UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 0-20945
A Minnesota Corporation IRS Employer ID No. 41-1350192
707 Eagleview
Boulevard, Suite 414
Exton, Pennsylvania
19341
(610) 458-6200
_________________
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of November 12, 2004, was 39,918,406.
_________________
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| PAGE | ||
|---|---|---|
| PART I. ITEM 1. ITEM 2. ITEM 3. ITEM 4. PART II. ITEM 2. ITEM 6. |
FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets, as of September 30, 2004 and December 31, 2003 Consolidated Statements of Operations for the three months and nine months ended September 30, 2004 and 2003 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Controls and Procedures OTHER INFORMATION Unregistered Sales of Equity Securities and Use of Proceeds Exhibits SIGNATURES |
3 4 5 6 17 22 23 25 25 25 26 |
2
| September 30, 2004 |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,135,402 | $ | 1,928,815 | ||||
| Short-term investments | 9,964,935 | — | ||||||
| Accounts receivable, net of allowances of $21,400 and $21,500, respectively | 163,985 | 481,886 | ||||||
| Other receivables | 78,662 | 7,947 | ||||||
| Inventories | 159,038 | 225,408 | ||||||
| Prepaid expenses and other assets | 174,225 | 61,239 | ||||||
| Total current assets | 11,676,247 | 2,705,295 | ||||||
| Equipment, furniture and fixtures, net | 567,761 | 801,369 | ||||||
| Patent rights, net | 1,248,061 | 1,214,356 | ||||||
| Goodwill | 1,095,355 | 1,095,355 | ||||||
| Other assets | 345,455 | 138,478 | ||||||
| Total Assets | $ | 14,932,879 | $ | 5,954,853 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 541,993 | $ | 253,336 | ||||
| Accrued expenses and other liabilities | 622,649 | 827,676 | ||||||
| Due to related parties | 20,900 | 162,964 | ||||||
| Capital lease obligations - current maturities | 3,045 | 36,003 | ||||||
| Deferred revenue - current | 816,822 | 809,945 | ||||||
| Total current liabilities | 2,005,409 | 2,089,924 | ||||||
| Deferred revenue - long term | 3,024,166 | 3,557,835 | ||||||
| Total liabilities | 5,029,575 | 5,647,759 | ||||||
| Shareholders' Equity: | ||||||||
| Series A Convertible Preferred Stock: $0.01 par; authorized 10,000 | ||||||||
| shares; 1,500 and 1,450 issued and outstanding at September 30, 2004 and | ||||||||
| December 31, 2003, respectively | 15 | 15 | ||||||
| Series D Convertible Preferred Stock: $0.01 par; authorized 245,000 shares; | ||||||||
| 63,588 and 243,749 issued and outstanding at September 30, 2004 and | ||||||||
| December 31, 2003, respectively | 636 | 2,437 | ||||||
| Common Stock: $0.01 par; authorized 100,000,000 shares; | ||||||||
| 39,913,406 and 19,831,296 issued and outstanding at | ||||||||
| September 30, 2004 and December 31, 2003, respectively | 399,135 | 198,313 | ||||||
| Additional paid-in capital | 93,753,145 | 78,054,269 | ||||||
| Accumulated deficit | (80,002,246 | ) | (74,126,619 | ) | ||||
| Prepaid license discount | (2,747,490 | ) | (2,894,677 | ) | ||||
| Deferred compensation | (878,390 | ) | (306,808 | ) | ||||
| Accumulated other comprehensive loss | (621,501 | ) | (619,836 | ) | ||||
| Total Shareholders' Equity | 9,903,304 | 307,094 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 14,932,879 | $ | 5,954,853 | ||||
See accompanying notes to consolidated financial statements.
3
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | ||||||||||||
| Revenue: | |||||||||||||||
| Product sales | $ | 417,846 | $ | 692,830 | $ | 1,324,202 | $ | 2,068,387 | |||||||
| Development revenue | 35,706 | 115,028 | 180,668 | 165,328 | |||||||||||
| Licensing fees | 135,307 | 183,916 | 464,472 | 513,752 | |||||||||||
| Royalties | 24,316 | 48,185 | 61,034 | 110,920 | |||||||||||
| Total revenue | 613,175 | 1,039,959 | 2,030,376 | 2,858,387 | |||||||||||
| Cost of sales: | |||||||||||||||
| Cost of product sales | 255,939 | 540,622 | 960,030 | 1,600,005 | |||||||||||
| Cost of development revenue | 9,734 | 1,271 | 53,926 | 13,445 | |||||||||||
| Total cost of sales | 265,673 | 541,893 | 1,013,956 | 1,613,450 | |||||||||||
| Gross margin | 347,502 | 498,066 | 1,016,420 | 1,244,937 | |||||||||||
| Operating expenses: | |||||||||||||||
| Research and development | 879,297 | 666,210 | 2,147,260 | 2,068,325 | |||||||||||
| Sales and marketing | 216,469 | 137,677 | 450,802 | 340,586 | |||||||||||
| General and administrative | 1,477,672 | 2,026,421 | 4,180,110 | 4,844,016 | |||||||||||
| 2,573,438 | 2,830,308 | 6,778,172 | 7,252,927 | ||||||||||||
| Net operating loss | (2,225,936 | ) | (2,332,242 | ) | (5,761,752 | ) | (6,007,990 | ) | |||||||
| Other income (expense): | |||||||||||||||
| Loss on debt extinguishments | — | — | — | (885,770 | ) | ||||||||||
| Loss on conversions of debt to equity | — | (16,283,677 | ) | — | (16,283,677 | ) | |||||||||
| Loss on common stock warrants | — | (4,379,686 | ) | — | (5,960,453 | ) | |||||||||
| Interest income | 34,739 | 4,481 | 80,351 | 14,148 | |||||||||||
| Interest expense | (21,875 | ) | (356,834 | ) | (100,959 | ) | (894,139 | ) | |||||||
| Foreign exchange gains (losses) | (2,727 | ) | 4,768 | (13,467 | ) | (9,341 | ) | ||||||||
| Other, net | (3,386 | ) | (1,798 | ) | (8,371 | ) | (4,778 | ) | |||||||
| 6,751 | (21,012,746 | ) | (42,446 | ) | (24,024,010 | ) | |||||||||
| Net loss | (2,219,185 | ) | (23,344,988 | ) | (5,804,198 | ) | (30,032,000 | ) | |||||||
| Preferred stock dividends | — | — | (71,429 | ) | (50,000 | ) | |||||||||
| Net loss applicable to common shares | $ | (2,219,185 | ) | $ | (23,344,988 | ) | $ | (5,875,627 | ) | $ | (30,082,000 | ) | |||
| Basic and diluted net loss per common share | $ | (0.06 | ) | $ | (1.40 | ) | $ | (0.17 | ) | $ | (2.23 | ) | |||
| Basic and diluted weighted average common shares outstanding | 38,825,537 | 16,687,449 | 35,145,638 | 13,501,701 | |||||||||||
See accompanying notes to consolidated financial statements.
4
| For the Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,804,198 | ) | $ | (30,032,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 445,538 | 634,261 | ||||||
| Loss on disposal and abandonment of assets | 5,701 | 5,576 | ||||||
| Stock-based compensation expense | 599,727 | 1,517,645 | ||||||
| Loss on conversions of debt to equity | — | 16,283,677 | ||||||
| Noncash interest expense | 75,388 | 862,308 | ||||||
| Provision for doubtful accounts | — | 34,629 | ||||||
| Loss on debt extinguishments | — | 741,570 | ||||||
| Losses on common stock warrants | — | 5,960,453 | ||||||
| Amortization of prepaid license discount | 147,186 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 317,901 | (252,246 | ) | |||||
| Other receivables | (116,460 | ) | (20,094 | ) | ||||
| Inventories | 66,370 | 445,491 | ||||||
| Prepaid expenses and other assets | (112,985 | ) | (68,924 | ) | ||||
| Accounts payable | 288,657 | (343,888 | ) | |||||
| Accrued expenses and other | (205,027 | ) | (196,087 | ) | ||||
| Deferred revenue | (526,792 | ) | 970,792 | |||||
| Due to related parties | (141,765 | ) | 69,108 | |||||
| Other | (206,973 | ) | (2,593 | ) | ||||
| Net cash used in operating activities | (5,167,732 | ) | (3,390,322 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment, furniture and fixtures | (123,981 | ) | (1,160 | ) | ||||
| Additions to patent rights | (133,638 | ) | (112,853 | ) | ||||
| Purchase of short-term investments | (15,919,190 | ) | — | |||||
| Proceeds from maturity of short-term investments | 6,000,000 | — | ||||||
| Net cash used in investing activities | (10,176,809 | ) | (114,013 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sales of common stock | 13,753,400 | 2,357,663 | ||||||
| Proceeds from exercise of warrants | 847,500 | 1,588,586 | ||||||
| Proceeds from loans from shareholders | — | 1,600,000 | ||||||
| Proceeds from loans from debenture holder | — | 621,025 | ||||||
| Principal payments on convertible debentures | — | (464,000 | ) | |||||
| Principal payments on capital lease obligations | (32,217 | ) | (88,404 | ) | ||||
| Payment of preferred stock dividends | (21,429 | ) | — | |||||
| Net cash provided by financing activities | 14,547,254 | 5,614,870 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 3,874 | (97,906 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | (793,413 | ) | 2,012,629 | |||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | 1,928,815 | 267,945 | ||||||
| End of period | $ | 1,135,402 | $ | 2,280,574 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 25,571 | $ | 20,439 | ||||
See accompanying notes to consolidated financial statements.
5
| The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003, as amended. Operating results for the three-month and nine-month periods ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. |
Critical Accounting Policies
| The Company has identified certain of its significant accounting policies that it considers particularly important to the portrayal of the Company’s results of operations and financial position and which may require the application of a higher level of judgment by the Company’s management, and as a result are subject to an inherent level of uncertainty. These are characterized as “critical accounting policies” and they address revenue recognition, foreign currency translation, valuation of long-lived and intangible assets and goodwill and accounting for debt and equity instruments, each more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended. To date, the Company has made no changes to these policies during 2004. |
Stock Based Compensation
| The Company applies Accounting Principles Board, Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock plans. Accordingly, no compensation expense has been recognized for stock-based compensation plans. Had compensation cost been determined based on the fair value at the grant date for stock options under SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, the net loss applicable to common shares and loss per common share would have increased to the pro-forma amounts shown below: |
6
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| Net loss applicable to common shares: | ||||||||||||||
| As reported | $ | (2,219,185 | ) | $ | (23,344,988 | ) | $ | (5,875,627 | ) | $ | (30,082,000 | ) | ||
| Intrinsic value of stock options granted | 42,642 | 206,594 | 127,402 | 206,594 | ||||||||||
| Fair-value method compensation expense | (297,423 | ) | (311,508 | ) | (880,477 | ) | (444,914 | ) | ||||||
| Pro forma | $ | (2,473,966 | ) | $ | (23,449,902 | ) | $ | (6,628,702 | ) | $ | (30,320,320 | ) | ||
| Basic and diluted net loss per common share: | ||||||||||||||
| As reported | $ | (0.06 | ) | $ | (1.40 | ) | $ | (0.17 | ) | $ | (2.23 | ) | ||
| Intrinsic value of stock options granted | — | — | — | — | ||||||||||
| Fair-value method compensation expense | (0.01 | ) | (0.01 | ) | (0.02 | ) | (0.02 | ) | ||||||
| Pro forma | $ | (0.07 | ) | $ | (1.41 | ) | $ | (0.19 | ) | $ | (2.25 | ) | ||
| The fair value of stock options granted was calculated using the Black-Scholes option pricing model with the following assumptions: |
| Three and Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Risk-free interest rate | 3 | .6% | 3 | .1% | ||||
| Annualized volatility | 143 | .0% | 140 | .0% | ||||
| Weighted average expected life | 5 | .0 | 5 | .0 | ||||
| Expected dividend yield | 0 | .0% | 0 | .0% | ||||
Reclassifications
| Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications did not impact previously reported net loss or net loss per share. |
| All short-term investments are commercial paper or agency discount notes that mature within four to six months of purchase and are classified as held-to-maturity because the Company has the positive intent and ability to hold the securities to maturity. The securities are carried at their amortized cost. At September 30, 2004 the securities have a fair value of $9,957,145 and a carrying value of $9,964,935. |
7
Inventories consist of the following:
| September 30, 2004 |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw material | $ | 42,529 | $ | 40,420 | ||||
| Finished goods | 116,509 | 184,988 | ||||||
| $ | 159,038 | $ | 225,408 | |||||
| The Company provides a warranty on its needle-free injector devices. Warranty terms for devices sold to end-users by dealers and distributors are included in the device instruction manual included with each device sold. Warranty terms for devices sold to corporate customers who provide their own warranty terms to end-users are included in the contracts with the corporate customers. The Company is obligated to repair or replace, at the Company’s option, a device found to be defective due to use of defective materials or faulty workmanship. The warranty does not apply to any product that has been used in violation of instructions as to the use of the product or to any product that has been neglected, altered, abused or used for a purpose other than the one for which it was manufactured. The warranty also does not apply to any damage or defect caused by unauthorized repair or the use of unauthorized parts. Warranty periods on devices range from 12 to 30 months from either the date of retail sale of the device by a dealer or distributor or the date of shipment to a customer if specified by contract. The Company recognizes the estimated cost of warranty obligations at the time the products are shipped based on historical claims incurred by the Company. Actual warranty claim costs could differ from these estimates. Warranty liability activity is as follows: |
| Balance at Beginning of Year |
Warranty Provisions |
Warranty Claims |
Balance at September 30 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | $ | 50,000 | $ | (13,643 | ) | $ | 6,357 | $ | 30,000 | |||||
| 2003 | $ | 179,000 | $ | 3,543 | $ | 95,543 | $ | 87,000 | ||||||
| On February 7, 2003, the Company completed a restructuring of its 10% debentures previously sold to four investors. Specifically, as part of this restructuring, on January 24, 2003 and January 31, 2003, the Company borrowed an aggregate of $621,025 on a 30 day, 8% unsecured promissory note from Xmark Funds. The Company used the proceeds of these borrowings to repurchase $464,000 principal amount of the 10% debentures previously sold to the two original 10% debenture holders who had converted $536,000 of principal into 1,660,863 shares of common stock, and to pay a repurchase premium of $144,200 and accrued interest of $12,825. As additional repurchase compensation, the Company issued 79,200 five-year non-callable warrants with an exercise price of $0.8351 to one of the two original 10% debenture holders and paid $5,000, in lieu of warrants, to the other. The Company recognized a debt extinguishment |
8
| loss of $885,770 in 2003 related to these transactions. Thereafter, in exchange for the surrender and cancellation of the $621,025 promissory notes, the Company issued to Xmark Funds 8% Senior Secured Convertible Debentures in the same principal amount of the promissory notes. The Company also exchanged Amended and Restated 8% Senior Secured Convertible Debentures for the remaining outstanding principal and accrued interest of $955,000 and $37,230, respectively, of the original 10% debentures. After the exchange of the $621,025 promissory notes and the $992,230 of outstanding principal and accrued interest of the original 10% debentures, the resulting aggregate principal amount of the 8% debentures was $1,613,255. The 8% debentures contained terms similar to the 10% debentures, except that the 8% debentures included a fixed conversion price of $.50 per share rather than a variable conversion price and an interest rate of 8% rather than 10% per annum. The 8% debentures were due March 31, 2004. Similar to the 10% debentures, the Company granted a senior security interest in substantially all of its assets to the holders of the 8% debentures. |
| In connection with this restructuring, the Company also issued to the holders of the 8% debentures five-year warrants to purchase an aggregate of 2,932,500 shares of the Company’s common stock at an exercise price of $0.55 per share. The warrants were subject to defined indemnifications if the underlying common shares were not fully tradable and the warrant holders incurred losses due to their inability to sell these shares. The Company analyzed the terms and conditions of the warrants and determined that the warrants should be classified as debt under EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. As such, the Company was required to mark-to-market these warrants at each reporting period with changes in the warrant values being recorded in the consolidated statement of operations. The warrants were recorded with an initial fair value on January 31, 2003 of $1,142,442, determined using the Black Scholes option pricing model, and were adjusted to their fair value at June 30, 2003 of $2,723,208. On August 12, 2003, the warrants were adjusted to their fair value of $4,437,269, when certain terms and conditions of the warrant agreements were amended, causing the warrants to be classified as equity rather than as debt as of the date of the amendment and ending the requirement to adjust the market value of the warrants each reporting period and thus eliminating the need to record any further adjustments to the statement of operations. The Company recognized losses on these common stock warrants in the three-month and nine-month periods ended September 30, 2003 of $1,714,061 and $3,294,827, respectively. |
| The aggregate original principal amount of the 8% debentures of $1,613,255 was held by two debenture holders in the amounts of $469,513 and $1,143,742, respectively. The Company analyzed each of the restructuring transactions for the two 8% debenture holders to determine the proper accounting treatment. The effective borrowing rate on $469,513 of restructured debentures was determined to be less than the effective borrowing rate on the original debentures immediately prior to the restructuring. As a result, the Company determined that these debentures should be accounted for as a troubled debt restructuring. The net carrying value of these debentures at the time of the restructuring was reduced from $140,659 to $97,710 resulting in a debt discount of $371,803 that was being amortized to interest expense through March 31, 2004 using the effective interest method. The transaction related to the remaining $1,143,742 was accounted for as a debt extinguishment under EITF 96-19. The restructured debentures were |
9
| determined to be substantially different from the original debentures because the present value of the cash flows under the terms of the restructured debentures was more than 10 percent different from the present value of the remaining cash flows under the terms of the original debentures. The debentures were recorded at a fair value of $1,276,339, and the premium of $132,597 was being amortized monthly through March 31, 2004 using the effective interest method. The unamortized discount and premium were written off on September 12, 2003, when the debentures were exchanged for common and preferred stock. |
| On September 12, 2003, the holders of the Company’s 8% Senior Secured Convertible Debentures and Amended and Restated 8% Senior Secured Convertible Debentures (collectively, the “Debentures”) exchanged the outstanding $1,218,743 aggregate principal and accrued interest of the Debentures for 243,749 shares of the Company’s Series D Convertible Preferred Stock (the “Series D Preferred”). Each share of Series D Preferred is currently convertible into ten shares of the Company’s Common Stock, resulting in an aggregate of 2,437,490 shares of Common Stock issuable upon conversion of the Series D Preferred. As a result, the Series D Preferred is convertible into the same number of shares of Common Stock as were the Debentures. In connection with the exchange of the Debentures for the Series D Preferred, the holders of the Debentures executed lien release letters terminating the security interest they held in the Company’s assets. As consideration for the release of the security interest, the Company adjusted the exercise price of certain warrants issued to the holders of the Debentures on January 31, 2003 from $0.55 per share to $0.40 per share. These warrants are exercisable for an aggregate of 2,932,500 shares of Common Stock and are redeemable at the option of the Company upon the achievement of certain milestones set forth in the warrants. In connection with the exchange of the Debentures for the Series D Preferred and the reduction in the warrant exercise price, the Company recognized a loss on conversion of $6,017,346 during the quarter ended September 30, 2003. The loss consists of the fair value of the Series D Preferred plus the increase in fair value of the warrants due to the reduction in the exercise price, less the carrying value of the Debentures. The carrying value of the Debentures included the aggregate principal and accrued interest less unamortized discount and premium. |
Common Stock
| On September 12, 2003, $475,000 of the Company’s 8% Senior Secured Convertible Debentures and Amended and Restated 8% Senior Secured Convertible Debentures were converted into 949,998 shares of common stock. |
| On September 12, 2003, principal of promissory notes totaling $2,300,000 and accrued interest of $98,635 due to the Company’s largest shareholder and Chairman of the Board, Dr. Jacques Gonella, was converted into 2,398,635 shares of common stock. |
10
| In January 2003, prior to the debenture restructuring discussed in Note 5, the Company issued 881,112 shares of common stock as a result of conversions of convertible debentures with aggregate principal balances of $198,250. |
| During the three-month and nine-month periods ended September 30, 2004 the Company issued to consultants and professional service organizations for services rendered 15,000 and 45,000 shares of common stock, respectively, and recognized expense of $14,750 and $48,300, respectively. During the three-month and nine-month periods ended September 30, 2004 the Company issued 20,000 and 35,000 shares of common stock, respectively, to directors, recognizing expense of $16,800 and $30,300, respectively. During the three-month and nine-month periods ended September 30, 2003, the Company issued to consultants and professional service organizations for services rendered 249,632 and 769,266 shares of common stock, respectively, and recognized expense of $359,400 and $595,696, respectively. |
Conversion of Series D Convertible Preferred Stock to Common Stock
| On September 12, 2003, the holders of the Company’s 8% Senior Secured Convertible Debentures and Amended and Restated 8% Senior Secured Convertible Debentures exchanged the outstanding $1,218,743 aggregate principal and accrued interest of these Debentures for 243,749 shares of the Company’s Series D Convertible Preferred Stock. Each share of Series D Preferred was convertible into ten shares of the Company’s Common Stock, resulting in an aggregate of 2,437,490 shares of Common Stock issuable upon conversion of the Series D Preferred. In August 2004, 180,161 shares of Series D Preferred Stock were converted into 1,801,610 shares of common stock. |
Private Placements
| During the nine-month period ended September 30, 2004 the Company received net proceeds of $13,753,400 in three private placements of its common stock. A total of 15,120,000 shares of common stock were sold to investors at a price of $1.00 per share. The Company also issued to the investors non-callable five-year warrants to purchase an aggregate of 5,039,994 shares of common stock at an exercise price of $1.25 per share. Additionally, non-callable warrants for the purchase of 1,612,000 shares of common stock at an exercise price of $1.00 per share were issued to the placement agent as a commission. |
| In July 2003 the Company received aggregate proceeds of $4,000,000 in two separate private placements of its common stock. The Company issued 4,000,000 shares of its common stock at a price of $1.00 per share and non-callable warrants to purchase 3,000,000 shares of common stock at an exercise price of $1.25 per share. The warrants expire in July 2008. |
| The warrants to purchase 3,000,000 shares of common stock issued in the private placement in July 2003 were subject to defined indemnifications if the underlying common shares were not fully tradable and the warrant holders incurred losses due to their inability to sell these shares. |
11
| The Company analyzed the terms and conditions of the warrants and determined that the warrants should be classified as debt under EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. As such, the Company was required to mark-to-market these warrants at each reporting period with changes in the warrant values being recorded in the consolidated statement of operations. The proceeds of $4,000,000 were allocated between equity and debt based on the relative fair values of the common stock and the warrants on the dates of the private placements. The fair value of the common stock was based on the market price and the warrant fair values were calculated using the Black-Scholes option pricing model. The allocation resulted in an initial value assigned to the warrants of $1,588,585. On September 30, 2003, certain terms and conditions of the warrant agreements were amended, causing the warrants to be classified as equity rather than as debt as of the date of the amendment and ending the requirement to adjust the market value of the warrants each reporting period. The warrants were adjusted to their fair value of $4,254,211 on September 30, 2003, resulting in a loss of $2,665,626 on these common stock warrants in 2003. |
Common Stock Option and Warrant Grants
| During the first nine months of 2004 and 2003 the Company issued options and/or warrants to purchase 558,250 and 800,000 shares, respectively, of the Company’s common stock at weighted average exercise prices of $1.14 and $1.15 per share, respectively, as compensation to directors and non-employees. The Company recognized expense of $329,205 and $630,107 during the first nine months of 2004 and 2003, respectively, in connection with the options and warrants issued to non-employees. |
Warrant Exercises
| During the nine-month period ended September 30, 2004 the Company received proceeds of $847,500 in connection with the issuance of 2,980,500 shares of common stock from the exercise of warrants. Of the shares issued, 2,932,500 were in connection with warrants exercised after the Company had offered a 30% discount in the exercise price to holders of warrants with an exercise price of under $1.00. In connection with the exercise of these warrants the Company recognized interest expense of $75,388, which represents the difference between the fair values of the warrants on the exercise date before and after applying the discount. Fair value was determined using the Black Scholes option pricing model. |
Shareholder Loan Warrant Grant
| During the nine-month period ended September 30, 2003 the Company issued warrants to Dr. Jacques Gonella, its largest shareholder and Chairman of the Board, for the purchase of 2,400,000 shares of common stock at an exercise price of $.55 per share in connection with promissory notes totaling $1,600,000. |
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Stock-based Compensation to Chief Executive Officer
| Jack E. Stover was appointed President and Chief Operating Officer on July 22, 2004, and was appointed Chief Executive Officer on September 1, 2004, upon the resignation of Roger G. Harrison, Ph.D. The terms of the employment agreement with Mr. Stover included the issuance of options to purchase 500,000 shares of common stock at $0.70 per share vesting over four years and the issuance of 100,000 shares of common stock, of which 50,000 shares vested immediately and the remaining 50,000 shares will become fully vested on the first anniversary of his employment. The Company recorded compensation expense of $35,000 related to the shares with immediate vesting and deferred compensation expense of $35,000 related to the shares vesting over one year. The amounts recorded were based on the market value of the stock on the measurement date. The deferred compensation expense is being recognized ratably over the one-year vesting period. Compensation expense of $5,833 was recognized in connection with these shares during the nine-month period ended September 30, 2004. Mr. Stover can earn up to an additional 459,999 shares of common stock upon the occurrence of various triggering events. The Company will begin recognizing expense in connection with these additional shares when it appears likely that a triggering event will be reached. |
| Roger G. Harrison, Ph.D., was appointed Chief Executive Officer of the Company effective March 12, 2001. Under the terms of the employment agreement with Dr. Harrison, the Company issued 88,000 restricted shares of common stock with a three-year vesting period that became fully vested on March 12, 2004. The Company had recorded deferred compensation expense of $341,000, the aggregate market value of the 88,000 shares at the measurement date. Compensation expense was recognized ratably over the three-year vesting period. Compensation expense of $85,248 and $23,688 was recognized in connection with these shares during the nine-month periods ended September 30, 2003 and 2004, respectively. Dr. Harrison resigned as Chief Executive Officer effective September 1, 2004, and on that date entered into an agreement with the Company under which he will provide consulting services. |
| Basic loss per common share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted loss per common share reflects the potential dilution from the exercise or conversion of securities into common stock. The following table discloses the basic and diluted loss per share. In addition, as the Company is in a loss position, the table discloses the stock options and warrants outstanding at the end of each period which were excluded from the weighted average shares outstanding as their impact is anti-dilutive. |
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7. Reconciliation of Loss and Share Amounts Used in EPS Calculation (Continued)
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| Net loss applicable to common shares | $ | (2,219,185 | ) | $ | (23,344,988 | ) | $ | (5,875,627 | ) | $ | (30,082,000 | ) | ||
| Basic and diluted weighted avg common shares outstanding | 38,825,537 | 16,687,449 | 35,145,638 | 13,501,701 | ||||||||||
| Basic and diluted net loss per common share | $ | (0.06 | ) | $ | (1.40 | ) | $ | (0.17 | ) | $ | (2.23 | ) | ||
| Potentially dilutive securities at September 30, 2004 and 2003, excluded from dilutive loss per share as their effect is anti-dilutive, are as follows: |
| Three and Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Stock options and warrants | 20,108,950 | 15,133,378 | ||||||
| At September 30, 2004 and 2003 the Company also had 63,588 and 243,749 shares, respectively, of Series D Convertible Preferred Stock convertible into 635,880 and 2,437,490 shares, respectively, of the Company's common stock. The stock options and warrants outstanding at September 30, 2004 and 2003 had a weighted average exercise price of $2.07 and $2.31, respectively. |
| The Company is primarily engaged in development and commercialization of transdermal and oral drug delivery pharmaceutical products and drug delivery injection devices and supplies. These operations are considered to be one segment. The geographic distributions of the Company’s identifiable assets and revenues are summarized in the following table: |
We have operating assets located in two countries as follows:
| September 30, 2004 |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Switzerland | $ | 1,203,744 | $ | 1,278,481 | ||||
| United States of America | 13,729,135 | 4,676,372 | ||||||
| $ | 14,932,879 | $ | 5,954,853 | |||||
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Revenues by customer location are summarized as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| United States of America | $ | 134,352 | $ | 216,444 | $ | 363,423 | $ | 574,436 | ||||||
| Europe | 419,172 | 814,237 | 1,452,892 | 2,192,390 | ||||||||||
| Other | 59,651 | 9,278 | 214,061 | 91,561 | ||||||||||
| $ | 613,175 | $ | 1,039,959 | $ | 2,030,376 | $ | 2,858,387 | |||||||
The following tables summarize significant customers comprising 10% or more of total revenue:
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| Ferring | $ | 322,810 | $ | 651,840 | $ | 993,962 | $ | 1,866,569 | ||||||
| BioSante | 87,762 | 121,181 | 218,742 | 320,199 | ||||||||||
| Solvay | 82,337 | 75,891 | 246,293 | 229,631 | ||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | |||||||||||
| Net loss | $ | (2,219,185 | ) | $ | (23,344,988 | ) | $ | (5,804,198 | ) | $ | (30,032,000 | ) | ||
| Change in cumulative translation adjustment | (5,508 | ) | (18,314 | ) | (1,665 | ) | (58,689 | ) | ||||||
| Comprehensive loss | $ | (2,224,693 | ) | $ | (23,363,302 | ) | $ | (5,805,863 | ) | $ | (30,090,689 | ) | ||
| The Company previously entered into a consulting agreement with JG Consulting AG, a company owned by the Company’s largest shareholder and Chairman of the Board, Dr. Jacques Gonella. This agreement was terminated as of December 31, 2003. In connection with this agreement, the Company recognized expense of $46,500 and $93,000 in the three-month and nine-month periods of 2003, respectively. The Company owed $162,595 to JG Consulting AG at December 31, 2003, which was paid in the first nine months of 2004. |
| During the nine months ended September 30, 2003 the Company recognized expense of $26,500 for consulting services provided by John Gogol, a Company board member until September 2003. |
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| During the first nine months of 2003 the Company borrowed $1,600,000 from its largest shareholder and Chairman of the Board, Dr. Jacques Gonella, under various promissory note agreements. This amount and $700,000 of previous borrowings from this shareholder, along with accrued interest of $98,635, was converted into 2,398,635 shares of common stock on September 12, 2003. In connection with this conversion, the Company issued to Dr. Gonella a warrant to purchase 1,798,976 shares of the Company’s common stock at an exercise price of $1.25 per share. The difference between the fair value of the common stock and warrants issued to the shareholder in excess of the carrying value of the debt on September 12, 2003, the date of the conversions, totaled $10,266,331, and was recorded as loss on conversions of debt to equity in the statement of operations. |
| At September 30, 2004 the Company owed $20,900 to various officers and directors for travel related and board meeting expenses. |
| On September 25, 2003, Josephberg Grosz & Company (“JGC”) notified the Company that it intends to commence an arbitration action against the Company in New York State. The Company and JGC entered into a letter agreement on April 8, 2002. JGC claims that, pursuant to the letter agreement, the Company owes it seven percent of the proceeds received by the Company, as well as ten percent of various shares and securities issued by the Company, in connection with up to $6 million in financing received by the Company since April 5, 2002. The Company disputes that it owes any amounts to JGC and intends to vigorously defend this claim. The Company has recorded no accrual in connection with this claim. |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company develops, produces and markets pharmaceutical delivery products, including transdermal gels, oral fast melting tablets and needle-free and mini-needle injector systems. In addition, the Company has several products and compound formulations under development. The Company has operating facilities in the U.S. and Switzerland. The U.S. operation develops needle-free and mini-needle injector systems and manufactures and markets needle-free injection devices and disposables. These operations, including all manufacturing and substantially all administrative activities, are located in Minneapolis, Minnesota and are referred to as Antares/Minnesota. The Company also has operations located in Basel, Switzerland, which consists of administration and facilities for the research and development of transdermal and oral fast melt tablet products. The Swiss operations, referred to as Antares/Switzerland, have historically focused on research and development. Antares/Switzerland has signed a number of license agreements with pharmaceutical companies for the application of its drug delivery systems and began generating revenue in 1999 with the recognition of license revenues.
The Company operates as a specialty pharmaceutical company in the pharmaceutical industry. Companies in this sector generally bring technology and know-how in the area of drug formulation and/or delivery devices to pharmaceutical product marketers through licensing and development agreements. The Company currently views pharmaceutical and biotechnology companies as its primary customers. The Company has negotiated and executed licensing relationships in the growth hormone segment (needle-free devices in Europe and Asia) and the transdermal hormone gels segment (several development programs in place worldwide, including the United States and Europe). In addition, the Company continues to market needle-free devices for the home administration of insulin in the U.S. market though distributors, and has licensed its needle-free technology in the diabetes and obesity fields to Eli Lilly and Company on a worldwide basis.
The Company has not historically, and does not currently, generate enough revenue to provide the cash needed to support its operations, and has continued to operate by raising capital and issuing debt. In order to better position the Company to take advantage of potential growth opportunities and to fund future operations, the Company raised additional capital in the first quarter of 2004. The Company received net proceeds of $13,753,400 in three private placements of its common stock in which a total of 15,120,000 shares of common stock were sold at a price of $1.00 per share. Additionally, the Company issued five-year non-callable warrants to purchase an aggregate of 5,039,994 shares of common stock at an exercise price of $1.25 per share. During the first nine months of 2004 the Company has also received proceeds of $847,500 in connection with the exercise of warrants for 2,980,500 shares of common stock.
The Company is reporting a net loss of $5,804,198 for the first nine months of 2004 and expects to report a net loss for the year ending December 31, 2004, as marketing and development costs related to bringing future generations of products to market continue. Long-term capital requirements will depend on numerous factors, including the status of collaborative arrangements, the progress of research and development programs and the receipt of revenues from sales of products.
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Critical Accounting Policies
The Company has identified certain of its significant accounting policies that it considers particularly important to the portrayal of the Company’s results of operations and financial position and which may require the application of a higher level of judgment by the Company’s management, and as a result are subject to an inherent level of uncertainty. These are characterized as “critical accounting policies” and address revenue recognition, foreign currency translation, valuation of long-lived and intangible assets and goodwill and accounting for debt and equity instruments, each more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended. To date, the Company has made no changes to these policies during 2004.
Three and Nine Months Ended September 30, 2004 and 2003
Revenues
Total revenues for the three and nine months ended September 30, 2004 were $613,175 and $2,030,376, respectively, compared to revenues for the same prior-year periods of $1,039,959 and $2,858,387, respectively. The decrease in the third quarter of $426,784, or 41%, and the decrease in the first nine months of 2004 of $828,011, or 29%, was primarily due to a decrease in product sales to the Company’s major customer, Ferring, who during the first nine months of 2003 was planning for the launch of the Medi-Ject Vision device into new markets and in anticipation of a temporary supply interruption as the Company outsourced its assembly operations during the second quarter of 2003.
Development revenue decreased by $79,322 or 69% in the third quarter of 2004 compared to 2003 and increased $15,340 or 9% for the nine months ended September 30, 2004 as compared to the prior-year period. Projects generating development revenue in the third quarter of 2003 reached a stage requiring less or no involvement from the Company by the third quarter of 2004, and no new projects were initiated that significantly impacted the third quarter of 2004, resulting in reduced development revenue in the 2004 period compared to the same period of 2003. The increase in the nine-month period was due mainly to one project originating in 2004 that generated enough development revenue to cause the total development revenue to exceed that of the prior year.
Licensing fees decreased by approximately $49,000 in both the three-month and nine-month periods of 2004 compared to 2003. Licensing fees of approximately $49,000 and $147,000, respectively, for the three and nine-month periods ended September 30, 2004 were offset by prepaid license discount amortization. The prepaid license discount, a contra equity account, was recorded at the fair value of the warrants issued to Eli Lilly and Company in the third quarter of 2003 in connection with its license agreement and is being amortized against revenue on a straight line basis over the life of the agreement. Excluding the prepaid license discount amortization; the licensing fees in the third quarter of 2004 were nearly unchanged from the third quarter of 2003, while the nine-month period showed an increase of approximately $98,000. Most of the licensing fee revenue is due to recognition of previously deferred amounts.
Royalty revenue is generated from the sale of needle-free injection devices to Ferring under the License Agreement dated January 22, 2003. Royalty revenue decreased by $23,869 to $24,316 for the third quarter of 2004 compared to $48,185 in the third quarter of 2003 and decreased by $49,886 to $61,034
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for the nine-month period of 2004 compared to $110,920 in the same period of 2003. Sales of devices to Ferring in 2003 were higher than in 2004 because in 2003 Ferring was planning for the launch of the device into new markets.
Cost of Sales
The cost of product sales is related to injection devices and disposable products. Cost of product sales as a percentage of product sales decreased to 61% in the third quarter of 2004 from 78% for the third quarter of 2003, and decreased to 72% for the first nine months of 2004 from 77% for the first nine months of 2003. The decreases in the third quarter and first nine months of 2004 as compared to 2003 is primarily due to decreases in overhead expenses as a result of the outsourcing of the assembly operations, which exceeded the increase in external production costs. The decrease in the first nine months was partially offset by a write-down of $45,000 in the second quarter of 2004 for excess inventory related to disposable components used with older injector device models.
The cost of development revenue consists of labor costs and an allocation of certain research and development expenses. Cost of development revenue as a percentage of development revenue was 27% and 30%, respectively, for the three and nine-month periods ended September 30, 2004, and for the same periods of the prior year were 1% and 8%, respectively. The increase in the third quarter of 2004 as compared to 2003 was primarily due to lower expense allocations made to the cost of development revenue in the 2003 periods as compared to 2004.
Research and Development
Research and development expenses totaled $879,297 and $2,147,260 in the three and nine-month periods ended September 30, 2004, respectively, compared to $666,210 and $2,068,325 in the same prior-year periods. The increases in the third quarter and first nine months of 2004 compared to the same periods of 2003 were primarily due to increases in prototyping and tooling expenses in connection with device development projects, as well as an increase in expenses for studies and analysis work related to gel development projects. The increases were partially offset by decreased rent resulting from space reductions at both the Minnesota and Swiss facilities and due to utilization of a higher amount of payroll and other expenses in connection with revenue generating development programs.
Sales and Marketing
Sales and marketing expenses totaled $216,469 and $450,802 in the three and nine-month periods ended September 30, 2004, respectively, compared to $137,677 and $340,586 in the same prior-year periods. The increases in the current year three and nine-month periods as compared to the prior-year periods of $78,792 or 57%, and $110,216 or 32%, respectively, are primarily due to increases in travel and legal expenses related to business development activities and due to increased advertising and promotional activities related to the MJ7 insulin market in the third quarter of 2004.
General and Administrative
General and administrative expenses totaled $1,477,672 and $4,180,110 in the three and nine-month periods ended September 30, 2004, respectively, compared to $2,026,421 and $4,844,016 in the same periods of the prior year. The decrease of $548,749, or 27%, in the third quarter of 2004 and the decrease of $663,906, or 14%, in the first nine months of 2004 as compared to the same periods in 2003 were due primarily to decreases in payroll and investor relations expenses, partially offset by increases in
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travel and insurance expenses. A portion of the professional services and investor relations expenses were non-cash expenses as a result of issuing common stock, warrants and options in exchange for services. Non-cash general and administrative expenses in the third quarter of 2004 and 2003 were approximately $90,000 and $800,000, respectively, and in the first nine months of 2004 and 2003 were approximately $380,000 and $1,200,000, respectively.
Other Income (Expense)
Net other income (expense) changed from $21,012,746 of net expense in the third quarter of 2003 to income of $6,751 in the third quarter of 2004, and decreased from net expense of $24,024,010 for the first nine months of 2003 to $42,446 in 2004. The change in the third quarter is primarily due to the fact that the third quarter of 2003 included losses on conversions of debt to equity of $16,283,677 and losses on common stock warrants of $4,379,686, while there were none in 2004, and the 2003 third quarter included interest expense of $356,834, primarily from the convertible debentures, while there was only $21,875 of interest expense in 2004. In addition, the third quarter of 2004 includes $34,739 of interest income compared to $4,481 in the same period of 2003, due to a significant increase in cash and short-term investments in 2004 from proceeds of the private placement in the first quarter of 2004. In the first nine months of 2004 compared to 2003 net other expense decreased $23,981,564. The first nine months of 2003 included losses on debt extinguishments, losses on conversions of debt to equity and losses on common stock warrants of $885,770, $16,283,677 and $5,960,453, respectively, compared to none in 2004, and the first nine months of 2003 included interest expense of $894,139 compared to $100,959 in the first nine months of 2004. Interest expense in the first nine months of 2003 was due primarily to both amortization of discounts and interest accruals related to the convertible debentures and the promissory notes with the Company’s largest shareholder. Interest expense in the first nine months of 2004 was mainly due to expense of $75,388 recognized in connection with warrants originally issued to convertible debenture holders that were exercised at a discounted exercise price. The increase in interest income of $66,203 in the first nine months of 2004 compared to 2003 was due to the increase in cash and short-term investments in 2004 compared to 2003.
Net Loss Per Common Share
The net loss per common share for the three and nine-month periods ended September 30, 2004 of $0.06 and $0.17, respectively, were less than the net loss per common share of $1.40 and $2.23, respectively, for the same prior-year periods. The decreases were partially due to smaller losses in 2004 than in 2003, which resulted primarily from significant non-cash expenses in 2003 related mainly to losses on conversions of debt to equity and losses on common stock warrants. The decreases were also due to an increase in the number of weighted average shares outstanding in the 2004 periods as a result of the private placements in the third quarter of 2003 and the first quarter of 2004.
Operating Activities
Net cash used in operating activities increased to $5,167,732 for the first nine months of 2004 from $3,390,322 for the first nine months of 2003, a change of $1,777,410. This increase in cash used was due to an increase in cash used for operating assets and liabilities of $1,238,633 in 2004 compared to 2003 and an increase in net loss net of noncash expenses of $538,777 in 2004 compared to 2003.
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Noncash expenses decreased by $24,766,579 to $1,273,540 in the first nine months of 2004 compared to $26,040,119 in the first nine months of 2003. The decrease was mainly due to losses on conversions of debt to equity, losses on common stock warrants and losses on debt extinguishments of $16,283,677, $5,960,453 and $741,570, respectively, that occurred in 2003 but not in 2004. The noncash expenses in the first nine months of 2004 were mainly due to stock based compensation expense of $599,727, depreciation and amortization of $445,538, amortization of prepaid license discount of $147,186 and noncash interest expense of $75,388. The remaining noncash expenses in the first nine months of 2003 were mainly due to stock based compensation expense of $1,517,645, noncash interest expense of $862,308 and depreciation and amortization of $634,261.
The change in operating assets and liabilities in the first nine months of 2004 resulted in a net decrease to cash of $637,074, comprised of increases in other receivables and prepaid expenses of $116,460 and $112,985, respectively, and decreases in accrued expenses, deferred revenue, due to related parties and other of $205,027, $526,792, $141,765 and $206,973, respectively, partially offset by decreases in accounts receivable and inventory of $317,901 and $66,370, respectively, and an increase in accounts payable of $288,657. The decrease in deferred revenue of $526,792 is due to amortization of previously deferred amounts that exceeded new amounts received and deferred under license or development agreements. The decrease in related parties was due mainly to the payment of amounts due to a consulting company owned by the Company’s largest shareholder for services rendered in 2003. The decrease in accounts receivable resulted primarily from fewer shipments and less billable development activity in September 2004 than in December 2003. The decrease in inventory is mainly the result of the timing of purchases of finished goods from the third-party supplier versus shipments to customers. At the end of 2003 the Company had a large amount of finished goods in inventory that was shipped to a customer in early January 2004. The same level of finished goods inventory did not exist at September 30, 2004.
The change in operating assets and liabilities in the first nine months of 2003 resulted in a net increase to cash of $601,559, comprised mainly of decreased inventory of $445,491 and increases in deferred revenue and due to related parties of $970,792 and $69,108, respectively, partially offset by increases in accounts receivable, other receivables and prepaid expenses and other assets of $252,246, $20,094 and $68,924, respectively, and decreases in accounts payable, accrued expenses and other of $343,888, $196,087 and $2,593, respectively. The decrease in inventory in 2003 was primarily due to the outsourcing of assembly operations during the second quarter of 2003 to a third-party supplier that carried a large portion of the inventory previously carried by the Company. The increase in deferred revenue in 2003 is mainly due to the receipt of $1,073,449 from Ferring in connection with the License Agreement dated January 22, 2003. The increase in accounts receivable in 2003 was due to a temporary increase in sales to the Company’s largest customer, Ferring, who during the first nine months of 2003 was planning for the launch of the Medi-Ject Vision device into new markets and in anticipation of a possible supply interruption as the Company outsourced its assembly operations during the second quarter of 2003. The decrease in accounts payable and accrued expenses was mainly due to the payment of various older liabilities with proceeds from the private placement in July 2003 and due to a lower level of inventory purchases after the outsourcing of the assembly operations.
Investing Activities
Net cash used in investing activities increased to $10,176,809 in the first nine months of 2004 from $114,013 in the first nine months of 2003. Purchases of equipment, furniture and fixtures in the first nine months of 2004 and 2003 totaled $123,981 and $1,160, respectively, and expenditures for patent acquisition and development totaled $133,638 and $112,853, respectively. The increase in purchases of
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equipment, furniture and fixtures in 2004 compared to 2003 is primarily due to office equipment and leasehold improvement expenditures related to the Minnesota operations move to a new facility in April of 2004 and to the acquisition of production tooling. After receiving proceeds from the private placement of common stock in the first quarter of 2004 the Company began investing in short-term securities. In 2004 the Company purchased $15,919,190 of short-term debt securities consisting of commercial paper and U.S. government agency discount notes, some of which matured during the year resulting in proceeds of $6,000,000.
Financing Activities
Net cash provided by financing activities increased to $14,547,254 in the first nine months of 2004 from $5,614,870 in the first nine months of 2003, due primarily to net proceeds of $13,753,400 related to private placements of common stock in the first quarter of 2004. Cash was also generated in the first nine months of 2004 from proceeds from exercise of warrants of $847,500 and was reduced by principal payments on capital lease obligations of $32,217 and payment of preferred stock dividends of $21,429. In the first nine months of 2003 cash increased due to net proceeds of $2,357,663 from private placements of common stock, exercise of warrants of $1,588,586 and loans from shareholders and debenture holders of $1,600,000 and $621,025, respectively. Cash decreased in 2003 due to principal payments on convertible debentures of $464,000 and principal payments on capital lease obligations of $88,404.
During the first nine months of 2003 the Company borrowed $1,600,000 from its largest shareholder under various promissory note agreements. The notes accrued interest at the three-month Euribor Rate as of the dates of the notes, plus 5%. In connection with the notes, the Company also issued to its largest shareholder warrants to purchase 2,400,000 shares of the Company’s common stock at an exercise price of $0.55 per share. On September 12, 2003, principal of $2,300,000 and accrued interest of $98,635 on these notes was converted into 2,398,635 shares of common stock. In connection with this conversion, the Company issued to the shareholder a warrant to purchase 1,798,976 shares of the Company’s common stock at an exercise price of $1.25 per share. The difference between the fair value of the common stock and warrants issued to the shareholder in excess of the carrying value of the debt on September 12, 2003, the date of the conversions, totaled $10,266,331, and was recorded as loss on conversions of debt to equity in the statement of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market risk exposure is foreign exchange rate fluctuations of the Swiss Franc to the U.S. dollar as the financial position and operating results of the Company’s subsidiaries in Switzerland are translated into U.S. dollars for consolidation. The Company’s exposure to foreign exchange rate fluctuations also arises from transferring funds to its Swiss subsidiaries in Swiss Francs. Additionally, the Company has exposure to exchange rate fluctuations between the Euro and the U.S. dollar. The licensing agreement entered into in January 2003 with Ferring establishes pricing in Euros for products sold under the existing supply agreement and for all royalties. The effect of foreign exchange rate fluctuations on the Company’s financial results for the three and nine-month periods ended September 30, 2004 and 2003 was not material. The Company does not currently use derivative financial instruments to hedge against exchange rate risk. Because exposure increases as intercompany balances grow, the Company will continue to evaluate the need to initiate hedging programs to mitigate the impact of foreign exchange rate fluctuations on intercompany balances.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
Internal Control over Financial Reporting.
There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the CEO and CFO, does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the words “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue” and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements. These statements are only predictions. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance and/or achievements.
Forward-looking statements represent the Company’s expectations or beliefs concerning future events, including statements regarding the Company’s current cash situation, need for additional capital, ability to continue operations, whether the Company will be successful in entering into new strategic relationships, the Company’s ability to attract and retain customers, the Company’s ability to adapt to changing technologies, the impact of competition and pricing pressures from actual and potential competitors with greater financial resources, the Company’s ability to hire and retain competent employees, the Company’s ability to protect and reuse its intellectual property, changes in general
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economic conditions, and other factors identified in the Company’s filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
There are a number of risks related to the Company, which are described under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| On each of July 15, 2004, August 15, 2004 and September 15, 2004, the Company issued 5,000 shares of its common stock to Mark Wachs and Associates. The shares were issued as compensation pursuant to a public relations letter agreement. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. |
| On July 22, 2004, the Company issued 100,000 shares of its common stock to Jack E. Stover as compensation in connection with his joining the Company as President and Chief Operating Officer. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. |
| On August 16, 2004, the Company issued 20,000 shares of its common stock to Paul Wotton as compensation for joining the Company’s board of directors. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. |
| On August 20 and 27, 2004, the Company issued 1,801,610 shares of its common stock in connection with the conversion of 180,161 shares of its Series D Convertible Preferred Stock. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. |
| In so much as the investors in the above transactions were sophisticated, used access to financial and other relevant information and could bear the economic risk of the investment, the transactions were exempt from the registration provision of the Securities Act of 1933 under Section 4(2) of the Act. |
Item 6. Exhibits
(a) Exhibits
| Exhibit No. |
Description |
|---|---|
| 10.67 | Employment Agreement, dated July 22, 2004, with Jack E. Stover |
| 31.1 | Section 302 CEO Certification |
| 31.2 | Section 302 CFO Certification |
| 32.0 | Section 906 CEO and CFO Certification |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized
| ANTARES PHARMA, INC. | |
| November 15, 2004 | /s/ Jack E. Stover |
|
Jack E. Stover Chief Executive Officer and President | |
| November 15, 2004 | /s/ Lawrence M. Christian |
| Lawrence M. Christian Chief Financial Officer, Vice President - Finance and Secretary |
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