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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001
COMMISSION FILE NUMBER 000-22347
---------
ASCENT PEDIATRICS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
-------------------------------------------------------- -----
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
--------------
None
----
(Former name, former address, and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
-
Indicate number of shares outstanding of the registrant's Common Stock: As
of May 11, 2001, there were 17,009,722 depositary shares outstanding, each
depositary share representing one share of common stock, $0.00004 par value per
share, and represented by a depositary receipt.
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ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
Unaudited Condensed Balance Sheets 1
Unaudited Condensed Statements of Operations 2
Unaudited Condensed Statements of cash Flows 3
Notes to Unaudited Condensed Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signature 23
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Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
March 31, December 31,
2001 2000
------------- --------------
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 963,771 $ 260,882
Accounts receivable, less allowance for doubtful accounts of $141,000 and
$137,000 at March 31, 2001 and December 31, 2000, respectively. . . . . 3,057,248 812,373
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,612,024 1,624,766
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,691 410,129
------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 5,888,734 3,108,150
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467,034 378,879
Debt issue costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,819,554 1,267,433
Assets contingently transferred to Alpharma . . . . . . . . . . . . . . . . . . . 10,493,146 10,493,146
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,300 45,300
------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,713,768 $ 15,292,908
============= ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,440,567 $ 1,309,124
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955,168 1,270,240
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,053,089 927,537
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,612,159 738,544
Series H redemption price. . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 52,083 33,884
------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 16,113,066 4,279,329
Subordinated secured notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,845,186 20,706,113
Debt contingently extinguished by Alpharma. . . . . . . . . . . . . . . . . . . . 12,000,000 12,000,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,080 14,080
------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,972,332 36,999,522
Redeemable preferred stock, $.01 par value; 5,000,000 shares authorized;
1 and 0 shares, designated as Series H preferred stock, issued and
outstanding at March 31, 2001 and December 31, 2000, respectively. . . . . . 1,000 -
Stockholders' deficit
Common stock, $.00004 par value; 60,000,000 shares authorized;
17,009,722 and 9,781,814 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively. . . . . . . . . . . 680 390
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 60,650,004 58,894,821
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,910,248) (80,601,825)
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Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . (30,258,564) (21,706,614)
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Total liabilities, redeemable preferred stock and stockholders' deficit $ 23,713,768 $ 15,292,908
============= ==============
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
------------------------------
2001 2000
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Product revenue, net. . . . . . . . . . . . . . $ 1,023,544 $ 574,292
Co-promotional revenue. . . . . . . . . . . . . - 535,414
------------------------------ ------------
Total net revenue . . . . . . . . . . . . . . . 1,023,544 1,109,706
Costs and expenses
Costs of product sales . . . . . . . . . . 260,729 331,088
Selling, general and administrative. . . . 3,816,428 3,018,311
Research and development . . . . . . . . . 345,262 744,332
------------------------------ ------------
Total costs and expenses . . . . . . . . . 4,422,419 4,093,731
Loss from operations. . . . . . . . . (3,398,875) (2,984,025)
Interest income . . . . . . . . . . . . . . . . 12,025 10,587
Interest expense. . . . . . . . . . . . . . . . (6,921,573) (624,730)
------------------------------ ------------
Net loss. . . . . . . . . . . . . . . $ (10,308,423) $(3,598,168)
============================== ============
Net loss per share, basic and diluted $ (0.98) $ (0.37)
============================== ============
Weighted average shares outstanding - basic
and diluted. . . . . . . . . . . . . . . . . 10,513,886 9,677,349
============================== ============
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
------------------------------
2001 2000
------------------------------ ------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,308,423) $(3,598,168)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 73,458 242,171
Non-cash interest expense . . . . . . . . . . . . . . . . . 6,412,217 147,905
Stock based compensation. . . . . . . . . . . . . . . . . . 9,693 -
Provision for bad debts . . . . . . . . . . . . . . . . . . 4,000 (4,400)
Inventory write-off . . . . . . . . . . . . . . . . . . . . (1,857) (3,936)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (2,248,875) (1,449,484)
Inventory . . . . . . . . . . . . . . . . . . . . . . . 14,599 (194,214)
Other assets. . . . . . . . . . . . . . . . . . . . . . 154,438 24,819
Accounts payable. . . . . . . . . . . . . . . . . . . . 131,443 (195,311)
Interest payable. . . . . . . . . . . . . . . . . . . . (315,072) 190,225
Accrued expenses. . . . . . . . . . . . . . . . . . . . 125,552 (611,525)
Deferred revenue. . . . . . . . . . . . . . . . . . . . 1,873,615 1,044,953
Other current liabilities . . . . . . . . . . . . . . . 18,199 10,333
------------------------------ ------------
Net cash used in operating activities. . . . . . . (4,057,013) (4,396,632)
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . (161,613) (133,998)
------------------------------ ------------
Net cash used in investing activities. . . . . . . (161,613) (133,998)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs. . 15,229 277,695
Proceeds from issuance of preferred stock, net of issuance costs 1,000 -
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . 5,000,000 3,582,701
Proceeds from issuance of debt related warrants. . . . . . . . . - 417,299
Cash paid for debt issue costs . . . . . . . . . . . . . . . . . (94,714) -
------------------------------ ------------
Net cash provided by financing activities . . . . 4,921,515 4,277,695
Net increase (decrease) in cash and cash equivalents. . . . . . . . . 702,889 (252,935)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . 260,882 1,067,049
------------------------------ ------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . $ 963,771 $ 814,114
============================== ============
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), formerly Ascent
Pharmaceuticals, Inc., incorporated in Delaware on March 16, 1989, is currently
focused on marketing products exclusively to the pediatric market. Since its
inception, until July 9, 1997, Ascent has operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business. We introduced our first two products, Feverall acetaminophen
suppositories and Pediamist nasal saline spray, to the market in the second half
of 1997. Ascent introduced Primsol(R) trimethoprim solution, a prescription
antibiotic, to the market in February 2000 and Orapred(R) syrup, a liquid
steroid for the treatment of inflammation, including inflammation resulting from
respiratory conditions, to the market in January 2001.
On December 29, 2000, we sold the Feverall product line in an asset sale to
Alpharma USPD Inc. ("Alpharma USPD") in exchange for the cancellation by
Alpharma USPD of $12.0 million of indebtedness owed to Alpharma USPD by us,
although we have maintained the right to repurchase the product line through
December 2001 at the same price. The Company also terminated its strategic
alliance with Alpharma, Inc. and Alpharma USPD. As part of this strategic
alliance, which the Company consummated on July 23, 1999, Alpharma USPD had
agreed to loan us up to $40.0 million from time to time for certain corporate
purposes, and we assigned to Alpharma USPD a call option, exercisable in the
first half of 2003, to purchase all of the Ascent common stock then issued and
outstanding at a price to be determined by an earnings-based formula. As of
December 29, 2000, we had borrowed an aggregate of $12.0 million in principal
under our loan agreement with Alpharma USPD, dated as of February 16, 1999, as
amended, by and among Ascent, Alpharma USPD and Alpharma, Inc., all of which was
cancelled in connection with the sale of the Feverall product line. On December
29, 2000, in addition to the product purchase agreement, pursuant to which
Ascent sold the Feverall product line, we entered into a series of agreements
with Alpharma USPD terminating the strategic alliance, including the loan
agreement. As part of these agreements, Alpharma USPD agreed not to exercise its
call option.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses in the future as Ascent seeks to maintain its sales
and marketing organization and promotion of Orapred and Primsol to the market.
In December 1999, we modified our strategy until such time as we determine that
our financial condition has adequately improved. Specifically, we are focused on
Orapred and Primsol and on seeking appropriate co-promotional opportunities. We
have suspended all product development activities until such time, if ever, as
our financial condition has adequately improved.
Ascent is subject to a number of risks similar to other companies in the
industry, including the need to obtain additional financing, rapid technological
change, uncertainty of market acceptance of products, uncertainty of regulatory
approval, limited sales and marketing experience, competition from substitute
products and larger companies, customers' reliance on third-party reimbursement,
compliance with government regulations, protection of proprietary technology,
dependence on third-party manufacturers, distributors, collaborators and limited
suppliers, product liability, and dependence on key individuals.
ING Furman Selz beneficially owns approximately 65% of our securities, including
depositary shares issuable upon conversion of outstanding convertible notes as
of March 31, 2001. Accordingly, ING Furman Selz, by virtue of its majority
ownership of our securities, has the power, acting alone, to elect a majority of
our board of directors over a three year period and has the ability to determine
the outcome of any corporate actions requiring stockholder approval, including
without limitation a sale of the Company, regardless of how our other
stockholders may vote. ING Furman Selz's interests could conflict with the
interests of our other stockholders. For instance, in the event of any sale of
the Company, the first $27.7 million in proceeds will be paid to ING Furman Selz
as repayment of debt, plus additional payments required under the terms of the
securities.
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2. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by Ascent in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The interim financial statements include, in the opinion
of management, all adjustments (consisting of normal and recurring adjustments)
that are necessary for a fair presentation of the results for the interim
periods ended March 31, 2001 and 2000. The results for the interim periods
presented are not necessarily indicative of results to be expected in the full
fiscal year. Certain prior period items have been reclassified to conform with
current period presentation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2000
included in Ascent's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product revenue is recognized upon evidence of an arrangement, when the related
fee is fixed or determinable and collection of the fee is reasonably assured.
Additionally, revenues for any product that is subject to a right of return is
deferred until such time that the right of return lapses, generally when the
Ascent's customers fulfill prescriptions to the consumer. Co-promotion revenue
is recognized as earned based upon the performance requirements of the
respective agreement.
Net Loss Per Common Share
Basic net income (loss) per common share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Diluted net income (loss) per common share gives effect to all dilutive
potential common shares outstanding during the period. The computation of
diluted earnings per share does not assume the issuance of common shares that
have an antidilutive effect on net income (loss) per common share.
Options and warrants outstanding to purchase or convert to 964,604 and 292,313
depositary shares as of March 31, 2001 and 2000, respectively, were not included
in the computation of diluted net loss per common share because Ascent is in a
loss position, and the inclusion of such shares, therefore, would be
antidilutive.
Similarly, options, warrants and convertible debt outstanding to purchase or
convert to 8,524,873 and 6,898,306 depositary shares as of March 31, 2001 and
2000, respectively, were not included in the computation of diluted net loss per
common share because the options, warrants and convertible debt have exercise or
conversion prices greater than the market price at March 31 of the depositary
shares and, therefore, would be antidilutive under the treasury stock method.
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Recent Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. During
1999, Financial Accounting Standards Board Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities deferral of the Effective Date of
the Statement of Financial Accounting Standards No. 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters beginning after June 15, 2001. The Company adopted SFAS 133 on
January 1, 2001. The Company has not historically entered into transactions
involving derivative instruments, nor has it hedged any of its business
activities, and the adoption of SFAS 133 did not effect its financial statements
for the period ended March 31, 2001.
4. INVENTORIES
Inventories are stated at the lower of cost or market using the first in, first
out (FIFO) method and consist of the following:
March 31, December 31,
2001 2000
---------- -------------
Raw materials. $ 915,250 $ 965,538
Finished goods 696,774 659,228
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Total . . . . $1,612,024 $ 1,624,766
========== =============
1. ACCRUED EXPENSES
Accrued expenses consisted of the following:
March 31, December 31,
2001 2000
---------- -------------
Employee compensation expenses $ 537,767 $ 342,296
Legal and accounting expenses. 97,054 74,910
Selling fees and chargebacks . 92,850 171,743
Preferred stock dividend . . . 323,082 323,082
Other. . . . . . . . . . . . . 2,336 15,506
---------- -------------
Total . . . . . . . . $1,053,089 $ 927,537
========== =============
1. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 Million Credit Facility. On July 1, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz Investments LLC
under which such funds agreed to loan Ascent up to $4.0 million. Pursuant to
this agreement, Ascent issued to the funds affiliated with ING Furman Selz 7.5%
convertible subordinated notes in the aggregate principal amount of $4.0 million
and warrants to purchase an aggregate of 600,000 depositary shares at an
exercise price of $3.00 per share, which, as described below, was subsequently
decreased to $0.05 per share, and which expire on July 1, 2006. As of February
2000, Ascent had borrowed the entire $4.0 million under this credit facility. Of
the $4.0 million convertible subordinated notes issued and sold, $3,605,700 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt) and $394,300 was allocated to the relative fair value of
the warrants (classified as additional paid-in-capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $3,605,700 to the maturity
amount of $4,000,000 as interest expense over the term of the convertible
subordinated notes. The notes mature on July 1, 2004 and are convertible into
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004. In connection with this arrangement, a second representative of ING
Furman Selz Investments was added to Ascent's board of directors.
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$10.0 Million Credit Facility. On October 15, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz under which such
funds agreed to loan Ascent up to an additional $10.0 million. Pursuant to this
agreement, Ascent issued to the funds affiliated with ING Furman Selz 7.5%
convertible subordinated notes in the aggregate principal amount of $10.0
million and warrants to purchase an aggregate of 5,000,000 depositary shares at
an original exercise price of $3.00 per share, which, as described below, was
subsequently decreased to $0.05 per share, and which expire on October 15, 2006.
As part of the right to draw down the $10.0 million, Ascent issued to the funds
affiliated with ING Furman Selz 1,000,000 warrants which were valued at $513,500
(classified as debt issue costs). As of December 31, 2000, Ascent had borrowed
an aggregate of $10.0 million under this credit facility. Of the $10.0 million
of convertible subordinated notes issued and sold, $8,540,187 was allocated to
the relative fair value of the convertible subordinated notes (classified as
debt), and $1,459,813 was allocated to the relative fair value of the warrants
(classified as additional paid-in-capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $8,540,187 to the maturity amount of
$10.0 million as interest expense over the term of the convertible subordinated
notes. The notes mature on July 1, 2004 and are convertible into Ascent
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004.
$10.25 Million Credit Facility. On December 29, 2000, Ascent entered into a
loan agreement with FS Ascent Investments LLC, which is affiliated with ING
Furman Selz Investments ("FS Investments"), and a fifth amendment to the Series
G securities purchase agreement. Pursuant to the loan agreement and the fifth
amendment, Ascent will receive up to $10.25 million in financing from FS
Investments. The financing is comprised of $6.25 million of 7.5% secured notes
($5.0 million of which has been advanced to Ascent in the quarter ended March
31, 2001) and $4.0 million of Series H preferred stock ($1,000 of which was
advanced in the quarter ended March 31, 2001). Under the terms of the notes,
Ascent will pay interest quarterly and repay the outstanding principal of the
notes on June 30, 2001, unless extended to no later than June 30, 2002 at
Ascent's election, or earlier upon a change in control (as defined in the loan
agreement) of Ascent or certain other conditions. The notes will be secured by
Ascent's Primsol product line, including intellectual property rights of Ascent
pertaining to Primsol, pursuant to a security agreement, dated as of December
29, 2000, by and between Ascent and FS Investments. The $6.25 million to be
advanced to Ascent under the loan agreement will be obtained by FS Investments
from Alpharma USPD under a loan agreement between FS Investments and Alpharma
USPD. Under the terms of the Series H preferred stock, Ascent will be entitled
to, and the holders of the Series H preferred stock will be entitled to cause
Ascent to redeem the Series H preferred stock for a price equal to the
liquidation amount ($1,000 per share) of the Series H preferred stock, plus
$10.0 million. The $10.0 million redemption price was recorded as a current
liability and as debt issue costs as an asset on the balance sheet to be
amortized to interest expense over the six month term of the loan agreement with
FS Investments. In connection with the financing, Ascent agreed to issue
warrants to FS Investments to purchase up to 10,950,000 depositary shares of
Ascent at an exercise price of $.05 per share (of which warrants to purchase
1,950,000 depositary shares have been issued during the fiscal quarter ended
March 31, 2001) and reduced the exercise price of previously issued outstanding
warrants to purchase a total of 5,600,000 depositary shares issued under the
Series G securities purchase agreement from $3.00 to $0.05 per share. The
warrants issued to FS Investments to purchase 1,950,000 shares of Ascent common
stock expire on December 29, 2007. The fair value of these warrants was recorded
as a contribution to additional paid in capital of $1,689,019. The incremental
value of the repriced 5.6 million warrants was recorded as a contribution to
additional paid in capital of $599,476 and as debt issue costs as an asset on
the balance sheet to be amortized to interest expense over the six month term of
the new loan agreement. The remaining warrants, issuable for an aggregate of
9,000,000 depositary shares will be issued upon the extension of the due date of
the principal of the note. The due date on the note can be extended in monthly
increments with the first three extensions requiring the issuance of warrants
exercisable for an aggregate of 1,000,000 depositary shares, and with each of
the fourth, fifth and sixth extensions requiring the issuance upon each
extension of warrants exercisable for an aggregate of 2,000,000 depositary
shares.
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The Series H preferred stock is entitled to cumulative annual dividends payable
on December 31, 2001 at the rate of 7.5% of the liquidation preference (as
defined in the loan agreement dated as of December 29, 2000 between Ascent and
FS Investments LLC). The Series H preferred stock is redeemable at the
redemption price at any time after the demand date or the occurrence of a change
in control (each as defined in such loan agreement) of Ascent at the option of
the holders of the Series H preferred stock holding at least 80% of the shares
of such stock then outstanding. Ascent may redeem all of the Series H preferred
stock at the redemption price at any time. The holders of Series H preferred
stock generally do not have any voting rights.
On March 23, 2001, the funds affiliated with ING Furman Selz and Flynn Partners
exercised all of their outstanding warrants, on a cashless basis, which resulted
in the issuance of 7,211,528 depositary shares.
2. SUBSEQUENT EVENT
On April 10, 2001, Ascent borrowed an additional $750,000 under the loan
agreement with FS Ascent Investments LLC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are engaged in the marketing of pharmaceuticals for use in the treatment of
common pediatric illnesses. We introduced our first two products, Feverall
acetaminophen suppositories and Pediamist nasal saline spray, to the market in
the second half of 1997. We introduced Primsol trimethoprim solution, a
prescription antibiotic, to the market in February 2000 and Orapred syrup, a
liquid steroid for the treatment of inflammation, including inflammation
resulting from respiratory conditions, to the market in January 2001. On
December 29, 2000, we sold the Feverall product line in an asset sale to
Alpharma USPD in exchange for the cancellation by Alpharma USPD of $12.0 million
owed to Alpharma USPD by us under the loan agreement between the two parties,
although we have maintained the right to repurchase the product line through
December 2001 at the same price.
We leverage our marketing and sales capabilities, including our sales force, by
seeking to enter into arrangements to promote third party pharmaceutical
products to pediatricians. Since July 1997, when we established a sales force,
we have entered into co-promotion agreements under which we promoted the
combination corticosteroid/antibiotic, Pediotic(R), Omnicef(R) (cefdinir) oral
suspension and capsules, and Duricef(R) (cefadroxil mono hydrate) oral
suspension. All of these agreements have either expired or been terminated.
We have incurred net losses since our inception and expect to incur additional
operating losses at least through 2001 as we seek to maintain our sales and
marketing organization and promotion of Orapred and Primsol to the market. We
expect cumulative losses to increase over this period. We have incurred a
deficit from inception through March 31, 2001 of $90,910,000.
In December 1999, we modified our strategy until such time as we determine that
our financial condition has adequately improved. Specifically, we are focused on
Orapred and Primsol and on seeking appropriate co-promotional opportunities. We
have suspended all product development activities until such time, if ever, as
our financial condition has adequately improved.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000
REVENUE: Ascent had total net revenue of $1,024,000 for the three months ended
March 31, 2001, compared with total net revenue of $1,110,000 for the three
months ended March 31, 2000. The decrease in revenue of $86,000 was primarily
attributable to the absence of Feverall revenue due to the sale of the Feverall
product line in December 2000 to Alpharma USPD and the absence of co-promotional
revenue due to the termination of the Omnicef(R) agreement in January 2000.
Total net revenues for the three months ended March 31, 2000 included $562,000
in Feverall revenue and $535,000 in co-promotional revenue. The reduced revenues
were offset by $744,000 in Orapred syrup revenue and an increase of $270,000 in
Primsol solution revenue.
COST OF PRODUCT SALES: Cost of product sales was $261,000 for the three months
ended March 31, 2001, compared with $331,000 for the three months ended March
31, 2000. The decrease in cost of product sales of $70,000 was primarily the
result of a decrease of $152,000 in manufacturing costs and a decrease of
$83,000 in amortization expense related to the termination of the Feverall
manufacturing agreement due to the sale of Feverall offset by an increase of
$109,000 in manufacturing and testing costs associated with the production of
Orapred syrup and Primsol solution.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling, general
and administrative expenses of $3,816,000 for the three months ended March 31,
2001, compared with $3,018,000 for the three months ended March 31, 2000,
representing an increase of $798,000.
Selling and marketing expenses were $3,299,000 for the three months ended March
31, 2001, compared with expenses of $2,482,000 for the three months ended March
31, 2000. The increase in selling and marketing expenses of $817,000 was
primarily the result of $955,000 for the launch of Orapred syrup, which included
a national sales meeting, samples and selling materials, direct mail, media, and
trade promotions. These expenses were offset by decreases of $133,000 in
personnel expenses due to reduced headcount and $42,000 in samples due to the
termination of the Omnicef(R) co-promotion agreement by Warner-Lambert Company
in January 2000 and the sale of the Feverall product line to Alpharma USPD in
December 2000.
General and administrative expenses were $517,000 for the three months ended
March 31, 2001, compared with expenses of $536,000 for the three months ended
March 31, 2000. The decrease of $19,000 was primarily attributable to increases
of (i) $70,000 due to changes in Ascent's bonus plan, (ii) $38,000 in consulting
expenses due to agreements with members of Ascent's board of directors, and
(iii) $23,000 in legal, accounting and investor relations expenses. These
increases were offset by a decrease of $75,000 in personnel expenses due to
reduced headcount from the first fiscal quarter of 2000 and a decrease of
$81,000 in amortization expense for trademarks and goodwill due to the sale of
Feverall assets to Alpharma USPD.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses of
$345,000 for the three months ended March 31, 2001, compared with expenses of
$744,000 for the three months ended March 31, 2000. The decrease of $399,000
was primarily attributable to decreases of (i) $46,000 for the Pediavent product
research and development program that was terminated in December 1999, but which
had certain outstanding obligations, (ii) $41,000 for the Orapred product's
research and development program due to timing differences in expenses while
Ascent waited for the FDA's response on its Abbreviated New Drug Application,
(iii) $87,000 in research and development expenses related to the production of
Primsol solution batches in anticipation of receiving FDA market approval, and
(iv) 167,000 in personnel expenses due to reduced headcount.
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INTEREST: Ascent had interest income of $12,000 for the three months ended
March 31, 2001, compared with interest income of $11,000 for the three months
ended March 31, 2000. Ascent had interest expense of $6,922,000 for the three
months ended March 31, 2001, compared with interest expense of $625,000 for the
three months ended March 31, 2000. The increase of $6,297,000 was primarily
attributable to the amortization of $5.0 million of the $10.0 million Series H
redemption price, as well as $1,297,000 in interest expense due to the
additional $13.5 million of subordinated notes issued and outstanding during the
first quarter of 2001 compared to the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from private
sales of preferred stock, with net proceeds of $33.6 million, the private sale
of subordinated secured notes and related common stock and depositary share
purchase warrants, with net proceeds of $46.3 million, and, in 1997, an initial
public offering of shares of common stock, with net proceeds of $17.5 million.
As of March 31, 2001, Ascent had $964,000 in cash and cash equivalents, an
increase of $703,000 from $261,000 as of December 31, 2000. As of May 1, 2001,
Ascent has borrowed $5.75 million from FS Ascent Investments LLC under its
$10.25 million credit facility described below. We will need additional funds to
repay debt, including interest payments, and to fund operations beyond December
31, 2001.
Ascent used $4.1 million of cash in operations for the three months ended March
31, 2001 compared to $4.4 million for the three months ended March 31, 2000.
Net cash used in operations for the three months ended March 31, 2001 was
primarily attributable to a $10.3 million net loss generated during the period,
an increase in accounts receivable of $2.2 million, and a decrease in interest
payable of $315,000. This was offset in part by non-cash interest expense of
$6.4 million and increases in deferred revenue of $1.9 million. Ascent's
investing activities resulted in net cash used of $162,000 for the three months
ended March 31, 2001 compared to $134,000 for the three months ended March 31,
2000. Ascent's capital expenditures consist primarily of purchases of property
and equipment, including computer equipment and software. Ascent expects that
its capital expenditures will remain steady in the future. Cash provided by
financing activities was $4.9 million for the three months ended March 31, 2001
compared to $4.3 million for the three months ended March 31, 2000. The
principal source of financing for the three months ended March 31, 2001 was the
FS Ascent Investments credit facility discussed below, which yielded net
proceeds of $5.0 million.
Outstanding Indebtedness to ING Furman Selz and Other Entities
As of March 31, 2001, Ascent had notes outstanding in the aggregate original
principal amount of $27.7 million under its financing arrangements with the
former holders of Series G preferred stock and funds affiliated with ING Furman
Selz. The notes currently outstanding are as follows:
- - 8% seven-year subordinated notes issued on June 1, 1998 to the holders of
Series G preferred stock pursuant to the May 1998 securities purchase agreement,
of which $1.7 million of principal amount was outstanding as of March 31, 2001.
The principal is shown on the balance sheet net of the fair market value
allocated to the warrants associated with the notes. These notes mature in June
2005.
- - 8% seven-year convertible subordinated notes issued on July 23, 1999 to
the holders of Series G preferred stock pursuant to the second amendment to the
May 1998 securities purchase agreement, as amended, upon the conversion of the
Series G preferred stock, of which $7.0 million of principal amount was
outstanding as of March 31, 2001. The principal is shown on the balance sheet
net of the fair market value allocated to the warrants associated with the
notes. These notes mature in June 2005.
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- - 7.5% convertible subordinated notes in the principal amount of up to $4.0
million issued on July 1, 1999 to funds affiliated with ING Furman Selz pursuant
to the third amendment to the May 1998 securities purchase agreement, as
amended, of which $4.0 million of principal amount was outstanding as of March
31, 2001. The principal is shown on the balance sheet net of the fair market
value allocated to the warrants associated with the notes. These notes mature in
July 2004.
- - 7.5% convertible subordinated notes in the principal amount of up to $10.0
million issued on October 15, 1999 to funds affiliated with ING Furman Selz
pursuant to the fourth amendment to the May 1998 securities purchase agreement,
as amended, of which $10.0 million of principal amount was outstanding as of
March 31, 2001. The principal is shown on the balance sheet net of the fair
market value allocated to the warrants associated with the notes. These notes
mature in July 2004.
- - 7.5% convertible subordinated notes in the principal amount of up to $6.25
million issued on January 2, 2001 to FS Ascent Investments of which $5.0 million
of the principal amount was outstanding as of March 31, 2001. These notes mature
in June 2001.
In addition from April 1, 2001 to May 1, 2001, Ascent borrowed an additional
$750,000 under the $10.25 credit facility it entered into with FS Ascent
Investments on December 29, 2000.
Ascent's financing arrangements, including the material terms of the foregoing
notes, are described in more detail below.
Series G Financing. On May 13, 1998, Ascent entered into a Series G Securities
Purchase Agreement with funds affiliated with ING Furman Selz Investments LLC
and BancBoston Ventures, Inc. In accordance with this agreement, on June 1,
1998, Ascent issued and sold to these funds an aggregate of 7,000 shares of
Series G convertible exchangeable preferred stock, $9.0 million of 8% seven-year
subordinated notes and seven-year warrants to purchase an aggregate of 2,116,958
shares of Ascent common stock at a per share exercise price of $4.75 per share,
which, as discussed below, was subsequently decreased, for an aggregate purchase
price of $16.0 million. Of the $9.0 million of subordinated secured notes issued
and sold by Ascent, $8,652,515 was allocated to the relative fair value of the
subordinated notes and $347,485 was allocated to the relative fair value of the
warrants. Accordingly, the 8% subordinated notes will be accreted from
$8,652,515 to the maturity amount of $9,000,000 as interest expense over the
term of the notes. The $347,485 allocated to the warrants was included in
additional paid-in-capital. Ascent used a portion of the net proceeds, after
fees and expense, of $14.7 million to repay $5.3 million in existing
indebtedness and used the balance for working capital. As a result of the early
repayment of subordinated notes, Ascent accelerated the unaccreted portion of
the discount amounting to $842,000. In addition, $325,000 of unamortized debt
issue costs were written off.
In connection with Ascent's strategic alliance with Alpharma USPD and Alpharma,
Inc., which, as discussed below, was subsequently terminated, Ascent entered
into a second amendment to the May 1998 securities purchase agreement in July
1999. The second amendment provided for, among other things, (a) Ascent's
agreement to exercise its right to exchange all outstanding shares of Series G
preferred stock for convertible subordinated notes in accordance with the terms
of the Series G preferred stock, (b) the reduction in the exercise price of
warrants to purchase an aggregate of 2,116,958 shares of Ascent common stock
from $4.75 per share to $3.00 per share and the agreement of the Series G
purchasers to exercise these warrants, (c) the issuance and sale to the Series G
purchasers of an aggregate of 300,000 shares of Ascent common stock at a price
of $3.00 per share and (d) the cancellation of approximately $7.25 million of
principal under the subordinated notes held by the Series G purchasers to pay
the exercise price of the warrants and the purchase price of the additional
300,000 shares.
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The subordinated notes and convertible notes bear interest at a rate of 8% per
annum, payable semiannually in June and December of each year, commencing
December 1998. Ascent deferred forty percent of the interest due on the
subordinated notes and fifty percent of the dividend interest due on the
convertible notes in each of December 1998, June 1999, December 1999 and June
2000 for a period of three years.
In the event of a change in control or unaffiliated merger of Ascent, Ascent
could redeem the convertible notes issued upon exchange of the Series G
preferred stock at a price equal to the liquidation preference plus accrued and
unpaid dividends, although Ascent would be required to issue new common stock
purchase warrants in connection with such redemption. In the event of a change
of control or unaffiliated merger of Ascent, the holders of the convertible
notes and the subordinated notes could require Ascent to redeem these notes at a
price equal to the unpaid principal plus accrued and unpaid interest on such
notes. In connection with the Series G financing, a representative of ING Furman
Selz Investments was added to Ascent's board of directors.
$4.0 Million Credit Facility. On July 1, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz Investments LLC
under which such funds agreed to loan Ascent up to $4.0 million. Pursuant to
this agreement, Ascent issued 7.5% convertible subordinated notes in the
aggregate principal amount of $4.0 million and warrants to purchase an aggregate
of 600,000 depositary shares at an exercise price of $3.00 per share, which, as
described below, was subsequently decreased to $0.05 per share, and which expire
on July 1, 2006, to the funds affiliated with ING Furman Selz. As of February
2000, Ascent had borrowed the entire $4.0 million under this credit facility. Of
the $4.0 million convertible subordinated notes issued and sold, $3,605,700 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt) and $394,300 was allocated to the relative fair value of
the warrants (classified as additional paid-in-capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $3,605,700 to the maturity
amount of $4,000,000 as interest expense over the term of the convertible
subordinated notes. The notes mature on July 1, 2004 and are convertible into
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004. In connection with this arrangement, a second representative of ING
Furman Selz Investments was added to Ascent's board of directors.
$10.0 Million Credit Facility. On October 15, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz under which such
funds agreed to loan Ascent up to an additional $10.0 million. Pursuant to this
agreement, Ascent issued to the funds affiliated with ING Furman Selz 7.5%
convertible subordinated notes in the aggregate principal amount of $10.0
million and warrants to purchase an aggregate of 5,000,000 depositary shares at
an original exercise price of $3.00 per share, which, as described below, was
subsequently decreased to $0.05 per share, and which expire on October 15, 2006.
As part of the right to draw down the $10.0 million, Ascent issued to the funds
affiliated with ING Furman Selz 1,000,000 warrants which were valued at $513,500
(classified as debt issue costs). As of December 31, 2000, Ascent had borrowed
an aggregate of $10.0 million under this credit facility. Of the $10.0 million
of convertible subordinated notes issued and sold, $8,540,187 was allocated to
the relative fair value of the convertible subordinated notes (classified as
debt), and $1,459,813 was allocated to the relative fair value of the warrants
(classified as additional paid-in-capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $8,540,187 to the maturity amount of
$10.0 million as interest expense over the term of the convertible subordinated
notes. The notes mature on July 1, 2004 and are convertible into Ascent
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004.
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$10.25 Million Credit Facility. On December 29, 2000, Ascent entered into a
loan agreement with FS Ascent Investments LLC, which is affiliated with ING
Furman Selz Investments ("FS Investments"), and a fifth amendment to the Series
G securities purchase agreement. Pursuant to the loan agreement and the fifth
amendment, Ascent will receive up to $10.25 million in financing from FS
Investments. The financing is comprised of $6.25 million of 7.5% secured notes
($5.0 million of which has been advanced to Ascent in the quarter ended March
31, 2001) and $4.0 million of Series H preferred stock ($1,000 of which was
advanced in the quarter ended March 31, 2001). Under the terms of the notes,
Ascent will pay interest quarterly and repay the outstanding principal of the
notes on June 30, 2001, unless extended to no later than June 30, 2002 at
Ascent's election, or earlier upon a change in control (as defined in the loan
agreement) of Ascent or certain other conditions. The notes will be secured by
Ascent's Primsol product line, including intellectual property rights of Ascent
pertaining to Primsol, pursuant to a security agreement, dated as of December
29, 2000, by and between Ascent and FS Investments. The $6.25 million to be
advanced to Ascent under the loan agreement will be obtained by FS Investments
from Alpharma USPD under a loan agreement between FS Investments and Alpharma
USPD. Under the terms of the Series H preferred stock, Ascent will be entitled
to, and the holders of the Series H preferred stock will be entitled to cause
Ascent to redeem the Series H preferred stock for a price equal to the
liquidation amount ($1,000 per share) of the Series H preferred stock, plus
$10.0 million. The $10.0 million redemption price was recorded as a current
liability and as debt issue costs as an asset on the balance sheet to be
amortized to interest expense over the six month term of the loan agreement with
FS Investments. In connection with the financing, Ascent agreed to issue
warrants to FS Investments to purchase up to 10,950,000 depositary shares of
Ascent at an exercise price of $.05 per share (of which warrants to purchase
1,950,000 depositary shares have been issued during the fiscal quarter ended
March 31, 2001) and reduced the exercise price of previously issued outstanding
warrants to purchase a total of 5,600,000 depositary shares issued under the
Series G securities purchase agreement from $3.00 to $0.05 per share. The
warrants issued to FS Investments to purchase 1,950,000 shares of Ascent common
stock expire on December 29, 2007. The fair value of these warrants was recorded
as a contribution to additional paid in capital of $1,689,019. The incremental
value of the repriced 5.6 million warrants was recorded as a contribution to
additional paid in capital of $599,476 and as debt issue costs as an asset on
the balance sheet to be amortized to interest expense over the six month term of
the loan agreement. The remaining warrants, issuable for an aggregate of
9,000,000 depositary shares will be issued upon the extension of the due date
of the principal of the note. The due date on the note can be extended in
monthly increments with the first three extensions requiring the issuance of
warrants exercisable for an aggregate of 1,000,000 depositary shares and with
each of the fourth, fifth and sixth extensions requiring the issuance upon each
such extension of warrants exercisable for an aggregate of 2,000,000 depositary
shares.
The Series H preferred stock is entitled to cumulative annual dividends payable
on December 31, 2001 at the rate of 7.5% of the liquidation preference (as
defined in the loan agreement dated as of December 29, 2000 between Ascent and
FS Investments LLC). The Series H preferred stock is redeemable at the
redemption price at any time after the demand date or the occurrence of a change
in control (each as defined in such loan agreement) of Ascent at the option of
the holders of the Series H preferred stock holding at least 80% of the shares
of such stock then outstanding. Ascent may redeem all of the Series H preferred
stock at the redemption price at any time. The holders of Series H preferred
stock generally do not have any voting rights.
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Future Capital Requirements. Ascent's future capital requirements will depend on
many factors, including the costs and margins on sales of its products, success
of its commercialization activities and arrangements, particularly the level of
product sales, its ability to maintain and, in the future, expand its sales and
marketing capability and resume product development, its ability to maintain its
manufacturing and marketing relationships, its ability to enter into and
maintain any promotion agreements, its ability to acquire and successfully
integrate businesses and products, the time and cost involved in maintaining
and, in the future, obtaining regulatory approvals, the costs involved in
prosecuting, enforcing and defending patent claims and competing technological
and market developments. Ascent's business strategy requires a significant
commitment of funds to engage in product and business acquisitions and to
maintain sales and marketing capabilities and manufacturing relationships
necessary to promote Orapred and Primsol.
Ascent anticipates that, based upon its current operating plan, including
anticipated sales of Primsol and Orapred, its existing capital resources and
access to the remaining $4.5 million under its credit facility with FS
Investments, it will have enough cash to fund operations through December 31,
2001. Ascent will need additional funds beyond December 31, 2001 to repay debt
and to fund operations. If adequate funds are not available, Ascent may be
required to (i) obtain funds on unfavorable terms that may require Ascent to
relinquish rights to certain of its technologies or products or that would
significantly dilute Ascent's stockholders, (ii) significantly scale back or
terminate operations and/or (iii) seek relief under applicable bankruptcy laws.
Interest payments under the 8% subordinated notes due June 1, 2005 in the
principal amount of $8.7 million are due and payable semiannually in June and
December of each year. During fiscal 2001, Ascent will be required to pay an
aggregate of $1,132,850 in interest under the 8% subordinated notes due June 1,
2005. Interest payments under the $4.0 and $10.0 million credit facilities with
the funds affiliated with ING Furman Selz are due and payable on the last day of
each calendar quarter. During fiscal 2001, Ascent will be required to pay an
aggregate of $300,000 under the $4.0 million credit facility and an aggregate of
$750,000 under the $10.0 million credit facility. As of May 1, 2001, Ascent has
borrowed $5.75 million of the $10.25 million 7.5% credit facility with FS
Investments and during fiscal 2001 will be required to pay an aggregate of
$375,000 in interest.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. During
1999, Financial Accounting Standards Board Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities deferral of the Effective Date of
the Statement of Financial Accounting Standards No. 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters beginning after June 15, 2001. The Company adopted SFAS 133 on
January 1, 2001. The Company has not historically entered into transactions
involving derivative instruments, nor has it hedged any of its business
activities, and the adoption of SFAS 133 did not effect its financial statements
for the period ended March 31, 2001.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause THE COMPANY'S ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH BELOW. In
addition, any forward-looking statements represent the Ascent's estimates only
as of the date this Quarterly Report as first filed with the Securities and
Exchange Commission and should not be relied upon as representing Ascent's
estimates as of any subsequent date. While Ascent may elect to update
forward-looking statements at some point in the future, Ascent specifically
disclaims any obligation to do so, even if its estimates change.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. As of March 31, 2001, our
accumulated deficit was approximately $90.9 million. We received our first
revenues from product sales in July 1997. We expect to incur additional
significant operating losses over the next 12 months and expect cumulative
losses to increase. We expect that our losses will fluctuate from quarter to
quarter based upon factors such as any product acquisitions of ours, sales and
marketing initiatives, competition and the extent and
severity of illness during cold and flu seasons. These quarterly fluctuations
may be substantial.
WE WILL REQUIRE ADDITIONAL FUNDING TO REPAY DEBT AND TO FUND OPERATIONS AND WE
MAY NOT BE ABLE TO OBTAIN ANY
We anticipate that, based upon our current operating plan, including anticipated
sales of Primsol and Orapred, our existing capital resources and access to the
remaining $5.25 million under our credit facility with FS Ascent Investments, we
will have enough cash to fund operations through December 31, 2001. We will
need additional funds to repay debt, including interest payments, and to fund
operations beyond December 31, 2001. If adequate funds are not available, we may
be required to (i) obtain funds on unfavorable terms that may require us to
relinquish rights to certain of our technologies or products or that would
significantly dilute our stockholders, (ii) significantly scale back or
terminate current operations and/or (iii) seek relief under applicable
bankruptcy laws. Any of such cases would have a material adverse effect on our
business.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS
AND OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF WE LOSE A CUSTOMER OR IF A
CUSTOMER CANCELS OR DELAYS AN ORDER.
Because we depend on a small number of customers, our revenue would decline
significantly if we lose a customer, or if a customer cancels or delays an
order. Sales to Warner Lambert Company accounted for 20% of our net revenues
for the year ended December 31, 2000 and 50% of our net revenues for the year
ended December 31, 1999. In addition, sales to McKesson HBOC accounted for 11%
of our net revenues for the year ended December 31, 2000 and 5% of our net
revenues for the year ended December 31, 1999. We do not have any long-term
contracts with any of our customers. We expect to continue to derive a majority
of our revenues from a limited number of customers in the near future.
YOU WILL NOT BE ABLE TO CONTROL OUR CORPORATE EVENTS BECAUSE ING FURMAN SELZ
OWNS APPROXIMATELY 65% OF OUR SECURITIES
ING Furman Selz beneficially owns approximately 65% of our securities, including
depositary shares issuable upon conversion of outstanding convertible notes as
of March 31, 2001. Accordingly, ING Furman Selz, by virtue of its majority
ownership of our securities, has the power, acting alone, to elect a majority of
our board of directors over a three year period and has the ability to determine
the outcome of any corporate actions requiring stockholder approval, including
without limitation a sale of the Company, regardless of how our other
stockholders may vote. ING Furman Selz's interests could conflict with the
interests of our other stockholders. For instance, in the event of any sale of
the Company, the first $27.7 million in proceeds will be paid to ING Furman Selz
as repayment of debt, plus additional payments required under the terms of the
securities.
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THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of Orapred syrup and Primsol solution will depend upon
their acceptance by pediatricians, pediatric nurses and third party payors as
clinically useful, cost-effective and safe. Factors that we believe will
materially affect market acceptance of these products include:
- - the safety, efficacy, side effect profile, taste, dosing and ease of
administration of the product;
- - the patent and other proprietary position of the product;
- - brand name recognition; and
- - price.
The failure to achieve market acceptance of Orapred syrup and Primsol solution
could have a material adverse effect on our business.
WE FACE SIGNIFICANT COMPETITION IN THE PEDIATRIC PHARMACEUTICAL INDUSTRY
The pediatric pharmaceutical industry is highly competitive and characterized by
rapid and substantial technological change. We may be unable to successfully
compete in this industry. Our competitors include several large pharmaceutical
companies that market pediatric products in addition to products for the adult
market, including GlaxoSmithKline, which markets Ceftin oral suspension which
competes with our Primsol product; Eli Lilly and Company, which markets Ceclor
suspension which competes with our Primsol product; the Ortho-McNeil
Pharmaceutical Division of Johnson & Johnson, Inc., which markets Tylenol
suspension which would compete with our acetaminophen extended release product;
and Muro Pharmaceuticals, Inc., which markets Prelone which competes with our
Orapred product.
We currently market three products as alternative treatments for pediatric
indications for which products with the same active ingredient are
well-entrenched in the market. Our products compete with products that do not
contain the same active ingredient but are used for the same indication and are
well entrenched within the pediatric market. Moreover, our products are
reformulations of existing drugs of other manufacturers and may have
significantly narrower patent or other competitive protection.
Particular competitive factors that we believe may affect us include:
- - many of our competitors have well known brand names that have been
promoted over many years;
- - many of our competitors offer well established, broad product lines and
services which we do not offer; and
- - many of our competitors have substantially greater financial, technical
and human resources than we have, including greater experience and capabilities
in undertaking preclinical studies and human clinical trials, obtaining FDA and
other regulatory approvals and marketing pharmaceuticals.
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WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS
We have no manufacturing facilities. Instead, we rely on third parties to
manufacture our products in accordance with current Good Manufacturing Practices
requirements
prescribed by the FDA. In particular, we rely on Lyne Laboratories, Inc. for the
manufacture of Orapred syrup and Primsol solution.
We expect to be dependent on third party manufacturers for the production of all
of our products. There are a limited number of manufacturers that operate under
the FDA's Good Manufacturing Practices requirements and capable of manufacturing
our products. In the event that we are unable to obtain contract manufacturing,
or obtain manufacturing on commercially reasonable terms, we may not be able to
commercialize our products as planned.
We have no experience in manufacturing on a commercial scale and no facilities
or equipment to do so. If we determine to develop our own manufacturing
capabilities, we will need to recruit qualified personnel and build or lease the
requisite facilities and equipment. We may not be able to successfully develop
our own manufacturing capabilities. Moreover, it may be very costly and time
consuming for us to develop the capabilities.
WE ARE DEPENDENT UPON SOLE SOURCE SUPPLIERS FOR OUR PRODUCTS
Some of our supply arrangements require that we buy all of our requirements of a
particular product exclusively from the other party to the contract. Moreover,
for one of our products, we have qualified only one supplier. Any interruption
in supply from any of our suppliers or their inability to manufacture our
products in accordance with the FDA's Good Manufacturing Practices requirements
may adversely affect us in a number of ways, including our being unable to meet
commercial demand for our products.
WE ARE DEPENDENT UPON A THIRD PARTY DISTRIBUTOR
We distribute our products through a third party distribution warehouse. We have
no experience with the distribution of products and rely on the third party
distributor to perform order entry, customer service and collection of accounts
receivable on our behalf. The success of this arrangement is dependent on, among
other things, the skills, experience and efforts of the third party distributor.
THE PRICING OF OUR PRODUCTS IS SUBJECT TO DOWNWARD PRESSURES
The availability of reimbursement by governmental and other third party payors
affects the market for our pharmaceutical products. These third party payors
continually attempt to contain or reduce healthcare costs by challenging the
prices charged for medical products and services. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control.
We expect to experience pricing pressure due to the trend toward managed
healthcare, the increasing influence of health maintenance organizations and
additional legislative proposals. We may not be able to sell our products
profitably if reimbursement is unavailable or limited in scope or amount.
WE MAY NOT BE ABLE TO MAINTAIN OR OBTAIN REGULATORY APPROVALS
The production and the marketing of our products are subject to extensive
regulation by federal, state and local governmental authorities in the United
States and other countries. If we fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating restrictions and
criminal prosecutions.
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Moreover, if our financial condition improves sufficiently such that we resume
product development, clearing the regulatory process for the commercial
marketing of a pharmaceutical product takes many years and requires the
expenditure of substantial resources. We have had only limited experience in
filing and prosecuting applications necessary to gain regulatory approvals.
Thus, we may not be able to obtain regulatory approvals to conduct clinical
trials of or manufacture or market any future potential products.
Factors that may affect the regulatory process for any future product candidates
we may have include:
- - our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities, which
could delay, limit or prevent regulatory approval;
- - we or the FDA may suspend clinical trials at any time if the participants
are being exposed to unanticipated or unacceptable health risks; and
- - any regulatory approval to market a product may be subject to limitations
on the indicated uses for which we may market the product. These limitations may
limit the size of the market for the product.
As to products for which we have or, with respect to future product candidates,
if any, obtain marketing approval, we, the manufacturer of the product, if other
than us, and the manufacturing facilities will be subject to continual review
and periodic inspections by the FDA. The subsequent discovery of previously
unknown problems with the product, manufacturer or facility may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
We also are subject to numerous and varying foreign regulatory requirements
governing the design and conduct of clinical trials and the manufacturing and
marketing of our products. The approval procedure varies among countries. The
time required to obtain foreign approvals often differs from that required to
obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities in other countries.
ANY PROMOTION ARRANGEMENTS DEPEND ON THE SUPPORT OF OUR COLLABORATORS
We plan to continue to seek to enter into arrangements to promote some
pharmaceutical products of third parties to pediatricians in the United States.
The success of any arrangement is dependent on, among other things, the third
party's commitment to the arrangement, the financial condition of the third
party and market acceptance of the third party's products.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks which are inherent
in the testing, manufacturing, marketing and sale of pharmaceuticals. Product
liability claims might be made by consumers, health care providers or
pharmaceutical companies or others that sell our products. If product liability
claims are made with respect to our products, we may need to recall the products
or change the indications for which they may be used. A recall of a product
would have a material adverse effect on our business, financial condition and
results of operations.
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WE HAVE LIMITED PRODUCT LIABILITY COVERAGE AND WE MAY NOT BE ABLE TO OBTAIN IT
IN THE FUTURE
Our product liability coverage is expensive and we have purchased only limited
coverage. This coverage is subject to various deductibles. In the future, we may
not be able to maintain or obtain the necessary product liability insurance at a
reasonable cost or in sufficient amounts to protect us against losses.
Accordingly, product liability claims could have a material adverse effect on
our business, financial condition and results of operations.
WE MAY BECOME INVOLVED IN PROCEEDINGS RELATING TO INTELLECTUAL PROPERTY RIGHTS
Because our products are based on existing compounds rather than new chemical
entities, we may become parties to patent litigation and interference
proceedings. The types of situations in which we may become parties to
litigation or proceedings include:
- - if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition proceedings to
determine the priority of invention;
- - if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we will
need to defend against such proceedings;
- - we may initiate litigation or other proceedings against third parties to
enforce our patent rights; or
- - we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by them or to obtain a judgment that our
products or processes do not infringe their patents.
An adverse outcome in any litigation or interference proceeding could subject us
to significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable terms
or at all. Thus, an unfavorable outcome in any patent litigation or interference
proceeding could have a material adverse effect on our business, financial
condition or results of operations.
The cost to us of any patent litigation or interference proceeding, even if
resolved in our favor, could be substantial. Uncertainties resulting from the
initiation and continuation of patent litigation or interference proceedings
could have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and interference proceedings may also absorb
significant management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION
We are a party to a number of patent licenses that are important to our business
and seek to enter into additional patent licenses in the future. These licenses
impose various commercialization, sublicensing, royalty, insurance and other
obligations on us. If we fail to comply with these requirements, the licensor
will have the right to terminate the license, which could have a material
adverse effect on our business, financial condition or results of operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE CANNOT ADEQUATELY PROTECT OUR
PROPRIETARY KNOW-HOW
We must maintain the confidentiality of our trade secrets and other proprietary
know-how. We seek to protect this information by entering into confidentiality
agreements with our employees, consultants, any outside scientific collaborators
and other advisors. These agreements may be breached by the other party. We may
not be able to obtain an adequate, or perhaps, any remedy to address the breach.
In addition, our trade secrets may otherwise become known or be independently
developed by our competitors.
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WE INTEND TO PURSUE STRATEGIC ACQUISITIONS WHICH MAY BE DIFFICULT TO INTEGRATE
As part of our overall business strategy, we intend to pursue strategic
acquisitions that would provide additional product offerings. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt or amortization
expenses related to the goodwill and other intangible assets, any of which could
have a material adverse effect on our business. In addition, acquisitions
involve numerous risks, including:
- - difficulties in the assimilation of the operations, technologies, products
and personnel of the acquired company;
- - the diversion of management's attention from other business concerns; and
- - the potential loss of key employees of the acquired company.
From time to time, we have engaged in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN ANY DEVELOPMENT EFFORTS THAT WE
MAY RESUME
We have introduced only three internally-developed products, Pediamist nasal
saline spray, Primsol trimethoprim solution and Orapred syrup into the market.
Although we have completed development of products and have filed applications
with the FDA for marketing approval, any future product candidates we may have
would require additional formulation, preclinical studies, clinical trials and
regulatory approval prior to any commercial sales. Moreover, in December 1999,
due to limitations on resources, we suspended the development of our products
indefinitely. If we resume product development, we will be required to
successfully address a number of technological challenges to complete the
development of our potential products. These products may have undesirable or
unintended side effects, toxicities or other characteristics that may prevent or
limit commercial use.
WE MAY BE UNSUCCESSFUL WITH ANY FUTURE CLINICAL TRIALS THAT WE MAY RESUME
In order to obtain regulatory approvals for the commercial sale of any future
products we may have under development, if any, we will be required to
demonstrate through preclinical testing and clinical trials that the product is
safe and efficacious. The results from preclinical testing and early clinical
trials of a product that is under development may not be predictive of results
that will be obtained in large-scale later clinical trials. In December 1999,
due to limitations on resources, we suspended the development of our products
indefinitely.
The rate of completion of our clinical trials, if any, is dependent on the rate
of patient enrollment, which is beyond our control. We may not be able
successfully to complete any clinical trial of a potential product within a
specified time period, if at all, including because of a lack of patient
enrollment. Moreover, clinical trials may not show any potential product to be
safe or efficacious. Thus, the FDA and other regulatory authorities may not
approve any of our potential products for any indication.
If we are unable to complete a clinical trial of one of our potential products,
if the results of the trial are unfavorable or if the time or cost of completing
the trial exceeds our expectation, assuming we resume product development, our
business, financial condition or results of operations could be materially
adversely affected.
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WE ARE DEPENDENT ON A FEW KEY EMPLOYEES WITH KNOWLEDGE OF THE PEDIATRIC
PHARMACEUTICAL INDUSTRY
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Clemente, the president and chairman of our
board of directors. The loss of the services of Dr. Clemente could have a
material adverse effect on our business.
UNCERTAINTY OF HEALTHCARE REFORM MEASURES
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the healthcare system.
Further proposals are likely. The potential for adoption of these proposals
affects and will affect our ability to raise capital, obtain additional
collaborative partners and market our products.
WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL WITH KNOWLEDGE OF
DEVELOPING AND MANUFACTURING PEDIATRIC PHARMACEUTICALS
Recruiting and retaining qualified scientific personnel to perform research and
development is critical to our success. Any growth and expansion into areas and
activities requiring additional expertise would expected to require the addition
of new management personnel and the development of additional expertise by
existing management personnel. We may not be able to attract and retain highly
skilled personnel on acceptable terms given the competition for experienced
scientists among pharmaceutical and health care companies, universities and
non-profit research institutions.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48, also known as FRR 48, "Disclosure of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments". FRR 48 requires disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those required under generally accepted accounting principles.
In the ordinary course of business, Ascent is exposed to interest rate risk for
its subordinated and convertible subordinated notes. All of the notes have fixed
annual rates of either 7.5% or 8.0%. At March 31, 2001, the fair value of these
notes was estimated to approximate carrying value. Market risk was estimated as
the potential increase in fair value resulting from a hypothetical 10% decrease
in the Company's weighted average short-term borrowing rate at March 31, 2001,
which was not materially different from the quarter-end carrying value.
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PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
a) See Part 1, "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," for a
description of (i) equity securities of Ascent sold by Ascent during the fiscal
quarter ended March 31, 2001 which were not registered under the Securities Act
of 1933, as amended (each of which was issued pursuant to Section 4(2) of the
Securities Act) and (ii) working capital and restrictions and other limitations
upon payment of dividends, which information is incorporated herein by
reference.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None.
b) Reports on Form 8-K
1. On January 16, 2001, Ascent filed a Current Report on Form 8-K with the
Securities and Exchange Commission announcing that Ascent had contingently sold
disposed of its Feverall product line to Alpharma USPD, Inc. and entered into a
loan agreement with FS Ascent Investments LLC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASCENT PEDIATRICS, INC.
Date: May 15, 2001 By: /s/ EMMETT CLEMENTE
-------------------------------------------
Emmett Clemente
President and Chairman of the Board
(Principal Executive and Financial Officer)
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