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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-20772
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QUESTCOR PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0476164
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
26118 RESEARCH ROAD
HAYWARD, CA 94545
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 732-5551
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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 prior 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 [ ]
At August 8, 2000 there were 24,808,663 shares of the Registrant's common
stock, no par value, outstanding.
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QUESTCOR PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements and Notes (Unaudited).................. 1
Condensed Consolidated Balance Sheets -- June 30, 2000 and
December 31, 1999........................................... 1
Condensed Consolidated Statements of Operations -- for the
three months and six months ended June 30, 2000 and July 31,
1999........................................................ 2
Condensed Consolidated Statements of Cash Flows -- for the
six months ended June 30, 2000 and July 31, 1999............ 3
Notes to Condensed Consolidated Financial Statements........ 4
Management's Discussion and Analysis of Financial Condition
Item 2 and Results of Operations................................... 7
Quantitative and Qualitative Disclosures about Market
Item 3 Risk........................................................ 10
PART II. OTHER INFORMATION
Item 1 Legal Proceedings........................................... 11
Item 2 Changes in Securities and Use of Proceeds................... 11
Item 3 Defaults upon Senior Securities............................. 11
Item 4 Submission of Matters to a Vote of Security Holders......... 11
Item 5 Other Information........................................... 11
Item 6 Exhibits and Reports -- Form 8-K............................ 11
Signatures.................................................. 12
</TABLE>
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QUESTCOR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (NOTE 1)
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Current assets:
Cash and cash equivalents................................. $ 9,043 $ 10,912
Short-term investments.................................... 4,744 10,787
Accounts receivable, net of allowance for doubtful
accounts of $200 at June 30, 2000 and $30 at December
31, 1999............................................... 283 1,889
Inventories............................................... 262 176
Prepaid expenses and other current assets................. 242 412
-------- --------
Total current assets.............................. 14,574 24,176
Property and equipment...................................... 2,560 2,852
Goodwill and other intangibles, net......................... 4,249 5,029
Other assets................................................ 162 164
-------- --------
Total assets...................................... $ 21,545 $ 32,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,514 $ 2,444
Accrued compensation...................................... 174 1,682
Deferred revenue.......................................... 197 167
Accrued development costs................................. 2,201 1,579
Other accrued liabilities................................. 22 415
Short-term debt and current portion of long-term debt..... 5,359 348
Current portion of capital lease obligations.............. 211 240
-------- --------
Total current liabilities......................... 9,678 6,875
Long-term debt.............................................. 688 5,893
Capital lease obligations................................... 94 185
Other non-current liabilities............................... 676 561
Commitments
Stockholders' equity:
Preferred stock, no par value, 7,500,000 shares authorized
at June 30, 2000 and December 31, 1999, 2,155,715
Series A shares issued and outstanding at June 30, 2000
and December 31, 1999, (aggregate liquidation of
$10,000 at June 30, 2000 and December 31, 1999)........ 5,081 5,081
Common stock, no par value, 75,000,000 shares authorized
at June 30, 2000 and December 31, 1999; 24,764,684 and
24,470,068 shares issued and outstanding at June 30,
2000 and December 31, 1999 respectively................ 66,154 65,423
Deferred compensation..................................... (119) (53)
Accumulated deficit....................................... (60,722) (51,724)
Accumulated other comprehensive gain (loss)............... 15 (20)
-------- --------
Total stockholders' equity........................ 10,409 18,707
-------- --------
Total liabilities and stockholders' equity........ $ 21,545 $ 32,221
======== ========
</TABLE>
See accompanying notes.
1
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QUESTCOR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JULY 31, JUNE 30, JULY 31,
2000 1999 2000 1999
-------- -------- -------- --------
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REVENUE:
Net product sales................................. $ 503 $ 705 $ 1,023 $ 1,311
Contract research revenue......................... 40 -- 206 --
Royalty revenue................................... -- -- 12 --
------- ------- ------- -------
Total revenues............................ 543 705 1,241 1,311
OPERATING COSTS AND EXPENSES:
Cost of product sales............................. 460 244 1,046 413
Sales and marketing............................... 661 526 1,172 891
General and administrative........................ 1,396 749 2,937 1,240
Product development............................... 901 558 2,966 1,203
Discovery research................................ 181 396 1,001 907
Depreciation and amortization..................... 557 307 1,093 630
------- ------- ------- -------
Total operating costs and expenses........ 4,156 2,780 10,215 5,284
------- ------- ------- -------
Loss from operations................................ (3,613) (2,075) (8,974) (3,973)
Interest and other income, net...................... 1 77 59 206
Rental income (expense), net........................ (135) 54 (83) 75
Net loss............................................ $(3,747) $(1,944) $(8,998) $(3,692)
======= ======= ======= =======
Net loss per common share:
Basic and diluted................................... $ (0.15) $ (0.12) $ (0.36) $ (0.23)
======= ======= ======= =======
Weighted average shares of common stock
outstanding....................................... 24,761 15,712 24,672 15,712
</TABLE>
See accompanying notes.
2
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QUESTCOR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JULY 31,
2000 1999
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OPERATING ACTIVITIES
Net loss.................................................... $(8,998) $(3,692)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation..................... 29 39
Depreciation and amortization............................. 1,101 649
Deferred rent expense..................................... 115 30
Loss on the sale of equipment............................. 21 --
Changes in operating assets and liabilities:
Accounts receivable....................................... 1,606 38
Inventories............................................... (86) (34)
Prepaid expenses and other current assets................. 170 67
Accounts payable.......................................... (930) 212
Accrued compensation and employee benefits................ (1,508) --
Deferred revenue.......................................... 30 --
Accrued development costs................................. 622 --
Other accrued liabilities................................. (393) 94
------- -------
Net cash flows used in operating activities....... (8,221) (2,597)
------- -------
INVESTING ACTIVITIES
Proceeds from the maturity (purchase) of short-term
investments............................................... 6,080 2,837
Purchase of property, equipment and leasehold
improvements.............................................. (48) (560)
Decrease in other assets.................................... (2) (4)
------- -------
Net cash flows provided by investing activities... 6,030 2,273
------- -------
FINANCING ACTIVITIES
Issuance of common stock, net............................... 636 --
Repayment of long-term debt................................. (194) (48)
Repayments of capital leases/obligations.................... (120) (56)
------- -------
Net cash flows (used in) provided by financing
activities....................................... 322 (104)
------- -------
Decrease in cash and cash equivalents....................... (1,869) (428)
Cash and cash equivalents at beginning of period............ 10,912 2,937
------- -------
Cash and cash equivalents at end of period.................. $ 9,043 $ 2,509
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 344 $ 21
======= =======
</TABLE>
See accompanying notes.
3
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QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Questcor
Pharmaceuticals, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles and applicable Securities and Exchange
Commission regulations for interim financial information. These financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
unaudited financial statements are intended to be read in conjunction with the
audited financial statements and footnotes thereto for the year ended December
31, 1999, contained in the Company's Annual Report filed on Form 10-K with the
Securities and Exchange Commission on March 30, 2000. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation of interim financial information have
been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
In conjunction with the November 1999 acquisition of RiboGene, Inc.
("RiboGene"), the Company changed its fiscal year end from July 31 to December
31. As a result, the statement of operations has been presented for the three
and six months ended June 30, 2000 and July 31, 1999 and the statement of cash
flows has been presented for the six months ended June 30, 2000 and July 31,
1999. Additionally, certain previously reported amounts have been reclassified
to conform to 2000 presentation.
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid investments with maturities from the
date of purchase of three months or less to be cash equivalents. The Company
determines the appropriate classifications of investment securities at the time
of purchase and reaffirms such designation as of each balance sheet date. The
Company had previously classified certain of its investments in marketable
securities as held to maturity. Upon the merger with RiboGene, the Company
re-evaluated its classification policy and changed the classification of
securities to be available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, if any, reported in
accumulated other comprehensive gain (loss), a separate component of
stockholders' equity. The Company's comprehensive gain (loss) for the six months
ended June 30, 2000 and July 31, 1999, respectively, approximated the Company's
net gain (loss). Held-to-maturity investments were carried at cost, adjusted for
amortization of premiums and accretion of dividends. The cost of securities sold
is based on the specific identification method. Realized gains and losses, if
any, are included in the statement of operations, in interest and other income,
net.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are comprised of raw materials of $107,000 and finished goods of
$155,000.
4. RECENTLY -- ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has determined that adoption of SFAS 133, which will be effective for the year
ending December 2001, will have no impact on its financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and
4
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QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
disclosure in the financial statements the Company files with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. SAB 101 is
required to be adopted by the quarter ended December 31, 2000. Management
believes that the Company's revenue recognition policy is in compliance with the
provisions of SAB 101 and the impact of SAB 101 will have no material affect on
its financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation" ("FIN 44"), which contains
rules designed to clarify the application of APB 25. FIN 44 is effective July 1,
2000. The Company believes the adoption of FIN 44 will not be material to the
operating results and financial position of the Company.
5. NOTES PAYABLE
In December 1998, RiboGene received $5.0 million in proceeds from the
issuance of a long-term note payable to a bank. The note requires monthly
interest-only payments at prime plus 1%. The rate at June 30, 2000 was 10.50%.
The principal is due at the end of the three-year term. The loan is
collateralized by a perfected security interest in all the unencumbered assets
of the Company and requires that the Company maintain its depository accounts
with the bank with a minimum of $5.0 million in aggregate cash and depository
balances. The Company is also required to comply with financial covenants based
on certain ratios. At June 30, 2000 the Company was not in compliance with at
least one such financial covenant. Hence, the Company has re-classified the $5.0
million note payable from long-term to short-term debt.
6. NET LOSS PER SHARE
Under SFAS No. 128, Earnings Per Share, basic and diluted loss per share is
based on net loss for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share gives effect to all potential dilutive common shares outstanding during
the period such as options, warrants, convertible preferred stock, and
contingently issuable shares. Diluted net loss per share has not been presented
separately as, due to the Company's net loss position, it is anti-dilutive. Had
the Company been in a net income position at June 30, 2000, shares used in
calculating diluted earnings per share would have included the dilutive effect
of an additional 5,392,407 stock options, 2,155,715 preferred shares, placement
unit options for 986,898 shares and 1,012,722 warrants.
7. STOCK OPTIONS AND WARRANTS
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to account for stock options and purchase rights granted to employees using the
intrinsic value method and, accordingly, does not recognize compensation expense
for options and purchase rights granted to employees with exercise prices which
are not less than fair value of the underlying common stock.
For equity awards to non-employees, including lenders and lessors, the
Company applies the Black-Scholes method to determine the fair value of such
instruments. The value of these awards is periodically revalued over their
vesting term and recognized as expense over the period of services received or
the term of the related financing.
8. COLLABORATION AGREEMENTS
In January 1998, RiboGene entered into a collaboration with Dainippon for
two of its targets in the antibacterial program. As part of the collaboration,
Dainippon agreed to provide research support payments over three years, and fund
additional research and development at Dainippon.
5
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QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In January 2000, the Company amended its existing agreement with Dainippon.
In exchange for a $2.0 million cash payment and potential future milestone and
royalty payments, the Company granted an exclusive, world-wide license to
Dainippon to use the Company's ppGpp Degradase and Peptide Deformylase
technology for the research, development and commercialization of pharmaceutical
products. The Company has retained the right to co-promote, in Europe and the
United States, certain products resulting from the arrangement. The Company will
be entitled to receive milestone payments upon the achievement of clinical and
regulatory milestones in the amount of $5.0 million in Japan and $5.0 million in
one other major market. Additionally, the Company will receive a royalty on net
sales that will range from 5% to 10%, depending on sales volume and territory.
The original agreement anticipated a third year of research collaboration
between the two firms. However, both companies agreed to terminate the
antibacterial research collaboration that was established in January 1998.
Hence, all drug discovery efforts of the Company ceased and will be assumed by
Dainippon in Osaka, Japan.
9. LEGAL PROCEEDINGS
In July 1998, the Company was served with a complaint in the United States
Bankruptcy Court for the Southern District of New York by the Trustee for the
liquidation of the business of A.R. Baron & Co., Inc. ("A.R. Baron") and the
Trustee of The Baron Group, Inc. (the "Baron Group"), the parent of A.R. Baron.
The complaint alleges that A.R. Baron and the Baron Group made certain
preferential or fraudulent transfers of funds to the Company prior to the
commencement of bankruptcy proceedings involving A.R. Baron and the Baron Group.
The Trustee is seeking return of the funds totaling $3.2 million. The Company
believes that the Trustee's claims are unfounded and is contesting the
allegations in the complaint vigorously. The Company contends that the transfers
challenged by the Trustee related to (i) the exercise by A.R. Baron in 1995 of
unit purchase options issued to it in 1992 as part of its negotiated
compensation for underwriting the Company's initial public offering and (ii) the
repayment by the Baron Group of the principal and interest (at 12% per annum)
payments and certain loan extension fees related to certain collateralized loans
made to it by the Company in 1995 and 1996 were appropriate and correct.
In June 2000 counsel for the Company reached an agreement in principle to
settle the Baron litigation for the payment by the Company of the total amount
of $525,000 to the bankruptcy estates of the Baron entities. Settlement
documentation is being prepared and it is anticipated that it will thereafter be
submitted to the Court for approval. The Company also has reached an agreement
in principle with a former insurer of Cypros in connection with the Baron
litigation in which the insurer will pay the Company $150,000 in exchange for
policy releases. Settlement documentation with the insurer is also being
prepared. The Company believes that settling this claim for a net charge of
$375,000 is an acceptable outcome to avoid incurring further legal fees and
management diversion.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note: Except for the historical information contained herein, this
discussion contains forward-looking statements that involve risks and
uncertainties. Such statements are subject to certain factors, which may cause
the Company's results to differ. Factors that may cause such differences
include, but are not limited to, the Company's need for additional funding,
uncertainties regarding the Company's intellectual property and other research,
development, marketing and regulatory risks, and, the ability of the Company to
implement its strategy and acquire products and, if acquired, to market them
successfully, as well as the risks discussed in Questcor's transition report on
Form 10-K for the fiscal year ended December 31, 1999 and other documents filed
with the Securities and Exchange Commission. The risk factors and other
information contained in these documents should be considered in evaluating
Questcor's prospects and future financial performance.
The Company was founded in 1990, commenced its research and development
activities in 1991, completed an initial public offering (the "IPO") in November
1992, commenced clinical trials in December 1994, acquired two FDA-cleared
products, Glofil and Inulin, in August 1995, acquired a third FDA-cleared
product, Ethamolin(R), in November 1996, and acquired the Dermaflo(TM) topical
burn/wound care technology and two FDA-cleared products, Neoflo(TM) and
Sildaflo(TM), in November 1997. On November 17, 1999, Cypros changed its name to
Questcor Pharmaceuticals, Inc. after completing the acquisition of RiboGene,
Inc. The Company has sustained an accumulated deficit of $ 61 million from
inception through June 30, 2000. As the Company will not have positive net
operating cash flow for the next few years and the Company's cost of product
sales, sales and marketing, product development and general and administrative
expenses during these years will be substantial and increasing, the Company
expects to incur increasing losses for the foreseeable future. Results of
operations may vary significantly from quarter to quarter depending on, among
other factors, the results of the Company's clinical testing, the timing of
certain expenses, the establishment of strategic alliances and corporate
partnering.
In conjunction with the November 1999 acquisition of RiboGene, Inc.
("RiboGene"), the Company changed its fiscal year end from July 31 to December
31. As a result, the statement of operations has been presented for the three
and six months ended June 30, 2000 and July 31, 1999. Additionally, certain
previously reported amounts have been reclassified to conform with the year 2000
presentation.
During the second quarter ended June 30, 2000, the Company, in
collaboration with the Hoxworth Blood Center in Cincinnati, Ohio, began
investigating the ability of Cordox(TM) to improve the biochemical and physical
characteristics of stored human red blood cells.
In the second quarter ended June 30, 2000, the Company commenced clinical
data collection and assessment of Ceresine(TM) in the treatment of congenital
lactose acidosis. The treatment of congenital lactic acidosis has been granted
orphan status by the Office of Orphan Products Development at the FDA. This
designation confers seven years of marketing exclusivity to the first licensed
agent as well as certain tax advantages. An additional six months of exclusivity
would be granted upon licensure if adequate studies have been conducted in
pediatric subjects. Through the Orphan route, Ceresine(TM) could be licensed in
a more expeditious fashion and benefit from marketing restrictions. To
accelerate NDA filing, information is being retrospectively collected about
subjects who have been receiving treatment for two to six years at The
Mitochondrial and Metabolic Disease Center, School of Medicine, University of
California, San Diego, under an Investigator IND. Once collected, the Company
will evaluate this information to determine if it may be sufficient to form the
clinical basis for the NDA filing.
After a thorough review of trial design and end points, priorities, and
resources in May 2000, the Company decided to terminate subject enrollment in
Protocol #FDP-301B, "A dose-ranging study of the efficacy and tolerability of
multiple doses of Cordox(TM) (fructose-1, 6-diphosphate) as adjunct therapy in
the management of an acute, sickle cell related, painful, vaso-occlusive
episode."
7
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RESULTS OF OPERATIONS
Three months ended June 30, 2000 compared to the three months ended July 31,
1999
During the second quarter ended June 30, 2000, the Company incurred a loss
of $ 3,747,000 (or $0.15 per share) compared to a loss of $1,944,000 (or $0.12
per share) for the quarter ended July 31, 1999. During the current quarter, the
Company reported revenues of $543,000, a 23% decrease from the $705,000 reported
in the comparable period in the prior year, principally due to a decrease in
sales of Ethamolin(R) and Glofil. This decrease was partially offset by higher
sales of rolled padded stock of NeoFlo(TM). Ethamolin(R) sales declines were a
result of wholesale stocking during previous periods and competition from
certain medical devices in the Ethamolin(R) market. Additionally, the Company
experienced significant turnover in its sales force.
Cost of product sales increased 89% to $460,000 during the quarter ended
June 30, 2000 from $244,000 in the comparable quarter ended July 31, 1999. The
increase in the cost resulted from the production of the Company's topical
triple antibiotic rolled padded stock.
Sales and marketing expense increased 26% to $661,000 during the quarter
ended June 30, 2000 from $526,000 in the comparable quarter ended July 31, 1999.
The increase is principally due to salary and recruiting costs associated with
the expansion of the sales force and expenses for sales and marketing materials.
In May 2000, the Company hired a Vice President Sales and Marketing.
General and administrative expense increased 86% to $1,396,000 during the
quarter ended June 30, 2000 from $749,000 in the comparable quarter ended July
31, 1999. This increase resulted from higher expenses for legal and other
professional services as well as a charge for the tentative settlement of the
A.R. Baron litigation.
Product development expense increased 61% to $901,000 during the quarter
ended June 30, 2000 from $558,000 in the comparable quarter ended July 31, 1999,
due to the increased costs associated with the clinical co-development of
Emitasol(R). There were no costs associated with Emitasol(R) during the quarter
ended July 31, 1999, as Emitasol(R) was acquired in the RiboGene merger.
Discovery research expense decreased 54% to $181,000 during the quarter
ended June 30, 2000 from $396,000 in the comparable quarter ending July 31,
1999, due to the Company having implemented a strategy that focused on approved
pharmaceutical products and late stage drug development candidates, and as a
result, the Company discontinued its drug discovery programs in the first
quarter of 2000. It is anticipated that future drug discovery costs will be
limited to in-house drug discovery research expenses for legal, patent and other
costs to license out such programs.
Depreciation and amortization expense increased 81% to $557,000 during the
quarter ended June 30, 2000 from $307,000 in the comparable quarter ended July
31, 1999, due to the additional tangible and intangible assets acquired in the
RiboGene merger.
An increase in interest expense on the notes payable and lower interest
income due to a decrease in the investment portfolio during the quarter ended
June 30, 2000 reduced net interest income to $1,000 from $77,000 in the
comparable quarter ended July 31, 1999.
Net rental expense increased to $135,000 during the quarter ended June 30,
2000 from a net rental income of $54,000 in the comparable quarter ended July
31, 1999 due to expenses associated with the sublease of the administrative
offices, laboratory premises and laboratory equipment at the Company's
headquarters in Hayward. In June 2000, the Company entered into an agreement
with Quantum Dot Corporation for the sublease of 15,000 sq. ft. of its
laboratory and office premises at headquarters including the sublease of
laboratory equipment, and sublease of the remaining 15,000 sq. ft. of office
premises by December 31, 2002. This agreement should result in a net positive
cash flow between the Company's cash obligations under the Master lease and the
income from the sublease over the next 6 years.
8
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Six months ended June 30, 2000 compared to the six months ended July 31, 1999
During the six months ended June 30, 2000, the Company incurred a loss of
$8,998,000 (or $0.36 per share) compared to a loss of $3,692,000 (or $0.23 per
share) for the six months ended July 31, 1999.
During the six months ended June 30, 2000, the Company reported revenues of
$1,241,000, a 5% decrease from the $1,311,000 reported in the comparable period
ended July 31, 1999. This decrease is primarily due to a sales decline in
Ethamolin(R), which was only partially offset by an increase in sales of the
Company's topical triple antibiotic rolled padded stock.
Cost of product sales increased 153% to $1,046,000 during the six months
ended June 30, 2000 from $413,000 in the comparable period ended July 31, 1999.
The increase in the cost resulted from the production of the Company's topical
triple antibiotic rolled padded stock.
Sales and marketing expense increased 32% to $1,172,000 during the six
months ended June 30, 2000 from $891,000 in the comparable period ended July 31,
1999. The increase is principally due to salary and recruiting costs associated
with the expansion of the sales force and expenses for sales and marketing
materials. In May, 2000 the Company hired a Vice President Sales and Marketing.
General and administrative expense increased 137% to $2,937,000 during the
six months ended June 30, 2000 from $1,240,000 in the comparable period ended
July 31, 1999. This increase resulted from merger related expenses associated
with the consolidation of the Company's corporate offices and combination of
administrative functions, higher expenses for audit, legal and other
professional services, a charge for the tentative settlement of the A.R. Baron
litigation as well as an increase in allowance for doubtful accounts.
Product development expense increased 147% to $2,966,000 during the six
months ended June 30, 2000 from $1,203,000 in the comparable period ended July
31, 1999, due to the increased costs associated with the clinical co-development
of Emitasol(R). There were no costs associated with Emitasol(R) during the
period ended July 31, 1999, since Emitasol(R) was acquired in the RiboGene
merger.
Discovery research expense increased 10% to $1,001,000 during the six
months ended June 30, 2000 from $907,000 in the comparable period ending July
31, 1999, due to higher research costs associated with drug discovery programs
acquired in the RiboGene merger. During the quarter ended March 31, 2000, the
Company also implemented a strategy that focused on approved pharmaceutical
products and late stage drug development candidates, and as a result,
discontinued its drug discovery programs. It is anticipated that future drug
discovery research expenses will be limited to in-house drug discovery research
expenses for legal, patent and other costs to license out such programs.
Depreciation and amortization expenses increased 73% to $1,093,000 during
the six months ended June 30, 2000 from $630,000 in the comparable period ended
July 31, 1999, due to the additional tangible and intangible assets acquired in
the RiboGene merger.
In addition, net interest and other income for the current period decreased
71% to $59,000 from the $206,000 in the prior-year period, principally due to
addition of debt with the acquisition of RiboGene.
Net rental expense increased to $83,000 for the current period from a net
rental income of $75,000 in the prior year period due to expenses associated
with the sublease of the Company's administrative offices and laboratory
premises in Hayward.
LIQUIDITY AND CAPITAL RESOURCES
The Company has principally funded its activities to date through various
issuances of equity securities, which have raised total net proceeds of $35
million, as well as product sales.
At June 30, 2000, the Company had cash, cash equivalents and short-term
investments of $13.8 million compared to $21.7 million at December 31, 1999. At
June 30, 2000, working capital was $4.9 million, compared to $17.3 million at
December 31, 1999. The decrease in both balance sheet items was principally due
to the loss from operations for the current and prior quarters and payments for
accrued restructuring costs resulting from the acquisition of RiboGene, Inc.
9
<PAGE> 12
As a result of the merger with RiboGene, the Company assumed $5.0 million
of long-term debt financing with a bank. The note requires monthly interest
payments, at prime plus 1% (10.5% at June 30, 2000), with the principal payment
due at the end of the three-year term. The note is collateralized by a perfected
security interest in all unencumbered assets of the Company and requires that
the Company maintain its depository balances. The Company is also required to
comply with financial covenants based on certain ratios. At June 30, 2000, the
Company was not in compliance with at least one such financial covenant. Hence,
the Company has re-classified the $5.0 million note payable from long-term to
short-term debt.
During the quarter ended June 30, 2000, the Company's employees, former
employees and consultants exercised 17,000 stock options that resulted in
$28,000 of additional capital.
In May 2000, one of the Company's major customers, NutraMax Products Inc.
("NutraMax) filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code. The Company has a multi-year marketing and joint venture agreement with
NutraMax Products, Inc. under which the Company is supplying its proprietary
triple antibiotic product using the Dermaflo(TM) technology to NutraMax for
conversion and sale in the form of adhesive strips and patches. NutraMax has the
exclusive right to sell the finished products to the retail and industrial first
aid markets. Further, the agreement calls for the Company and NutraMax to
jointly develop several new products using the Dermaflo(TM) technology and to
share the development expense and profits from future sales. The Company began
shipping the products to NutraMax in March 1999. Net sales to NutraMax totaled
$167,000 for the year ended July 31, 1999, $35,000 for the five months ended
December 31, 1999, and $454,000 for the six months ended June 30, 2000,
representing 7%, 6% and 37% of total revenues, respectively. As of May 2, the
day NutraMax filed for protection under Chapter XI of the United States
Bankruptcy Code, the Company had a claim outstanding of $191,000 as an unsecured
creditor. It is unclear how much of this amount will be recovered. Since the
filing date, the Company has agreed on new payment terms with NutraMax and has
sold $212,000 of product for which the Company has been paid in accordance with
the revised terms.
It is anticipated that the NutraMax reorganization will have an impact on
the Company's future sales and cash flow, the extent of which, will depend on
the outcome of the NutraMax reorganization and/or the Company's success in
identifying alternative customers for the product.
The Company expects that its cash needs will increase significantly in
future periods due to increased clinical testing activity, growth of
administrative, clinical and laboratory staff and expansion of facilities to
accommodate increased numbers of employees. The Company's management believes
that the Company's working capital will be sufficient to fund the operations of
the Company into the first quarter of 2001. However, there can be no assurance
that the Company will not require additional funding prior to such time. The
Company's future funding requirements will depend on many factors, including,
any expansion or acceleration of the Company's development programs; the results
of preclinical studies and clinical trials conducted by the Company or its
collaborative partners or licenses, if any; the acquisition and licensing of
products, technologies or compounds, if any; the Company's ability to manage
growth; competing technological and market developments; time out costs involved
in filing, prosecuting, defending and enforcing patent and intellectual property
claims; the receipt of licensing milestone fees from current or future
collaborative and license agreements, if established; the timing of regulatory
approvals and other factors.
The Company is funding a portion of its operating expenses through cash
flow from product sales, but expects to seek additional funds through public or
private equity financings, collaborations, or from other sources. There can be
no assurance that additional funds can be obtained on desirable terms or at all.
The Company may seek to raise additional capital whenever conditions in the
financial markets are favorable, even if the Company does not have an immediate
need for additional cash at that time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk at June 30, 2000 has not changed
materially from December 31, 1999, and reference is made to the more detailed
disclosures of market risk included in the Company's 1999 Form 10-K as filed
with the Securities and Exchange Commission on March 30, 2000.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1998, the Company was served with a complaint in the United States
Bankruptcy Court for the Southern District of New York by the Trustee for the
liquidation of the business of A.R. Baron & Co., Inc. ("A.R. Baron") and the
Trustee of The Baron Group, Inc. (the "Baron Group"), the parent of A.R. Baron.
The complaint alleges that A.R. Baron and the Baron Group made certain
preferential or fraudulent transfers of funds to the Company prior to the
commencement of bankruptcy proceedings involving A.R. Baron and the Baron Group.
The Trustee is seeking return of the funds totaling $3.2 million. The Company
believes that the Trustee's claims are unfounded and is contesting the
allegations in the complaint vigorously. The Company contends that the transfers
challenged by the Trustee related to (i) the exercise by A.R. Baron in 1995 of
unit purchase options issued to it in 1992 as part of its negotiated
compensation for underwriting the Company's initial public offering and (ii) the
repayment by the Baron Group of the principal and interest (at 12% per annum)
payments and certain loan extension fees related to certain collateralized loans
made to it by the Company in 1995 and 1996 were appropriate and correct.
In June 2000 counsel for the Company reached an agreement in principle to
settle the Baron litigation for the payment by the Company of the total amount
of $525,000 to the bankruptcy estates of the Baron entities. Settlement
documentation is being prepared and it is anticipated that it will thereafter be
submitted to the Court for approval. The Company also has reached an agreement
in principle with a former insurer of Cypros in connection with the Baron
litigation in which the insurer will pay the Company $150,000 in exchange for
policy releases. Settlement documentation with the insurer is also being
prepared. The Company believes that settling this claim for a net charge of
$375,000 is an acceptable outcome in order to avoid incurring further legal fees
and management diversion.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
11
<PAGE> 14
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 hereunto duly authorized.
QUESTCOR PHARMACEUTICALS, INC.
Date: August 14, 2000 By: /s/ CHARLES J. CASAMENTO
------------------------------------
Charles J. Casamento
Chairman, President & CEO
Date: August 14, 2000 By: /s/ HANS P. SCHMID
------------------------------------
Hans P. Schmid
Principal Financial and Chief
Accounting Officer
12
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
