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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 SEPTEMBER 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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<S> <C>
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 NOVEMBER 10, 2000 there were 25,265,862 shares of the Registrant's
common stock, no par value, outstanding.
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QUESTCOR PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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PAGE
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Item 1 Financial Statements and Notes (Unaudited) ............................................. 1
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 ................. 1
Consolidated Statements of Operations - for the three months and nine
months ended September 30, 2000 and October 31, 1999 ................................ 2
Consolidated Statements of Cash Flows - for nine months ended September
30, 2000 and October 31, 1999 ....................................................... 3
Notes to Consolidated Financial Statements ............................................. 4
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .. 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk ............................. 11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings ...................................................................... 11
Item 2 Changes in Securities and Use of Proceeds .............................................. 12
Item 3 Defaults upon Senior Securities ........................................................ 12
Item 4 Submission of Matters to a Vote of Security Holders .................................... 12
Item 5 Other Information ...................................................................... 13
Item 6 Exhibits and Reports - ................................................................. 13
Signatures ............................................................................. 14
</TABLE>
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QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS (unaudited) (Note 1)
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Current assets:
Cash and cash equivalents (which includes a compensating balance
of $5,000) ............................................................ $ 7,263 $ 10,912
Short-term investments .................................................. 3,512 10,787
Accounts receivable, net of allowance for doubtful accounts of $200
at September 30, 2000 and $30 at December 31, 1999 ................... 248 1,889
Inventories ............................................................. 150 176
Prepaid expenses and other current assets ............................... 618 412
-------- --------
Total current assets ............................................. 11,791 24,176
Property and equipment .................................................... 2,094 2,852
Goodwill and other intangibles, net ....................................... 3,767 5,029
Other assets .............................................................. 660 164
-------- --------
Total assets ..................................................... $ 18,312 $ 32,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 380 $ 2,444
Accrued compensation .................................................... 280 1,682
Deferred revenue ........................................................ 122 167
Accrued development costs ............................................... 1,233 1,579
Other accrued liabilities ............................................... 822 415
Short-term debt and current portion of long-term debt ................... 5,373 348
Current portion of capital lease obligations ............................ 173 240
-------- --------
Total current liabilities ........................................ 8,383 6,875
Long-term debt ............................................................ 566 5,893
Capital lease obligations ................................................. 72 185
Other non-current liabilities ............................................. 811 561
Stockholders' equity:
Preferred stock ......................................................... 5,081 5,081
Common stock ............................................................ 66,178 65,423
Deferred compensation ................................................... (94) (53)
Accumulated deficit ..................................................... (62,688) (51,724)
Accumulated other comprehensive income (loss) ........................... 3 (20)
-------- --------
Total stockholders' equity ....................................... 8,480 18,707
-------- --------
Total liabilities and stockholders' equity ....................... $ 18,312 $ 32,221
======== ========
</TABLE>
See accompanying notes.
1
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QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 31, SEPTEMBER 30, OCTOBER 31,
2000 1999 2000 1999
------------- ----------- ------------- -----------
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Revenues:
Net product sales ......................... $ 559 $ 498 $ 1,581 $ 1,809
Technology revenue ........................ 1,250 -- 1,250 --
Contract research revenue ................. -- -- 207 --
Royalty revenue ........................... -- -- 12 --
-------- -------- -------- --------
Total revenues .............................. 1,809 498 3,050 1,809
Operating costs and expenses:
Cost of product sales ..................... 546 355 1,592 768
Sales and marketing ....................... 468 584 1,639 1,475
General and administrative ................ 1,490 900 4,426 2,140
Product development ....................... 460 650 3,333 1,853
Discovery research ........................ 179 161 1,276 1,068
Depreciation and amortization ............. 949 289 2,042 919
-------- -------- -------- --------
Total operating costs and
expenses .......................... 4,092 2,939 14,308 8,223
-------- -------- -------- --------
Loss from operations ........................ (2,283) (2,441) (11,258) (6,414)
Interest and other income, net .............. 37 140 102 346
Rental income (expense), net ................ 280 13 192 88
-------- -------- -------- --------
Net loss .................................... $ (1,966) $ (2,288) $(10,964) $ (5,980)
======== ======== ======== ========
Net loss per common share:
Basic and diluted ........................... $ (0.08) $ (0.15) $ (0.44) $ (0.38)
======== ======== ======== ========
Weighted average shares of common
stock outstanding ......................... 24,771 15,723 24,705 15,716
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
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QUESTCOR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
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NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, OCTOBER 31,
2000 1999
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OPERATING ACTIVITIES
Net loss ................................................ $(10,964) $ (5,980)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation ................. 77 103
Depreciation and amortization ......................... 2,030 960
Deferred rent expense ................................. 171 52
Loss on the sale of equipment ......................... 20 --
Deferred acquisition costs, net ....................... -- (573)
Non cash gain on sale of technology ................... (500) --
Changes in operating assets and liabilities:
Accounts receivable ................................... 1,641 (27)
Inventories ........................................... 26 30
Prepaid expenses and other current assets ............. (206) 143
Accounts payable ...................................... (2,064) 228
Accrued compensation and employee benefits ............ (1,402) --
Deferred revenue ...................................... (45) --
Accrued development costs ............................. (346) --
Other accrued liabilities ............................. 486 24
-------- --------
Net cash flows used in operating activities ............. (11,076) (5,040)
-------- --------
INVESTING ACTIVITIES
Proceeds from the maturity (purchase) of short-term
investments, net ........................................ 7,298 4,261
Purchase of property and equipment ...................... (30) (581)
Decrease (increase) in other assets ..................... 4 (4)
-------- --------
Net cash flows provided by investing activities ......... 7,272 3,676
-------- --------
FINANCING ACTIVITIES
Issuance of common stock, net ........................... 637 --
Repayment of long-term debt ............................. (302) (50)
Repayments of capital leases/obligations ................ (180) (84)
-------- --------
Net cash flows (used in) provided by financing
activities .............................................. 155 (134)
-------- --------
Decrease in cash and cash equivalents ................... (3,649) (1,498)
Cash and cash equivalents at beginning of period ........ 10,912 2,937
-------- --------
Cash and cash equivalents at end of period .............. $ 7,263 $ 1,439
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest .................................. $ 513 $ 48
======== ========
</TABLE>
See accompanying notes.
3
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QUESTCOR PHARMACEUTICALS, INC.
NOTES TO 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 should be read in conjunction with the audited
financial statements and related footnotes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, as filed on March 30,
2000 with the Securities and Exchange Commission. 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, statements of operations have been presented for the three and
nine month periods ended September 30, 2000 and October 31, 1999 and statements
of cash flows have been presented for the nine month periods ended September 30,
2000 and October 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.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, if any, reported in accumulated other comprehensive income
(loss), a separate component of stockholders' equity. The Company's
comprehensive loss for the nine months ended September 30, 2000 and October 31,
1999, respectively, approximated the Company's net loss. 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 at September 30, 2000 are comprised of raw materials of $52,000
and finished goods of $98,000.
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 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
implemented by the fourth quarter of 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.
4
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QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
5. NON-CASH EXPENSES
For the three months ended September 30, 2000, the Company recognized a
non-cash charge of $303,000 related to additional depreciation expense in
connection with a change in the estimated useful life of certain leased
laboratory and manufacturing equipment. For the three months ended September 30,
2000, the Company recognized a non-cash expense of $50,000 as a result of an
adjustment to the value of product inventory.
6. 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 required monthly
interest-only payments at prime plus 1%. The rate at September 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 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 September 30, 2000 the Company was not in compliance with
at least one such financial covenant. Hence, the Company has classified the $5.0
million note payable from long-term to short-term debt. (See note 11).
7. 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 September 30, 2000, shares used in
calculating diluted earnings per share would have included the dilutive effect
of an additional 5,420,309 stock options, 2,155,715 convertible preferred
shares, placement unit options for 986,898 shares and 989,662 warrants.
8. 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 fair value of awards that vest over a performance period are
periodically revalued over their term and recognized as expense over the period
of services received.
5
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QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
9. SALE OF TECHNOLOGY
On September 27, 2000 Questcor entered into an agreement with Rigel
Pharmaceuticals, Inc. to sell exclusive rights to certain proprietary antiviral
drug research technology. In exchange for a cash payment of $750,000, shares of
Rigel's preferred stock valued at $500,000 (or $6 per share) and future
milestone and royalty payments, Questcor has assigned to Rigel certain antiviral
technology, including its Hepatitis C drug discovery technology for the
research, development and commercialization of pharmaceutical products.
10. 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 alleged 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 sought return of funds totaling $3.2 million. The Company believed
that the Trustee's claims were unfounded and vigorously contested the
allegations in the complaint.
During the quarter ended June 30, 2000, the Company reached an agreement
to settle the Baron litigation for the payment of a total amount of $525,000 to
the bankruptcy estates of the Baron entities. Additionally, the Company also
reached a settlement agreement with a former insurer in connection with the
Baron litigation in which the insurer agreed to pay the Company $150,000 in
exchange for policy releases. The Company believes that settling this claim for
a net payment of $375,000 was an acceptable outcome to avoid incurring further
legal fees and management diversion.
On September 26, 2000, the courts formally approved the settlement and
the case is now closed.
11. SUBSEQUENT EVENTS
On October 26, 2000, the Company entered into an agreement to lease a
new facility in Union City, California. The initial lease term is for 120
months, with an option for an additional five years and the commencement date is
scheduled for March 1, 2001. As a condition of this agreement, the Company is to
provide an irrevocable Standby Letter of Credit in the amount of $659,200 for a
period of 24 months, with the face value of the Letter of Credit, subject to
certain conditions, declining thereafter. The Company entered into this new
lease agreement to lower rent costs as laboratory space is no longer necessary.
The current sub-lessee will fully occupy the Hayward facility upon the Company's
relocation.
In November 2000, the $5.0 million long-term note payable was converted
into a $5.0 million cash secured facility, the financial covenants removed and
the blanket lien on all assets released.
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.
OVERVIEW
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 $63 million from
inception through September 30, 2000. As the Company will not have positive net
operating cash flow for at least 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, statements of operations have been presented for the three and
nine month periods ended September 30, 2000 and October 31, 1999 and statements
of cash flows have been presented for the nine month periods ended September 30,
2000 and October 31, 1999. Additionally, certain previously reported amounts
have been reclassified to conform to 2000 presentation.
During the third quarter ended September 30, 2000, the Company,
completed its Phase II clinical study of Emitasol(R) (Metoclopramide, Nasal
Spray) in the treatment of diabetic gastroparesis, a serious complication of
diabetes that substantially reduces quality of life. The study found encouraging
results in terms of safety and a preliminary evaluation of efficacy.
In summary, the study showed that both Emitasol(R) and oral
metoclopramide were bioavailable when administered to diabetic gastroparesis
patients. This study in disease state subjects differed from previous
pharmacokinetic studies, which were conducted in normal subjects. The trial also
suggested that Emitasol(R) treatment may enhance the clinical response versus
oral metoclopramide. No adverse events reported were categorized as serious. The
Company intends to begin a Phase III clinical trial in 2001.
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. As of September 30, 2000, this
study is ongoing.
7
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In the second quarter ended June 30, 2000, the Company commenced
clinical data collection and assessment of Ceresine(TM) in the treatment of
congenital lactic 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. As of September 30, 2000, the evaluation is
ongoing.
RESULTS OF OPERATIONS
Three months ended September 30, 2000 compared to the three months ended October
31, 1999.
During the third quarter ended September 30, 2000, the Company incurred
a loss of $ 1,966,000 (or $0.08 per share) compared to a loss of $2,288,000 (or
$0.15 per share) for the quarter ended October 31, 1999.
During the quarter ended September 30, 2000, the Company reported
revenues of $1,809,000, a 263% increase from the $498,000 reported in the
comparable period in the prior year, principally due to the inclusion of
$1,250,000 of technology revenue from the sale of Questcor's proprietary
antiviral drug research technology, HCV IRES and HCV NS5A-PKR, to Rigel
Pharmaceuticals, Inc.
Product sales for the quarter ended September 30, 2000 were $559,000, a
12% increase from $498,000 in the comparable quarter ended October 31, 1999
primarily due to an increase in Glofil sales. This increase was partially offset
by declines in Ethamolin(R) sales. The sales decline of Ethamolin(R) was a
result of wholesale stocking during previous periods and competition from
certain medical devices in the Ethamolin(R) market.
Cost of product sales increased 54% to $546,000 during the quarter ended
September 30, 2000 from $355,000 in the comparable quarter ended October 31,
1999. The increase in the cost resulted from the production of the Company's
topical triple antibiotic rolled padded stock in addition to a $50,000
write-down of the value of certain inventory in stock.
Sales and marketing expense decreased 20% to $468,000 during the quarter
ended September 30, 2000 from $584,000 in the comparable quarter ended October
31, 1999. The decrease is principally due to a significant turnover in the
Company's sales force.
General and administrative expense increased 66% to $1,490,000 during
the quarter ended September 30, 2000 from $900,000 in the comparable quarter
ended October 31, 1999. This increase is principally a result of higher
professional fees, legal fees and personnel related costs.
Product development expense decreased 29% to $460,000 during the quarter
ended September 30, 2000 from $650,000 in the comparable quarter ended October
31, 1999, due to reduction in clinical trial costs for sickle cell anemia. After
a thorough review of trial design and end points, priorities, and resources in
May 2000, the Company decided to terminate subject enrollment in a dose-ranging
study in sickle cell anemia.
Discovery research expense increased 11% to $179,000 during the quarter
ended September 30, 2000 from $161,000 in the comparable quarter ending October
31, 1999, due to legal costs and ongoing obligations associated with
discontinued drug discovery programs including those acquired in the RiboGene
merger.
8
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Depreciation and amortization expense increased 228% to $949,000 during
the quarter ended September 30, 2000 from $289,000 in the comparable quarter
ended October 31, 1999, due to the additional tangible and intangible assets
acquired in the RiboGene merger as well as an additional charge of $303,000 to
depreciation in order to reflect a change in the estimated useful life of
certain leased laboratory and manufacturing equipment.
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
September 30, 2000 reduced net interest income to $37,000 from $140,000 in the
comparable quarter ended October 31, 1999.
Net rental income increased to $280,000 during the quarter ended
September 30, 2000 from $13,000 in the comparable quarter ended October 31, 1999
primarily due to the sublease of a portion of the Company's Hayward facility. In
June 2000, the Company entered into an agreement for the sublease of 15,000 sq.
ft. of its laboratory and office premises including the sublease of laboratory
equipment.
Nine months ended September 30, 2000 compared to the nine months ended October
31, 1999
During the nine months ended September 30, 2000, the Company incurred a
loss of $10,964,000 (or $0.44 per share) compared to a loss of $5,980,000 (or
$0.38 per share) for the nine months ended October 31, 1999.
During the nine months ended September 30, 2000, the Company reported
revenues of $3,050,000, a 69% increase from the $1,809,000 reported in the
comparable period ended October 31, 1999. This increase was primarily due to the
inclusion of $1,250,000 of technology revenue from the sale of Questcor's
proprietary antiviral drug research technology, HCV IRES and HCV NS5A-PKR, to
Rigel Pharmaceuticals, Inc.
Product sales decreased 13% to $1,581,000, during the nine months ended
September 30, 2000 from $1,809,000 in the comparable period ended October 31,
1999. This decrease was due to declines in Ethamolin(R) sales and was partially
offset by an increase in sales of our 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.
Cost of product sales increased 107% to $1,592,000 during the nine
months ended September 30, 2000 from $768,000 in the comparable period ended
October 31, 1999. The increase in the cost resulted from the production of the
Company's topical triple antibiotic padded stock in addition to a $50,000
write-down to accurately reflect the current value of inventory in stock.
Sales and marketing expense increased 11% to $1,639,000 during the nine
months ended September 30, 2000 from $1,475,000 in the comparable period ended
October 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.
General and administrative expense increased 107% to $4,426,000 during
the nine months ended September 30, 2000 from $2,140,000 in the comparable
period ended October 31, 1999. This increase resulted from merger related
expenses associated with the consolidation of the Company's corporate offices
and a combination of administrative functions, higher expenses for audit, legal
and other professional services, a charge for the settlement of the A. R. Baron
litigation, as well as an increase in allowance for doubtful accounts.
Product development expense increased 80% to $3,333,000 during the nine
months ended September 30, 2000 from $1,853,000 in the comparable period ended
October 31, 1999, due to the increased costs associated with the clinical
co-development of Emitasol(R). There were no costs associated with Emitasol
during the comparable period ended October 31, 1999, since Emitasol(R) was
acquired in the RiboGene merger.
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Discovery research expense increased 19% to $1,276,000 during the nine
months ended September 30, 2000 from $1,068,000 in the comparable period ending
October 31, 1999, due to legal costs and ongoing obligations associated with
drug discovery programs including those acquired in the RiboGene merger.
Depreciation and amortization expense increased 122% to $2,042,000
during the nine months ended September 30, 2000 from $919,000 in the comparable
period ended October 31, 1999, due to the additional tangible and intangible
assets acquired in the RiboGene merger as well as an additional charge of
$303,000 to depreciation in order to reflect a change in the estimated useful
life of certain leased laboratory and manufacturing equipment.
Net interest and other income for the period ended September 30, 2000
decreased 71% to $102,000 from the $346,000 in the prior-year period,
principally due to the addition of debt and lease obligations for leased
laboratory equipment with the acquisition of RiboGene.
Net rental income increased to $192,000 during the nine months ended
September 30, 2000 from $88,000 in the comparable period ended October 31, 1999
primarily due to the sublease of a portion of the Company's Hayward facility.
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 September 30, 2000, the Company had cash, cash equivalents and
short-term investments of $10.8 million compared to $21.7 million at December
31, 1999. At September 30, 2000, working capital was $ 3.4 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.
As a result of the merger with RiboGene, the Company assumed $5.0
million of long-term debt financing with a bank. The note required monthly
interest payments, at prime plus 1% (10.5% at September 30, 2000), with the
principal payment due at the end of the three-year term. The note was
collateralized by a perfected security interest in all unencumbered assets of
the Company and required that the Company maintain depository balances. The
Company was also required to comply with financial covenants based on certain
ratios. At September 30, 2000 the Company was not in compliance with at least
one such financial covenant. Hence, the Company reclassified the $5.0 million
note payable from long-term to short-term debt. In November 2000, the $5.0
million long-term note payable was converted into a $5.0 million cash secured
facility, the financial covenants removed and the blanket lien on all assets
released.
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 $535,000 for the nine months ended September
30, 2000, representing 7%, 6% and 34% 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 $293,000 of product for which the Company has been paid in accordance with
the revised terms.
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<PAGE> 13
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 sales,
marketing, administrative and clinical staff. 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. 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 licensees, 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; 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 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.
The Company has retained the services of investment bankers to identify
and pursue various financing alternatives.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk at September 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.
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 alleged 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 sought return of the funds totaling $3.2 million.
During the quarter ended June 30, 2000, the Company reached an agreement
to settle the Baron litigation and pay a total amount of $525,000 to the
bankruptcy estates of the Baron entities. Additionally, the Company also reached
a settlement agreement with a former insurer in connection with the Baron
litigation in which the insurer agreed to pay the Company $150,000 in exchange
for policy releases. The Company believes that settling this claim for a net
payment of $375,000 was an acceptable outcome to avoid incurring further legal
fees and management diversion.
On September 26, 2000, the courts formally approved the settlement and
the case is now closed.
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<PAGE> 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In December 1998, RiboGene received $5.0 million in proceeds from the
issuance of a long-term note payable to a bank. The note required monthly
interest-only payments at prime plus 1%. The rate at September 30, 2000 was
10.50%. The principal was due at the end of the three-year term. The loan was
collateralized by a perfected security interest in all unencumbered assets of
the Company and required 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 was also required to comply with financial covenants based
on certain ratios. At September 30, 2000 the Company was not in compliance with
at least one such financial covenant. Hence, the Company reclassified the $5.0
million note payable from long-term to short-term debt.
In November 2000, the $5.0 million long-term note payable was converted
into a $5.0 million cash secured facility, the financial covenants removed and
the blanket lien on all assets released.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 22, 2000, the Company held the Annual Meeting of Shareholders.
Matters voted on and the results of such voting are as follows:
1. The election of seven directors to hold office until the next Annual
Meeting of Shareholders or until their respective successors shall be
elected and qualified. The following persons were elected as our
directors and received the number of votes set forth below:
<TABLE>
<CAPTION>
Director For Withhold Total Voted
<S> <C> <C> <C>
Charles J. Casamento 15,253,976 6,461 15,260,437
Robert F. Allnut 15,253,826 6,611 15,260,470
Digby Barrios 15,253,826 6,611 15,260,470
Frank J. Sasinowski 15,253,826 6,611 15,260,470
Jon S. Saxe 15,253,826 6,611 15,260,470
Roger G. Stoll 15,253,826 6,611 15,260,470
Virgil D. Thompson 15,253,826 6,611 15,260,470
John T. Spitznagel 15,253,826 6,611 15,260,470
</TABLE>
2. To approve the Questcor's 2000 Employee Stock Purchase Plan and to
authorize and reserve 600,000 shares of the Company's common stock for
issuance under the stock purchase plan.
<TABLE>
<S> <C>
Votes For 14,919,808
Votes Against 218,603
Votes Abstained 3,220
Votes Not Voted 119,914
</TABLE>
3. To ratify the Board of Director's selection of Ernst & Young, LLP as the
Company's independent accountants for the fiscal year ending December
31, 2000.
<TABLE>
<S> <C>
Votes For 15,208,718
Votes Against 50,406
Votes Abstained 2,411
Votes Not Voted 10
</TABLE>
12
<PAGE> 15
4. To transact such other business as may properly come before the Questcor
Annual Meeting or any adjournment or postponement thereof.
<TABLE>
<S> <C>
Votes For 13,735,062
Votes Against 436,988
Votes Abstained 1,006,145
Votes Not Voted 83,350
</TABLE>
Total voted shares represented by proxy: 15,261,545
Percentage of the outstanding votable shares: 61.61%
Outstanding votable shares: 24,771,305
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
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<PAGE> 16
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.
PHARMACEUTICALS, INC.
By: /s/ Charles J. Casamento
--------------------------------------
Date: November 13, 2000 Charles J. Casamento
Chairman, President & CEO
By: /s/ Hans P. Schmid
--------------------------------------
Date: November 13, 2000 Hans P Schmid
Principal Financial and Chief
Accounting Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
