses of
$158,000 associated with the Company's election not to renew consulting
arrangements that were in effect during the first six months of 1998, and (ii) a
decrease of $117,000 in distribution expenses due to a decrease in sales volume.
General and administrative expenses were $913,000 and $1,763,000 for the
three and six months ended June 30, 1999, respectively, compared with $897,000
and $1,726,000 for the three and six months ended June 30, 1998, respectively.
The increase of $37,000 for the six months ended June 30, 1999 was primarily
attributable to an increase in recruiting expenses.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses
of $989,000 and $1,822,000 for the three and six months ended June 30, 1999,
respectively, compared with $1,099,000 and $2,426,000 for the three and six
months ended June 30, 1998, respectively. The decrease of $110,000 for the three
months ended June 30, 1999 was primarily due to (i) $37,000 in reduced spending
on the Primsol and Pediavent products' R&D programs due to the completion of
clinical and biological studies of these products during the first quarter of
1998 and (ii) $62,000 in reduced legal/patent expenses. The decrease of $604,000
for the six months ended June 30, 1999 was primarily due to (i) $476,000 in
reduced spending on the Primsol and Pediavent products' R&D programs due to the
completion of clinical and biological studies of these products during the first
half of 1998, (ii) $73,000 in reduced legal/patent expenses, and (iii) $51,000
in reduced personnel costs due to a reduction in the number of R&D personnel
during the second half of 1998.
INTEREST: Ascent had interest income of $16,000 and $42,000 for the three
and six months ended June 30, 1999, respectively, compared with interest income
of $58,000 and $217,000 for the three and months ended June 30, 1998,
respectively. The decreases of $42,000 and $175,000 for the three and six months
ended June 30, 1999, respectively, were primarily due to a lower average cash
investment balance. Ascent had interest expense of $282,000 and $513,000 for the
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three and six months ended June 30, 1999, respectively, compared to $356,000 and
$827,000 for the three and six months ended June 30, 1998, respectively. The
decreases of $74,000 and $314,000 for the three and six months ended June 30,
1999, respectively, were the result of the issuance of subordinated notes in
connection with the sale of shares of Ascent Series G preferred stock and the
use of the proceeds of such issuance to repay the Triumph subordinated secured
notes on June 1, 1998. The subordinated notes issued in connection with the
shares of Ascent Series G preferred stock have a lower effective interest rate
than the Triumph subordinated secured notes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from
private sales of preferred stock, the private sale of subordinated secured notes
and related common stock purchase warrants and, in 1997, an initial public
offering of shares of common stock. As of June 30, 1999, Ascent had raised
approximately $33,560,000 (net of issuance costs) from the sales of preferred
stock, approximately $19,696,000 (net of issuance costs and deferred charges)
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. In addition, in the second half of
1997, Ascent began shipping its first two products, Feverall(R) acetaminophen
suppositories and Pediamist(R) nasal saline spray, in February 1999 began
promoting Omnicef(R) pursuant to a promotion agreement with Warner-Lambert
Company, and in May 1999 began promoting Pediotic(R) pursuant to a co-promotion
agreement with King Pharmaceuticals, Inc.
ALPHARMA STRATEGIC ALLIANCE. On July 23, 1999, Ascent consummated its
strategic alliance with Alpharma. Under the strategic alliance, Ascent entered
into a series of agreements with Alpharma, Inc. and its wholly-owned subsidiary,
Alpharma USPD Inc. ("Alpharma"), including a loan agreement under which Alpharma
will loan Ascent up to $40.0 million from time to time, $12.0 million of which
may be used for general corporate purposes and $28.0 million of which may only
be used for specified projects and acquisitions intended to enhance Ascent's
growth. In addition, Ascent obtained a call option to acquire all of its
outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002, to purchase all of the Ascent common
stock then outstanding at a purchase price to be determined by a formula based
on Ascent's 2001 earnings. On February 19, 1999, Ascent borrowed $4.0 million
from Alpharma under the loan agreement and issued Alpharma a 7.5% convertible
subordinated note in the principal amount of up to $40.0 million. On July 23,
1999, Ascent borrowed an additional $1.5 million from Alpharma under the loan
agreement and increased the outstanding principal on the existing note to $5.5
million.
On July 1, 1999, the Company entered into a supplemental agreement with
Alpharma amending the terms of the loan agreement and the other strategic
alliance agreements between the Company and Alpharma. Under the supplemental
agreement, the Company agreed to certain additional restrictions on its ability
to borrow additional funds under the loan agreement, including a prohibition,
prior to the approval and commercial launch of both the Company's Primsol and
Orapred products, on the use of any funds for any purpose other than normal
operating expenses and expenses relating to such products as set forth in the
Company's internal operating plan, as updated from time to time. In addition,
the Company may only use the additional $8.0 million allocated for general
corporate purposes under the loan agreement for the
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purposes set forth in the Company's internal operating plan, as updated from
time to time, and may only use the $28.0 million allocated for acquisitions and
research and development projects for those acquisitions and projects that are
approved by a newly-formed screening committee comprised of two nominees of
Ascent, one nominee of Alpharma and one nominee of ING Furman Selz. This
screening committee was established for the purpose of approving any changes to
the Company's internal operating plan involving materially increased
expenditures and reviewing and approving acquisitions of companies, products or
product lines or rights to sell a product or product line and research and
development projects. The Company's two representatives on the screening
committee together have one vote, and the representatives of Alpharma and ING
Furman Selz each have one vote. The screening committee must act by unanimous
approval prior to the approval and commercial launch of the Company's Primsol
and Orapred products and by majority approval following the approval and
commercial launch of these products.
In connection with the consummation of Ascent's strategic alliance with
Alpharma, on July 23, 1999, Ascent consummated the transactions contemplated by
the second amendment to the May 1998 securities purchase agreement with ING
Furman Selz, including: (a) the exchange all outstanding shares of Series G
preferred stock for convertible subordinated notes in the original principal
amount of $7.0 million in accordance with the terms of the Series G preferred
stock, (b) the reduction in the exercise price of warrants to purchase
2,116,958 shares of Ascent common stock from $4.75 per share to $3.00 per share
and the exercise of these warrants, (c) the issuance and sale to the Series G
purchasers of an aggregate of 300,000 shares of Ascent common stock at a price
of $3.00 per share and (d) the cancellation of approximately $7.25 million of
principal under the subordinated notes held by the Series G purchasers to pay
the exercise price of the warrants and the purchase price of the additional
300,000 shares. On July 23, 1999, in connection with these transactions, Ascent
issued 150,000 shares of Ascent common stock to ING Furman Selz in lieu of the
payment of certain financial advisory fees pursuant to an amendment to a
financial advisory services fee agreement with ING Furman Selz.
ING FURMAN SELZ LOAN ARRANGEMENT. On June 30, 1999, the Company issued and
sold 7.5% demand promissory notes in the principal amount of $2.0 million to
funds affiliated with ING Furman Selz. On July 1, 1999, the Company and the
Series G purchasers entered into a third amendment to the May 1998 securities
purchase agreement under which funds affiliated with ING Furman Selz agreed to
loan the Company up to $4.0 million. Upon executing the third amendment, the
Company issued 7.5% convertible subordinated notes in the aggregate principle
amount of up to $4.0 million and warrants to purchase 300,000 shares of Ascent
common stock at an exercise price of $3.00 per share
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to the funds affiliated with ING Furman Selz and cancelled the $2.0 million of
7.5% demand promissory notes issued on June 30, 1999. The obligation of the
funds affiliated with ING Furman Selz to loan the Company the remaining $2.0
million is subject to the fulfillment to their reasonable satisfaction or the
waiver by the funds of conditions, including that Ascent has or expects to have
a stockholders' deficit reflected on the balance sheet (calculated in a manner
that treats as equity any amounts outstanding under the 8% subordinated notes
and the 7.5% convertible subordinated notes and any amounts outstanding under
any debt securities issued upon exchange of the Series G preferred stock) and
either the requested loan from the funds affiliated with ING Furman Selz will
prevent or eliminate such stockholders' deficit or Alpharma agrees in writing
that it will not deny Ascent's next borrowing request under the Alpharma loan
agreement because of such stockholders' deficit.
The Company has agreed that, if it borrows any portion of the additional
$2.0 million, it will issue additional warrants to purchase shares of Ascent
common stock to the funds affiliated with ING Furman Selz. The warrants will be
exercisable for a number of shares of Ascent common stock equal to 1.5 shares
for each additional $10.00 borrowed. All of the warrants the Company will issue
under the third amendment will have an exercise price of $3.00 per share and
will expire on July 1, 2006.
The 7.5% convertible subordinated notes expire on July 1, 2004 and are
convertible into shares of Ascent common stock at a conversion price of $3.00
per share in accordance with the terms of the May 1998 securities purchase
agreement, as amended. Interest on these notes is due and payable quarterly, in
arrears, on the last day of each calendar quarter, and the outstanding principle
on the notes is payable in full on July 1, 2004.
FUTURE CAPITAL REQUIREMENTS. Ascent's business strategy requires a
significant commitment of funds to engage in product and business acquisitions,
to conduct clinical testing of potential products, to pursue regulatory
approval of such products and to maintain sales and marketing capabilities and
manufacturing relationships necessary to bring such products to market. Ascent
anticipates, based upon its current operating plan, that its existing capital
resources, internally generated funds and the funds available for general
corporate purposes from Alpharma under the loan agreement and from ING Furman
Selz under the third amendment to the May 1998 securities purchase agreement,
should satisfy its capital requirements for at least 12 months.
If Ascent's business does not progress in accordance with its current
operating plan, however, the Company may need to raise additional funds.
Ascent's future capital requirements will depend on many factors, including
whether Ascent receives marketing approval of its two lead products in
development, Orapred Syrup, a liquid steroid for the treatment of inflammation,
and Primsol Trimethoprim Solution, a prescription antibiotic for the treatment
of ear infections in children, on a timely basis or at all, the costs and
margins on sales of its products, the success of its commercialization
activities and arrangements, particularly the level of product sales, its
ability to acquire and successfully integrate businesses and products, 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 costs involved in filing,
prosecuting, enforcing and defending patent claims, competing technological and
market developments, the ability of Ascent to maintain and, in the future,
expand its sales and marketing capability and product development,
manufacturing and marketing relationships, and the ability of Ascent to enter
into and maintain its promotion agreements.
In August 1999, the FDA issued a major deficiency letter to Ascent with
respect to its Abbreviated New Drug Applications, or ANDAs, for Orapred. Based
on discussions with the FDA regarding this letter, Ascent intends to submit a
letter to the FDA requesting that the deficiency letter be reclassified as a
minor deficiency letter. Even if the FDA agrees to reclassify the deficiency
letter as a minor deficiency letter, Ascent expects that, based on the matters
raised in the letter, marketing approval of Orapred will be received later than
Ascent had previously expected. If the FDA does not agree to reclassify the
deficiency letter into a minor deficiency letter, FDA approval of the marketing
of Orapred will be delayed significantly longer.
Additional financing may not be available to Ascent if the Company needs
to raise additional funds, or may not be available on acceptable terms. If
adequate funds are not available, Ascent may be required to significantly
curtail one or more of its product development programs or product
commercialization efforts, obtain funds through arrangements with collaborative
partners or others that may require Ascent to relinquish rights to certain of
its technologies, product candidates or products which Ascent would otherwise
pursue on its own or significantly scale back or terminate operations.
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IMPACT OF YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Following December
31, 1999, Ascent'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.
During the third quarter of fiscal 1998, Ascent established an internal
Year 2000 task force, comprised of employees and members of management, for the
purpose of evaluating the Year 2000 compliance of its existing computer systems,
software and operations infrastructure and any Year 2000 issues of third parties
of business importance to Ascent. The goal of Ascent's Year 2000 task force is
to minimize any disruptions to Ascent's business which could result from the
Year 2000 problem and to minimize liabilities which Ascent might incur as a
result of such disruptions. As of June 30, 1999, Ascent has completed its
internal Year 2000 assessment.
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Ascent anticipates that its remediation and testing efforts will be completed by
September 30, 1999.
Ascent has also initiated communications with its significant suppliers,
including Upsher-Smith Laboratories, Inc. and Lyne Laboratories, and service
providers and certain strategic customers to determine the extent to which such
suppliers, providers or customers will be affected by any significant Year 2000
issues. As of June 30, 1999, Ascent has been notified that approximately fifty
percent of its significant suppliers are Year 2000 compliant. Of the remaining
significant suppliers, Ascent has been in regular contact regarding the
suppliers' progress to determine the extent to which it may be affected by the
failure of these third parties to address their own Year 2000 issues and may
facilitate the coordination of Year 2000 solutions between Ascent and these
third parties. Third parties of business importance to Ascent may not
successfully and timely evaluate and address their own Year 2000 issues. The
failure of any of these third parties to achieve Year 2000 compliance in a
timely fashion could have a material adverse effect on Ascent's business,
financial position, results of operations or cash flows.
Ascent is funding the costs of its Year 2000 compliance efforts with cash
flows from operations. Ascent does not anticipate that the costs of becoming
Year 2000 compliant will have a material adverse effect upon Ascent's business,
financial position, results of operations or cash flows. Ascent does not expect
that the costs of replacing or modifying computer equipment and software will be
substantially different, in the aggregate, from the normal, recurring costs
incurred by Ascent 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, Ascent attempts to obtain
replacements that are Year 2000 compliant. For example, Ascent upgraded its
financial accounting software and received written representations that the
system was Year 2000 compliant. As of June 30, 1999, in addition to the costs
that Ascent would have incurred in the ordinary course of replacing computer
equipment and software, Ascent has incurred less than $5,000 for the replacement
of computer equipment and software that was not Year 2000 compliant. Ascent
expects to incur total costs of less than $25,000 to become Year 2000 compliant.
Ascent does not presently believe that the Year 2000 issue will pose
significant operational problems for the Company. However, if Ascent does not
properly identify all Year 2000 issues, or the timeliness of assessment,
remediation and testing are affected with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issue will not have a
material adverse effect on Ascent's business, financial position, results of
operations or cash flows or adversely affect Ascent's relationships with
customers, suppliers or others.
As of June 30, 1999, Ascent has completed its contingency plans for dealing
with the operational problems and costs (including loss of revenues) that would
be reasonably likely to result from failure by Ascent and certain third parties
to achieve Year 2000 compliance on a timely basis. Ascent plans to spend
approximately $62,000 to stockpile certain raw materials to prevent disruptions
to its production schedule.
The foregoing assessment of the impact of the Year 2000 problem on Ascent
is based on management's best estimates as of the date of this quarterly report,
which are based on numerous
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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
"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, 1998 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48, also known as FRR 48, "Disclosure of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments". FRR 48 requires disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those required under generally accepted accounting principles.
In the ordinary course of business, Ascent is exposed to interest rate risk
for its subordinated notes. At June 30, 1999, the fair market value of these
notes was estimated to approximate carrying value. Market risk was estimated as
the potential increase in fair value resulting from a hypothetical 10% decrease
in the Company's weighted average short-term borrowing rate at June 30, 1999,
which was not materially different from the quarter-end carrying value.
PART II. OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
OTC BULLETIN BOARD
Upon closing of the strategic alliance with Alpharma on July 23, 1999,
Ascent merged with one of its subsidiaries and each share of Ascent common stock
was converted into one depositary share, representing one share of Ascent common
stock subject to a call option held by Alpharma and represented by a depositary
receipt. The depositary shares are quoted and traded on the OTC Bulletin Board
under the symbol "ASCTP." During a transitionary period from July 23, 1999
through August 9, 1999, the depositary shares were traded under a temporary
symbol, "ASCZV."
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 16 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.
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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 12, 1999 By: /s/ ALAN R. FOX
---------------------------
Alan R. Fox, President and
Chief Executive Officer
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Exhibit Index
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
99(1) Pages 37 through 47 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 as filed
with the SEC (which is not deemed filed except to the
extent that portions thereof are expressly incorporated
by reference therein)
(1) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1999 filed with the
Securities and Exchange Commission on May 17, 1999.
Page 20
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