1
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 JUNE 30, 2001
COMMISSION FILE NUMBER 000-22347
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ASCENT PEDIATRICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-3047405
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
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(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
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None
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(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 August 14, 2001, there were 17,056,817 depositary shares outstanding, each
depositary share representing one share of common stock, $0.00004 par value per
share, and represented by a depositary receipt.
2
ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
Page
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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 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds 23
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signature 26
Exhibit Index 27
3
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
June 30, December 31,
2001 2000
------------- --------------
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,247,830 $ 260,882
Accounts receivable, less allowance for doubtful accounts of $180,852 and
$137,164 at June 30, 2001 and December 31, 2000, respectively . . . . . 1,485,574 812,373
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,568,745 1,624,766
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,810 410,129
------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 4,539,959 3,108,150
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419,192 378,879
Debt issue costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897,786 1,267,433
Assets contingently transferred to Alpharma . . . . . . . . . . . . . . . . . . . 10,493,146 10,493,146
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,432 45,300
------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,394,515 $ 15,292,908
============= ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 938,411 $ 1,309,124
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798,788 1,270,240
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,259,178 927,537
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,912,567 738,544
Series H redemption price. . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 18,349 33,884
------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 15,927,293 4,279,329
Subordinated secured notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,154,894 20,706,113
Debt contingently extinguished by Alpharma. . . . . . . . . . . . . . . . . . . . 12,000,000 12,000,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,080 14,080
------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,096,267 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 June 30, 2001 and December 31, 2000, respectively . . . . . . 1,000 -
------------- --------------
Total redeemable preferred stock. . . . . . . . . . . . . . . . . . . . 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
June 30, 2001 and December 31, 2000, respectively . . . . . . . . . . . 680 390
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 61,107,693 58,894,821
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (99,811,125) (80,601,825)
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Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . (38,702,752) (21,706,614)
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Total liabilities, redeemable preferred stock and stockholders' deficit $ 16,394,515 $ 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 June 30, Six Months Ended June 30,
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2001 2000 2001
----------------------------- --------------------------- -------------
Product revenue, net. . . . . . . . . . . . . . $ 2,274,372 $ 662,620 $ 3,297,916
Co-promotional revenue. . . . . . . . . . . . . - 445,106 -
----------------------------- --------------------------- -------------
Total net revenue . . . . . . . . . . . . . . . 2,274,372 1,107,726 3,297,916
Costs and expenses
Costs of product sales . . . . . . . . . . 414,376 288,361 674,173
Selling, general and administrative. . . . 3,530,870 3,316,065 7,353,808
Research and development . . . . . . . . . 236,429 530,784 576,112
----------------------------- --------------------------- -------------
Total costs and expenses . . . . . . . . . 4,181,675 4,135,210 8,604,093
Loss from operations. . . . . . . . . (1,907,303) (3,027,484) (5,306,177)
Interest income . . . . . . . . . . . . . . . . 9,391 16,842 21,416
Interest expense. . . . . . . . . . . . . . . . (7,002,965) (705,824) (13,924,539)
----------------------------- --------------------------- -------------
Net loss. . . . . . . . . . . . . . . $ (8,900,877) $ (3,716,466) $(19,209,300)
============================= =========================== =============
Net loss per share, basic and diluted
$ (0.52) $ (0.38) $ (1.39)
============================= =========================== =============
Weighted average shares outstanding - basic
And diluted. . . . . . . . . . . . . . . . . 17,009,722 9,764,158 13,779,748
============================= =========================== =============
2000
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Product revenue, net. . . . . . . . . . . . . . $ 1,236,912
Co-promotional revenue. . . . . . . . . . . . . 980,520
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Total net revenue . . . . . . . . . . . . . . . 2,217,432
Costs and expenses
Costs of product sales . . . . . . . . . . 619,449
Selling, general and administrative. . . . 6,334,366
Research and development . . . . . . . . . 1,275,115
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Total costs and expenses . . . . . . . . . 8,228,930
Loss from operations. . . . . . . . . (6,011,498)
Interest income . . . . . . . . . . . . . . . . 27,419
Interest expense. . . . . . . . . . . . . . . . (1,330,555)
------------
Net loss. . . . . . . . . . . . . . . $(7,314,634)
============
Net loss per share, basic and diluted
$ (0.75)
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Weighted average shares outstanding - basic
And diluted. . . . . . . . . . . . . . . . . 9,720,753
============
See accompanying notes to unaudited condensed financial statements.
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ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
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2001 2000
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Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (19,209,300) $(7,314,634)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 150,259 491,729
Non-cash interest expense . . . . . . . . . . . . . . . . . 12,848,628 315,741
Stock based compensation. . . . . . . . . . . . . . . . . . (1,753) -
Provision for bad debts . . . . . . . . . . . . . . . . . . 43,688 -
Inventory write-off . . . . . . . . . . . . . . . . . . . . (32,915) (16,620)
Loss on disposal of fixed assets. . . . . . . . . . . . . . 23,494 -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (716,889) 202,575
Inventory . . . . . . . . . . . . . . . . . . . . . . . 88,936 (328,965)
Other assets. . . . . . . . . . . . . . . . . . . . . . 173,187 (50,468)
Accounts payable. . . . . . . . . . . . . . . . . . . . (370,713) (737,127)
Interest payable. . . . . . . . . . . . . . . . . . . . (471,452) 201,355
Accrued expenses. . . . . . . . . . . . . . . . . . . . 331,641 (699,825)
Deferred revenue. . . . . . . . . . . . . . . . . . . . 2,174,023 707,606
Other current liabilities . . . . . . . . . . . . . . . (15,535) (54,426)
Other liabilities . . . . . . . . . . . . . . . . . . . - 14,080
--------------------------- ------------
Net cash used in operating activities. . . . . . . (4,984,701) (7,268,979)
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . (214,066) (179,920)
--------------------------- ------------
Net cash used in investing activities. . . . . . . (214,066) (179,920)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs. . 15,229 277,694
Proceeds from issuance of preferred stock, net of issuance costs 1,000 -
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . 6,250,000 5,849,797
Proceeds from issuance of debt related warrants. . . . . . . . . - 650,203
Cash paid for debt issue costs . . . . . . . . . . . . . . . . . (80,514) -
--------------------------- ------------
Net cash provided by financing activities . . . . 6,185,715 6,777,694
Net increase (decrease) in cash and cash equivalents. . . . . . . . . 986,948 (671,205)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . 260,882 1,067,049
--------------------------- ------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . $ 1,247,830 $ 395,844
=========================== ============
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 had operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business. Ascent introduced its 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, Ascent 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 Ascent,
although Ascent maintains 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 Ascent up to $40.0 million from time to time for certain
corporate purposes, and Ascent 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, Ascent had borrowed an
aggregate of $12.0 million in principal under the 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,
Ascent 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, the Company modified its strategy until such time as the
Company determines that its financial condition has adequately improved.
Specifically, Ascent is focused on marketing Orapred and Primsol and on seeking
appropriate co-promotional opportunities. Ascent has suspended all product
development activities until such time, if ever, as the Company's 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.
FS Private Investments, formerly ING Furman Selz Investments LLC, beneficially
owns approximately 67% of our securities, including depositary shares issuable
upon conversion of outstanding convertible notes and warrants as of June 30,
2001. Accordingly, FS Private Investments, by virtue of its majority ownership
of our securities, has the power, acting alone, to elect a majority of Ascent's
board of directors over a three year period and has the ability to determine the
Page 4
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outcome of any corporate actions requiring stockholder approval, including,
without limitation, a sale of the Company, regardless of how Ascent's other
stockholders may vote. FS Private Investments' interests could conflict with the
interests of Ascent's other stockholders. For instance, in the event of any sale
of the Company, the first $28.95 million in proceeds will be paid to FS Private
Investments as repayment of debt, plus additional payments required under the
terms of certain outstanding securities.
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 June 30, 2001 and 2000. The results for the interim periods
presented are not necessarily indicative of results to be expected in the full
fiscal year or any future periods. 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.
Recognition of 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
Ascent's customers fulfill prescriptions for the consumer. Co-promotion revenue
is recognized as earned based upon the performance requirements of the
respective agreement.
The Company launched Primsol solution during February 2000 and Orapred syrup
during January 2001. The Company is deferring the recognition of revenue from
the sale of both products until such time that the right of return lapses.
Through June 30, 2001, the Company has deferred $717,700 in Primsol revenue and
$2,194,800 in Orapred revenue.
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.
Page 5
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Options and warrants outstanding to purchase an aggregate of 1,970,854 and
672,313 depositary shares as of June 30, 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 would be antidilutive.
Similarly, options, warrants and convertible debt outstanding to purchase or
convert into an aggregate of 8,479,521 and 8,846,431 depositary shares as of
June 30, 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 per share market price
at June 30 of the depositary shares and would be antidilutive under the treasury
stock method.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The Company
does not believe that the adoption of SFAS No.141 and SFAS No. 142 will have any
effect on its financial statements.
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:
June 30, December 31,
2001 2000
---------- -------------
Raw materials. $ 726,311 $ 965,538
Finished goods 842,434 659,228
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Total . . . . $1,568,745 $ 1,624,766
========== =============
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
June 30, December 31,
2001 2000
---------- -------------
Employee compensation expenses $ 744,951 $ 342,296
Legal and accounting expenses. 112,082 74,910
Selling fees and chargebacks . 75,851 171,743
Preferred stock dividend . . . 323,082 323,082
Other. . . . . . . . . . . . . 3,212 15,506
---------- -------------
Total . . . . . . . . $1,259,178 $ 927,537
========== =============
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6. FS PRIVATE INVESTMENTS LOAN ARRANGEMENTS
$4.0 Million Credit Facility. On July 1, 1999, Ascent entered into an
arrangement with certain funds affiliated with FS Private Investments under
which such funds agreed to loan Ascent up to $4.0 million. Pursuant to this
agreement, Ascent issued to the funds affiliated with FS Private Investments
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 FS
Private 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 FS Private Investments 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 FS
Private Investments 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 FS Private Investments
1,000,000 warrants which were valued at $513,500 (classified as debt issue
costs). As of December 31, 2000, Ascent had borrowed the entire $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 ("FS Investments"), which is
affiliated with FS Private 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
(of which the entire $6.25 million has been advanced to Ascent as of June 30,
2001) and $4.0 million of Series H preferred stock ($1,000 of which has been
advanced as of June 30, 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 December 31, 2001 at Ascent's election,
or earlier upon a change in control (as defined in the loan agreement) of Ascent
or certain other conditions. Ascent has currently elected to extend the
maturity date until August 31, 2001. 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 advanced
to Ascent under the loan agreement was 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
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over the original 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 2,950,000 depositary shares have
been issued as of June 30, 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, all of which warrants, as discussed below, were exercised as of March 23,
2001. The warrants issued to FS Investments to purchase 2,950,000 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
$2,133,570. The incremental value of the repriced 5,600,000 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 original six month term of the loan agreement with FS
Investments. The remaining warrants, issuable for an aggregate of 9,000,000
depositary shares will be issued in increments upon the extension of the due
date of the principal of the note from June 30, 2001 to no later than December
31, 2001, as discussed above. The due date on the notes can be extended by
Ascent until December 31, 2001 in monthly increments with the first three
extensions each 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 of warrants exercisable for an aggregate of
2,000,000 depositary shares. On June 30, 2001, Ascent issued warrants to
purchase 1,000,000 depositary shares to FS Investments to extend the due date
from June 30, 2001 to July 31, 2001. The fair value of these warrants was
recorded as a contribution to additional paid in capital of $469,135 and will be
recorded as interest expense in the quarter ended September 30, 2001.
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 due 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 FS Private Investments and Flynn
Partners exercised all of their then outstanding warrants (including the
repriced warrants exercisable for an aggregate of 5,600,000 depositary shares
discussed above), on a cashless basis, which resulted in the issuance of
7,211,528 depositary shares.
7. SUBSEQUENT EVENTS
On July 31, 2001, Ascent issued warrants to purchase an aggregate of 1,000,000
depositary shares to FS Ascent Investments LLC to extend the due date from July
31, 2001 to August 31, 2001 on the $6.25 million of 7.5% secured notes. The
fair value of these warrants was recorded as a contribution to additional paid
in capital of $439,131 on July 31, 2001 (the date of issuance). It will be
recorded as interest expense in the quarter ended September 30, 2001.
On July 24, 2001, Ascent notified FS Ascent Investments of its intent to extend
the due date on the $6.25 million of 7.5% secured notes from August 31, 2001 to
September 30, 2001. On August 31, 2001 Ascent will issue warrants to purchase an
aggregate of 1,000,000 depositary shares to FS Ascent Investments LLC to
finalize this extension.
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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 June 30, 2001 of $99,811,000.
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
marketing 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.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 2000
REVENUE: Ascent had total net revenue of $2,274,000 and $3,298,000 for the
three and six months ended June 30, 2001, respectively, compared with total net
revenue of $1,108,000 and $2,217,000 for the three and six months ended June 30,
2000, respectively. The increase in net revenue of $1,166,000 for the three
months ended June 30, 2001, was primarily attributable to $2,108,000 in Orapred
syrup revenue and an increase in Primsol revenue of $77,000 over fiscal year
2000. This was offset by the absence of Feverall revenue of $572,000 due to the
sale of the Feverall product line in December 2000 to Alpharma USPD and the
absence of co-promotional revenue of $445,000 due to the termination of the
Omnicef(R) agreement in January 2000. The increase in net revenue of $1,081,000
for the six months ended June 30, 2001, was primarily attributable to $2,842,000
in Orapred syrup revenue and an increase in Primsol revenue of $346,000 over
fiscal year 2000. This was offset by the absence of Feverall revenue of
$1,123,000 due to the sale of the Feverall product line in December 2000 to
Alpharma USPD and the absence of co-promotional revenue of $980,000 due to the
termination of the Omnicef(R) agreement in January 2000.
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COST OF PRODUCT SALES: Cost of product sales was $414,000 and $674,000 for the
three and six months ended June 30, 2001, respectively, compared with $288,000
and $619,000 for the three and six months ended June 30, 2000, respectively.
The increase in cost of product sales of $126,000 for the three months ended
June 20, 2001, was primarily the result of an increase of $342,000 in
manufacturing and testing costs associated with the production of Orapred syrup
and Primsol solution. This was offset by decreases of $144,000 in manufacturing
costs and $83,000 in amortization expense related to the termination of the
Feverall manufacturing agreement due to the sale of the Feverall product line.
The increase in cost of product sales of $55,000 for the six months ended June
20, 2001, was primarily the result of an increase of $472,000 in manufacturing
and testing costs associated with the production of Orapred syrup and Primsol
solution. This was offset by a decreases of $296,000 in manufacturing costs and
$167,000 in amortization expense related to the termination of the Feverall
manufacturing agreement due to the sale of the Feverall product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling, general
and administrative expenses of $3,531,000 and $7,354,000 for the three and six
months ended June 30, 2001, respectively, compared with $3,316,000 and
$6,334,000 for the three and six months ended June 30, 2000, respectively,
representing increases of $215,000 and $1,020,000, respectively.
Selling and marketing expenses were $2,772,000 and $6,063,000 for the three and
six months ended June 30, 2001, respectively, compared with expenses of
$2,725,000 and $5,207,000 for the three and six months ended June 30, 2000,
respectively. The increase in selling and marketing expenses of $47,000 for the
three months ended June 30, 2001, was primarily the result of $337,000 in
advertising and promotion expenses for Orapred syrup. This was offset by (i) a
decrease of $78,000 in personnel expenses due to reduced headcount, (ii) a
decrease of $188,000 in advertising and promotion expenses for Primsol solution
and (iii) the increase in fiscal 2000 and not fiscal 2001 of $35,000 in
telesales expenses in a marketing program. The increase in selling and marketing
expenses of $856,000 for the six months ended June 30, 2001, was primarily the
result of $1,299,000 for the launch of Orapred syrup, which included a national
sales meeting, samples and selling materials, direct mail, media, and trade
promotions. This was offset by (i) a decrease of $282,000 in personnel expenses
due to reduced headcount, (ii) a decrease of $281,000 in advertising and
promotion expenses for Primsol solution and (iii) the increase in fiscal 2000
and not fiscal 2001 of $37,000 in telesales expenses in a marketing program.
General and administrative expenses were $759,000 and $1,291,000 for the three
and six months ended June 30, 2001, respectively, compared with expenses of
$591,000 and $1,127,000 for the three and six months ended June 30, 2000,
respectively. The increase of $168,000 for the three months ended June 30, 2001,
was primarily attributable to increases of (i) $193,000 due to changes in
Ascent's bonus plan, (ii) $14,000 in consulting expenses due to agreements with
members of Ascent's board of directors, and (iii) $43,000 in legal, accounting
and investor relations expenses. These increases were offset by a decrease of
$14,000 in personnel expenses due to reduced headcount and a decrease of $81,000
in amortization expense for trademarks and goodwill due to the sale of the
Feverall product line to Alpharma USPD. The increase of $164,000 for the six
months ended June 30, 2001, was primarily attributable to increases of (i)
$263,000 due to changes in Ascent's bonus plan, (ii) $52,000 in consulting
expenses due to agreements with members of Ascent's board of directors, and
(iii) $73,000 in legal, accounting and investor relations expenses. These
increases were offset by a decrease of $33,000 in personnel expenses due to
reduced headcount and a decrease of $163,000 in amortization expense for
trademarks and goodwill due to the sale of the Feverall product line to Alpharma
USPD.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses of
$236,000 and $576,000 for the three and six months ended June 30, 2001,
respectively, compared with expenses of $531,000 and $1,275,000 for the three
and six months ended June 30, 2000, respectively. The decrease of $295,000 for
the three months ended June 30, 2001, primarily reflects the incurrence in
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fiscal 2000 and not fiscal 2001 of (i) $46,000 for the Pediavent product
research and development program that was terminated in December 1999, but which
had certain outstanding obligations in fiscal 2000, (ii) $14,000 for the Orapred
product's research and development program due to timing differences in expenses
in anticipation of the FDA's response on Ascent's Abbreviated New Drug
Application, (iii) $32,000 in testing expenses related to the production of
Primsol solution batches in anticipation of receiving FDA market approval and
(iv) $158,000 in personnel expenses due to reduced headcount. The decrease of
$699,000 for the six months ended June 30, 2001, primarily reflects the
incurrence in fiscal 2000 and not fiscal 2001 of (i) $92,000 for the Pediavent
product research and development program that was terminated in December 1999,
but which had certain outstanding obligations in fiscal 2000, (ii) $89,000 for
the Orapred product's research and development program due to timing differences
in expenses in anticipation of the FDA's response on Ascent's Abbreviated New
Drug Application, (iii) $139,000 in manufacturing and testing expenses related
to the production of Primsol solution batches in anticipation of receiving FDA
market approval and (iv) $389,000 in personnel expenses due to reduced
headcount.
INTEREST: Ascent had interest income of $9,000 and $21,000 for the three and
six months ended June 30, 2001, respectively, compared with interest income of
$17,000 and $27,000 for the three and six months ended June 30, 2000,
respectively, representing decreases of $8,000 and $5,000, respectively. Ascent
had interest expense of $7,003,000 and $13,925,000 for the three and six months
ended June 30, 2001, respectively, compared with interest expense of $706,000
and $1,331,000 for the three and six months ended June 30, 2000, respectively.
The increase of $6,297,000 for the three months ended June 30, 2001, was
primarily attributable to the amortization of $5.0 million of the $10.0 million
Series H redemption price, as well as $1,199,000 in interest expense due to the
additional $14.75 million of subordinated notes issued and outstanding during
the second quarter of 2001 compared to the second quarter of 2000. The increase
of $12,594,000 for the six months ended June 30, 2001, was primarily
attributable to the amortization of $10.0 million of the $10.0 million Series H
redemption price, as well as $2,370,000 in interest expense due to the
additional $14.75 million of subordinated notes issued and outstanding during
the first six months of 2001 compared to the first six months 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 $46.8 million, and, in 1997, an initial
public offering of shares of common stock, with net proceeds of $17.5 million.
As of June 30, 2001, Ascent had $1,248,000 in cash and cash equivalents, an
increase of $987,000 from $261,000 as of December 31, 2000. As of August 1,
2001, Ascent has borrowed $6.25 million from FS Ascent Investments LLC under its
$10.25 million credit facility described below. Although Ascent currently has
access to sufficient cash to fund operations through December 31, 2001, the
Company does not have sufficient funds to repay debt or interest on such debt
which becomes due in December 2001. As a result, Ascent will need additional
funds in December 2001 to repay outstanding debt, including interest payments,
in December 2001 and to fund operations beyond December 2001.
Ascent used $5.0 million of cash in operations for the six months ended June 30,
2001 compared to $7.3 million for the six months ended June 30, 2000. Net cash
used in operations for the six months ended June 30, 2001 was primarily
attributable to a $19.2 million net loss generated during the period, an
increase in accounts receivable of $717,000 and a decrease in interest payable
of $471,000. This was offset in part by non-cash interest expense of $12.8
million, an increase in deferred revenue of $2.2 million and an increase in
accrued expenses of $332,000. Ascent's investing activities resulted in net cash
used of $214,000 for the six months ended June 30, 2001 compared to $180,000 for
the six months ended June 30, 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
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in the future. Cash provided by financing activities was $6.2 million for the
six months ended June 30, 2001 compared to $6.8 million for the six months ended
June 30, 2000. The principal source of financing for the six months ended June
30, 2001 was the FS Ascent Investments credit facility discussed below, which
yielded net proceeds of $6.25 million.
Outstanding Indebtedness to FS Private Investments and Other Entities
As of June 30, 2001, Ascent had notes outstanding in the aggregate original
principal amount of $28.95 million under its financing arrangements with the
former holders of Series G preferred stock and funds affiliated with FS Private
Investments. 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 June 30, 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 June 30, 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.
- - 7.5% convertible subordinated notes in the principal amount of up to $4.0
million issued on July 1, 1999 to funds affiliated with FS Private Investments
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 June
30, 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 FS Private
Investments 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 June 30, 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% subordinated notes in the principal amount of up to $6.25 million
issued on January 2, 2001 to FS Ascent Investments of which $6.25 million of the
principal amount was outstanding as of June 30, 2001. These notes were
originally due in June 2001. We have currently elected to extend the due date
until August 31, 2001. We have the right to extend the due date to December 31,
2001.
Ascent's financing arrangements, including the material terms of the foregoing
notes, are described in more detail below.
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Series G Financing. On May 13, 1998, Ascent entered into a Series G Securities
Purchase Agreement with funds affiliated with FS Private Investments 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.
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 FS Private
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 FS Private Investments 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 FS Private Investments. 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
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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 FS Private 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 FS Private Investments 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 FS
Private Investments 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 FS Private Investments
1,000,000 warrants which were valued at $513,500 (classified as debt issue
costs). As of December 31, 2000, Ascent had borrowed the entire $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 ("FS Investments"), which is
affiliated with FS Private 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
(of which the entire $6.25 million has been advanced to Ascent as of June 30,
2001) and $4.0 million of Series H preferred stock ($1,000 of which has been
advanced as of June 30, 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 December 31, 2001 at Ascent's election
(which it has exercised, as discussed below), 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 advanced to Ascent under the loan
agreement was 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
original 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 2,950,000 depositary shares have
been issued as of June 30, 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, all of which warrants, as discussed below, were exercised as of March 23,
2001. The warrants issued to FS Investments to purchase 2,950,000 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
$2,133,570. The incremental value of the repriced 5,600,000 million warrants
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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 original six month term of the loan agreement with FS
Investments. The remaining warrants, issuable for an aggregate of 9,000,000
depositary shares will be issued in increments upon the extension of the due
date of the principal of the note from June 30, 2001 to no later than December
31, 2001, as discussed above. The due date on the notes can be extended by
Ascent until December 31, 2001, in monthly increments with the first three
extensions each 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 of warrants exercisable for an aggregate of
2,000,000 depositary shares. On June 30, 2001, Ascent issued warrants to
purchase 1,000,000 depositary shares to FS Investments to extend the due date
from June 30, 2001 to July 31, 2001. The fair value of these warrants was
recorded as a contribution to additional paid in capital of $469,135.
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 due 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.
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 co-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 and its existing capital resources and
access to the remaining $4.0 million under its credit facility with FS
Investments, it will have enough cash to fund operations through December 31,
2001. However, the Company does not have sufficient funds to repay debt or
interest on such debt which becomes due in December 2001. As a result, Ascent
will need additional funds in December 2001 to repay outstanding debt, including
interest payments, in December 2001 and to fund operations beyond December 2001.
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 $868,371 in interest under the 8% subordinated notes due June 1,
2005. As of June 30, 2001, $349,965 of such interest payments had been paid.
Interest payments under the $4.0 and $10.0 million credit facilities with the
funds affiliated with FS Private Investments 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 June 30, 2001, $525,000
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of such interest payments had been paid. As of August 1, 2001, Ascent has
borrowed $6.25 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
$397,552 in interest. As of June 30, 2001, $163,177 of such interest payments
had been paid.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The Company
does not believe that the adoption of SFAS No.141 and SFAS No. 142 will have any
effect on its financial statements.
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 of this Quarterly Report on Form 10-Q 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 June 30, 2001, our
accumulated deficit was approximately $99.8 million. We received our first
revenues from product sales in July 1997. We expect to incur additional
significant operating losses at least 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 sales and marketing initiatives,
competition, any product acquisitions of ours 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 $4.0 million under our credit facility with FS Ascent Investments, we
will have enough cash to fund operations through December 31, 2001. However, we
do not have sufficient funds to repay debt or interest on such debt which
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becomes due in December 2001. As a result, we will need additional funds in
December 2001 to repay outstanding debt, including interest payments, in
December 2001 and to fund operations beyond December 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.
In addition, in their report on our December 31, 2000 financial statements
contained in our Annual Report on Form 10-K, PricewaterhouseCoopers LLP, our
independent public accountants, states that there is substantial doubt about our
ability to continue as a going concern.
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 FS PRIVATE
INVESTMENTS OWNS APPROXIMATELY 67% OF OUR SECURITIES
FS Private Investments beneficially owns approximately 67% of our securities,
including depositary shares issuable upon conversion of outstanding convertible
notes and the exercise of outstanding warrants as of June 30, 2001. Accordingly,
FS Private Investments, 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. FS
Private Investments' interests could conflict with the interests of our other
stockholders. For instance, in the event of any sale of the Company, the first
$28.95 million in proceeds will be paid to FS Private Investments as repayment
of debt, plus additional payments required under the terms of certain
outstanding securities to certain other lenders.
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.
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The failure to achieve market acceptance of Orapred syrup and Primsol solution
would 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 and
which competes with our Primsol product; Eli Lilly and Company, which markets
Ceclor suspension and which competes with our Primsol product; the Ortho-McNeil
Pharmaceutical Division of Johnson & Johnson, Inc., which markets Tylenol
suspension and which would compete with our acetaminophen extended release
product; and Muro Pharmaceuticals, Inc., which markets Prelone and 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.
Moreover, we may face competition from companies that develop generic versions
of any of our products. If generic version of our products are introduced, the
selling prices of our products and our profit margins may decrease because of
the increased competition.
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.
WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS AND THEIR MANUFACTURING CAPACITY
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 continue 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. As a result, we may experience difficulty
in obtaining adequate capacity for our future needs. 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.
To the extent that we enter into manufacturing arrangements with third parties,
we are dependent upon these third parties to perform their obligations in a
timely manner and in accordance with applicable government regulations.
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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 try and 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 two of our products, we have qualified only two suppliers. 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. 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.
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;
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- - 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.
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:
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- - 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.
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:
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- - 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.
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.
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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 June 30, 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 June 30, 2001,
which was not materially different from the quarter-end carrying value.
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 June 30, 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.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2001 Annual Meeting of Stockholders on June 13, 2001. The following
matters were voted upon at the Annual Meeting:
AGAINST/
PROPOSAL FOR WITHHELD ABSTAIN
- --------------------------------------- ---------- -------- -------
To elect Dr. Raymond F. Baddour as
a Class I director to serve for a three
year term expiring at the 2004 Annual
Meeting of Stockholders.. . . . . . . . 13,924,605 10,500 N/A
To elect Mr. James E. Flynn as a
Class I director to serve for a three
year term expiring at the 2004 Annual
Meeting of Stockholders.. . . . . . . . 13,924,605 10,500 N/A
To elect Mr. Brian P. Friedman as a
Class I director to serve for a three
year term expiring at the 2004 Annual
Meeting of Stockholders.. . . . . . . . 13,924,605 10,500 N/A
To ratify the selection of
PricewaterhouseCoopers LLP as our
independent auditors for the current
fiscal year.. . . . . . . . . . . . . . 13,926,825 7,750 530
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 27 for a list of exhibits filed as part of this
Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by
reference.
b) Reports on Form 8-K
1. On April 4, 2001, Ascent filed a Current Report on Form 8-K with the
Securities and Exchange Commission announcing that funds affiliated with FS
Private Investments filed an amended Schedule 13D with the Securities and
Exchange Commission disclosing that it had exercised, on a cashless basis,
warrants to purchase a total of 7,550,000 depositary shares, each of which
evidences an interest in one share of common stock, par value $.0004 per share,
of Ascent Pediatrics, Inc. ("Ascent") and is represented by a depositary receipt
(the "Depositary Shares"), with an exercise price of $.05 per share. As a result
of the cashless exercise of these warrants, Ascent issued to FS Private
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Investments a total of 7,211,528 Depositary Shares. Such warrants had been
issued to FS Private Investments pursuant to the May 13, 1998 Series G
Securities Purchase Agreement, as amended, by and among Ascent, funds affiliated
with FS Private Investments, Flynn Partners and BancBoston Ventures, Inc. FS
Private Investments beneficially owns approximately 67% of the outstanding
Depositary Shares of Ascent.
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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: August 14, 2001 . . . . . .By: /s/ EMMETT CLEMENTE, Ph.D.
Emmett Clemente, Ph.D.
President and Chairman of the Board
(Principal Executive and Financial Officer)
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Exhibit Index
Exhibit Number Description
- -------------- -----------
10.1 Lease Surrender Agreement and Second Amendment to Lease,
dated as of May 1, 2001, between Ballardvale Investors
Limited Partnership and the Registrant.
10.2 1992 Equity Plan, as amended and restated as of February 14,
2001.
10.3 1999 Stock Incentive Plan, as amended and restated as of
February 14, 2001.
10.4 2000 California Stock Option Plan, as amended and restated on
February 14, 2001.
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