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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
Commission File Number 0-20945
ANTARES PHARMA, INC.
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
----- -----
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of May 13, 2003, was 11,972,706.
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1
ANTARES PHARMA, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets, as of December 31, 2002 and
March 31, 2003 ................................................. 3
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2003 ........................... 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2003 ........................... 5
Notes to Consolidated Financial Statements ..................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .....20
ITEM 4. Controls and Procedures ........................................20
PART II. OTHER INFORMATION ..............................................22
SIGNATURES .....................................................24
2
ANTARES PHARMA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
2002 2003
------------ ------------
Assets
Current Assets:
Cash ....................................................................... $ 267,945 $ 193,998
Accounts receivable, net of allowances of $12,000 and $70,000, respectively 174,566 194,659
VAT and other receivables .................................................. 38,289 596,996
Inventories ................................................................ 558,911 614,525
Deferred financing costs ................................................... 454,910 72,082
Prepaid expenses and other assets .......................................... 39,849 95,418
------------ ------------
Total current assets ................................................ 1,534,470 1,767,678
Equipment, furniture and fixtures, net ............................................ 1,531,063 1,369,468
Patent rights, net ................................................................ 2,157,174 2,181,148
Goodwill, net ..................................................................... 1,095,355 1,095,355
Other assets ...................................................................... 90,909 92,678
------------ ------------
Total Assets ........................................................ $ 6,408,971 $ 6,506,327
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable ........................................................... $ 608,695 $ 937,025
Accrued expenses and other liabilities ..................................... 1,521,177 2,057,536
Due to related parties ..................................................... 893,892 978,066
Convertible debentures, net of issuance discount of $891,187 and $236,578,
respectively ............................................................ 733,159 1,397,539
Common stock warrants ...................................................... -- 1,026,731
Capital lease obligations - current maturities ............................. 106,493 87,808
Deferred revenue ........................................................... 1,859,288 3,110,598
------------ ------------
Total current liabilities ........................................... 5,722,704 9,595,303
Capital lease obligations, less current maturities ................................ 30,979 14,521
------------ ------------
Total liabilities ................................................... 5,753,683 9,609,824
------------ ------------
Shareholders' Equity (Deficit):
Series A Convertible Preferred Stock: $0.01 par; authorized 10,000
shares; 1,350 issued and outstanding at December 31, 2002 and
March 31, 2003 .......................................................... 14 14
Common Stock: $0.01 par; authorized 30,000,000 shares;
10,776,885 and 11,887,506 issued and outstanding at
December 31, 2002 and March 31, 2003, respectively ...................... 107,769 118,875
Additional paid-in capital ................................................. 42,353,492 41,605,479
Accumulated deficit ........................................................ (41,165,798) (44,183,249)
Deferred compensation ...................................................... (137,352) (108,936)
Accumulated other comprehensive loss ....................................... (502,837) (535,680)
------------ ------------
655,288 (3,103,497)
------------ ------------
Total Liabilities and Shareholders' Equity (Deficit) ................ $ 6,408,971 $ 6,506,327
============ ============
See accompanying notes to consolidated financial statements.
3
ANTARES PHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31,
----------------------------
2002 2003
------------ ------------
Revenues:
Product sales ......................................... $ 538,013 $ 703,696
Licensing and product development ..................... 130,958 161,448
Royalties ............................................. -- 44,982
------------ ------------
668,971 910,126
Cost of product sales ...................................... 661,424 502,476
------------ ------------
Gross margin ............................................... 7,547 407,650
------------ ------------
Operating Expenses:
Research and development .............................. 731,128 714,775
Sales and marketing ................................... 158,421 110,865
General and administrative ............................ 1,277,329 1,498,332
------------ ------------
2,166,878 2,323,972
------------ ------------
Net operating loss ......................................... (2,159,331) (1,916,322)
------------ ------------
Other income (expense):
Loss on debt extinguishments .......................... -- (885,770)
Gains on common stock warrants ........................ -- 115,711
Interest income ....................................... 3,232 3,882
Interest expense ...................................... (8,362) (310,480)
Foreign exchange gains (losses) ....................... 18,538 (28,559)
Other, net ............................................ (717) 4,087
------------ ------------
12,691 (1,101,129)
------------ ------------
Net loss applicable to common shares ....................... $ (2,146,640) $ (3,017,451)
============ ============
Basic and diluted net loss per common share ................ $ (.23) $ (.26)
============ ============
Basic and diluted weighted average common shares outstanding 9,170,077 11,736,291
============ ============
See accompanying notes to consolidated financial statements.
4
ANTARES PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
--------------------------
2002 2003
----------- -----------
Cash flows from operating activities:
Net loss .................................................... $(2,146,640) $(3,017,451)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................... 233,363 220,785
Amortization of deferred financing costs .................... -- 249,705
Stock-based compensation expense ............................ 46,862 239,600
Provision for doubtful accounts ............................. -- 57,675
Loss on debt extinguishments ................................ -- 741,570
Gains on common stock warrants .............................. -- (115,711)
Net debt discount accretion and premium amortization ........ -- 2,628
Changes in operating assets and liabilities, net of effect of
business acquisition:
Accounts receivable ...................................... (75,239) (78,093)
VAT and other receivables ................................ 12,996 (558,707)
Inventories .............................................. 133,931 (55,614)
Prepaid expenses and other assets ........................ (148,999) (101,866)
Accounts payable ......................................... (43,670) 328,330
Accrued expenses and other ............................... 18,846 625,356
Deferred revenue ......................................... 149,183 1,251,310
Liabilities to related parties ........................... (112,481) 2,108
Other .................................................... 1,206 (1,772)
----------- -----------
Net cash used in operating activities ................................ (1,930,642) (210,147)
----------- -----------
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures .............. (68,431) (1,160)
Additions to patent rights .................................. (81,133) (60,707)
----------- -----------
Net cash used in investing activities ................................ (149,564) (61,867)
----------- -----------
Cash flows from financing activities:
Proceeds from loans from shareholders ....................... 1,000,000 130,000
Proceeds from loan from debenture holder .................... -- 621,025
Principal payments on convertible debentures ................ -- (464,000)
Principal payments on capital lease obligations ............. (20,777) (37,281)
----------- -----------
Net cash provided by financing activities ............................ 979,223 249,744
----------- -----------
Effect of exchange rate changes on cash and cash equivalents ......... 9,211 (51,677)
----------- -----------
Net increase (decrease) in cash and cash equivalents ................. (1,091,772) (73,947)
Cash and cash equivalents:
Beginning of period ......................................... 1,965,089 267,945
----------- -----------
End of period ............................................... $ 873,317 $ 193,998
=========== ===========
Cash paid during the period for interest ............................. $ 3,942 $ 16,811
See accompanying notes to consolidated financial statements
5
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2002 and 2003
1. Basis of Presentation
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 generally accepted accounting
principles 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, 2002. Operating results for the three-month period ended
March 31, 2003, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2003.
2. Going Concern
The accompanying financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and
the satisfaction of liabilities and other commitments in the normal
course of business. The Company had negative working capital of
$4,188,234 and $7,827,625 at December 31, 2002 and March 31, 2003,
respectively, and has had net losses and negative cash flows from
operating activities since inception.
The Company expects to report a net loss for the year ending December
31, 2003, 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.
The Company's cash position is currently only sufficient to fund
working capital requirements for two or three weeks from May 12, 2003.
Moreover, the Company has no immediate access to additional capital.
Management's intentions are to raise additional capital through
alliances with strategic corporate partners, equity offerings, and/or
debt financing. There can be no assurance that the Company will ever
become profitable or that additional adequate funds will be available
when needed or on acceptable terms. If for any reason the Company is
unable to obtain additional financing it may not be able to continue as
a going concern, which may result in material asset impairments, other
material adverse changes in the business, results of operations or
financial condition, or the loss by shareholders of all or a part of
their investment in the Company.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary if
the Company is unable to continue as a going concern.
The Company received a notice from Nasdaq on November 29, 2002, because
for the 30 consecutive trading days prior to November 29, 2002, the
Company's common stock closed below the minimum $1.00 per share
requirement for continued listing under certain of Nasdaq's
6
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
2. Going Concern (Continued)
marketplace rules. Nasdaq provided the Company 180 calendar days, or
until May 28, 2003, to regain compliance with respect to this per share
bid price requirement. This notice was described more fully in the
Company's Current Report on Form 8-K, filed on December 3, 2002.
In addition, by letter dated March 24, 2003, the Listing Qualifications
arm of The Nasdaq Stock Market, Inc. notified the Company that it does
not comply with Marketplace Rule 4310(c)(2)(B), which requires listed
companies to have a minimum of (i) $2,500,000 in shareholders' equity,
(ii) $35,000,000 market value of listed securities or (iii) $500,000 of
net income from continuing operations for the most recently completed
fiscal year or two of the three most recently completed fiscal years.
Based on the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, the Company's shareholders' equity was $655,288.
Additionally, as of March 24, 2003, the market value of the Company's
listed securities was $5,943,753 (based on 11,887,506 shares
outstanding multiplied by the closing bid price of $0.50). Finally, the
Company reported a net loss from continuing operations for each of the
last three fiscal years.
The Company has corresponded with Nasdaq regarding potential
transactions that the Company may consummate to increase its
shareholders' equity. However, following review of these proposals, on
April 28, 2003, Nasdaq notified the Company of its intent to delist the
Company's common stock from the Nasdaq SmallCap Market effective May 7,
2003. The Company appealed Nasdaq's determination by requesting an oral
hearing before the Nasdaq Listing Qualifications Panel. This hearing
request will stay the delisting of the Company's common stock pending
the Listing Qualifications Panel's decision.
To maintain listing on the Nasdaq SmallCap Market, the Company must
address the issues raised by both the November 28, 2002 and March 24,
2003 notice letters received from Nasdaq. As of March 31, 2003, the
Company does not meet any of the financial requirements for continued
or initial listing on the Nasdaq SmallCap Market. If the Company's
stock were to be delisted, it would constitute an event of default
under the newly restructured 8% debentures, and at the option of the
holder, exercisable through delivery of written notice to the Company,
they would become due and payable at 130% of the outstanding principal
and accrued interest.
3. Product Warranty
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
7
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
3. Product Warranty (Continued)
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 Warranty Warranty Balance at
of Year Provisions Claims March 31
---------- ---------- -------- ----------
2002 ........... $ 87,000 $12,172 $12,172 $ 87,000
2003 ........... $179,000 $16,541 $36,541 $159,000
4. Comprehensive Loss
Three Months Ended
March 31,
---------------------------
2002 2003
------------ -----------
Net loss ............................. $ (2,146,640) $(3,017,451)
Change in cumulative translation
adjustment ........................ (1,626) (32,843)
------------ -----------
Comprehensive loss ................... $ (2,148,266) $(3,050,294)
============ ===========
5. Inventories
Inventories consist of the following:
December 31, March 31,
2002 2003
------------ ---------
Raw material ....................... $287,177 $323,639
Work in-process .................... 32,370 175,507
Finished goods ..................... 289,364 165,379
-------- --------
608,911 664,525
Inventory reserve .................. (50,000) (50,000)
-------- --------
$558,911 $614,525
======== ========
6. Industry Segment and Operations by Geographic Areas
The Company is primarily engaged in development of drug delivery
transdermal and transmucosal 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:
8
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
6. Industry Segment and Operations by Geographic Areas (Continued)
The Company has operating assets located in two countries as follows:
December 31, March 31,
2002 2003
------------ ----------
Switzerland ........................... $1,447,468 $1,757,595
United States of America .............. 4,961,503 4,748,732
---------- ----------
$6,408,971 $6,506,327
========== ==========
Revenues by customer location are summarized as follows:
For the Three Months
Ended March 31,
-----------------------
2002 2003
-------- --------
United States of America .............. $159,011 $177,117
Europe ................................ 486,018 693,868
Other ................................. 23,942 39,141
-------- --------
$668,971 $910,126
======== ========
The Company's primary customer, Ferring, accounted for revenues of
approximately $530,000 and $605,000 for the quarters ended March 31,
2002 and 2003, respectively. No other single customer accounted for 10%
or more of total revenue in either period.
7. Convertible Debentures
To reduce the risk of substantial dilution to common shareholders in
the near-term, on February 7, 2003, the Company completed a
restructuring of its 10% debentures previously sold to four primary
investors. Specifically, as part of this restructuring, on January 24,
2003 and January 31, 2003, the Company borrowed an aggregate of
$621,025 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 common stock, and to pay a
repurchase premium of $144,200 and accrued interest of $12,825. As
additional repurchase compensation, the Company issued warrants 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
loss of $885,770 related to these transactions. Thereafter, in exchange
for the surrender and cancellation of the 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. The
aggregate principal amount of the 8% debentures is $1,613,255. The 8%
debentures contain terms similar to the 10% debentures, except that the
8% debentures include a fixed conversion price of $.50 per share and an
interest rate of 8% per annum. The 8%
9
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
7. Convertible Debentures (Continued)
debentures are 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. At March 31, 2003 accrued
interest of $20,862 was converted to principal, resulting in a
principal balance of $1,634,117 at March 31, 2003. If the full
principal amount of debentures were converted at the $0.50 conversion
price, a total of 3,268,234 shares would be issued, which would result
in substantial dilution to current shareholders. 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 are redeemable at the option of the Company upon
the achievement of certain milestones set forth in the warrants.
Upon conversion of the 8% debentures and exercise of the warrants, the
Company will be obligated to issue an aggregate of 6,200,734 shares of
its common stock, resulting in the holders of the 8% debentures and
warrants owning in excess of 34% of the Company's common stock.
Pursuant to NASD Marketplace Rules, the Company must obtain shareholder
approval for the issuance of 20% or more of its currently outstanding
shares. Therefore, under the terms of the 8% debentures and warrants,
the holders thereof could not convert the 8% debentures or exercise the
warrants for more than 19.99% of the number of shares of the Company's
common stock outstanding on January 31, 2003, or 2,366,337 shares,
until the Company obtained shareholder approval for the transaction and
related stock issuances. In connection with the restructuring
transaction, the Company's majority shareholder, Dr. Jacques Gonella,
delivered a letter of undertaking to the holders of the 8% debentures
stating that he would vote in favor of allowing the issuance of the
Company's common stock upon conversion or exercise of the 8% debentures
or warrants. The Company obtained shareholder approval for the
transaction and related stock issuances at a special shareholders'
meeting on May 8, 2003.
The aggregate principal amount of the 8% debentures of $1,613,255 is
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
the debentures totaling $469,513 should be accounted for as a troubled
debt restructuring. The Company reduced the net carrying value of these
debentures at the time of the restructuring from $140,659 to $97,710.
The debt discount of $371,803 will be accreted to interest expense
through March 31, 2004 using the effective interest method. The
transaction related to the remaining $1,143,742 has been accounted for
as a debt extinguishment under EITF 96-19. The restructured debentures
were 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 have been recorded at a fair value
of $1,276,339, and the premium of $132,597 will be amortized monthly
through March 31, 2004 using the effective interest method. In
connection with both transactions, the Company issued warrants to
acquire 2,932,500 shares of common stock. The Company determined that
the fair value of these warrants was $1,142,442 using the Black Scholes
option pricing model. As further described in Note 8, these common
stock warrants are classified as debt for accounting purposes. As a
result of these debenture restructurings and the initial exchange of
the $464,000 of 10% convertible debentures for the 8% bridge notes, the
Company recognized losses on debt extinguishments of $885,770,
consisting of write offs of debenture discounts and issuance costs of
$693,098, repurchase premiums paid of $144,200, and $48,472
representing the excess of the fair value of the warrants issued plus
the debenture premium over the value of the reacquired conversion
feature.
10
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
8. Common Stock Warrants
In connection with the debenture restructuring transactions, the
Company 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 are subject
to defined indemnifications if the underlying common shares are not
fully tradable and the warrant holders incur 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 is 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 March 31, 2003 of $1,026,731,
with the difference of $115,711 being recorded as a gain on common
stock warrants in the three months ended March 31, 2003. Upon exercise
of the warrants the Company will record a reduction in the liability
and an increase in additional-paid-in-capital. The warrants are not
designated as a hedging instrument.
9. Accounting for License Revenues
During the quarter ended December 31, 2000 and effective January 1,
2000, the Company adopted the cumulative deferral method for accounting
for license revenues. The adoption of this accounting principle
resulted in a $1,059,622 cumulative effect adjustment in the first
quarter 2000.
During the quarters ended March 31, 2002 and March 31, 2003, the
Company recognized $39,228 and $31,684, respectively, of license
revenues that were previously recognized by the Company prior to the
adoption of the cumulative deferral method.
Ferring License Agreement
The Company entered into a License Agreement, dated January 22, 2003,
with Ferring BV ("Ferring"), under which the Company licensed certain
of its intellectual property and extended the territories available to
Ferring for use of certain of the Company's needle-free injector
devices. Specifically, the Company granted to Ferring an exclusive,
perpetual, irrevocable, royalty-bearing license, within a prescribed
manufacturing territory, to manufacture certain of the Company's
needle-free injector devices. The Company granted to Ferring similar
non-exclusive rights outside of the prescribed manufacturing territory.
In addition, the Company granted to Ferring a non-exclusive right to
make and have made the equipment required to manufacture the licensed
products, and an exclusive, perpetual, royalty-free license in a
prescribed territory to use and sell the licensed products.
The Company also granted to Ferring a right of first offer to obtain an
exclusive worldwide license to manufacture and sell the Company's AJ-1
device for the treatment of limited medical conditions.
As consideration for the license grants, Ferring paid the Company
EUR500,000 ($532,400) upon execution of the License Agreement, and paid
an additional EUR1,000,000 ($1,082,098) on February 24, 2003. Ferring
will also pay the Company royalties for each device manufactured by or
on behalf of Ferring, including devices manufactured by the Company.
Beginning on January 1, 2004, EUR500,000 ($541,049) of the license fee
received on February 24, 2003, will be credited against the royalties
owed by Ferring, until such amount is exhausted. These royalty
obligations expire, on a country-by-country basis, when the respective
patents for the products expire, despite the fact that the License
Agreement does not itself expire until the last of such patents
expires. The license fees are being recognized in income over the
period from January 22, 2003 through expiration of the patents in
December 2016.
The Company also agreed that it would enter into a third-party supply
agreement to supply sufficient licensed products to meet the Company's
obligations to Ferring under the License Agreement and under the
parties' existing supply agreement.
10. Third Party Supply Agreement
On February 22, 2003 the Company entered into a manufacturing agreement
under which all assembly work currently performed by the Company at its
Minneapolis facility will be outsourced to a third-party supplier
("Supplier"). Under the terms of the agreement, the Supplier will be
responsible for procurement of raw materials and components, inspection
of procured materials, production, assembly, testing, sterilization,
labeling, packaging
11
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
10. Third Party Supply Agreement (Continued)
and shipping to the Company's customers. The manufacturing operations
were transferred to the Supplier in April 2003. The Company will
continue to have responsibility for the manufacturing of the product
including the quality of all products and the release of all products
produced by the Supplier. The agreement has an initial term of two
years. The Company reviewed the long-lived assets related to the
manufacturing operations and determined there was no impairment as a
result of the transfer.
11. Shareholders' Equity
Roger G. Harrison, Ph.D., was appointed Chief Executive Officer of
Antares Pharma, Inc., effective March 12, 2001. The terms of the
employment agreement with Dr. Harrison include the issuance of up to
216,000 restricted shares of common stock upon the achievement of
certain time-based and performance-based milestones. The time-based
milestones have been achieved and the Company issued Dr. Harrison
48,000 and 40,000 restricted shares in April 2001 and March 2002,
respectively. All restricted shares issued under the terms of the
employment agreement vest on March 12, 2004. The Company has recorded
deferred compensation expense of $341,000, the aggregate market value
of the 88,000 shares at the measurement date. Compensation expense is
being recognized ratably over the three-year vesting period.
Compensation expense of $28,416 was recognized in connection with these
shares during each of the quarters ended March 31, 2002 and 2003.
During the first quarter of 2003 the Company issued 1,110,621 shares of
common stock, of which 881,112 were issued due to conversions of
convertible debentures and 229,509 were issued to consultants for
services performed. The Company recognized $76,318 of expense in the
quarter ended March 31, 2003 in connection with the shares issued to
consultants.
During the first quarter of 2003 the Company issued warrants to
purchase 300,000 shares of the Company's common stock at an exercise
price of $.55 per share as compensation to non-employees for
professional services. The Company recognized expense of $134,866 in
connection with these warrants.
On March 28, 2003 the Company issued a warrant to its majority
shareholder for the purchase of 195,000 shares of common stock at an
exercise price of $.55 per share in connection with a $130,000 Term
Note described in Note 15.
12. New Accounting Pronouncements
In December 2002, the Emerging Issues Task Force ("EITF") issued EITF
00-21, Revenue Arrangements with Multiple Deliverables. EITF 00-21
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating
activities. In some arrangements, the different revenue-generating
activities (deliverables) are sufficiently separable, and there exists
sufficient evidence of their fair values to separately account for some
or all of the deliverables (that is, there are separate units of
12
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
12. New Accounting Pronouncements (Continued)
accounting). In other arrangements, some or all of the deliverables are
not independently functional, or there is not sufficient evidence of
their fair values to account for them separately. EITF 00-21 addresses
when and, if so, how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF 00-21 does
not change otherwise applicable revenue recognition criteria. EITF
00-21 is applicable for the Company effective July 1, 2003, and could
have an impact on revenue recognition of future licensing transactions.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB
Statement 133, Accounting for Derivative Instruments and Hedging
Activities. Statement 149 has multiple effective date provisions
depending on the nature of the amendment to Statement 133. The Company
does not expect this statement to have a material impact on its
consolidated results of operations or financial position, because the
Company does not currently have derivative instruments or engage in
hedging activities.
13. Reconciliation of Loss and Share Amount Used in EPS Calculation
Basic loss per common share is computed by dividing net loss available
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. The conversion of the Company's 8%
convertible debentures into common stock would result in the issuance
of 3,268,234 shares of common stock.
Three Months Ended
March 31,
--------------------------
2002 2003
------------ ------------
Net loss ..................................$(2,146,640) $ (3,017,451)
Basic and diluted weighted average
common shares outstanding ............... 9,170,077 11,736,291
------------ ------------
Basic and diluted net loss per common
share ...................................$ (0.23) $ (0.26)
============ ============
13
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
13. Reconciliation of Loss and Share Amount Used in EPS Calculation
(Continued)
Potentially dilutive securities excluded from dilutive loss per share
at March 31, 2002 and 2003, as their effect is anti-dilutive, is as
follows:
Three Months Ended
March 31,
----------------------
2002 2003
---------- ----------
Stock options and warrants .................. 1,743,482 5,184,299
========== ==========
Principal of convertible debentures ......... $ - $1,634,117
========== ==========
14. 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 and loss per share would have
increased to the pro-forma amounts shown below:
Three Months Ended
March 31,
---------------------------
2002 2003
----------- ------------
Net loss:
As reported ........................... $(2,146,640) $(3,017,451)
Compensation expense .................. (366,798) (243,108)
----------- ------------
Pro forma ............................. $(2,513,438) $(3,260,559)
=========== ============
Basic and diluted net loss per
common share:
As reported ........................... $ (0.23) $ (0.26)
Compensation expense .................. (0.04) (0.02)
----------- ------------
Pro forma ............................. $ (0.27) $ (0.28)
=========== ============
15. Related Party Transactions
Effective February 1, 2001, the Company entered into a consulting
agreement with JG Consulting AG, a company owned by the Company's
majority shareholder, Dr. Jacques Gonella. In connection with this
agreement, the Company recognized expense of $46,500 in each of the
quarters ended March 31, 2002 and 2003. Amounts owed to JG Consulting
AG at December 31, 2002 and March 31, 2003 were $46,500 and $93,000,
respectively.
During 2001 the Company recognized expense of $92,500 for feasibility
study and market research services performed by a company in which Dr.
Gonella has an ownership interest of approximately 25%. At December 31,
2002 and March 31, 2003 the Company had a payable to this company of
$92,500.
14
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2002 and 2003
15. Related Party Transactions (Continued)
During the three months ended March 31, 2003 the Company recognized
expense of $10,500 for consulting services provided by John Gogol, one
of the Company's board members. The Company had a payable to Mr. Gogol
at December 31, 2002 and March 31, 2003 of $22,211 and $10,500,
respectively.
The Company received $1,000,000 on March 12, 2002 and $1,000,000 on
April 24, 2002 from the Company's majority shareholder, Dr. Jacques
Gonella, under a Term Note agreement dated February 20, 2002. The Term
Note agreement allowed for total advances to the Company of $2,000,000
and was interest bearing at the three-month Euribor Rate as of the date
of each advance, plus 5%. The principal of $2,000,000 and accrued
interest of $36,550 was converted into 509,137 shares of common stock
on June 10, 2002 at $4.00 per share. In addition, the Company borrowed
from its majority shareholder $300,000, $200,000 and $200,000 in June,
September and December of 2002, respectively, to be repaid in July,
September and December of 2003, respectively, with interest at the
three-month Euribor Rate as of the date of the advance, plus 5%. The
Company borrowed an additional $130,000 from its majority shareholder
on March 28, 2003, to be repaid in December 2003, at the same interest
rate as the 2002 borrowings. These amounts are included in due to
related parties on the consolidated balance sheets as of December 31,
2002 and March 31, 2003.
The Company borrowed from its majority shareholder an additional
$480,000, $140,000 and $250,000 on April 15, April 28 and May 8, 2003,
respectively. The loans are due in December 2003 with interest at the
three-month Euribor Rate as of the dates of the loans, plus 5%. The
majority shareholder was also issued warrants for the purchase of
195,000, 720,000, 210,000 and 375,000 shares of the Company's common
stock at an exercise price of $0.55 per share in connection with the
loans on March 28, April 15, April 28, and May 8, 2003, respectively.
At March 31, 2002 and 2003 and May 14, 2003, aggregate loans from the
majority shareholder excluding applicable debt discounts were
$1,000,000, $830,000 and $1,700,000, respectively.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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, inventory
reserves and valuation of long-lived and intangible assets and goodwill, 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, 2002. The Company has made no changes to these
policies during 2003.
Three Months Ended March 31, 2002 and 2003
Revenues
Total revenues for the three months ended March 31, 2002 and 2003 were $668,971
and $910,126, respectively. The increase in revenues of $241,155, or 36% is
primarily the result of an increase in product sales of $165,683, or 31%. The
product sales increase was mainly due to increased sales of injector device
disposable components to the Company's major customer.
Licensing and product development fee income increased by $30,490 or 23% for the
three months ended March 31, 2003 as compared to the prior-year period. The
increase results primarily from the receipt of approximately $500,000 of license
and product development fees in April 2002 that was deferred and is being
recognized over 47 months.
Cost of Sales
The cost of product sales of $661,424 and $502,476 for the first quarter of 2002
and 2003, respectively, are primarily related to injection devices and
disposable products. Cost of sales as a percentage of product sales decreased
from 123% for the first quarter of 2002 to 71% for the first quarter of 2003.
The significant improvement in gross margin during the 2003 period was primarily
due to approximately $282,000 of inventory write-offs and inventory reserve
adjustments in the first quarter of 2002 related to the launch of the Medi-Ject
Vision device into new markets.
Research and Development
Research and development expenses decreased $16,353 or 2% to $714,775 in the
three months ended March 31, 2003 from $731,128 in the prior year period. Higher
payroll costs due to research employee additions during 2002 at
Antares/Switzerland for increased research activities were offset by reductions
in prototyping and tooling expenses.
16
Sales and Marketing
Sales and marketing expenses totaled $158,421 and $110,865 in the three months
ended March 31, 2002 and 2003, respectively. This decrease of $47,556 or 30% is
primarily due to lower payroll costs caused by staff reductions at
Antares/Minnesota and reductions in travel expenses and professional fees.
General and Administrative
General and administrative expenses totaled $1,277,329 and $1,498,332 in the
three months ended March 31, 2002 and 2003, respectively. The increase of
$221,003 or 17% is primarily due to increases in professional and legal fees
partially offset by reductions in travel expenses.
Other Income (Expense)
Net other income (expense) decreased $1,113,820 from net other income of $12,691
in the first quarter of 2002 to net other expense of $1,101,129 in the first
quarter of 2003. The first quarter 2002 other income (expense) is primarily
composed of exchange gains of $18,538 and interest income of $3,232, offset by
interest expense of $8,362. The first quarter 2003 other income (expense) is
primarily composed of loss on extinguishment of debt of $885,770, exchange
losses of $28,559 and interest expense of $310,480, partially offset by gains on
common stock warrants of $115,711. The interest expense primarily relates to the
convertible debentures, consisting of $249,705 from the amortization of deferred
financing costs and debt issuance discount in connection with the 10%
convertible debentures and debenture interest totaling $31,733. Gains on common
stock warrants represents the change in fair value, using the Black Scholes
option pricing model, of the debenture holders' warrants from the issuance date
of January 31, 2003 to March 31, 2003, described further in Note 8 to the
Consolidated Financial Statements.
Cash Flows
Operating Activities
Net cash used in operating activities decreased by $1,720,495, from $1,930,642
for the first quarter of 2002 to $210,147 for the first quarter of 2003. This
was the result of net losses of $2,146,640 and $3,017,451 in the first quarter
of 2002 and 2003, respectively, adjusted by noncash expenses and changes in
operating assets and liabilities.
Net noncash expenses in the first quarter of 2002 totaled $280,225, consisting
primarily of depreciation and amortization of $233,363 and stock-based
compensation expense of $46,862. Noncash expenses of $1,396,252 in the first
quarter of 2003 were mainly due to depreciation and amortization of $220,785,
amortization of deferred financing costs of $249,705, stock-based compensation
expense of $239,600, provision for doubtful accounts of $57,675 and loss on
extinguishment of debt of $741,570, less gains on common stock warrants of
$115,711.
The change in operating assets and liabilities in the first quarter of 2002
resulted in a net decrease in cash of $64,227, primarily due to the increase in
accounts receivable and prepaid expenses of $75,239 and $148,999, respectively,
along with a decrease in liabilities to related parties of $112,481, offset by a
decrease in inventories of $133,931 and an increase in deferred revenue of
$149,183. Prepaid expenses increased $148,999 during the current quarter due
primarily to payment of the annual directors' insurance premium of $155,000. In
the first quarter of 2003, the change in operating assets and liabilities caused
a net increase in cash of $1,411,052, primarily due to increases in deferred
revenue and accrued expenses of $1,251,310 and $625,356, respectively, and a
decrease in accounts payable of $328,330, offset by increases in accounts
receivable, VAT and other receivables, inventories and prepaid and other assets
of $78,093, $558,707, $55,614 and $101,866, respectively. The increase in
deferred revenue in 2003 is
17
mainly due to the receipt of over $1,000,000 in the first quarter from Ferring
in connection with a License Agreement described in Note 9 to the Consolidated
Financial Statements.
Investing Activities
Net cash used in investing activities decreased $87,697, from $149,564 in the
first quarter of 2002 to $61,867 in the same period of 2003. Purchases of
equipment, furniture and fixtures in the first quarter of 2002 and 2003 totaled
$68,431 and $1,160, respectively, and expenditures for patent acquisition and
development totaled $81,133 and $60,707, respectively.
Financing Activities
Net cash provided by financing activities decreased $729,479 from $979,223 in
the first quarter of 2002 to $249,744 in the same period of 2003, due primarily
to net proceeds of $1,000,000 received from the majority shareholder during the
first quarter of 2002 compared to $130,000 during the first quarter of 2003. In
the first quarter of 2003 the Company borrowed $621,025 from one of the
debenture holders and used these proceeds to repurchase $464,000 principal
amount of the 10% debentures from two of the original debenture holders, and to
pay a repurchase premium of $144,200 and accrued interest of $12,825.
Liquidity
The Company had negative working capital of $4,188,234 and $7,827,625 at
December 31, 2002 and March 31, 2003, respectively, and incurred a net loss of
$3,017,451 for the quarter ended March 31, 2003. In addition, the Company has
had net losses and has had negative cash flows from operating activities since
inception. The Company expects to report a net loss for the year ending December
31, 2003, 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.
The Company's cash position is currently only sufficient to fund working capital
requirements for two or three weeks from May 12, 2003. Moreover, the Company has
no immediate access to additional capital. Management's intentions are to
attempt to raise additional capital through alliances with strategic corporate
partners, equity offerings, and/or debt financing. However, there can be no
assurance that the Company will ever become profitable or that additional
adequate funds will be available when needed or on acceptable terms. If for any
reason the Company is unable to obtain additional financing it may not be able
to continue as a going concern, which may result in material asset impairments,
other material adverse changes in the business, results of operations or
financial condition, or the loss by shareholders of all or a part of their
investment in the Company.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary if the Company is unable
to continue as a going concern.
The Company received a notice from Nasdaq on November 29, 2002, because for the
30 consecutive trading days prior to November 29, 2002, the Company's common
stock closed below the minimum $1.00 per share requirement for continued listing
under certain of Nasdaq's marketplace rules. Nasdaq provided the Company 180
calendar days, or until May 28, 2003, to regain compliance with respect to
18
this per share bid price requirement. This notice was described more fully in
the Company's Current Report on Form 8-K, filed on December 3, 2002.
In addition, by letter dated March 24, 2003, Nasdaq notified the Company that it
currently does not comply with Marketplace Rule 4310(c)(2)(B), which requires
listed companies to have a minimum of (i) $2,500,000 in shareholders' equity,
(ii) $35,000,000 market value of listed securities or (iii) $500,000 of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. Based on the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, the Company's
shareholders' equity was $655,288. Additionally, as of March 24, 2003, the
market value of the Company's listed securities was $5,943,753 (based on
11,887,506 shares outstanding multiplied by the closing bid price of $0.50).
Finally, the Company reported a net loss from continuing operations for each of
the last three fiscal years.
The Company has corresponded with Nasdaq regarding potential transactions that
the Company may consummate to increase its shareholders' equity. However,
following review of these proposals, on April 28, 2003, Nasdaq notified the
Company of its intent to delist the Company's common stock from the Nasdaq
SmallCap Market effective May 7, 2003. The Company appealed Nasdaq's
determination by requesting an oral hearing before the Nasdaq Listing
Qualifications Panel. This hearing request will stay the delisting of the
Company's common stock pending the Listing Qualifications Panel's decision.
To maintain listing on the Nasdaq SmallCap Market, the Company must address the
issues raised by both the November 28, 2002 and March 24, 2003 notice letters
received from Nasdaq. As of March 31, 2003, the Company does not meet any of the
financial requirements for continued or initial listing on the Nasdaq SmallCap
Market. If the Company's stock were to be delisted, it would constitute an event
of default under the newly restructured 8% debentures, and at the option of the
holder, exercisable through delivery of written notice to the Company, they
would become due and payable at 130% of the outstanding principal and accrued
interest.
New Accounting Pronouncements
In December 2002, the Emerging Issues Task Force ("EITF") issued EITF 00-21,
Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. In some arrangements, the
different revenue-generating activities (deliverables) are sufficiently
separable, and there exists sufficient evidence of their fair values to
separately account for some or all of the deliverables (that is, there are
separate units of accounting). In other arrangements, some or all of the
deliverables are not independently functional, or there is not sufficient
evidence of their fair values to account for them separately. EITF 00-21
addresses when and, if so, how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF 00-21 does not change
otherwise applicable revenue recognition criteria. EITF 00-21 is applicable for
the Company effective July 1, 2003, and could have an impact on revenue
recognition of future licensing transactions.
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement 133, Accounting for Derivative
Instruments and Hedging Activities. Statement 149 has multiple effective date
provisions depending on the nature of the amendment to Statement 133. The
Company does not expect this statement to have a material impact on its
consolidated results of
19
operations or financial position, because the Company does not currently have
derivative instruments or engage in hedging activities.
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. Most of the Company's sales and licensing fees are denominated in
U.S. dollars, thereby significantly mitigating the risk of exchange rate
fluctuations on trade receivables. The effect of foreign exchange rate
fluctuations on the Company's financial results for the quarters ended March 31,
2002 and 2003 was not material. Beginning in 2003 the Company also 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 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.
The Company's exposure to interest rate risk is limited to $830,000 borrowed in
2002 and 2003 under four Term Note agreements with its majority shareholder. The
notes bear interest at the three month Euribor Rate as of the date of each
advance, plus 5%. Due to the short-term nature of the notes, the Company's
exposure to interest rate risk is not believed to be material. The Company's 8%
convertible debentures, like all fixed rate instruments, are subject to interest
rate risk and will decline in value if market interest rates decrease. The
Company does not use derivative financial instruments to manage interest rate
risk.
The market value of the Company's 8% convertible debentures and the common stock
warrants are impacted by fluctuations in the price of the Company's common
stock.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the disclosure controls and procedures conducted
within 90 days prior to the filing date of this Quarterly Report on Form 10-Q,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c)) are effective. There were no significant changes in the internal
controls or in other factors that could significantly affect those controls
subsequent to the date of the evaluation thereof.
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.
20
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 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.
21
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 7, 2003, Company completed a restructuring of its
outstanding debt securities previously sold to four primary investors.
In connection with this restructuring, the Company repurchased certain
of its outstanding 10% convertible debentures using funds borrowed from
one of the 10% debenture holders. The Company then issued new 8% Senior
Secured Convertible Debentures to this holder in the same amount
borrowed from the debenture holder, and issued replacement 8%
debentures in exchange for the remaining outstanding 10% debentures. In
all, the Company issued $1,613,255 aggregate principal amount of its 8%
debentures. The 8% debentures include a fixed conversion price of $.50
per share and earn interest at a rate of 8% per annum. The Company
granted a senior security interest in substantially all of its assets
to the holders of the 8% debentures. The Company also issued to the
debenture holders five-year warrants to purchase an aggregate of
2,932,500 shares of the Company's common stock at an exercise price of
$.55 per share. Upon conversion of the 8% debentures and exercise of
the warrants, the Company will be obligated to issue an aggregate of
6,159,011 shares of its common stock. As this amount exceeds 20% of the
Company's current outstanding shares of common stock, the Company was
required to obtain shareholder approval for this transaction. The
Company's shareholders approved the issuance of the 8% debentures and
the warrants at a special meeting held on May 8, 2003. Because this
transaction was a restructuring of existing debt, the Company did not
receive any additional proceeds as a result of it. The sale of the
debentures and warrants was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
On each of January 15, 2003, February 15, 2003 and March 15, 2003, the
Company issued 10,000 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 the following dates, the Company issued the indicated number of
shares of its common stock to Duncan Capital LLC:
January 10, 2003 100,000 shares
January 17, 2003 19,608 shares
February 17, 2003 19,231 shares
March 1, 2003 10,670 shares
The shares were issued as compensation to Duncan Capital LLC pursuant
to an Advisory Agreement dated December 17, 2002. The issuance of the
shares was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
On January 15, 2003, the Company issued 50,000 shares to Brown Simpson
Asset Management, LLC as compensation pursuant to an Advisory Agreement
dated January 15, 2003. The Company also issued to Brown Simpson a
three-year warrant to purchase 300,000 shares of common stock at $.55
per share. The issuance of the shares and the warrant was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
22
On March 28, 2003, the Company issued to Jacques Gonella, the Company's
principal shareholder, a five-year warrant to purchase 195,000 shares
of common stock at $.55 per share. The warrant was issued in connection
with a Term Note in the principal amount of $130,000.00 issued to Dr.
Gonella. The issuance of the warrant was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- ----------------------------------------------------
3.8 Articles of Amendment to Third Amended and Restated
Articles of Incorporation
99.1 Section 906 CEO and CFO Certification
(b) Reports on Form 8-K
On February 12, 2003 the Company filed a Current Report on Form 8-K
reporting under Item 5, Other Events, that it completed a restructuring
of its outstanding debt securities. The Company exchanged $992,230 of
its 10% Convertible Debentures and $621,025 of promissory notes for
$1,613,255 of 8% Convertible Debentures plus warrants to purchase
2,932,500 shares of common stock. The 8% Convertible Debentures contain
substantially the same terms as the 10% Convertible Debentures, except
that the 8% Convertible Debentures include a fixed conversion price of
$.50 per share and an interest rate of 8%.
On February 20, 2003 the Company filed a Current Report on Form 8-K
reporting under Item 5, Other Events, that it entered into a License
Agreement dated January 22, 2003, with Ferring BV ("Ferring"), under
which the Company licensed certain of its intellectual property and
extended the territories available to Ferring for use of certain of the
Company's needle-free injector devices.
On March 25, 2003 the Company filed a Current Report on Form 8-K
reporting under Item 5, Other Events and Required FD Disclosure, that
the Listing Qualifications arm of the Nasdaq Stock Market, Inc.
notified the Company by letter dated March 24, 2003 that the Company is
at risk of having its common stock delisted from the Nasdaq SmallCap
Stock Market.
23
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.
May 20, 2003 /s/ Roger G. Harrison, Ph.D.
---------------------------------------
Roger G. Harrison, Ph.D.
Chief Executive Officer and President
May 20, 2003 /s/ Lawrence M. Christian
---------------------------------------
Lawrence M. Christian
Chief Financial Officer, Vice
President - Finance and Secretary
24
Certifications
I, Roger G. Harrison, Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Antares Pharma,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 20, 2003
/s/ Roger G. Harrison, Ph. D.
- -----------------------------------------
Roger G. Harrison, Ph. D.
Chief Executive Officer and President
25
I, Lawrence M. Christian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Antares Pharma,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 20, 2003
/s/ Lawrence M. Christian
- -----------------------------------------
Lawrence M. Christian
Chief Financial Officer, Vice President -
Finance and Secretary
26