SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1996
[ ] 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 0-24760
Orphan Medical, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1784594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13911 Ridgedale Drive, Suite 475,
Minnetonka, MN 55305 (612) 513-6900
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 6,039,588
---------------------------- ---------
(Class) (Outstanding at April 29, 1996)
INDEX
ORPHAN MEDICAL, INC.
(Development Stage Enterprise)
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1996 and December 31,1995. 3
Statement of Operations - Three month periods ended
March 31, 1996 and March 31, 1995 and for the period
January 1, 1993 (inception) through March 31, 1996. 4
Statement of Cash Flows - Three months ended March 31,
1996 and March 31, 1995 and for the period January 1,
1993 (inception) through March 31, 1996. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 8
PART II. OTHER INFORMATION
Items 1 through 4 have been omitted since all items
are inapplicable or answers negative.
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
Exhibits -- Exhibit 27 -- for SEC only 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,789,163 $ 4,998,332
Short-term investments 5,214,645 3,713,983
Receivable from Chronimed Inc. 26,241 14,192
Other receivables 71,607 41,790
Prepaid expenses (Note 9) 407,893 42,629
------------ ------------
Total current assets 7,509,549 8,810,926
Property and equipment:
Office equipment 214,144 211,372
Accumulated depreciation (44,944) (35,502)
------------ ------------
169,200 175,870
Organization costs, net of amortization 525 566
------------ ------------
Total assets $ 7,679,274 $ 8,987,362
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,848,004 $ 1,454,081
Accrued payroll and related taxes 49,493 39,291
------------ ------------
Total current liabilities 1,897,497 1,493,372
Commitments (Note 8)
Shareholders' equity:
Common Stock, $.01 par value; 25,000,000 shares
authorized; 3,739,588 and 3,739,588 shares
issued and outstanding 37,396 37,396
Additional paid-in capital 14,648,079 14,648,079
Deficit accumulated during the development stage (8,903,698) (7,191,485)
------------ ------------
Total shareholders' equity 5,781,777 7,493,990
------------ ------------
Total liabilities and shareholders' equity $ 7,679,274 $ 8,987,362
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
STATEMENT OF OPERATIONS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
Period from
For the Three Months Ended January 1,
-------------------------- 1993 (Inception)
March 31, March 31, to March 31,
1996 1995 1996
----------- ----------- -----------
Operating expenses:
Research and development $ 1,382,527 $ 614,832 $ 6,857,558
General and administrative 440,121 252,739 2,691,995
----------- ----------- -----------
Loss from operations (1,822,648) (867,571) (9,549,553)
----------- ----------- -----------
Other income
Interest 110,435 54,642 645,855
----------- ----------- -----------
Net loss and deficit accumulated
during the development stage $(1,712,213) $ (812,929) $(8,903,698)
=========== =========== ===========
Net loss per common share $ (.46) $ (.69) $ (4.79)
=========== =========== ===========
Weighted average number of
shares outstanding 3,739,588 1,180,838 1,859,156
=========== =========== ===========
SEE ACCOMPANYING NOTES.
STATEMENT OF CASH FLOWS
ORPHAN MEDICAL, INC.
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Period from
For the Three Months Ended January 1, 1993
---------------------------- (Inception) to
March 31, March 31, March 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,712,213) $ (812,929) $ (8,903,698)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation & amortization 9,483 4,622 45,227
Changes in operating assets and liabilities:
Increase in accounts payable and accruals 404,126 259,911 1,897,498
Increase in receivables and other (41,867) (16,225) (107,278)
Increase in prepaids (365,264) (148,743) (407,893)
------------ ------------ ------------
Net cash used in operating activities (1,705,735) (713,364) (7,476,144)
INVESTING ACTIVITIES:
Proceeds from sale of office equipment -- -- 38,192
Acquisition of office equipment (2,772) (6,869) (252,336)
Purchase of short-term investments (1,500,662) -- (5,214,645)
------------ ------------ ------------
Net cash used in investing activities (1,503,434) (6,869) (5,428,789)
FINANCING ACTIVITIES
Net proceeds from capital contribution -- -- 5,000,000
Net proceeds from stock offering -- -- 8,801,766
Operating expenses paid by Chronimed -- -- 892,330
------------ ------------ ------------
Net cash provided by financing activities -- -- 14,694,096
------------ ------------ ------------
Increase in cash and cash equivalents (3,209,169) (720,233) 1,789,163
Cash and cash equivalents at beginning of
period 4,998,332 3,186,328 --
============ ============ ============
Cash and cash equivalents at end of
period $ 1,789,163 $ 2,466,095 $ 1,789,163
============ ============ ============
Supplemental cash flow information:
Interest received $ 81,583 $ 39,032 $ 580,080
</TABLE>
SEE ACCOMPANYING NOTES
ORPHAN MEDICAL, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Orphan Medical, Inc. (the "Company") was formed to acquire, develop, and market
important medical products to patients with inadequately treated or uncommon
diseases. The Company is the successor to the business previously conducted by
the Orphan Medical Division of Chronimed Inc. ("Chronimed"). In July 1994,
Chronimed contributed the assets and personnel of its Orphan Medical Division,
together with the rights to several pharmaceutical products in development, to
the Company. In October 1994, Chronimed distributed the shares of the Company's
Common Stock to the shareholders of Chronimed.
The financial statements are presented as if the Company had been a stand-alone
company as of its inception date of January 1, 1993, which is the date the
Company was formed as a division of Chronimed. The assets and liabilities
recorded are those which were transferred from Chronimed to the Company at the
effective date of the spin-off. These financial statements do not necessarily
represent the results that would have been obtained by the Company on a
stand-alone basis for the period prior to July 2, 1994.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the audited financial
statements and accompanying notes contained in the Company's Form 10-K filing
for the fiscal year ended December 31, 1995.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Accordingly, actual results could differ from those estimates.
3. CHANGE IN FISCAL YEAR
The Company changed its fiscal year ending June 30 to a calendar year ending
December 31. This change resulted in a shortened fiscal year of six months, July
1, 1995 to December 31, 1995.
4. LOSS PER SHARE
Loss per share is based upon the weighted average number of shares outstanding
during the respective periods. Common stock equivalents are not included as
their effect is anti-dilutive.
5. CASH EQUIVALENTS
The Company considers all highly liquid investments, consisting of U.S.
government agency securities and investment grade commercial paper, with
remaining maturities of 90 days or less when purchased to be cash equivalents.
Cash equivalents are carried at cost plus accrued interest, which approximates
market value.
6. SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments, consisting of U.S.
government agency securities and investment grade commercial paper, with
remaining maturities of more than 90 days, but less than one year, when
purchased to be short-term investments. Short-term investments are carried at
cost plus accrued interest, which approximates market value, with no resulting
unrealized gains or losses recognized. The Company has classified its short-term
investments as available-for-sale.
7. STOCK OPTIONS
In October 1995, shareholders approved the 1994 Stock Option Plan, pursuant to
which 1,250,000 shares of Common Stock are reserved for issuance to employees,
directors, and consultants.
The following table summarizes all option grants through March 31, 1996
(unaudited):
<TABLE>
<CAPTION>
Shares Exercise
Reserved Options Price
for Options Outstanding Exercisable Per Share
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at July 1, 1994 -- -- -- --
Reserved - August 1994 1,250,000 -- -- --
Granted or became exercisable (1,044,500) 1,044,500 151,900 $4.19 - $5.00
---------- ---------- ----------
Balance at June 30, 1995 205,500 1,044,500 151,900
Granted or became exercisable (189,500) 189,500 286,100 $5.00 - $7.63
---------- ---------- ----------
Balance at December 31, 1995 16,000 1,234,000 438,000
Granted or became exercisable (3,000) 3,000 -- $8.50
---------- ---------- ----------
Balance at March 31, 1996 13,000 1,237,000 438,000 $4.19 - $8.50
========== ========== ==========
</TABLE>
8. COMMITMENTS
The Company has various commitments under agreements with outside consultants,
contract drug development and technical service companies, license and research
agreements and agreements with Chronimed. Fees paid or accrued under agreements
with contract drug development and technical service companies totaled
approximately $952,000 for the three months ended March 31, 1996. At March 31,
1996, the Company expects to incur approximately $2,153,000 of additional
expenditures in subsequent periods under these existing commitments.
9. PUBLIC OFFERING
At March 31, 1996, the Company has incurred approximately $270,000 in
expenditures related to the sale of 2.3 million shares of its Common Stock.
These expenditures have been capitalized and included in "prepaid expenses" on
the balance sheet. The Company intends to net these expenditures against the
proceeds received from the public offering. See Item 5.
10. RECLASSIFICATIONS
Certain amounts presented for three months ended March 31, 1995 have been
reclassified in order to conform to the three months ended March 31, 1996
presentation.
Item 2. Management's Discussion and Analysis of Financial Condition ands Results
of Operations
GENERAL
Orphan Medical, Inc., a development stage company, was incorporated on June 17,
1994 in order to carry on the business previously conducted by the Orphan
Medical Division of Chronimed Inc.. The activities of the Orphan Medical
Division, formed in January 1993, and the Company, since its incorporation, have
primarily related to acquisition of products for development, hiring of
personnel required to implement the Company's business plan, and commencement of
development activities. As of March 31, 1996, approximately $7,476,144 of cash
has been used to fund operating activities since January 1, 1993 (inception).
The Company has had no revenues from the sale of its products to date and does
not expect to have any such revenues until at least late 1996.
THREE MONTHS ENDED MARCH 31, 1996 VS. THREE MONTHS ENDED MARCH 31, 1995
Research and development expenses increased from $614,832 (71% of the total loss
from operations) for the three months ended March 31, 1995 to $1,382,527 (76% of
the total loss from operations) for the three months ended March 31, 1996. The
$767,695 increase is largely attributable to outside development expenditures,
principally clinical programs, toxicology, and drug manufacturing costs for
Caprogel(TM) topical gel, Antizol(TM) for injection, Busulfanex(TM) for
injection, and Xyrem(TM). This increase reflects increased spending for several
products for which the Company filed NDAs in late 1995 and for which it expects
to file NDAs in 1996. As of March 31, 1996, the Company had thirteen products
under development; whereas ten products were under development as of March 31,
1995. Research and development expenditures will likely continue to fluctuate
from quarter to quarter and from year to year depending on, among other factors,
the timing of product development and the progress of preclinical and clinical
development programs. The Company's product development schedule for the
products currently under development and additional products it may develop in
the future will also be influenced by regulatory decisions, competitive
pressures, and the availability of funding.
General and administrative expenses increased from $252,739 (29% of the total
loss from operations) for the three months ended March 31, 1995 to $440,121 (24%
of the total loss from operations) for the three months ended March 31, 1996.
The $187,382 increase is principally due to adding staff and a bonus
arrangement.
Other income increased from $54,642 for the three months ended March 31, 1995 to
$110,435 for the three months ended March 31, 1996. This increase is due solely
to interest income attributable to higher levels of investable funds, which
resulted from the Company's public offering of Common Stock in May 1995. Other
income will continue to fluctuate from quarter to quarter and from year to year
depending principally on the amount of funds available for investment.
Net losses for the three months ended March 31, 1996 and for the three months
ended March 31, 1995 were $(1,712,213) and $(812,929), respectively. Net losses
per common share for these respective periods were $(.46) and $(.69), based on
weighted average number of common shares outstanding of 3,739,588 and 1,180,838,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company collected in full a $5,000,000 receivable from Chronimed (plus
interest thereon) in 1994. In May 1995, the Company completed a public offering
in which it sold 2,225,000 shares of Common Stock for $4.00 per share. In June
1995, the Company sold an additional 333,750 shares of Common Stock in the
public offering for $4.00 per share pursuant to the underwriters' over-allotment
option.
Net proceeds of the 1995 public offering were $8,801,766 after commissions and
expenses. The Company has financed its operations to date from the receivable
collected from Chronimed, the net proceeds from the 1995 public offering, and
interest income. The Company has used approximately $7,476,144 to fund
operations from inception through March 31, 1996. Of this amount, Chronimed paid
$826,063 to fund the Company's operating expenses from inception through July 1,
1994. Thereafter, the Company has used approximately $6,650,081 to fund
operations.
The Company's future commitments for consulting, drug development, and technical
services increased from $1,839,000 at December 31, 1995 to $2,153,000 at March
31, 1996. See Note 8 of the notes to Financial Statements.
Net working capital (current assets less current liabilities) decreased from
$7,317,554 at December 31, 1995 to $5,612,052 at March 31, 1996. Total current
assets (primarily cash, cash equivalents, and short-term investments) decreased
from $8,810,926 at December 31, 1995 to $7,509,549 at March 31, 1996.
Subsequent to March 31, 1996, the Company completed the sale of 2,300,000 shares
of its Common Stock pursuant to a registration statement declared effective by
the Securities and Exchange Commission on April 17, 1996. This sale resulted in
the Company collecting cash proceeds of $15,016,500 on April 23, 1996. The cash
proceeds from this sale are not reflected in the financial statements or in net
working capital at March 31, 1996. The Company believes that, after giving
effect to the additional cash proceeds from this sale of Common Stock, it will
have sufficient capital to fully implement its current product development
schedule at least through the next twenty four months.
PART II -- OTHER INFORMATION
Item 5. Other Information
On April 18, 1996, the Company announced the sale of 2,300,000 shares of its
Common Stock at $7.125 per share pursuant to a registration statement declared
effective by the Securities and Exchange Commission on April 17, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule -- for SEC only
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
Registrant
Date April 30, 1996 By /s/ David A. Feste
-------------- ------------------
David A. Feste
Chief Financial Officer
(principal accounting officer
and principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,789,163
<SECURITIES> 5,214,645
<RECEIVABLES> 97,848
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,509,549
<PP&E> 214,144
<DEPRECIATION> 44,944
<TOTAL-ASSETS> 7,679,274
<CURRENT-LIABILITIES> 1,897,497
<BONDS> 0
0
0
<COMMON> 37,396
<OTHER-SE> 5,744,381
<TOTAL-LIABILITY-AND-EQUITY> 7,679,274
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,822,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (110,435)
<INCOME-PRETAX> (1,712,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,712,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,712,213)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
