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 SEPTEMBER 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
-------------------------------------------------------- -----
(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 November 10, 2000, there were 9,781,814 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>
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Page
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<S> <C>
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
1
Unaudited Condensed Balance Sheets
2
Unaudited Condensed Statements of Operations
3
Unaudited Condensed Statements of Cash Flows
4
Notes to Unaudited Condensed Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
8
Condition and Results of Operations
13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds
13
13
Item 6 - Exhibits and Reports on Form 8-K
14
Signature
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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ASSETS
<S> <C> <C> <C>
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 892,149 $ 1,067,049
Accounts receivable, less allowance for doubtful accounts of $72,000 and
$67,000 at September 30, 2000 and December 31, 1999, respectively . 536,457 759,098
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,810,832 1,012,430
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 179,161 132,555
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 3,418,599 2,971,132
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508,015 516,165
Debt issue costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,610,005 1,882,365
Intangibles, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,363,159 9,857,648
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,300 45,300
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,945,078 $ 15,272,610
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,255,953 $ 1,645,302
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917,963 523,023
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863,550 1,520,591
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661,967 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 36,397 80,264
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 3,735,830 3,769,180
Subordinated secured notes. . . . . . . . . . . . . . . . . . . . . . . . . . 30,957,926 21,461,041
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,080 -
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 34,707,836 25,230,221
Stockholders' deficit
Preferred stock, $.01 par value; 5,000,000 shares authorized; no
shares issued and outstanding at September 30, 2000 and December
31, 1999 - -
Common stock, $.00004 par value; 60,000,000 shares authorized;
9,781,814 and 9,643,883 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively. . . . . . . 390 385
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 57,837,961 56,304,465
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (77,601,109) (66,262,461)
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Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . (19,762,758) (9,957,611)
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Total liabilities and stockholders' deficit . . . . . . . . . . . . $ 14,945,078 $ 15,272,610
=============== ==============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page1
<PAGE>
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2000 1999 2000
---------------------------------- --------------------------------- -------------
<S> <C> <C> <C>
Product revenue, net. . . . . . . . . . . $ 757,711 $ 644,913 $ 1,994,623
Co-promotional revenue. . . . . . . . . . 88,043 1,235,000 1,068,563
---------------------------------- --------------------------------- -------------
Total net revenue . . . . . . . . . . . . 845,754 1,879,913 3,063,186
Costs and expenses
Costs of product sales . . . . . . . 350,048 404,434 969,907
Selling, general and administrative. 3,100,454 4,527,302 9,447,419
Research and development . . . . . . 658,520 1,137,118 1,941,200
---------------------------------- --------------------------------- -------------
Total costs and expenses . . . . . . 4,109,022 6,068,854 12,358,526
Loss from operations. . . . . . (3,263,268) (4,188,941) (9,295,340)
Interest income . . . . . . . . . . . . . 20,898 15,256 48,317
Interest expense. . . . . . . . . . . . . (802,234) (417,578) (2,132,789)
Other income. . . . . . . . . . . . . . . 20,590 - 41,164
---------------------------------- --------------------------------- -------------
Net loss. . . . . . . . . . . . (4,024,014) (4,591,263) (11,338,648)
Preferred stock dividend. . . . . . . . . - 52,888 -
---------------------------------- --------------------------------- -------------
Net loss to common stockholders $ (4,024,014) $ (4,644,151) $(11,338,648)
================================== ================================= =============
Results per common share:
Historical - basic and diluted:
Net loss. . . . . . . . . . . . $ (0.41) $ (0.51) $ (1.16)
Preferred stock dividend. . . . $ - $ (0.01) $ -
---------------------------------- --------------------------------- -------------
Net loss to common stockholders $ (0.41) $ (0.52) $ (1.16)
================================== ================================= =============
Weighted average shares outstanding-
basic and diluted. . . . . . . . . . . 9,775,864 9,008,592 9,739,256
================================== ================================= =============
1999
-------------
<S> <C>
Product revenue, net. . . . . . . . . . . $ 2,391,771
Co-promotional revenue. . . . . . . . . . 3,085,000
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Total net revenue . . . . . . . . . . . . 5,476,771
Costs and expenses
Costs of product sales . . . . . . . 1,305,861
Selling, general and administrative. 12,117,878
Research and development . . . . . . 2,958,765
-------------
Total costs and expenses . . . . . . 16,382,504
Loss from operations. . . . . . (10,905,733)
Interest income . . . . . . . . . . . . . 56,985
Interest expense. . . . . . . . . . . . . (981,218)
Other income. . . . . . . . . . . . . . . -
-------------
Net loss. . . . . . . . . . . . (11,829,966)
Preferred stock dividend. . . . . . . . . 444,791
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Net loss to common stockholders $(12,274,757)
=============
Results per common share:
Historical - basic and diluted:
Net loss. . . . . . . . . . . . $ (1.54)
Preferred stock dividend. . . . $ (0.06)
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Net loss to common stockholders $ (1.60)
=============
Weighted average shares outstanding-
basic and diluted. . . . . . . . . . . 7,689,268
=============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page2
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11,338,648) $(11,829,966)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 749,801 794,369
Non-cash interest expense. . . . . . . . . . . . . . . . 502,540 395,840
Provision for bad debts. . . . . . . . . . . . . . . . . 5,154 11,397
Inventory write-off. . . . . . . . . . . . . . . . . . . (41,348) (79,037)
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . 217,487 (750,864)
Inventory. . . . . . . . . . . . . . . . . . . . . . (757,054) 237,493
Other assets . . . . . . . . . . . . . . . . . . . . (46,606) (5,387)
Accounts payable . . . . . . . . . . . . . . . . . . (389,349) 529,771
Interest payable . . . . . . . . . . . . . . . . . . 394,940 354,282
Accrued expenses . . . . . . . . . . . . . . . . . . (657,041) (364,229)
Deferred revenue . . . . . . . . . . . . . . . . . . 661,967 -
Other current liabilities. . . . . . . . . . . . . . (43,867) 266,475
Other liabilities. . . . . . . . . . . . . . . . . . 14,080 -
--------------------------------- -------------
Net cash used in operating activities . . . . . (10,727,944) (10,439,856)
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . . . . (247,162) (171,139)
--------------------------------- -------------
Net cash used in investing activities . . . . . (247,162) (171,139)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 300,206 1,122,065
Proceeds from issuance of debt. . . . . . . . . . . . . . . . 9,287,822 8,853,184
Proceeds from issuance of debt related warrants . . . . . . . 1,212,178 195,505
Cash paid for debt issue costs. . . . . . . . . . . . . . . . - (1,271,217)
Cash paid for preferred stock dividends . . . . . . . . . . . - (353,691)
--------------------------------- -------------
Net cash provided by financing activities. . . 10,800,206 8,545,846
Net decrease in cash and cash equivalents. . . . . . . . . . . . . (174,900) (2,065,149)
Cash and cash equivalents, beginning of period . . . . . . . . . . 1,067,049 2,171,777
--------------------------------- -------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 892,149 $ 106,628
================================= =============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page3
<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 September 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 and the unaudited
financials statements and notes thereto for the quarters ended March 31, 2000
and June 30, 2000 included in the Company's Quarterly Reports on Form 10-Q as
filed with the Securities and Exchange Commission.
Page4
<PAGE>
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. At September 30, 2000, the Company
has deferred Primsol revenue of $662,000.
Net Loss Per Common Share
Options and warrants to purchase or convert to 556,823 and 955,135 depositary
shares, outstanding as of September 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 11,985,972 and
4,630,305 depositary shares, outstanding as of September 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
adoption of FIN 44 has not had a material impact on the Company's financial
position or results of operations.
Page5
<PAGE>
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>
September 30, December 31,
2000 1999
-------------- -------------
<S> <C> <C>
Raw materials. $ 920,972 $ 375,719
Finished goods 889,860 636,711
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Total . . . . $ 1,810,832 $ 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>
September 30, December 31,
2000 1999
-------------- -------------
<S> <C> <C>
Employee compensation expenses $ 188,194 $ 1,033,187
Legal and accounting expenses. 83,295 81,726
Selling fees and chargebacks . 127,666 78,071
Preferred stock dividend . . . 323,082 323,082
Regulatory user fees . . . . . 121,723 -
Other. . . . . . . . . . . . . 19,590 4,525
-------------- -------------
Total . . . . . . . . $ 863,550 $ 1,520,591
============== =============
</TABLE>
Employee compensation expenses decreased $845,000 from December 31, 1999 to
September 30, 2000 due primarily to decreases of (i) $145,000 in accrued payroll
expenses due to the timing differences in payroll transmissions, (ii) $541,000
in incentive and retention expenses due to restructuring of the respective
plans, and (iii) $164,000 in reduced compensation expenses due to the
termination of employees.
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"),
which provides for a number of arrangements, including a $40.0 million credit
facility which Alpharma has agreed to loan Ascent 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.
Page6
<PAGE>
As of January 31, 2000, Ascent had borrowed the entire $12.0 million available
for general corporate purposes. As of September 30, 2000, Ascent had not
borrowed any of the $28.0 million allocated for projects and acquisitions.
8. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION CREDIT FACILITY. On July 1, 1999, the Company entered into an
arrangement with certain funds affiliated with ING Furman Selz Investments LLC
("ING Furman Selz") under which such funds agreed to loan the Company up to $4.0
million.
As of February 14, 2000, the Company had borrowed the entire $4.0 million under
this credit facility and issued $4.0 million of 7.5% convertible subordinated
notes and warrants to purchase an aggregate of 600,000 Ascent depositary shares.
Of the $4.0 million convertible subordinated notes issued and sold by Ascent
under this credit facility, $3,605,495 was allocated to the relative fair value
of the convertible subordinated notes (classified as debt) and $394,505 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 $3,605,495 to the maturity amount of $4,000,000 as interest
expense over the term of the convertible subordinated notes.
$10.0 MILLION CREDIT FACILITY. On October 15, 1999, the Company entered into an
arrangement with certain funds affiliated with ING Furman Selz under which such
funds agreed to loan the Company up to an additional $10.0 million, subject to
certain conditions.
As of September 30, 2000, the Company had borrowed an aggregate of $8.0 million
under this credit facility and issued $8.0 million of 7.5% convertible
subordinated notes and warrants to purchase an aggregate of 3,500,000 Ascent
depositary shares. Of the $8.0 million of convertible subordinated notes issued
and sold by Ascent under this credit facility, $6,920,000 was allocated to the
relative fair value of the convertible subordinated notes (classified as debt),
and $1,080,000 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 $6,920,000 to the maturity amount of
$8.0 million as interest expense over the term of the convertible subordinated
notes.
9. SUBSEQUENT EVENTS
On November 1, 2000, the Company borrowed an additional $1.0 million under the
$10.0 million credit facility with funds affiliated with ING Furman Selz and
issued additional warrants to purchase 500,000 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 November 1, 2000, $780,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $220,000 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 $780,000 to the maturity
amount of $1,000,000 as interest expense over the term of the convertible
subordinated notes. On November 3, 2000, the Company provided the funds
affiliated with ING Furman Selz with notice of its intention to borrow the
remaining $1.0 million under the $10.0 million credit facility on November 28,
2000.
On November 14, 2000, the funds affiliated with ING Furman Selz agreed to
postpone $507,000 in interest payments due in December 2000 under the $4.0
million credit facility, the $10.0 million credit facility and 8% subordinated
notes due June 1, 2005 held by such funds until January 1, 2001.
Page7
<PAGE>
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, in the
United States.
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 September 30, 2000 of $77,601,000.
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999
REVENUE: Ascent had total net revenue of $846,000 and $3,063,000 for the three
and nine months ended September 30, 2000, respectively, compared with total net
revenue of $1,880,000 and $5,477,000 for the three and nine months ended
September 30, 1999, respectively. The decrease in revenue of $1,034,000 for the
three months ended September 30, 2000, was primarily attributable to a decrease
of $1,147,000 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 $166,000 of revenue from sales of
Primsol Solution which Ascent introduced to the market in February 2000. The
decrease in revenue of $2,414,000 for the nine months ended September 30, 2000,
was primarily attributable to a decrease of $2,016,000 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
$579,000 in Feverall revenue due to the loss of a large retail customer and the
loss of institutional contracts which was partially offset by $233,000 of
revenue from sales of Primsol Solution.
Page8
<PAGE>
COST OF PRODUCT SALES: Cost of product sales was $350,000 and $970,000 for the
three and nine months ended September 30, 2000, respectively, compared with
$404,000 and $1,306,000 for the three and nine months ended September 30, 1999,
respectively. The decrease in cost of product sales of $54,000 for the three
months ended September 30, 2000, was primarily due to a prior year raw material
write-off of $41,000. The decrease in cost of product sales of $336,000 for the
nine months ended September 30, 2000, was primarily the result of a decrease of
$250,000 in manufacturing costs associated with the production of Feverall as a
result of a decrease in sales volume of this product and $79,000 for a raw
material write-off.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling, general
and administrative expenses of $3,100,000 and $9,447,000 for the three and nine
months ended September 30, 2000, respectively, compared with $4,527,000 and
$12,118,000 for the three and nine months ended September 30, 1999,
respectively, representing decreases of $1,427,000 and $2,671,000, respectively.
Selling and marketing expenses were $2,544,000 and $7,756,000 for the three and
nine months ended September 30, 2000, respectively, compared with expenses of
$2,748,000 and $8,625,000 for the three and nine months ended September 30,
1999, respectively. The decrease in selling and marketing expenses of $204,000
for the three months ended September 30, 2000, was primarily the result of
decreases of (i) $191,000 in personnel expenses mainly due to a restructured
commission policy, (ii) $45,000 in expenses related to maintaining a sales force
due to cost containment efforts with respect to the operations of the sales
force, (iii) $59,000 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, (iv) $81,000 in advertising and promotion expenses for the Feverall
product line which decreases were offset by an increase of $212,000 in samples,
selling materials, media and direct mailings for the Primsol Solution product.
The decrease in selling and marketing expenses of $869,000 for the nine months
ended September 30, 2000, was primarily the result of decreases of (i) $565,000
in personnel expenses mainly due to a restructured commission policy, (ii)
$265,000 in expenses related to maintaining a sales force due to cost
containment efforts, and (iii) $288,000 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) $394,000 in samples and trade promotions due
to lower sales for the Feverall product line, which decreases were offset by an
increase of $675,000 in samples, selling materials and direct mailings for the
Primsol Solution product.
General and administrative expenses were $556,000 and $1,691,000 for the three
and nine months ended September 30, 2000, respectively, compared with expenses
of $1,779,000 and $3,493,000 for the three and nine months ended September 30,
1999, respectively. The decrease of $1,223,000 for the three months ended
September 30, 2000, was primarily attributable to decreases of (i) $111,000 in
personnel expenses due to reduced headcount, (ii) $39,000 due to changes in the
Company's bonus plan, (iii) $1,018,000 for the termination of an advisory
services agreement in the third quarter of 1999, and (iv) $46,000 in investor
relations expenses due to cost containment efforts. The decrease of $1,802,000
for the nine months ended September 30, 2000, was primarily attributable to
decreases of (i) $234,000 in personnel expenses due to reduced headcount, (ii)
$269,000 due to changes in the Company's bonus plan, (iii) $1,094,000 for the
termination of an advisory services agreement in the third quarter of 1999, (iv)
$86,000 in investor relations expenses due to cost containment efforts, (v)
$77,000 in consulting expenses due to the non-renewal of contracts that ended in
1999, and (vi) $64,000 in recruiting expenses.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses of
$659,000 and $1,941,000 for the three and nine months ended September 30, 2000,
respectively, compared with expenses of $1,137,000 and $2,959,000 for the three
and nine months ended September 30, 1999, respectively. The decrease of
$478,000 for the three months ended September 30, 2000, was primarily
attributable to (i) $254,000 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 $157,000 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 $69,000 in consulting expenses due to
the reduced use of the consultants' time. The decrease of $1,018,000 for the
nine months ended September 30, 2000, was primarily attributable to (i) $654,000
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 $282,000 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 $129,000 in consulting expenses due to the reduced use of the
consultants' time.
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INTEREST: Ascent had interest income of $21,000 and $48,000 for the three and
nine months ended September 30, 2000, respectively, compared with interest
income of $15,000 and $57,000 for the three and nine months ended September 30,
1999, respectively. The decrease of $9,000 for the nine months ended September
30, 2000, was primarily due to a lower average cash investment balance. Ascent
had interest expense of $802,000 and $2,133,000 for the three and nine months
ended September 30, 2000, respectively, compared with interest expense of
$418,000 and $981,000 for the three and nine months ended September 30, 1999,
respectively. The increases of $384,000 and $1,152,000, respectively, were
primarily attributable to the additional $10,500,000 of subordinated notes
issued and outstanding at September 30, 2000 compared to September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from private
sales of preferred stock, with net proceeds of $33.6 million, the private sale
of subordinated secured notes and related common stock purchase warrants, with
net proceeds of $38.8 million, and with the net proceeds of $17.5 million from
an initial public offering completed in May of 1997. As of September 30, 2000,
Ascent had $892,000 in cash and cash equivalents, an increase of $785,000 from
$107,000 as of December 31, 1999.
Ascent used $10.7 million of cash in operations in the nine months ended
September 30, 2000 compared to $10.4 million in operations in the nine months
ended September 30, 1999. Net cash used in operations for the nine months ended
September 30, 2000 was primarily attributable to a $11.3 million net loss
generated during the period, an increase in inventory of $757,000, and a
decrease in accrued expenses of $657,000. This was offset in part by non-cash
charges for depreciation and amortization expense of $750,000 and non-cash
interest expense of $503,000, and increases in deferred revenue of $662,000.
Ascent's investing activities resulted in net cash used of $247,000 for the nine
months ended September 30, 2000 and $171,000 for the nine months ended September
30, 1999. Ascent's capital expenditures consist primarily of purchases of
property and equipment, including computer equipment and software. Ascent
expects that its capital expenditures will remain steady in the future. Cash
provided by financing activities was $10.8 million for the nine months ended
September 30, 2000 and $8.5 million for the nine months ended September 30,
1999. The principal sources of financing for the nine months ended September 30,
2000 were the Alpharma and ING Furman Selz credit facilities which yielded net
proceeds of $1.5 million and $9.0 million, respectively.
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"), which provides for a number of arrangements,
including (i) a $40.0 million credit facility which Alpharma has agreed to loan
Ascent 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 and (ii) an
arrangement giving Alpharma the option, exercisable in 2003, 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 2002 earnings
Page10
<PAGE>
As of January 31, 2000, Ascent had borrowed the entire $12.0 million available
for general corporate purposes. As of September 30, 2000, Ascent had not
borrowed any of the $28.0 million allocated for projects and acquisitions.
ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION CREDIT FACILITY. On July 1, 1999, the Company entered into an
arrangement with certain funds affiliated with ING Furman Selz Investments LLC
("ING Furman Selz") under which such funds agreed to loan the Company up to $4.0
million.
As of February 14, 2000, the Company had borrowed the entire $4.0 million under
this credit facility and issued $4.0 million of 7.5% convertible subordinated
notes and warrants to purchase an aggregate of 600,000 Ascent depositary shares.
Of the $4.0 million convertible subordinated notes issued and sold by Ascent
under this credit facility, $3,605,495 was allocated to the relative fair value
of the convertible subordinated notes (classified as debt) and $394,505 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 $3,605,495 to the maturity amount of $4,000,000 as interest
expense over the term of the convertible subordinated notes.
$10.0 MILLION CREDIT FACILITY. On October 15, 1999, the Company entered into an
arrangement with certain funds affiliated with ING Furman Selz under which such
funds agreed to loan the Company up to an additional $10.0 million, subject to
certain conditions.
As of September 30, 2000, the Company had borrowed an aggregate of $8.0 million
under this credit facility and issued $8.0 million of 7.5% convertible
subordinated notes and warrants to purchase an aggregate of 3,500,000 Ascent
depositary shares. Of the $8.0 million of convertible subordinated notes issued
and sold by Ascent under this credit facility, $6,920,000 was allocated to the
relative fair value of the convertible subordinated notes (classified as debt),
and $1,080,000 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 $6,920,000 to the maturity amount of
$8.0 million as interest expense over the term of the convertible subordinated
notes.
The 7.5% convertible subordinated notes issued pursuant to this credit facility
expire on July 1, 2004 and are convertible into Ascent depositary shares at a
conversion price of $3.00 per share. 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. All of
the warrants issued by the Company under the $10.0 million facility have an
exercise price of $3.00 per share and will expire on October 15, 2006.
On November 1, 2000, the Company borrowed an additional $1.0 million under the
$10.0 million credit facility with funds affiliated with ING Furman Selz and
issued additional warrants to purchase 500,000 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 November 1, 2000, $780,000 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $220,000 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 $780,000 to the maturity
amount of $1,000,000 as interest expense over the term of the convertible
subordinated notes. On November 3, 2000, the Company provided the funds
affiliated with ING Furman Selz with notice of its intention to borrow the
remaining $1.0 million under the $10.0 million credit facility on November 28,
2000.
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FUTURE CAPITAL REQUIREMENTS. Ascent anticipates that its existing capital
resources, including the remaining $1.0 million available under the $10.0
million financing arrangement with ING Furman Selz (which Ascent expects to
borrow by November 30, 2000) will be sufficient to fund operations through
December 31, 2000. Ascent will need to raise additional funds in order to
operate beyond December 31, 2000. Ascent is currently seeking additional funds
through transactions relating to its business lines and/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 (i) significantly curtail its product commercialization efforts beyond the
actions the Company has already taken, (ii) 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, (iii) significantly scale back
or terminate operations and/or (iv) seek relief under applicable bankruptcy
laws.
Interest payments under the Alpharma credit facility and the $4.0 and $10.0
million credit facilities with the funds affiliated with ING Furman Selz are due
and payable on the last day of each calendar quarter. Interest payments under
the 8% subordinated notes due June 1, 2005 in the principal amount of $8,749,000
are due and payable semiannually in June and December of each year. In December
2000, the Company will be required to pay an aggregate of $314,000 in interest
under its credit facilities with Alpharma and certain holders of 8% subordinated
notes due June 1, 2005. Under an agreement with the funds affiliated with ING
Furman Selz, on January 1, 2001 the Company will be required to pay an aggregate
of $507,000 in interest under the $4.0 and $10.0 million credit facilities with
such funds and the 8% subordinated notes due January 1, 2005 held by such funds.
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 sales of its products, including Primsol, its ability
to acquire and successfully integrate business 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
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. Based on conversations with the FDA, Ascent
believes that it has addressed the concerns cited in the minor deficiency letter
and anticipates receiving the marketing approval of Orapred 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 was 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.
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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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
September 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 September 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
On July 7, 2000, August 7, 2000, September 25, 2000 and November 1, 2000, the
Company borrowed an aggregate of $5,000,000 from the funds affiliated with ING
Furman Selz pursuant to the Company's $10.0 million credit facility with such
funds and made a corresponding adjustment to the outstanding principal balance
of the 7.5% convertible subordinated notes in the aggregate principal amount of
up to $10.0 million issued to such funds on October 15, 1999. In connection
with these borrowings, the Company issued such funds warrants to purchase an
aggregate of 2,000,000 Ascent depositary shares at an exercise price of $3.00
per share. The terms of the 7.5% convertible subordinated notes and associated
warrants are set forth in "Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," which information is incorporated herein by this reference. These
issuances were conducted pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 15 for a list of exhibits filed as part of this
Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by
reference.
b) Reports on Form 8-K
None.
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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>
<S> <C>
ASCENT PEDIATRICS, INC.
Date: November 14, 2000 . . . . . . . . . . . . . . . . . By: /s/ Emmett Clemente
-----------------------
Emmett Clemente
President, Chairman and Treasurer
(Principal Executive, Financial and Accounting Officer)
</TABLE>
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Exhibit Index
<TABLE>
<CAPTION>
<S> <C>
Exhibit Number Description
-------------- --------------------------------------------------------------
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 SE
(1) Incorporated herein by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
</TABLE>
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[ARTICLE] 5
[MULTIPLIER] 1
<TABLE>
<CAPTION>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] SEP-30-2000
[CASH] 892,149
[SECURITIES] 0
[RECEIVABLES] 608,567
[ALLOWANCES] 72,110
[INVENTORY] 1,810,832
[CURRENT-ASSETS] 3,418,599
[PP&E] 1,724,375
[DEPRECIATION] 1,216,360
[TOTAL-ASSETS] 14,945,078
[CURRENT-LIABILITIES] 3,735,830
[BONDS] 30,957,926
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 390
[OTHER-SE] 57,837,961
[TOTAL-LIABILITY-AND-EQUITY] 14,945,078
[SALES] 1,994,623
[TOTAL-REVENUES] 3,063,186
[CGS] 493,660
[TOTAL-COSTS] 969,907
[OTHER-EXPENSES] 11,388,619
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 2,132,789
[INCOME-PRETAX] (11,338,647)
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (11,338,647)
[EPS-BASIC] (1.160)
[EPS-DILUTED] (1.160)
</TABLE>
