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 SEPTEMBER 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 November 12, 2001, there were 17,056,817 depositary shares outstanding, each
depositary share representing one share of common stock, $0.00004 par value per
share.
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 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds 27
Item 6 - Exhibits and Reports on Form 8-K 27
Signature 28
Exhibit Index 29
Page 1
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
September 30, December 31,
2001 2000
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,957 $ 260,882
Accounts receivable, less allowance for doubtful accounts of $198,280 and
$137,164 at September 30, 2001 and December 31, 2000, respectively. . . 1,628,732 812,373
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,882,097 1,624,766
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,519 410,129
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 3,933,305 3,108,150
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,750 378,879
Debt issue costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,376,284 1,267,433
Assets contingently transferred to Alpharma . . . . . . . . . . . . . . . . . . . 10,493,146 10,493,146
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 45,300
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,209,485 $ 15,292,908
=============== ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,031,814 $ 1,309,124
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992,373 1,270,240
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 934,217 927,537
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,239,128 738,544
Series H redemption price. . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 -
Current portion of subordinated secured notes. . . . . . . . . . . . . . . . 6,250,000 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 56,232 33,884
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 22,503,764 4,279,329
Subordinated secured notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,050,937 20,706,113
Debt contingently extinguished by Alpharma. . . . . . . . . . . . . . . . . . . . 12,000,000 12,000,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14,080
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,554,701 36,999,522
Redeemable preferred stock, $.01 par value; 5,000,000 shares authorized;
2,001 and 0 shares, designated as Series H preferred stock, issued and
outstanding at September 30, 2001 and December 31, 2000, respectively. . . . 2,001,000 -
--------------- --------------
Total redeemable preferred stock. . . . . . . . . . . . . . . . . . . . 2,001,000 -
Stockholders' deficit
Common stock, $.00004 par value; 60,000,000 shares authorized;
17,056,817 and 9,781,814 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively. . . . . . . . . 682 390
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 63,187,460 58,894,821
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (104,534,358) (80,601,825)
--------------- --------------
Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . (41,346,216) (21,706,614)
--------------- --------------
Total liabilities, redeemable preferred stock and stockholders' deficit $ 16,209,485 $ 15,292,908
=============== ==============
See accompanying notes to unaudited condensed financial statements.
Page 2
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2001 2000 2001
---------------------------------- --------------------------------- -------------
Product revenue, net. . . . . . . . . . . . $ 2,818,927 $ 757,711 $ 6,116,843
Co-promotional revenue. . . . . . . . . . . - 88,043 -
---------------------------------- --------------------------------- -------------
Total net revenue . . . . . . . . . . . . . 2,818,927 845,754 6,116,843
Costs and expenses
Costs of product sales . . . . . . . . 547,569 349,636 1,221,743
Selling, general and administrative. . 4,427,042 3,087,853 11,780,850
Research and development . . . . . . . 269,340 650,943 845,452
---------------------------------- --------------------------------- -------------
Total costs and expenses . . . . . . . 5,243,951 4,088,432 13,848,045
Loss from operations. . . . . . . (2,425,024) (3,242,678) (7,731,202)
Interest income . . . . . . . . . . . . . . 4,338 20,898 25,755
Interest expense. . . . . . . . . . . . . . (2,302,547) (802,234) (16,227,086)
---------------------------------- --------------------------------- -------------
Net loss. . . . . . . . . . . . . (4,723,233) (4,024,014) (23,932,533)
Preferred stock dividend. . . . . . . . . . 8,812 - 8,812
---------------------------------- --------------------------------- -------------
Net loss to common stockholders . $ (4,732,045) $ (4,024,014) $(23,941,345)
================================== ================================= =============
Results per common share:
Historical - basic and diluted:
Net loss. . . . . . . . . . . . . (0.28) (0.41) (1.77)
Preferred stock dividend. . . . . - - -
---------------------------------- --------------------------------- -------------
Net loss to common stockholders . $ (0.28) $ (0.41) $ (1.77)
================================== ================================= =============
Weighted average shares outstanding - basic
And diluted. . . . . . . . . . . . . . . 17,040,948 9,775,864 13,512,286
================================== ================================= =============
2000
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Product revenue, net. . . . . . . . . . . . $ 1,994,623
Co-promotional revenue. . . . . . . . . . . 1,068,563
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Total net revenue . . . . . . . . . . . . . 3,063,186
Costs and expenses
Costs of product sales . . . . . . . . 969,084
Selling, general and administrative. . 9,422,226
Research and development . . . . . . . 1,926,052
-------------
Total costs and expenses . . . . . . . 12,317,362
Loss from operations. . . . . . . (9,254,176)
Interest income . . . . . . . . . . . . . . 48,317
Interest expense. . . . . . . . . . . . . . (2,132,789)
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Net loss. . . . . . . . . . . . . (11,338,648)
Preferred stock dividend. . . . . . . . . . -
-------------
Net loss to common stockholders . $(11,338,648)
=============
Results per common share:
Historical - basic and diluted:
Net loss. . . . . . . . . . . . . (1.16)
Preferred stock dividend. . . . . -
-------------
Net loss to common stockholders . $ (1.16)
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Weighted average shares outstanding - basic
And diluted. . . . . . . . . . . . . . . 9,739,256
=============
See accompanying notes to unaudited condensed financial statements.
Page 3
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
---------------------------------
2001 2000
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Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (23,932,533) $(11,338,648)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . . 234,944 749,801
Non-cash interest expense and Series H redemption price 14,577,902 502,540
Stock based compensation. . . . . . . . . . . . . . . . 7,085 -
Provision for bad debts . . . . . . . . . . . . . . . . 61,116 5,154
Inventory write-off . . . . . . . . . . . . . . . . . . (122,366) (41,348)
Loss on disposal of fixed assets. . . . . . . . . . . . 23,494 -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . (877,475) 217,487
Inventory . . . . . . . . . . . . . . . . . . . . . (134,965) (757,054)
Other assets. . . . . . . . . . . . . . . . . . . . 68,910 (46,606)
Accounts payable. . . . . . . . . . . . . . . . . . 722,690 (389,349)
Interest payable. . . . . . . . . . . . . . . . . . (277,867) 394,940
Accrued expenses. . . . . . . . . . . . . . . . . . (2,132) (657,041)
Deferred revenue. . . . . . . . . . . . . . . . . . 1,500,584 661,967
Other current liabilities . . . . . . . . . . . . . 22,348 (43,867)
Other liabilities . . . . . . . . . . . . . . . . . (14,080) 14,080
--------------------------------- -------------
Net cash used in operating activities. . . . . (8,142,345) (10,727,944)
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . (286,309) (247,162)
--------------------------------- -------------
Net cash used in investing activities. . . . . (286,309) (247,162)
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . 33,243 300,206
Proceeds from issuance of preferred stock. . . . . . . . . . 2,001,000 -
Proceeds from issuance of debt . . . . . . . . . . . . . . . 6,250,000 9,287,822
Proceeds from issuance of debt related warrants. . . . . . . - 1,212,178
Cash paid for debt issue costs . . . . . . . . . . . . . . . (80,514) -
--------------------------------- -------------
Net cash provided by financing activities . . 8,203,729 10,800,206
Net decrease in cash and cash equivalents . . . . . . . . . . . . (224,925) (174,900)
Cash and cash equivalents, beginning of period. . . . . . . . . . 260,882 1,067,049
--------------------------------- -------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 35,957 $ 892,149
================================= =============
See accompanying notes to unaudited condensed financial statements.
Page 4
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 October 1, 2001, Ascent entered into a definitive merger agreement with
Medicis Pharmaceutical Corporation ("Medicis") and a wholly-owned subsidiary of
Medicis, under which Ascent would merge with the subsidiary of Medicis and
become a wholly-owned subsidiary of Medicis. The Company's board of directors
has unanimously recommended the transaction to its stockholders. The closing of
the transaction is contingent upon approval by Ascent stockholders and customary
closing conditions. Under a separate agreement, entities affiliated with FS
Private Investments have agreed to vote shares, which, as of October 1, 2001,
represented 53.9% of our outstanding shares, in favor of the transaction.
Under the terms of the merger agreement, Medicis will pay approximately $60
million, less certain retention payments and transaction fees and expenses, upon
the closing of the transaction for the outstanding capital stock and retirement
of indebtedness of Ascent and has agreed to pay to the holders of Ascent's
common equity up to an additional $10 million per year for each of the first
five years following closing based upon reaching certain sales threshold
milestones on the Ascent products (as defined under the merger agreement).
The Company has scheduled a special meeting of our stockholders to consider and
vote on the proposal to adopt and approve the merger agreement, and the
transactions contemplated by the merger agreement, for Thursday, November 15,
2001 and the Company expects the merger to close on such date.
Ascent has incurred net losses since its inception. If the merger with Medicis
does not occur on November 15, 2001, Ascent 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.
Ascent expects to close the merger on November 15, 2001. In December 1999,
Ascent modified its strategy until such time as Ascent 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 Ascent's financial condition has adequately improved.
Page 5
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.
As of September 30, 2001, 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. 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 outcome of any corporate actions requiring stockholder
approval, including, without limitation, the proposed merger with Medicis,
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 a merger involving Ascent, the first $28.95 million,
plus accumulated interest, in proceeds will be paid to FS Private Investments as
repayment of currently outstanding debt, $13.0 million in proceeds will be paid
to FS Private Investments as repayment of Series H preferred stock ($12.0
million of which was outstanding as of September 30, 2001), 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 September 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.
Ascent launched Primsol solution during February 2000 and Orapred syrup during
January 2001. Ascent is deferring the recognition of revenue from the sale of
both products until such time that the right of return lapses. Through
September 30, 2001, Ascent has deferred $531,083 in Primsol revenue and
$1,708,045 in Orapred revenue.
Page 6
Net Loss Per Common Share
Basic net income (loss) per common share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Diluted net income (loss) per common share gives effect to all dilutive
potential common shares outstanding during the period. The computation of
diluted earnings per share does not assume the issuance of common shares that
have an antidilutive effect on net income (loss) per common share.
Options and warrants outstanding to purchase an aggregate of 6,359,882 and
1,440,113 depositary shares as of September 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 8,568,703 and 11,153,922 depositary shares as of
September 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 September 30, 2001 or 2000, as the case may be, of the
depositary shares and would be antidilutive under the treasury stock method.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which is effective January 1, 2003. SFAS No. 143
addresses the financial accounting and reporting for obligations and retirement
costs related to the retirement of tangible long-lived assets. The Company does
not expect that the adoption of SFAS No. 143 will have a material impact on its
financial statements.
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 Ascent, as required, in fiscal year 2002. Ascent does not
believe that the adoption of SFAS No.141 and SFAS No. 142 will have any effect
on its financial statements.
Page 7
In August 2001, the FASB issued SFAS No. 144 , "Accounting for the Impairment
or Disposal of Long-Lived Assets", which is effective January 1, 2002. SFAS
No. 144 supersedes SFAS No. 121, " Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. Ascent does not expect that the
adoption of SFAS No. 144 will have a material impact 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:
September 30, December 31,
2001 2000
-------------- -------------
Raw materials. $ 874,302 $ 965,538
Finished goods 1,007,795 659,228
-------------- -------------
Total . . . . $ 1,882,097 $ 1,624,766
============== =============
Page 8
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
September 30, December 31,
2001 2000
-------------- -------------
Employee compensation expenses $ 487,955 $ 342,296
Legal and accounting expenses. 59,851 74,910
Selling fees and chargebacks . 51,179 171,743
Preferred stock dividend . . . 331,894 323,082
Other. . . . . . . . . . . . . 3,338 15,506
-------------- -------------
Total . . . . . . . . $ 934,217 $ 927,537
============== =============
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.
Page 9
$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 September
30, 2001) and $4.0 million of Series H preferred stock ($2,001,000 of which has
been advanced as of September 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 November 30, 2001. The notes are 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 and was 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 6,950,000
depositary shares have been issued as of September 30, 2001(1,950,000 of which
were exercised as of September 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 6,950,000 depositary shares (1,950,000 of which were exercised as of
September 30, 2001) expire on December 29, 2007. The fair value of these
warrants was recorded as a contribution to additional paid in capital of
$4,219,884. The incremental value of the repriced 5,600,000 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
warrants, issuable for an aggregate of 9,000,000 depositary shares are 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 29, 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 as interest expense in the quarter ended
September 30, 2001. On July 30, 2001, Ascent issued warrants to purchase
1,000,000 depositary shares to FS Investments to extend the due date from July
31, 2001 to August 31, 2001. The fair value of these warrants was recorded as a
contribution to additional paid in capital of $439,121 and as interest expense
in the quarter ended September 30, 2001. On August 30, 2001, Ascent issued
warrants to purchase 1,000,000 depositary shares to FS Investments to extend the
due date from August 31, 2001 to September 30, 2001. The fair value of these
warrants was recorded as a contribution to additional paid in capital of
$640,463 and as interest expense in the quarter ended September 30, 2001. On
September 29, 2001, Ascent issued warrants to purchase 2,000,000 depositary
shares to FS Investments to extend the due date from September 30, 2001 to
October 31, 2001. The fair value of these warrants was recorded as a
contribution to additional paid in capital of $982,146 and was capitalized as
debt issue costs on the balance sheet. The value of these warrants will be
amortized as interest expense in the quarter ended December 31, 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). As of September 30, 2001, cumulative dividends payable are
$8,812. 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.
Page 10
On March 23, 2001, the funds affiliated with FS Private Investments 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 October 1, 2001, Ascent announced with Medicis that they, and a wholly owned
subsidiary of Medicis, had entered into a definitive merger agreement under
which Ascent would merge with the subsidiary of Medicis and become a
wholly-owned subsidiary of Medicis. Our board of directors has unanimously
recommended the transaction to our stockholders. The closing of the transaction
is contingent upon approval by Ascent stockholders and customary closing
conditions. Under a separate agreement, entities affiliated with FS Private
Investments have agreed to vote shares, which, as of October 1, 2001,
represented 53.9% of our outstanding shares, in favor of the transaction.
Under the terms of the merger agreement, Medicis will pay approximately $60
million, less certain retention payments and transaction fees and expenses, upon
the closing of the transaction for the outstanding capital stock and retirement
of indebtedness of Ascent and has agreed to pay to the holders of Ascent's
common equity up to an additional $10 million per year for each of the first
five years following closing based upon reaching certain sales threshold
milestones on the Ascent products (as defined under the merger agreement).
Ascent has scheduled a special meeting of our stockholders to consider and vote
on the proposal to adopt and approve the merger agreement, and the transactions
contemplated by the merger agreement, for Thursday, November 15, 2001 and the
Company expects the merger to close on such date.
In connection with the merger, Ascent will incur approximately $6,431,000 in
related costs, which includes (i) a $3.0 million transaction fee to entities
affiliated with FS Private Investments, (ii) a total of $1.675 million to be
paid at closing as retention payments to Ascent's executive officers and certain
other of Ascent's employees, (iii) a total of $300,000 to be paid at closing to
two of Ascent's directors, and (iv) transaction costs incurred by Ascent, to the
extent that such costs exceed $1.2 million.
On November 9, 2001 Ascent received notice that Triumph-Connecticut Limited
Partnership and related parties had brought a civil action against the Company
on such date in the Superior Court, Suffolk County in the Commonwealth of
Massachusetts. In the action, the Triumph group claims that the execution by
the Company of the merger agreement and the anticipated consummation of the
merger contemplated by the merger agreement without the consent of the Triumph
group or the payment to the Triumph group of a specified amount breaches the
terms of a securities purchase agreement entered into in January 1997 between
the Company and the Triumph group, the terms of warrants issued by the Company
to the Triumph group, an implied covenant of good faith and fair dealing and
chapter 93A of the Massachusetts general laws. The Triumph group is seeking
damages in an amount not less than $18.6 million, plus multiple damages under
chapter 93A. The Company believes that the claims of the Triumph group are
without merit and intends to vigorously contest and defend the suit by the
Triumph group.
On October 9, 2001 Ascent drew down $1 million from FS Ascent Investments LLC
under the $10.25 million credit facility in exchange for issuing 1,000 shares of
Series H preferred stock.
On October 30, 2001 Ascent issued warrants to purchase 2,000,000 depositary
shares to FS Ascent Investments LLC to extend the due date on the $6.25 million
of 7.5% secured notes from October 31, 2001 to November 30, 2001. The fair
value of these warrants was recorded as a contribution to additional paid in
capital of $1,139,862 on October 30, 2001 (the date of issuance). It will be
recorded as interest expense in the quarter ended December 31, 2001.
Page 11
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. If the merger with Medicis does
not occur on November 15, 2001, we expect to incur additional operating losses
into 2002 as we seek to maintain our sales and marketing organization and
promotion of Orapred and Primsol to the market. We expect the merger to close on
November 15, 2001.We expect cumulative losses to increase over this period. We
have incurred a deficit from inception through September 30, 2001 of
$104,534,000.
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.
Page 12
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000
REVENUE: Ascent had total net revenue of $2,819,000 and $6,117,000 for the
three and nine months ended September 30, 2001, respectively, compared with
total net revenue of $846,000 and $3,063,000 for the three and nine months ended
September 30, 2000, respectively. The increase in net revenue of $1,973,000 for
the three months ended September 30, 2001, was primarily attributable to
$2,670,000 in Orapred syrup revenue. This was offset by a decrease in Primsol
revenue of $31,000 over fiscal year 2000, the absence of Feverall revenue of
$581,000 due to the sale of the Feverall product line in December 2000 to
Alpharma USPD and the absence of co-promotional revenue of $88,000 due to the
termination of the Omnicef(R) agreement in January 2000. The increase in net
revenue of $3,054,000 for the nine months ended September 30, 2001, was
primarily attributable to $5,512,000 in Orapred syrup revenue and an increase in
Primsol revenue of $316,000 over fiscal year 2000. This was offset by the
absence of Feverall revenue of $1,703,000 due to the sale of the Feverall
product line in December 2000 to Alpharma USPD and the absence of co-promotional
revenue of $1,069,000 due to the termination of the Omnicef(R) agreement in
January 2000.
COST OF PRODUCT SALES: Cost of product sales was $548,000 and $1,222,000 for
the three and nine months ended September 30, 2001, respectively, compared with
cost of product sales of $350,000 and $969,000 for the three and nine months
ended September 30, 2000, respectively. The increase in cost of product sales
of $198,000 for the three months ended September 30, 2001, was primarily the
result of an increase of $294,000 in manufacturing and testing costs associated
with the production of Orapred syrup and Primsol solution. This was offset by
decreases of $153,000 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
$253,000 for the nine months ended September 30, 2001, was primarily the result
of an increase of $766,000 in manufacturing and testing costs associated with
the production of Orapred syrup and Primsol solution. This was offset by a
decreases of $449,000 in manufacturing costs and $250,000 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 $4,427,000 and $11,781,000 for the three and nine
months ended September 30, 2001, respectively, compared with $3,088,000 and
$9,422,000 for the three and nine months ended September 30, 2000, respectively,
representing increases of $1,339,000 and $2,359,000, respectively.
Selling and marketing expenses were $2,968,000 and $9,031,000 for the three and
nine months ended September 30, 2001, respectively, compared with expenses of
$2,538,000 and $7,744,000 for the three and nine months ended September 30,
2000, respectively. The increase in selling and marketing expenses of $430,000
for the three months ended September 30, 2001, was primarily the result of
$446,000 in advertising and promotion expenses for Orapred syrup and an increase
of $48,000 in sample accountability expenses due to increased requirements under
the Prescription Drug Medical Act ("PDMA"). This was offset by a decrease of
$156,000 in advertising and promotion expenses for Primsol solution. The
increase in selling and marketing expenses of $1,287,000 for the nine months
ended September 30, 2001, was primarily the result of (i) $1,744,000 for the
launch of Orapred syrup, which included a national sales meeting, samples and
selling materials, direct mail, media, and trade promotions, (ii) an increase of
$125,000 in sample accountability expenses due to increased PDMA requirements,
and (iii) an increase of $77,000 in trade show expense due to an increased
presence at trade shows in 2001. This was offset by (i) a decrease of $169,000
in personnel expenses due to reduced headcount, (ii) a decrease of $437,000 in
advertising and promotion expenses for Primsol solution and (iii) the decrease
of $47,000 in telesales expenses in a marketing program.
Page 13
General and administrative expenses were $1,459,000 and $2,750,000 for the three
and nine months ended September 30, 2001, respectively, compared with expenses
of $550,000 and $1,678,000 for the three and nine months ended September 30,
2000, respectively. The increase of $909,000 for the three months ended
September 30, 2001, was primarily attributable to increases of $758,000 due to
expenses related to the proposed merger between Ascent and Medicis and $155,000
in recruiting expenses due to the expansion of the sales force. These increases
were offset by 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 $1,072,000 for the nine months ended September 30, 2001, was
primarily attributable to increases of (i) $758,000 due to expenses related to
the proposed merger between Ascent and Medicis, (ii) $241,000 due to changes in
Ascent's bonus plan, (iii) $75,000 in consulting expenses due to agreements with
members of Ascent's board of directors, and (iv) $138,000 in recruiting expenses
due to the expansion of the sales force. These increases were offset by a
decrease of $244,000 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
$269,000 and $845,000 for the three and nine months ended September 30, 2001,
respectively, compared with expenses of $651,000 and $1,926,000 for the three
and nine months ended September 30, 2000, respectively. The decrease of
$382,000 for the three months ended September 30, 2001, primarily reflects the
incurrence in fiscal 2000 and not fiscal 2001 of (i) $103,000 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, (ii) $121,000 in FDA user fees, and (iii) $136,000 in personnel
expenses due to reduced headcount. The decrease of $1,081,000 for the nine
months ended September 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) $131,000 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) $148,000 in manufacturing and testing expenses related to the production
of Primsol solution batches in anticipation of receiving FDA market approval,
(iv) $121,000 in FDA user fees, and (v) $530,000 in personnel expenses due to
reduced headcount.
INTEREST: Ascent had interest income of $4,000 and $26,000 for the three and
nine months ended September 30, 2001, respectively, compared with interest
income of $21,000 and $48,000 for the three and nine months ended September 30,
2000, respectively, representing decreases of $17,000 and $22,000, respectively.
Ascent had interest expense of $2,303,000 and $16,227,000 for the three and nine
months ended September 30, 2001, respectively, compared with interest expense of
$802,000 and $2,133,000 for the three and nine months ended September 30, 2000,
respectively. The increase of $1,501,000 for the three months ended September
30, 2001, was primarily attributable to interest expense due to the additional
$6.25 million of subordinated notes issued and outstanding during the third
quarter of 2001 compared to the third quarter of 2000. The increase of
$14,094,000 for the nine months ended September 30, 2001, was primarily
attributable to the amortization of the $10.0 million Series H redemption price,
as well as $3,518,000 in interest expense due to (i) the additional $6.25
million of subordinated notes issued and outstanding at September 30, 2001
compared to September 30, 2000, and (ii) the additional 3,000,000 warrants
expensed during the quarter ended September 30, 2001.
Page 14
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from private
sales of preferred stock, with net proceeds of $35.6 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 September 30, 2001, Ascent had $36,000 in cash and cash equivalents, a
decrease of $225,000 from $261,000 as of December 31, 2000. As of November 1,
2001, Ascent has borrowed $9.25 million from FS Ascent Investments LLC under its
$10.25 million credit facility described below. Ascent currently does not have
access to sufficient cash to fund operations and repay debt and interest on such
debt through December 31, 2001. If the merger with Medicis does not occur on
November 15, 2001, Ascent will need additional funds in December 2001 beyond the
$1 million available under the $10.25 million credit facility to fund operations
and to repay outstanding debt, including interest payments. Ascent expects the
merger to close on November 15, 2001.
Ascent used $8.1 million of cash in operations for the nine months ended
September 30, 2001 compared to $10.7 million for the nine months ended September
30, 2000. Net cash used in operations for the nine months ended September 30,
2001 was primarily attributable to a $23.9 million net loss generated during the
period, an increase in accounts receivable of $877,000 and a decrease in
interest payable of $278,000. This was offset in part by non-cash interest
expense of $14.6 million and increases in deferred revenue of $1.5 million and
accounts payable of $723,000. Ascent's investing activities resulted in net cash
used of $286,000 for the nine months ended September 30, 2001 compared to
$247,000 for the nine months ended September 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 in the future. Cash provided by financing activities was
$8.2 million for the nine months ended September 30, 2001 compared to $10.8
million for the nine months ended September 30, 2000. The principal source of
financing for the nine months ended September 30, 2001 was the FS Ascent
Investments credit facility discussed below, which yielded net proceeds of $8.25
million.
Outstanding Indebtedness to FS Private Investments and Other Entities
As of September 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 September 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 September 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
September 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.
Page 15
- - 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 September 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 September 30, 2001. These notes were
originally due in June 2001. We have currently elected to extend the due date
until November 30, 2001. If the merger with Medicis does not take place on
November 15, 2001, we have the right to extend the due date to December 31,
2001. Ascent expects the merger to close on November 15, 2001.
Ascent's financing arrangements, including the material terms of the foregoing
notes, are described in more detail below.
Series G Financing. On May 13, 1998, Ascent entered into a Series G Securities
Purchase Agreement with funds affiliated with 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.
Page 16
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 (which right has been
waived, as discussed below). 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
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.
Page 17
$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 September
30, 2001) and $4.0 million of Series H preferred stock ($2,001,000 of which has
been advanced as of September 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 November 30, 2001. The notes are 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 and was 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 6,950,000
depositary shares have been issued as of September 30, 2001(1,950,000 of which
were exercised as of September 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 6,950,000 depositary shares (1,950,000 of which were exercised as of
September 30, 2001) expire on December 29, 2007. The fair value of these
warrants was recorded as a contribution to additional paid in capital of
$4,219,884. The incremental value of the repriced 5,600,000 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
warrants, issuable for an aggregate of 9,000,000 depositary shares are 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 29, 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 as interest expense in the quarter ended
September 30, 2001. On July 30, 2001, Ascent issued warrants to purchase
1,000,000 depositary shares to FS Investments to extend the due date from July
31, 2001 to August 31, 2001. The fair value of these warrants was recorded as a
contribution to additional paid in capital of $439,121 and as interest expense
in the quarter ended September 30, 2001. On August 30, 2001, Ascent issued
warrants to purchase 1,000,000 depositary shares to FS Investments to extend the
due date from August 31, 2001 to September 30, 2001. The fair value of these
warrants was recorded as a contribution to additional paid in capital of
$640,463 and as interest expense in the quarter ended September 30, 2001. On
September 29, 2001, Ascent issued warrants to purchase 2,000,000 depositary
shares to FS Investments to extend the due date from September 30, 2001 to
October 31, 2001. The fair value of these warrants was recorded as a
contribution to additional paid in capital of $982,146 and was capitalized as
debt issue costs on the balance sheet. The value of these warrants will be
amortized as interest expense in the quarter ended December 31, 2001.
Page 18
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). As of September 30, 2001 cumulative dividends are $8,812.
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.
In connection with entering into the merger agreement, BancBoston Ventures Inc.,
Flynn Partners and the entities affiliated with FS Private Investments entered
into a note agreement with Ascent. Under the note agreement, BancBoston
Ventures Inc., Flynn Partners and the entities affiliated with FS Private
Investments agreed that, until the earliest to occur of the termination of the
merger agreement pursuant to its terms, the closing of the merger and January
31, 2002:
- - they would not transfer any of our securities unless the transferee agrees
in writing to become bound by the terms of the note agreement; and
- - they would not convert any convertible subordinated notes into equity
securities of Ascent.
Such holders of convertible subordinated notes also agreed to waive the
requirement that we issue additional warrants to them as a condition to our
right to redeem the convertible subordinated notes in connection with the merger
and waived any required notices of the merger or the anticipated redemption of
the notes upon consummation of the merger.
In addition, under the note agreement, FS Ascent Investments agreed that until
the earliest to occur of the termination of the merger agreement pursuant to its
terms, the closing of the merger and January 31, 2002, it would:
- - not take any action that would cause us to redeem any or all of the Series
H preferred stock or take any action to cause us to repay our 7.5% subordinated
note;
- - extend the date on which we are required to repay the principal amount of
our 7.5% subordinated note to December 31, 2001 for no additional consideration
other than as required under the terms of the notes;
- - extend the date on which we are required to repay the principal amount of
our 7.5% subordinated note to January 31, 2002 if the merger is not completed by
December 31, 2001;
- - waive any required notices of the merger and the anticipated redemption of
the 7.5% subordinated note upon the completion of the merger; and
- - agree that all unexercised warrants held by FS Ascent Investments
terminate immediately prior to the completion of the merger.
Page 19
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 $1.0 million under its credit facility with FS
Investments, it will not have enough cash to fund operations through December
31, 2001. The Company also 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 fund operations and to repay
outstanding debt, including interest payments, in 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 September 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 September 30, 2001,
$787,500 of such interest payments had been paid. As of November 1, 2001, Ascent
has borrowed $9.25 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 September 30, 2001, $280,365 of such interest
payments had been paid. These interest payments and the repayments of the notes
are subject to the note agreement described above and our merger agreement with
Medicis.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which is effective January 1, 2003. SFAS No. 143
addresses the financial accounting and reporting for obligations and retirement
costs related to the retirement of tangible long-lived assets. The Company does
not expect that the adoption of SFAS No. 143 will have a material impact on its
financial statements.
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 Ascent, as required, in fiscal year 2002. Ascent does not
believe that the adoption of SFAS No.141 and SFAS No. 142 will have any effect
on its financial statements.
Page 20
In August 2001, the FASB issued SFAS No. 144 , "Accounting for the Impairment
or Disposal of Long-Lived Assets", which is effective January 1, 2002. SFAS
No. 144 supersedes SFAS No. 121, " Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. The Company does not expect that the
adoption of SFAS No. 144 will have a material impact 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 September 30, 2001, our
accumulated deficit was approximately $104.5 million. We received our first
revenues from product sales in July 1997. If the merger with Medicis does not
occur on November 15, 2001, we expect to incur additional significant operating
losses at least over the next 12 months and expect cumulative losses to
increase. We expect the merger to close on November 15, 2001. 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
If the merger with Medicis does not occur on November 15, 2001, 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
$1.0 million under our credit facility with FS Ascent Investments, we would not
have enough cash to fund operations through December 31, 2001. We also do not
have sufficient funds to repay debt or interest on such debt which becomes due
in December 2001. We expect the merger to close on November 15, 2001. As a
result, we will need additional funds in December 2001 to fund operations and to
repay outstanding debt, including interest payments. 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.
Page 21
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 September 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, the proposed merger with Medicis, 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 a merger
involving the Company, the first $28.95 million, plus accumulated interest, in
proceeds will be paid to FS Private Investments as repayment of currently
outstanding debt, $13.0 million in proceeds will be paid to FS Private
Investments as repayment of Series H preferred stock ($12.0 million of which was
outstanding as of September 30, 2001), 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.
The failure to achieve market acceptance of Orapred syrup and Primsol solution
would have a material adverse effect on our business.
Page 22
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.
Page 23
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;
Page 24
- - 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.
Page 25
WE MAY BECOME INVOLVED IN PROCEEDINGS RELATING TO INTELLECTUAL PROPERTY RIGHTS
Because our products are based on existing compounds rather than new chemical
entities, we may become parties to patent litigation and interference
proceedings. The types of situations in which we may become parties to
litigation or proceedings include:
- - if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition proceedings to
determine the priority of invention;
- - if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we will
need to defend against such proceedings;
- - we may initiate litigation or other proceedings against third parties to
enforce our patent rights; or
- - we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by them or to obtain a judgment that our
products or processes do not infringe their patents.
An adverse outcome in any litigation or interference proceeding could subject us
to significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable terms
or at all. Thus, an unfavorable outcome in any patent litigation or interference
proceeding could have a material adverse effect on our business, financial
condition or results of operations.
The cost to us of any patent litigation or interference proceeding, even if
resolved in our favor, could be substantial. Uncertainties resulting from the
initiation and continuation of patent litigation or interference proceedings
could have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and interference proceedings may also absorb
significant management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION
We are a party to a number of patent licenses that are important to our business
and seek to enter into additional patent licenses in the future. These licenses
impose various commercialization, sublicensing, royalty, insurance and other
obligations on us. If we fail to comply with these requirements, the licensor
will have the right to terminate the license, which could have a material
adverse effect on our business, financial condition or results of operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE CANNOT ADEQUATELY PROTECT OUR
PROPRIETARY KNOW-HOW
We must maintain the confidentiality of our trade secrets and other proprietary
know-how. We seek to protect this information by entering into confidentiality
agreements with our employees, consultants, any outside scientific collaborators
and other advisors. These agreements may be breached by the other party. We may
not be able to obtain an adequate, or perhaps, any remedy to address the breach.
In addition, our trade secrets may otherwise become known or be independently
developed by our competitors.
Page 26
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.
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.
Page 27
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 September 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
September 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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 29 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
None.
Page 28
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: November 14, 2001 . . . . . . . By: /s/ EMMETT CLEMENTE, Ph.D.
------------------------------
Emmett Clemente, Ph.D.
President and Chairman of the Board
(Principal Executive and
Financial Officer)
Page 29
Exhibit Index
Exhibit Number Description
- -------------- -------------------------------------------------------------
10.1 Employment Agreement Amendment No. 3 between the Company and
Emmett Clemente, dated as of March 15, 2001, as amended.
10.2 Letter Regarding a Retention Payment Plan between the Company
and Emmett Clemente, dated as of August 8, 2001.
10.3 Consulting Agreement Amendment No. 1, dated as of July 9, 2001,
between the Company and Joseph Ianelli.
10.4 Letter Regarding a Retention Payment Plan between the Company
and Steven Evans, dated as of July 10, 2001.
10.5 Letter Regarding a Retention Payment Plan between the Company
and David Benn, dated as of July 10, 2001.
10.6 Consulting Agreement Amendment No. 1, dated as of July 12, 2001,
between the Company and Robert Baldini.