SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
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 No.)
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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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: As
of August 8, 2000, there were 9,764,158 depositary shares outstanding, each
depositary share representing one share of common stock, $0.00004 par value per
share, and represented by a depositary receipt.
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ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
Unaudited Condensed Balance Sheets
1
Unaudited Condensed Statements of Operations
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
11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
18
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds
18
Item 4 - Submission of Matters to a Vote of Security Holders
18
Item 5 - Other Information
19
Item 6 - Exhibits and Reports on Form 8-K
19
Signature
20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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ASSETS
<S> <C> <C> <C>
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 395,844 $ 1,067,049
Accounts receivable, less allowance for doubtful accounts of
$67,000 at June 30, 2000 and December 31, 1999 . . . . . . . . . 556,523 759,098
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,358,015 1,012,430
Other current assets . . . . . . . . . . . . . . . . . . . . . . 183,023 132,555
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Total current assets. . . . . . . . . . . . . . . . . . . . 2,493,405 2,971,132
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . 534,015 516,165
Debt issue costs, net . . . . . . . . . . . . . . . . . . . . . . . . 1,701,245 1,882,365
Intangibles, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,527,989 9,857,648
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,300 45,300
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 14,301,954 $ 15,272,610
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 908,175 $ 1,645,302
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . 724,378 523,023
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 820,766 1,520,591
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . 707,606 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . 25,838 80,264
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Total current liabilities . . . . . . . . . . . . . . . . . 3,186,763 3,769,180
Subordinated secured notes. . . . . . . . . . . . . . . . . . . . . . 27,426,484 21,461,041
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 14,080 -
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Total liabilities . . . . . . . . . . . . . . . . . . . . . 30,627,327 25,230,221
Stockholders' deficit
Preferred stock, $.01 par value; 5,000,000 shares authorized; no
shares issued and outstanding at June 30, 2000 and December
31, 1999 - -
Common stock, $.00004 par value; 60,000,000 shares authorized;
9,764,158 and 9,643,883 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively . . . . . 389 385
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 57,251,333 56,304,465
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (73,577,095) (66,262,461)
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Total stockholders' deficit . . . . . . . . . . . . . . . . (16,325,373) (9,957,611)
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Total liabilities and stockholders' deficit . . . . . . . . $ 14,301,954 $ 15,272,610
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</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page 1
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Product revenue, net. . . . . . . . . . . . $ 662,620 $ 505,459 $ 1,236,912 $ 1,746,858
Co-promotional revenue. . . . . . . . . . . 445,106 1,235,000 980,520 1,850,000
------------ ------------ ------------ ------------
Total net revenue . . . . . . . . . . . . . 1,107,726 1,740,459 2,217,432 3,596,858
Costs and expenses
Costs of product sales . . . . . . . . 288,772 320,003 619,860 901,427
Selling, general and administrative. . 3,328,654 3,700,615 6,346,965 7,590,576
Research and development . . . . . . . 538,348 988,654 1,282,679 1,821,647
------------ ------------ ------------ ------------
Total costs and expenses . . . . . . . 4,155,774 5,009,272 8,249,504 10,313,650
Loss from operations. . . . . . . (3,048,048) (3,268,813) (6,032,072) (6,716,792)
Interest income . . . . . . . . . . . . . . 16,842 15,832 27,419 41,729
Interest expense. . . . . . . . . . . . . . (705,824) (308,937) (1,330,555) (563,640)
Other income. . . . . . . . . . . . . . . . 20,564 - 20,574 -
------------ ------------ ------------ ------------
Net loss. . . . . . . . . . . . . (3,716,466) (3,561,918) (7,314,634) (7,238,703)
Preferred stock dividend. . . . . . . . . . - 199,402 - 391,903
------------ ------------ ------------ ------------
Net loss to common stockholders . $(3,716,466) $(3,761,320) $(7,314,634) $(7,630,606)
============ ============ ============ ============
Results per common share:
Historical - basic and diluted:
Net loss. . . . . . . . . . . . . $ (0.38) $ (0.51) $ (0.75) $ (1.03)
Preferred stock dividend. . . . . $ - $ (0.03) $ - $ (0.06)
------------ ------------ ------------ ------------
Net loss to common stockholders
$ (0.38) $ (0.54) $ (0.75) $ (1.09)
============ ============ ============ ============
Weighted average shares outstanding - basic
and diluted. . . . . . . . . . . . . . . 9,764,158 7,026,445 9,720,753 7,018,676
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page 2
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,314,634) $(7,238,703)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 491,729 516,384
Non-cash interest expense. . . . . . . . . . . . . . . . 315,741 74,998
Provision for bad debts. . . . . . . . . . . . . . . . . - 11,817
Inventory write-off. . . . . . . . . . . . . . . . . . . (16,620) (79,037)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . 202,575 (479,874)
Inventory. . . . . . . . . . . . . . . . . . . . . . (328,965) 130,514
Other assets . . . . . . . . . . . . . . . . . . . . (50,468) (54,942)
Accounts payable . . . . . . . . . . . . . . . . . . (737,127) 1,471,766
Interest payable . . . . . . . . . . . . . . . . . . 201,355 455,372
Accrued expenses . . . . . . . . . . . . . . . . . . (699,825) (10,193)
Deferred revenue . . . . . . . . . . . . . . . . . . 707,606 -
Other current liabilities. . . . . . . . . . . . . . (54,426) 148,424
Other liabilities. . . . . . . . . . . . . . . . . . 14,080 -
------------ ------------
Net cash used in operating activities . . . . . (7,268,979) (5,053,474)
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . . . . (179,920) (121,139)
------------ ------------
Net cash used in investing activities . . . . . (179,920) (121,139)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 277,694 76,893
Proceeds from issuance of debt. . . . . . . . . . . . . . . . 5,849,797 6,000,000
Proceeds from issuance of debt related warrants . . . . . . . 650,203 -
Cash paid for debt issue costs. . . . . . . . . . . . . . . . - (1,012,923)
------------ ------------
Net cash provided by financing activities. . . 6,777,694 5,063,970
Net decrease in cash and cash equivalents. . . . . . . . . . . . . (671,205) (110,643)
Cash and cash equivalents, beginning of period . . . . . . . . . . 1,067,049 2,171,777
------------ ------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 395,844 $ 2,061,134
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page 3
<PAGE>
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), incorporated in Delaware on
March 16, 1989, is a drug development and marketing company focused exclusively
on the pediatric market. From its inception to 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 closed the acquisition of the Feverall
line of acetaminophen rectal suppositories from Upsher-Smith Laboratories, Inc.
and subsequently commenced sales of the Feverall line of products. In October
1997, the Company also commenced sales of Pediamist nasal saline spray. 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, which agreement was terminated in January
2000. During May 1999, the Company began marketing Pediotic(R) (a combination
corticosteroid/antibiotic) to pediatricians in the United States pursuant to a
one-year co-promotion agreement with King Pharmaceuticals, Inc., which agreement
expired in April 2000. During February 2000, the Company began marketing
Primsol(R) solution, an internally developed prescription antibiotic for the
treatment of middle ear infections, in the United States.
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 and introduces products to the market. The Company is
subject to a number of risks similar to other companies in the industry,
including rapid technological change, uncertainty of market acceptance of
products, uncertainty of regulatory approval, limited sales and marketing
experience, competition from substitute products and larger companies,
customers' reliance on third-party reimbursement, the need to obtain additional
financing, compliance with government regulations, protection of proprietary
technology, dependence on third-party manufacturers, distributors, collaborators
and limited suppliers, product liability and dependence on key individuals.
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, 2000 and 1999. 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, 1999
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Page 4
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product revenue is recognized upon shipment of the product when the terms are
F.O.B. shipping point or upon customer receipt of the product when the terms are
F.O.B. destination and provided that no significant obligations remain
outstanding and the resulting receivable is deemed collectible by management.
Co-promotion revenue is recognized as earned based upon the performance
requirements of the respective agreement.
During February 2000, the Company launched a new product, Primsol solution, with
extended payment terms and certain rights of return. The Company is deferring
the recognition of revenue from the sale of Primsol solution until the product
is no longer returnable or sufficient information becomes available to make a
reasonable and reliable estimate of returns. Through June 30, 2000, the Company
has deferred $708,000 in Primsol revenue.
Net Loss Per Common Share
Options, warrants and preferred stock to purchase or convert to 649,275
depositary shares and 2,110,081 shares of common stock, outstanding as of June
30, 2000 and 1999, 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, warrants and debt to purchase or convert to 1,416,590
depositary shares and 4,148,571 shares of common stock outstanding as of June
30, 2000 and 1999, 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.
Recent Accounting Pronouncements
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 will be
required in the Company's fourth quarter of fiscal 2000. The Company is
currently assessing the impact that the provisions of SAB 101 will have on its
financial statements.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.
Page 5
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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:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
Raw materials. $ 947,496 $ 375,719
Finished goods 410,519 636,711
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Total . . . . $1,358,015 $1,012,430
========== ==========
</TABLE>
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 expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, the Company would recognize an impairment loss as a charge to
operations. If impaired, the intangible asset would be written down to the
present value of estimated expected future cash flows using a discount rate
commensurate with the risks involved. Impairment of 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:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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<S> <C> <C>
Employee compensation expenses $312,137 $1,033,187
Legal and accounting expenses. 75,485 81,726
Selling fees and chargebacks . 89,280 78,071
Preferred stock dividend . . . 323,082 323,082
Other. . . . . . . . . . . . . 20,782 4,525
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Total . . . . . . . . $820,766 $1,520,591
======== ==========
</TABLE>
6. 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 agreed to 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. This agreement was
amended as described below.
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
this closing, the Company 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 (delayed to 2003 pursuant to the second
Page 6
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supplemental agreement described below), 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 (delayed to the Company's 2002 earnings pursuant
to the second supplemental agreement described below). In connection with the
closing of these transactions, the Company consummated a merger with a
wholly-owned subsidiary pursuant to which each share of common stock of the
Company was converted into one depositary share, representing one share of
common stock, subject to Alpharma's call option, and represented by a depositary
receipt.
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. As of June 30, 2000, Ascent has
borrowed the entire $12.0 million available for general corporate purposes. 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 (extended to December 31, 2003 pursuant to the second supplemental
agreement described below), 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 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. On October 15, 1999, pursuant to the
second supplemental agreement described below, the Company and Alpharma agreed
to change the foregoing dates to December 31, 2003, January 1, 2004 and February
28, 2004, respectively.
ALPHARMA FIRST SUPPLEMENTAL AGREEMENT. On July 1, 1999, the Company entered into
a first supplemental agreement with Alpharma amending the terms of the loan
agreement and the other strategic alliance agreements between the Company and
Alpharma. Under the first 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 as of the date
of the first supplemental 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 screening committee
comprised of two nominees of Ascent, one nominee of Alpharma and one nominee of
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<PAGE>
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. Since the resignation of Alan R. Fox as
the Company's chief executive officer in December 1999, the Company has
maintained only one representative on the screening committee. 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.
ALPHARMA SECOND SUPPLEMENTAL AGREEMENT. On October 15, 1999, the Company entered
into a second supplemental agreement with Alpharma amending the terms of the
loan agreement and the other strategic alliance agreements between the Company
and Alpharma. Under the second supplemental agreement, the Company agreed, among
other things, (i) to extend by 12 months the exercise period of Alpharma's call
option to the first half of year 2003, (ii) to change the fiscal year upon which
the exercise price of Alpharma's call option is based from 2001 to 2002, (iii)
to change the minimum aggregate exercise price of Alpharma's call option from
$140 million to $150 million and (iv) to modify certain conditions on Ascent's
access to funds under the loan agreement relating to the granting of a security
interest in any business or product acquired by the Company using such funds and
to the performance by the Company and the funds affiliated with ING Furman Selz
of their respective obligations under the fourth amendment to the May 1998
Securities Purchase Agreement described below. In addition, the Company agreed
that, to the extent it borrowed funds from Alpharma under the loan agreement to
finance the acquisition of products or businesses, it would grant Alpharma a
security interest in such products or businesses. The modification of the terms
of Alpharma's call option was approved by Ascent's stockholders at the annual
meeting of its stockholders held on June 14, 2000.
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 Securities Purchase Agreement dated as of May 13, 1998 by and among
the Company, BancBoston Ventures, Inc., Flynn Partners and funds affiliated with
ING Furman Selz Investments LLC (the "May 1998 Securities 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) 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 $1,348,000 in legal, accounting and
consulting fees as of June 30, 2000. These fees have been capitalized on the
balance sheet as debt issue costs and are being amortized over the life of the
debt.
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8. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION FACILITY. 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 Investments LLC ("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 principal 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. Of the $2.0 million convertible
subordinated notes issued and sold by Ascent on July 1, 1999, $1,804,495 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt) and $195,505 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $1,804,495 to the maturity
amount of $2,000,000 as interest expense over the term of the convertible
subordinated notes. The obligation of the funds affiliated with ING Furman Selz
to loan the Company the remaining $2.0 million was subject to the fulfillment to
their reasonable satisfaction or the waiver by the funds of conditions,
including that Ascent had or expected 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, 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 would have prevented or eliminated such
stockholders' deficit or Alpharma agreed in writing that it would not deny
Ascent's next borrowing request under the Alpharma loan agreement because of
such stockholders' deficit.
On December 30, 1999, the Company borrowed an additional $1.0 million under this
loan arrangement and issued additional warrants to purchase 150,000 Ascent
depositary shares to the funds affiliated with ING Furman Selz. Of the $1.0
million of convertible subordinated notes issued and sold by Ascent on December
30, 1999, $933,000 was allocated to the relative fair value of the convertible
subordinated notes (classified as debt), and $67,000 was allocated to the
relative fair value of the warrants (classified as additional paid in capital).
Accordingly, the 7.5% convertible subordinated notes will be accreted from
$933,000 to the maturity amount of $1,000,000 as interest expense over the term
of the convertible subordinated notes.
On February 14, 2000, the Company borrowed the final $1.0 million under this
loan arrangement and issued additional warrants to purchase 150,000 Ascent
depositary shares to the funds affiliated with ING Furman Selz. Of the $1.0
million of convertible subordinated notes issued and sold by Ascent on February
14, 2000, $868,000 was allocated to the relative fair value of the convertible
subordinated notes (classified as debt), and $132,000 was allocated to the
relative fair value of the warrants (classified as additional paid in capital).
Accordingly, the 7.5% convertible subordinated notes will be accreted from
$868,000 to the maturity amount of $1,000,000 as interest expense over the term
of the convertible subordinated notes.
All of the warrants issued by Ascent under the third amendment have an exercise
price of $3.00 per share and expire on July 1, 2006.
$10.0 MILLION FACILITY. On October 15, 1999, the Company and the Series G
purchasers entered into a fourth amendment to the May 1998 Securities Purchase
Agreement under which funds affiliated with ING Furman Selz agreed to loan the
Company up to an additional $10.0 million. Upon executing the fourth amendment,
the Company issued 7.5% convertible subordinated notes in the aggregate
principal amount of up to $10.0 million and warrants to purchase 1,000,000
Ascent depositary shares at an exercise price of $3.00 per share to the funds
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affiliated with ING Furman Selz. The obligation of the funds affiliated with
ING Furman Selz to loan the Company the $10.0 million is subject to the
fulfillment to their reasonable satisfaction or the waiver by the funds of
certain conditions. The Company has agreed to issue warrants to purchase up to
an additional 4,000,000 Ascent depositary shares in connection with borrowings
under this credit facility. All of the warrants issued by the Company under the
fourth amendment will have an exercise price of $3.00 per share and will expire
on October 15, 2006. The Company has agreed that, to the extent it grants
Alpharma a security interest in products or businesses acquired by the Company
using funds borrowed under the Alpharma loan agreement, the Company will grant a
junior security interest in such assets to the funds affiliated with ING Furman
Selz to secure the Company's indebtedness under the $10.0 million credit
facility.
On March 13, 2000, the Company borrowed $1.5 million under the fourth amendment
and issued warrants to purchase 375,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.5 million of convertible
subordinated notes issued and sold by Ascent on March 13, 2000, $1,215,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $285,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $1,215,000 to the maturity
amount of $1,500,000 as interest expense over the term of the convertible
subordinated notes.
On May 8, 2000, the Company borrowed an additional $1.25 million under the
fourth amendment to the May 1998 Securities Purchase Agreement and issued
additional warrants to purchase 312,500 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.25 million of convertible
subordinated notes issued and sold by Ascent on May 8, 2000, $1,100,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $150,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $1,100,000 to the maturity
amount of $1,250,000 as interest expense over the term of the convertible
subordinated notes.
On June 5, 2000, the Company borrowed an additional $1.25 million under the
fourth amendment to the May 1998 Securities Purchase Agreement and issued
additional warrants to purchase 312,500 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.25 million of convertible
subordinated notes issued and sold by Ascent on June 5, 2000, $1,167,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $83,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $1,167,000 to the maturity
amount of $1,250,000 as interest expense over the term of the convertible
subordinated notes.
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible
subordinated notes issued pursuant to the third and fourth amendments to the May
1998 Securities Purchase Agreement 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 principal on the
notes is payable in full on July 1, 2004.
9. SUBSEQUENT EVENTS
On July 7, 2000, the Company borrowed an additional $1.5 million under the
fourth amendment to the May 1998 Securities Purchase Agreement and issued
additional warrants to purchase 500,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.5 million of convertible
subordinated notes issued and sold by Ascent on July 8, 2000, $1,382,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $118,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
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convertible subordinated notes will be accreted from $1,382,000 to the maturity
amount of $1,500,000 as interest expense over the term of the convertible
subordinated notes.
On August 7, 2000, the Company borrowed an additional $1.5 million under the
fourth amendment to the May 1998 Securities Purchase Agreement and issued
additional warrants to purchase 500,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. Of the $1.5 million of convertible
subordinated notes issued and sold by Ascent on August 7, 2000, $1,282,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $218,000 was allocated to the relative fair value of
the warrants (classified as additional paid in capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $1,282,000 to the maturity
amount of $1,500,000 as interest expense over the term of the convertible
subordinated notes. Following this borrowing, $3.0 million remained available
for borrowing under the $10 million credit facility.
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 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, 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. Following the sale by Warner-Lambert of its assets
with respect to Omnicef(R) to Abbott Laboratories in January 2000, Ascent ceased
promoting this product. During the quarter ended June 30, 1999, the Company
began marketing Pediotic(R) (a combination corticosteroid/antibiotic) to
pediatricians in the United States under a one-year co-promotion agreement with
King Pharmaceuticals, Inc., which agreement expired in April 2000. In February
2000, Ascent began marketing Primsol solution, an internally-developed
prescription antibiotic for the treatment of middle ear infections.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least into 2001 as it continues its product
development programs 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, 2000 of $73,577,000.
In December 1999, Ascent modified its short-term strategy. Specifically, Ascent
determined to focus on introducing Primsol to the market, obtaining FDA approval
for Orapred and introducing it to the market and seeking appropriate
co-promotional opportunities. In connection with the adoption of this strategy,
Ascent suspended its other product development activities until its financial
condition has adequately improved.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 1999
REVENUE: Ascent had total net revenue of $1,108,000 and $2,217,000 for the
three and six months ended June 30, 2000, respectively, compared with total net
revenue of $1,740,000 and $3,597,000 for the three and six months ended June 30,
1999, respectively. The decrease in revenue of $632,000 for the three months
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ended June 30, 2000, was primarily attributable to a decrease of $790,000 in
co-promotional revenue due to the termination of the Omnicef(R) agreement in
January 2000 and the termination of the Pediotic(R) agreement in April 2000
which was partially offset by $74,000 of revenue from sales of Primsol Solution
which Ascent introduced to the market in February 2000. The decrease in revenue
of $1,380,000 for the six months ended June 30, 2000, was primarily attributable
to a decrease of $870,000 in co-promotional revenue due to the termination of
the Omnicef(R) agreement in January 2000 and the termination of the Pediotic(R)
agreement in April 2000 and a decrease of $466,000 in Feverall revenue due to
the loss of a large retail customer and the loss of institutional contracts
which was partially offset by $74,000 of revenue from sales of Primsol Solution.
COST OF PRODUCT SALES: Cost of product sales was $289,000 and $620,000 for the
three and six months ended June 30, 2000, respectively, compared with $320,000
and $901,000 for the three and six months ended June 30, 1999, respectively.
The decrease in cost of product sales of $31,000 for the three months ended June
30, 2000, was primarily due to a prior year raw material write-off of $25,000.
The decrease in cost of product sales of $281,000 for the six months ended June
30, 2000, was primarily the result of a decrease of $237,000 in manufacturing
costs associated with the production of Feverall as a result of a decrease in
sales volume of this product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling, general
and administrative expenses of $3,329,000 and $6,347,000 for the three and six
months ended June 30, 2000, respectively, compared with $3,701,000 and
$7,591,000 for the three and six months ended June 30, 1999, respectively,
representing decreases of $372,000 and $1,244,000, respectively.
Selling and marketing expenses were $2,730,000 and $5,213,000 for the three and
six months ended June 30, 2000, respectively, compared with expenses of
$2,815,000 and $5,878,000 for the three and six months ended June 30, 1999. The
decrease in selling and marketing expenses of $85,000 for the three months ended
June 30, 2000, was primarily the result of decreases of (i) $100,000 in
personnel expenses mainly due to a restructured commission policy, (ii) $136,000
in expenses related to maintaining a sales force due to cost containment efforts
with respect to the operations of the sales force, and (iii) $136,000 in samples
expenses reflecting the termination of the Omnicef(R) co-promotion agreement by
Warner-Lambert Company in January 2000 and the termination of the sampling that
the Company was conducting under the agreement, which decreases were offset by
an increase of $260,000 in samples, selling materials, trade promotions, media
and telesales for the Primsol Solution product. The decrease in selling and
marketing expenses of $665,000 for the six months ended June 30, 2000, was
primarily the result of decreases of (i) $374,000 in personnel expenses mainly
due to a restructured commission policy, (ii) $210,000 in expenses related to
maintaining a sales force due to cost containment efforts, and (iii) $226,000 in
samples and trade promotions due to the termination of the Omnicef(R)
co-promotion agreement by Warner-Lambert Company in January 2000, and (iv)
$166,000 in samples and trade promotions due to lower sales for the Feverall
product line, which decreases were offset by an increase of $308,000 in samples,
selling materials and direct mailings for the Primsol Solution product.
General and administrative expenses were $599,000 and $1,134,000 for the three
and six months ended June 30, 2000, respectively, compared with expenses of
$886,000 and $1,713,000 for the three and six months ended June 30, 1999,
respectively. The decrease of $287,000 for the three months ended June 30, 2000,
was primarily attributable to decreases of (i) $77,000 in personnel expenses due
to reduced headcount, (ii) $143,000 due to changes in the Company's bonus plan,
and (iii) $72,000 in consulting expenses due to the non-renewal of contracts
that ended in 1999. The decrease of $579,000 for the six months ended June 30,
2000, was primarily attributable to decreases of (i) $130,000 in personnel
expenses due to reduced headcount, (ii) $230,000 due to changes in the Company's
bonus plan, (iii) $158,000 in consulting expenses due to the non-renewal of
contracts that ended in 1999, and (iv) $47,000 in recruiting expenses.
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RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses of
$538,000 and $1,283,000 for the three and six months ended June 30, 2000,
respectively, compared with expenses of $989,000 and $1,822,000 for the three
and six months ended June 30, 1999, respectively. The decrease of $451,000 for
the three months ended June 30, 2000, was primarily attributable to (i) $282,000
less in expenses associated with the Pediavent and Feverall Extended Release
products' research and development programs due to the Company's suspension of
product development for its products other that Primsol and Orapred in December
1999, (ii) a decrease of $83,000 in expenses for the Orapred product's research
and development program due to timing differences in expenses while the Company
waited for the FDA's response on its Abbreviated New Drug Applications and (iii)
a decrease of $48,000 in consulting expenses due to the reduced use of the
consultants' time. The decrease of $539,000 for the six months ended June 30,
2000, was primarily attributable to (i) $399,000 less in expenses associated
with the Pediavent and Feverall Extended Release products' research and
development programs due to the Company's suspension of product development for
its products other that Primsol and Orapred in December 1999, (ii) a decrease of
$134,000 in expenses for the Orapred product's research and development program
due to timing differences in expenses while the Company waited for the FDA's
response on its Abbreviated New Drug Applications and (iii) a decrease of
$105,000 in consulting expenses due to the reduced use of the consultants' time.
These decreases were offset by an increase of $105,000 in research and
development expenses related to the production of Primsol solution batches in
anticipation of receiving FDA market approval.
INTEREST: Ascent had interest income of $17,000 and $27,000 for the three and
six months ended June 30, 2000, respectively, compared with interest income of
$16,000 and $42,000 for the three and six months ended June 30, 1999,
respectively. The decrease of $15,000 for the six months ended June 30, 2000,
was primarily due to a lower average cash investment balance. Ascent had
interest expense of $706,000 and $1,331,000 for the three and six months ended
June 30, 2000, respectively, compared with interest expense of $309,000 and
$564,000 for the three and six months ended June 30, 1999, respectively. The
increases of $397,000 and $767,000, respectively, were primarily attributable to
the additional $5 million and $7 million of subordinated notes issued and
outstanding during the three and six months ended June 30, 2000, respectively,
compared to the three and six months ended June 30, 1999.
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, 2000, Ascent had raised approximately
$33,560,000 (net of issuance costs) from the sales of preferred stock,
approximately $34,818,000 (net of issuance costs and deferred charges) from the
issuance of subordinated secured notes and related warrants (including
approximately $10.7 million borrowed under the Alpharma loan agreement and
approximately $17.8 under the ING Furman Selz facilities) 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 acetaminophen
suppositories and Pediamist nasal saline spray. In February 1999, Ascent began
promoting Omnicef(R) pursuant to a promotion agreement with Warner-Lambert
Company that was subsequently terminated in January 2000. In May 1999, Ascent
began promoting Pediotic(R) pursuant to a one-year co-promotion agreement with
King Pharmaceuticals, Inc. that expired in April 2000. In February 2000, Ascent
began marketing Primsol solution in the United States.
ALPHARMA STRATEGIC ALLIANCE. On February 16, 1999, Ascent entered into a series
of agreements with Alpharma. This strategic alliance contemplates a number of
transactions, including a loan agreement under which Alpharma agreed to 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
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addition, Ascent has obtained a call option to acquire all of its then
outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002 (delayed to 2003 pursuant to the second
supplemental agreement described below), 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 (delayed to Ascent's 2002 earnings pursuant to the
second supplemental agreement described below).
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. As of June 30, 2000, Ascent has
borrowed the entire $12.0 million available for general corporate purposes. The
principal terms of the Alpharma note are set forth below. The loan agreement
prohibits, among other things, Ascent's ability to make distributions of
property or cash, including dividends, in respect of its capital stock.
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,
Ascent does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, Ascent 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, Ascent may repay all or a portion of
the outstanding principal amount under the note. Ascent 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 (extended
to December 31, 2003 pursuant to the second supplemental agreement described
below), Ascent may prepay all of the outstanding principal amount under the
note, together with any accrued and unpaid interest, if it also pays a
conversion termination fee equal to 25% of the principal amount of the note
outstanding as of December 31, 2001. Ascent may not otherwise prepay the note.
Following a change in control of Ascent, Alpharma may require Ascent 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 Ascent common stock on one occasion after a
change in control of Ascent 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 Ascent 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 Ascent common stock within three business days
after the increase. On October 15, 1999, pursuant to the second supplemental
agreement described below, Ascent and Alpharma agreed to change the foregoing
dates to December 31, 2003, January 1, 2004 and February 28, 2004, respectively.
ALPHARMA FIRST SUPPLEMENTAL AGREEMENT. On July 1, 1999, Ascent entered into a
first supplemental agreement with Alpharma amending the terms of the loan
agreement and the other strategic alliance agreements between Ascent and
Alpharma. Under the first supplemental agreement, Ascent 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 Ascent'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 Ascent's internal operating plan, as updated from time
to time. In addition, Ascent may only use the additional $8.0 million allocated
for general corporate purposes under the loan agreement as of the date of the
first supplemental agreement for the purposes set forth in its 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 screening committee comprised
of two nominees of Ascent, one nominee of Alpharma and one nominee of ING Furman
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Selz. This screening committee was established for the purpose of approving any
changes to Ascent'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. Ascent's two representatives on the screening committee
together have one vote, and the representatives of Alpharma and ING Furman Selz
each have one vote. Since the resignation of Alan R. Fox as the Company's chief
executive officer in December 1999, the Company has maintained only one
representative on the screening committee. The screening committee must act by
unanimous approval prior to the approval and commercial launch of Ascent's
Primsol and Orapred products and by majority approval following the approval and
commercial launch of these products.
ALPHARMA SECOND SUPPLEMENTAL AGREEMENT. On October 15, 1999, Ascent entered
into a second supplemental agreement with Alpharma amending the terms of the
loan agreement and the other strategic alliance agreements between Ascent and
Alpharma. Under the second supplemental agreement, Ascent agreed, among other
things, (i) to delay by 12 months the exercise period of Alpharma's call option
to the first half of year 2003, (ii) to change the fiscal year upon which the
exercise price of Alpharma's call option is based from 2001 to 2002, (iii) to
change the minimum aggregate exercise price of Alpharma's call option from $140
million to $150 million and (iv) to modify certain conditions on Ascent's access
to funds under the loan agreement relating to the granting of a security
interest in any business or product acquired by Ascent using such funds and to
the performance by Ascent and the funds affiliated with ING Furman Selz of their
respective obligations under the fourth amendment to the May 1998 Securities
Purchase Agreement described below. In addition, Ascent agreed that, to the
extent it borrowed funds from Alpharma under the loan agreement to finance the
acquisition of products or businesses, it would grant Alpharma a security
interest in such products or businesses. The modification of the terms of
Alpharma's call option was approved by Ascent's stockholders at the annual
meeting of its stockholders held on June 14, 2000.
ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION FACILITY. On June 30, 1999, Ascent 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, Ascent 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 Ascent up to
$4.0 million. Upon executing the third amendment, Ascent issued 7.5% convertible
subordinated notes in the aggregate principal amount of up to $4.0 million and
warrants to purchase 300,000 Ascent depositary shares 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 Ascent the
remaining $2.0 million was subject to the fulfillment to their reasonable
satisfaction or the waiver by the funds of conditions, including that Ascent had
or expected 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, 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 would have prevented or eliminated such stockholders' deficit or
Alpharma agreed in writing that it would not deny Ascent's next borrowing
request under the Alpharma loan agreement because of such stockholders' deficit.
On December 30, 1999, Ascent borrowed an additional $1.0 million under this loan
arrangement and issued additional warrants to purchase 150,000 Ascent depositary
shares to the funds affiliated with ING Furman Selz. On February 14, 2000,
Ascent borrowed the final $1.0 million under this loan arrangement and issued
additional warrants to purchase 150,000 Ascent depositary shares to the funds
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affiliated with ING Furman Selz. All of the warrants Ascent has issued under the
third amendment have an exercise price of $3.00 per share and will expire on
July 1, 2006.
$10.0 MILLION FACILITY. On October 15, 1999, Ascent and the Series G purchasers
entered into a fourth amendment to the May 1998 Securities Purchase Agreement
under which funds affiliated with ING Furman Selz agreed to loan Ascent up to an
additional $10.0 million. Upon executing the fourth amendment, Ascent issued
7.5% convertible subordinated notes in the aggregate principal amount of up to
$10.0 million and warrants to purchase 1,000,000 depositary shares at an
exercise price of $3.00 per share to the funds affiliated with ING Furman Selz.
Under the fourth amendment Ascent borrowed $1.5 million on March 13, 2000, $1.25
million on May 8, 2000, $1.25 million on June 5, 2000, $1.5 million on July 7,
2000, and $1.5 million on August 7, 2000. The obligation of the funds
affiliated with ING Furman Selz to loan Ascent the remaining $3 million is
subject to the fulfillment to their reasonable satisfaction or the waiver by the
funds of certain conditions. Ascent has agreed to issue warrants to purchase up
to an additional 4,000,000 depositary shares in connection with borrowings under
this credit facility. In addition to the warrants issued upon execution of the
fourth amendment, Ascent has issued warrants exercisable for an aggregate of
2,000,000 depositary shares in connection with borrowings under the fourth
amendment to date. All of the warrants Ascent has issued or will issue under
the fourth amendment have or will have an exercise price of $3.00 per share and
expire on October 15, 2006. Ascent has agreed that, to the extent it grants
Alpharma a security interest in products or businesses acquired by Ascent using
funds borrowed under the Alpharma loan agreement, Ascent will grant a junior
security interest in such assets to the funds affiliated with ING Furman Selz to
secure Ascent's indebtedness under the $10.0 million credit facility.
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible subordinated
notes issued pursuant to the third and fourth amendments to the May 1998
Securities Purchase Agreement 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 principal on the
notes is payable in full on July 1, 2004.
FUTURE CAPITAL REQUIREMENTS. Ascent anticipates that, based upon its current
operating plan and its existing capital resources, it will have enough cash to
fund operations through December 31, 2000. Through June 30, 2000, Ascent had
borrowed $4 million under the $10 million financing arrangement with ING Furman
Selz and during July and August 2000, Ascent borrowed an additional $3 million
under the same financing arrangement. Ascent expects to borrow the remaining $3
million available under the $10 million financing arrangement with ING Furman
Selz by December 31, 2000. Ascent will need to raise additional funds in order
to operate its business beyond December 31, 2000. Ascent expects to seek such
funds through collaborative relationships, transactions relating to one or more
of its product lines and public or private financings. The additional financing
may not be available to Ascent or may not be available on acceptable terms. If
adequate funds are not available, Ascent may be required to significantly
curtail its product commercialization efforts beyond the actions the Company has
already taken, obtain funds through arrangements with collaborative partners or
others on unfavorable terms 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 that would significantly dilute the Company's
stockholders, or significantly scale back or terminate operations.
Ascent's future capital requirements will depend on many factors, including the
timing of FDA approval of Orapred, the costs and margins on sales of its
products, success of its commercialization activities and arrangements,
particularly the level of product sales, its ability to acquire and successfully
integrate business and products, continued progress in its product development
Page 16
<PAGE>
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 promotion agreements.
As noted above, Ascent is currently focusing on introducing Primsol to the
market, obtaining FDA approval for Orapred and introducing it to the market and
seeking appropriate co-promotional opportunities. In connection with the
adoption of this strategy, Ascent suspended its other product development
activities until its financial condition has adequately improved. In April 2000,
the FDA issued a minor deficiency letter with respect to Ascent's Abbreviated
New Drug Applications for Orapred. Ascent still believes, based on the matters
raised in the letter and communications with the third party manufacturer that
produces this product for Ascent, that it is reasonable to expect that marketing
approval of Orapred will be granted by the end of year 2000. In August 2000,
Ascent reduced its sales force and in conjunction with this reduction
approximately $213,000 in severance costs will be incurred during the third
quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 will be
required in the Company's fourth quarter of fiscal 2000. The Company is
currently assessing the impact that the provisions of SAB 101 will have on its
financial statements.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.
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, 1999 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
Page 17
<PAGE>
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 and convertible subordinated notes and the promissory note
issued by Ascent to Alpharma under its loan agreement with Alpharma. At June 30,
2000, the fair 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, 2000, which was not materially different from the
year-end carrying value.
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
a) See Part I, "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Alpharma
Second Supplemental Agreement," for a description of certain changes to
Alpharma's call option which affect Ascent depositary shares, which information
is incorporated herein by reference.
b) See Part I, "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," for a
description of (i) equity securities of Ascent sold by Ascent which were not
registered under the Securities Act of 1933, as amended, (each of which was
issued pursuant to Section 4(2) of the Securities Act) and (ii) working capital
and restrictions and other limitations upon payment of dividends, which
information is incorporated herein by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 14, 2000, the
following proposals were adopted by the vote specified below:
a) The election of the following Class III directors:
<TABLE>
<CAPTION>
For Withhold
--------- --------
<S> <C> <C>
Emmett Clemente, Ph.D.. 7,207,737 22,657
Nicholas Daraviras. . . 7,210,084 20,310
Andre L. Lamotte, Sc.D. 7,209,558 20,836
</TABLE>
In addition, the following directors' terms in office continued after the Annual
Meeting: Thomas L. Anderson, Raymond F. Baddour, Sc.D., Robert E. Baldini,
James L. Luikart, and Lee J. Schroeder. On December 16, 1999, Alan R. Fox
resigned as a director. On April 12, 2000, Joseph R. Ianelli, former President
and CEO of Renaissance Pharmaceuticals, Inc., and its Internet Affiliate
PharmaConnect, Inc., was appointed to the Board of Directors to fill this
vacancy.
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<PAGE>
a) Approval of (i) certain amendments to the Depositary Agreement dated as
of February 16, 1999, as amended, among the Company, Alpharma USPD, Inc., and
State Street Bank and Trust Company, (ii) certain amendments to the Loan
Agreement dated as of February 16, 1999, as amended, among the Company, Alpharma
USPD, Inc., and Alpharma, Inc., and (iii) the delay by one year, from 2002 to
2003, of the period during which the call option assigned by the Company to
Alpharma UPSD, Inc., to purchase all of the Company's common stock then
outstanding may be exercised.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
<S> <C> <C> <C>
5,029,187 8,388 3,437 2,189,382
</TABLE>
a) Approval of an amendment to the Company's 1999 Stock Incentive Plan.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
<S> <C> <C> <C>
4,820,472 218,380 2,160 2,189,382
</TABLE>
a) Ratification of Selection of PricewaterhouseCoopers LLP as independent
accountants of the Company for the current fiscal year.
<TABLE>
<CAPTION>
For Against
--------- -------
<S> <C>
7,229,144 1,250
</TABLE>
ITEM 5 - OTHER INFORMATION
a) On July 7, 2000, Eliot M. Lurier, Chief Financial Officer, resigned from
the Company. On July 14, 2000, Gregory A. Vannatter, Executive Vice President,
Sales and Marketing, resigned from the Company. Currently, Emmett Clemente
remains the only corporate officer.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 21 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.
Page 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
ASCENT PEDIATRICS, INC.
<S> <C>
Date: August 14, 2000 . . . . . . . . . . . . . . . . . . By: /s/ EMMETT CLEMENTE
-----------------------
Emmett Clemente
President, Chairman and Treasurer
(Principal Executive, Financial and Accounting Officer)
</TABLE>
Page 20
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Number Description
<C> <S>
27 Financial Data Schedule
99(1) Pages 30 through 37 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 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 herein by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000, filed with the
Securities and Exchange Commission on May 15, 2000.
</TABLE>
Page 21
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1
<TABLE>
<CAPTION>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] JUN-30-2000
[CASH] 395,844
[SECURITIES] 0
[RECEIVABLES] 623,479
[ALLOWANCES] 66,956
[INVENTORY] 1,358,015
[CURRENT-ASSETS] 2,493,405
[PP&E] 1,657,133
[DEPRECIATION] 1,123,118
[TOTAL-ASSETS] 14,301,954
[CURRENT-LIABILITIES] 3,186,763
[BONDS] 27,426,484
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 389
[OTHER-SE] 57,251,333
[TOTAL-LIABILITY-AND-EQUITY] 14,301,954
[SALES] 1,236,912
[TOTAL-REVENUES] 2,217,432
[CGS] 321,145
[TOTAL-COSTS] 619,860
[OTHER-EXPENSES] 7,629,644
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,330,555
[INCOME-PRETAX] (7,314,634)
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (7,314,634)
[EPS-BASIC] (.750)
[EPS-DILUTED] (.750)
</TABLE>
