================================================
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 September 30, 2001March 31, 2002
Commission File Number 0-20945
ANTARES PHARMA, INC.
A Minnesota Corporation IRS Employer ID No. 41-1350192
161 Cheshire Lane North,707 Eagleview Boulevard, Suite 100
Minneapolis, Minnesota 55441
(763) 475-7700
________________________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 November 1, 2001,April 30, 2002, was 8,973,125.
=========================9,201,188.
===================
1
ANTARES PHARMA, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets, as of December 31, 20002001 and
September 30, 2001......................................................March 31, 2002 ..................................................... 3
Consolidated Statements of Operations for the three months ended
March 31, 2001 and nine
months ended September 30, 2000 and 2001................................2002 ............................................ 4
Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Loss for the nine months ended
September 30, 2001 ..................................................... 5
Consolidated Statements of Cash Flows for the ninethree months ended
September 30, 2000March 31, 2001 and 2001............................................. 62002 ............................................ 5
Notes to Consolidated Financial Statements.............................. 7Statements ......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 15Operations .......................................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............. 20Risk ......... 15
PART II. OTHER INFORMATION....................................................... 21
SIGNATURES.............................................................. 22INFORMATION .................................................. 16
SIGNATURES ......................................................... 17
2
ANTARES PHARMA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, September 30,
2000March 31,
2001 ------------2002
-------------- --------------
ASSETSAssets
Current Assets:
Cash and cash equivalents.................................................................................................................... $ 243,2221,965,089 $ 4,375,925873,317
Accounts receivable, less allowance for doubtful accounts of $18,000 in 2001............................................... -- 426,835
Other........... 535,461 610,700
VAT and other receivables ................................................ 408,534 76,598
Inventories....................................................... -- 788,203...................................................... 331,660 318,664
Inventories .................................................................... 655,691 521,760
Prepaid expenses and other assets................................. 13,165 148,994
------------assets .............................................. 55,041 204,040
-------------- 664,921 5,816,555--------------
Total current assets .................................................... 3,542,942 2,528,481
Equipment, furniture and fixtures, net................................. 831,541 2,500,839net ................................................ 1,924,675 1,783,880
Patent rights, net..................................................... 253,434 1,755,001net .................................................................... 2,464,336 2,508,423
Goodwill, net ......................................................... 88,982 1,191,687
Other intangible assets, net........................................... -- 2,006,064
Notes receivable and due from Medi-Ject Corporation.................... 5,133,296 --......................................................................... 3,095,355 3,095,355
Other assets .......................................................... 2,374 60,795
------------.......................................................................... 101,142 99,936
-------------- --------------
Total Assets ............................................................ $ 6,974,54811,128,450 $ 13,330,941
============10,016,075
============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)==============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable..................................................payable ............................................................... $ 369,177637,794 $ 518,651594,124
Accrued expenses and other liabilities............................ 646,254 1,024,458liabilities ......................................... 1,070,916 1,089,762
Deferred revenue ............................................................... 1,511,198 1,660,381
Capital lease obligations - current maturities ................................. 91,054 90,814
Liabilities to related parties.................................... 321,640 --
Long-term obligations -parties ................................................. 243,692 1,131,211
-------------- --------------
Total current maturities........................ 107,815 69,590
Deferred revenue.................................................. 1,659,612 1,666,016
------------- --------------
3,104,498 3,278,715
Subordinated loans from shareholders................................... 17,664,020 --
Long-termliabilities ............................................... 3,554,654 4,566,292
Capital lease obligations, less current maturities......................... 67,635 60,230
-------------maturities .................................... 105,629 83,020
-------------- --------------
Total liabilities...................................................... 20,836,153 3,338,945
-------------liabilities ....................................................... 3,660,283 4,649,312
-------------- --------------
Shareholders' Equity (Deficit):Equity:
Series A Convertible Preferred Stock: $0.01 par; authorized 10,000
shares; 1,2001,250 issued and outstanding at September 30, 2001............................................ -- 12December 31, 2001 and
March 31, 2002 .............................................................. 13 13
Common Stock: $0.01 par; authorized 15,000,000 shares:
10,000shares;
9,161,188 and 8,973,1259,201,188 issued and outstanding at
December 31, 20002001 and September 30, 2001,March 31, 2002, respectively 689,655 89,732.......................... 91,612 92,012
Additional paid-in capital. ....................................... 1,174,680 36,954,690capital ..................................................... 37,464,531 37,482,577
Accumulated deficit............................................... (17,264,463) (26,397,492)deficit ............................................................ (29,457,033) (31,603,673)
Deferred compensation............................................. -- (279,432)compensation .......................................................... (251,016) (222,600)
Accumulated other comprehensive income (loss)..................... 1,538,523 (375,514)
-------------loss ........................................... (379,940) (381,566)
-------------- (13,861,605) 9,991,996
------------- --------------
7,468,167 5,366,763
-------------- --------------
Total Liabilities and Shareholders' Equity .............................. $ 6,974,54811,128,450 $ 13,330,941
=============10,016,075
============== ==============
See accompanying notes to consolidated financial statements.
3
ANTARES PHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, September 30,
-------------------------------For the Three Months Ended
March 31,
--------------------------------
2000 2001 2000 2001
---------- ----------- ----------- ------------
(as restated, see note 4) (as restated, see note 4)2002
--------------- ---------------
Revenues:
Product sales...........................sales ............................................................... $ --471,377 $ 457,555 $ -- $ 1,742,286538,013
Licensing and product development....... 133,981 139,202 390,125 547,793
---------- ----------- ----------- ------------
133,981 596,757 390,125 2,290,079development ........................................... 115,792 130,958
--------------- ---------------
587,169 668,971
Cost of product sales.................... -- 373,190 -- 1,093,116
---------- ----------- ----------- ------------sales ............................................................ 293,872 661,424
--------------- ---------------
Gross margin............................. 133,981 223,567 390,125 1,196,963
---------- ----------- ----------- ------------margin ..................................................................... 293,297 7,547
--------------- ---------------
Operating Expenses:
Research and development................ 236,206 685,894 646,434 2,080,673development .................................................... 570,951 731,128
In-process research and development (Note 1)................... -- -- -- ................................ 948,000 Marketing-
Sales and sales..................... 315,883 363,050 888,769 1,007,057marketing ......................................................... 260,298 158,421
General and administrative.............. 401,904 1,334,437 1,693,317 3,719,477
---------- ----------- ----------- ------------
953,993 2,383,381 3,228,520 7,755,207
---------- ----------- ----------- ------------administrative .................................................. 1,184,175 1,277,329
--------------- ---------------
2,963,424 2,166,878
--------------- ---------------
Net operating loss....................... (820,012) (2,159,814) (2,838,395) (6,558,244)
---------- ----------- ----------- ------------loss ............................................................... (2,670,127) (2,159,331)
--------------- ---------------
Other income (expense):
Interest income......................... 3,438 44,667 12,634 202,851income ............................................................. 129,387 3,232
Interest expense........................ (112,649) (4,399) (281,026) (95,350)expense ............................................................ (84,204) (8,362)
Foreign exchange gains (losses)......... (29,675) (13,132) (150,002) (20,741) ............................................. (27,095) 18,538
Other, net.............................. -- (24,212) -- (18,076)
---------- ----------- ----------- ------------
(138,886) 2,924 (418,394) 68,684
---------- ----------- ----------- ------------
Loss before cumulative effect of change
in accounting principle................. (958,898) (2,156,890) (3,256,789) (6,489,560)
Cumulative effect of change in
accounting principle.................... -- -- (1,059,622) --
---------- ----------- ----------- ------------net .................................................................. (1,908) (717)
--------------- ---------------
16,180 12,691
--------------- ---------------
Net loss................................. (958,898) (2,156,890) (4,316,411) (6,489,560)loss ......................................................................... (2,653,947) (2,146,640)
In-the-money conversion feature-
preferredfeature-preferred stock dividend (Note 5)....... -- -- --6) ................ (5,314,125) Preferred stock dividends................ -- -- -- (50,000)
---------- ----------- ----------- -------------
--------------- ---------------
Net loss applicable to common shares.....shares ............................................. $ (958,898) $(2,156,890) $(4,316,411) $(11,853,685)
========== =========== =========== ============(7,968,072) $ (2,146,640)
=============== ===============
Basic and diluted net loss per common share before cumulative effect of
change in accounting principle................................................ $ (0.22)(1.14) $ (0.24) $ (0.75) $ (1.43)
Cumulative effect of change in
accounting principle.................... -- -- (0.25) --
---------- ----------- ----------- ------------
Basic and diluted net loss per common
share................................... $ (0.22) $ (0.24) $ (1.00) $ (1.43)
========== =========== =========== ============(.23)
=============== ===============
Basic and diluted weighted average common shares outstanding............... 4,326,733 8,955,347 4,325,436 8,276,424
========== =========== =========== ============outstanding ..................... 7,012,134 9,170,077
=============== ===============
See accompanying notes to consolidated financial statements.
4
ANTARES PHARMA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Convertible Preferred Stock Common Stock
------------------------------------ -----------------------------------------
Series A Series C Permatec Medi-Ject
----------------- ----------------- -------------------- -------------------
Additional
Number of Number of Number of Number of Paid-In
Shares Amount Shares Amount Shares Amount Shares Amount Capital
--------- ------ --------- ------ --------- --------- --------- -------- -----------
Balance
December 31, 2000............. -- $ -- -- $ -- 10,000 $ 689,655 -- $ -- $ 1,174,680
Net liabilities of
subsidiaries assumed
by shareholders............... -- -- -- -- -- -- -- -- (644,725)
Medi-Ject stock outstanding
at date of share transaction.. 1,150 12 -- -- -- -- 1,430,336 14,303 6,625,659
Exchange of Permatec shares
for Medi-Ject stock........... -- -- -- -- (10,000) (689,655) 2,900,000 29,000 660,655
Conversion of shareholder
loans to equity............... -- -- -- -- -- -- -- -- 13,173,497
Conversion of notes to
preferred Series C............ -- -- 27,500 275 -- -- -- -- --
Conversion of preferred
Series C to common stock...... -- -- (27,500) (275) -- -- 2,750,000 27,500 5,286,900
Exercise of stock options...... -- -- -- -- -- -- 38,307 384 56,474
Stock issued in lieu of
dividends..................... 50 -- -- -- -- -- -- -- 50,000
Stock-based compensation
expense....................... -- -- -- -- -- -- 48,000 480 348,224
Issuance of common stock in
private placement............. -- -- -- -- -- -- 1,706,482 17,065 9,974,326
Conversion of preferred
Series B to common stock...... -- -- -- -- -- -- 100,000 1,000 249,000
Net loss....................... -- -- -- -- -- -- -- -- --
Translation adjustment......... -- -- -- -- -- -- -- -- --
Comprehensive loss............. -- -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- --------- --------- -------- -----------
Balance
September 30, 2001............. 1,200 $ 12 -- $ -- -- $ -- 8,973,125 $ 89,732 $36,954,690
========= ====== ========= ====== ========= ========= ========= ======== ===========
Accumulated
Other Total
Accumulated Deferred Comprehensive Shareholders'
Deficit Compensation Income (Loss) Equity (Deficit)
------------- ------------ ------------- ----------------
Balance
December 31, 2000............. $ (17,264,463) $ -- $ 1,538,523 $ (13,861,605)
Net liabilities of
subsidiaries assumed
by shareholders............... 2,720,931 -- (1,538,523) 537,683
Medi-Ject stock outstanding
at date of share transaction.. -- -- -- 6,639,974
Exchange of Permatec shares
for Medi-Ject stock........... -- -- -- --
Conversion of shareholder
loans to equity............... -- -- -- 13,173,497
Conversion of notes to
preferred Series C............ (275) -- -- --
Conversion of preferred
Series C to common stock...... (5,314,125) -- -- --
Exercise of stock options...... -- -- -- 56,858
Stock issued in lieu of
dividends..................... (50,000) -- -- --
Stock-based compensation
expense....................... -- (279,432) -- 69,272
Issuance of common stock in
private placement............. -- -- -- 9,991,391
Conversion of preferred
Series B to common stock...... -- -- -- 250,000
Net loss....................... (6,489,560) -- -- (6,489,560)
Translation adjustment......... -- -- (375,514) (375,514)
----------------
Comprehensive loss............. -- -- -- (6,865,074)
------------- ------------ ------------- ----------------
Balance
September 30, 2001............. $ (26,397,492) $ (279,432) $ (375,514) $ 9,991,996
============= ============ ============= ================
See accompanying notes to consolidated financial statements.
5
ANTARES PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the NineThree Months Ended
September 30,
----------------------------
2000March 31,
----------------------------------
2001 ------------ ------------2002
--------------- ---------------
Cash flows from operating activities:
Net loss ........................................................................................................................... $ (4,316,411)(2,653,947) $ (6,489,560)(2,146,640)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................ 295,309 892,269
(Gain) loss................................................. 312,236 233,363
Loss on disposal and abandonment of assets ............ (9,000) 30,049.................................... 126 -
In-process research and development .......................... --........................................... 948,000 -
Stock-based compensation ..................................... 64,583 69,272expense .............................................. 1,926 46,862
Changes in operating assets and liabilities, net of effectseffect of
business combination:acquisition:
Accounts receivable .................................... -- (1,433)
Other........................................................ 35,030 (75,239)
VAT and other receivables ...................................... 169,906 328,007.................................................. 6,586 12,996
Inventories ............................................ -- (376,022)................................................................ (75,766) 133,931
Prepaid expenses and other assets ...................... (30,699) (3,926).......................................... (93,614) (148,999)
Accounts payable ....................................... 20,345 (860,150)........................................................... (523,781) (43,670)
Accrued expenses and other liabilities ................. (80,528) (395,854)................................................. (124,350) 18,846
Deferred revenue ........................................................... (199,998) 149,183
Liabilities to related parties ......................... --............................................. 9,302 Deferred revenue ....................................... 1,781,545 6,404
Restructuring provisions .............................. (272,307) --(112,481)
Other .................................................. 5,331 (54,646)
------------ ------------...................................................................... 1,423 1,206
--------------- ---------------
Net cash used in operating activities ................................. (2,371,926) (5,898,288)
------------ ------------.................................................. (2,356,827) (1,930,642)
--------------- ---------------
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures ............... (53,603) (390,270)................................ (61,239) (68,431)
Proceeds from salessale of equipment, furniture and& fixtures ..... --......................... 91,699 -
Additions to patent rights ................................... (32,850) (98,255)
Deferred acquisition costs ................................... (360,000) --.................................................... (82,866) (81,133)
Increase in notes receivable and due from Medi-Ject .......... --........................... (602,756) -
Acquisition of Medi-Ject, including cash acquired ............ --............................. 355,578 ------------ -------------
--------------- ---------------
Net cash used in investing activities ................................. (446,453) (644,004)
------------ ------------.................................................. (299,584) (149,564)
--------------- ---------------
Cash flows from financing activities:
Proceeds from loans from shareholders ........................ 2,736,629......................................... 1,188,199 Proceeds from sale of common stock ........................... -- 10,048,2491,000,000
Principal payments on capital lease obligations .............. (87,816) (148,273)
------------ ------------............................... (99,088) (20,777)
Proceeds from issuance of common stock, net ................................... 9,994,549 -
--------------- ---------------
Net cash provided by financing activities ............................. 2,648,813 11,088,175
------------ ------------.............................................. 11,083,660 979,223
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents .......... (30,897) (413,180)
------------ ------------........................... (290,304) 9,211
--------------- ---------------
Net increase (decrease) in cash and cash equivalents .................. (200,463) 4,132,703................................... 8,136,945 (1,091,772)
Cash and cash equivalents:
Beginning of period ................................. 674,569........................................................... 243,222 ------------ ------------1,965,089
--------------- ---------------
End of period ........................................................................................................ $ 474,1068,380,167 $ 4,375,925
============ ============873,317
=============== ===============
Cash paid during the period for interest ............................................................................. $ 281,02684,204 $ 95,3503,942
____________________- ----------
Schedule of non-cash investing and financing activities: See information
regarding non-cash investing and financing activities related to the Share
Transaction in Notes 1 and 5.6.
See accompanying notes to consolidated financial statements.
6statements
5
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000March 31, 2001 and 20012002
1. BASIS OF PRESENTATIONBasis 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 accounting principles generally accepted in the
United States of Americaaccounting
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 and Form 8-K/A filings.for the year ended
December 31, 2001. Operating results for the nine-
monththree-month period ended
September 30, 2001,March 31, 2002, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001.
In July 2000,2002.
On January 31, 2001, Medi-Ject Corporation, now known as Antares
Pharma, Inc. ("Antares" or "the Company"), entered into a Purchase Agreement with purchased from Permatec
Holding AG ("Permatec"), all of the outstanding shares of Permatec
Pharma AG, Permatec Technology AG, (each of the foregoing, a company organized under the laws of
Switzerland), and Permatec NV (a company organized under the laws of the
Netherlands Antilles). Pursuant to the Purchase Agreement, on January 31,
2001, Antares purchased all of the outstanding shares of the three Permatec
Subsidiaries (Share Transaction)(the "Share
Transaction"). In exchange, Antares issued 2,900,000 shares of Antares
common stock to Permatec. Upon the issuance, Permatec owned
approximately 67% of the outstanding shares of Antares common stock.
For accounting purposes, Permatec is deemed to have acquired Antares.
The acquisition has been accounted for by the purchase method of
accounting.
The financial statements and related disclosures that were previously
reported for Medi-Ject have been replaced with the Permatec financial
statements and disclosures. The operating financial history of Antares has
become that of Permatec.
As of January 31, 2001, Permatec had two other subsidiaries that were not
sold pursuant to the Purchase Agreement and they are in the process of
being dissolved. All assets and liabilities relating to those two
subsidiaries remain with Permatec and did not form part of the Share
Transaction.
Upon closing of the Share Transaction on January 31, 2001, the full
principal amount of Permatec's shareholders' loans to the three
Permatec subsidiaries which were included in the Share Transaction, of
$13,173,497,$13,069,870, was converted to equity.
Also on January 31, 2001, promissory notes issued by Medi-Ject to
Permatec between January 25, 2000 and January 15, 2001, in the
aggregate principal amount of $5,500,000, were converted into Series C
Convertible Preferred Stock ("Series C"). Permatec, the holder of the
Series C stock, immediately exercised its right to convert the Series C
stock, 7
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
September 30, 2000 and 2001
1. BASIS OF PRESENTATION (Continued)
and Antares issued 2,750,000 shares of common stock to Permatec
upon such conversion. Also on that date, the name of the corporation
was changed to Antares Pharma, Inc.
The total consideration paid, or purchase price, for Medi-Ject was
approximately $6,889,974, which represents the fair market value of
Medi-
JectMedi-Ject and related transaction costs of $480,095. For accounting
purposes, the fair value of Medi-Ject is based on the 1,424,729 shares
of Medi-Ject common stock outstanding on January 25, 2000, at an
average closing price three days before and after such date of $2.509
per share plus the estimated fair value of the Series A convertible
preferred stock and the Series B mandatorily redeemable convertible
preferred stock plus the fair value of outstanding stock options and
warrants representing shares of Medi-Ject common stock either vested on
January 25, 2000, or that became vested at the close of the Share
Transaction plus the capitalized acquisition cost of Permatec.
6
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2001 and 2002
1. Basis of Presentation (Continued)
The purchase price allocation, based on an appraisal by an independent
third-party appraisal firm, was as follows:
Cash acquired ............................ $ 394,535
Current assets ........................... 900,143
Equipment, furniture and fixtures ........ 1,784,813
Patents .................................. 1,470,000
Other intangible assets .................. 2,194,000
Goodwill ................................. 1,276,806
Other assets ............................. 3,775
Current liabilities ...................... (2,026,723)
Debt ..................................... (55,375)
In-process research and development ...... 948,000
---------------------------
Purchase price ........................... $ 6,889,974
===========
Patents are being amortized over periods ranging from six to ten years.
Other intangible assets include values assigned to workforce, ISO
certification and clinical studies and are being amortized over estimated
useful lives which range from five to ten years. Goodwill is being
amortized over a period of ten years.================
In connection with the Share Transaction on January 31, 2001, the
Company acquired in-process research and development projects having an
estimated fair value of $948,000, that had not yet reached
technological feasibility and had no alternative future use.
Accordingly, this amount was immediately expensed in the Consolidated
StatementStatements of Operations.
82. 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 $11,712
and $2,037,811 at December 31, 2001 and March 31, 2002, 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, 2002, 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 has sufficient cash through June 2002 and will be required
to raise additional working capital to continue to exist. Management's
intentions are to raise this additional capital through alliances with
strategic corporate partners, equity offerings, and/or borrowing from
the Company's majority shareholder. 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. The note bears interest at the
three month Euribor Rate as of the date of each advance, plus 5%. The
principal and accrued interest is due on the earlier of (i) August 20,
2002, or (ii) the closing of a private placement of equity by the
Company that results in net proceeds of $5,000,000. There can be no
assurance hat the Company will ever
7
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 2001 and 2002
2. Going Concern (Continued)
(UNAUDITED)
September 30, 2000become profitable or that additional adequate funds will be available when
needed or on acceptable terms.
The financial statements do not include any adjustments relating to the
recoverability and 2001
2. INVENTORIESclassification 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.
3. Inventories
Inventories consist of the following:
December 31, 2000 September 30,March 31,
2001 ----------------- ------------------2002
------------- --------------
Raw Materialmaterial .......................... $ --294,643 $ 234,160288,406
Work in-process -- 169,728....................... 29,611 42,645
Finished goods -- 384,315........................ 436,437 271,709
------------- --------------
760,691 602,760
Inventory reserve (105,000) (81,000)
------------- --------------
$ --655,691 $ 788,203521,760
============= =============
3. INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS
Upon consummation of the Share Transaction, the==============
4. Industry Segment and Operations by Geographic Areas
The Company has one operating
segment, drug delivery, which includes theis 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'sPermatec's identifiable assets
and revenues are summarized in the following table:
We have operating assets located on two continents as follows:
December 31, 2000 September 30,March 31,
2001 ----------------- ------------------
Basel,2002
-------------- ---------------
Switzerland ......................... $ 6,974,5482,388,337 $ 2,389,847
Minneapolis, Minnesota -- 10,941,0942,023,131
United States of America ............ 8,740,113 7,992,944
-------------- ---------------
--------------
$ 6,974,54811,128,450 $ 13,330,94110,016,075
============== =============== ==============
Revenues by region of origin are summarized as follows:
For the Three Months Ended
-----------------------------------------
September 30, 2000 September 30,March 31,
--------------------------
2001 ------------------ ------------------
US2002
----------- -----------
United States of America ...... $ 52,63257,768 $ 313,260159,011
Europe 81,349 288,594........................ 465,935 486,018
Other -- (5,097)
---------- ------------......................... 63,466 23,942
----------- -----------
$ 133,981587,169 $ 596,757
========== ============
For the Nine Months Ended
-----------------------------------------
September 30, 2000 September 30, 2001
------------------ ------------------
US $ 70,175 $ 564,486
Europe 319,950 1,658,250
Other -- 67,343
---------- ------------
$ 390,125 $ 2,290,079
========== ============
9668,971
=========== ===========
8
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(CONTINUED)
(UNAUDITED)
September 30, 2000March 31, 2001 and 2001
4. ACCOUNTING FOR LICENSE AND PRODUCT DEVELOPMENT REVENUES2002
5. 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 and product development revenues. The adoption of this accounting principle resulted in a
$1,059,622 cumulative effect adjustment in 2000,
and the license and product development revenues reported for the three and
nine-month periods ended September 30, 2000 were previously reported as
$62,048 and $862,048, respectively, and were adjusted to $133,981 and
$390,125, respectively, upon adoption of the cumulative deferral method.first quarter 2000.
During the nine monthsquarters ended September 30, 2000March 31, 2001 and September 30, 2001,March 31, 2002, the Company
recognized $207,902$69,301 and $186,490,$39,228, respectively, of license and
product development revenues that were
previously recognized by the Company prior to the adoption of the
cumulative deferral method.
5. IN-THE-MONEY CONVERSION FEATURE-PREFERRED STOCK DIVIDEND6. In-The-Money Conversion Feature Preferred Stock Dividend
During 2000 and 2001, prior to the closing of the Share Transaction on
January 31, 2001, Medi-Ject borrowed a total of $5,500,000 in convertible
promissory notes from Permatec. At the closing of the Share Transaction,
the principal amount of convertible promissory notes converted to 27,500
shares of Series C preferred stock. At the option of the holder, these
shares were immediately converted into 2,750,000 shares of Antares common
stock. As the conversion feature to common stock was contingent upon the
closing of the Share Transaction, the measurement of the stated conversion
feature as compared to the Company's common stock price of $4.56 at January
31, 2001, resulted in an in-the-money conversion feature of $5,314,125,
which is a deemed dividend to the Series C preferred shareholder. This
dividend increases the net loss applicable to common shareholders in the
Antares' net loss per share calculation.
6. EMPLOYMENT AGREEMENT WITH ROGER G. HARRISON, PH.D.7. Restricted Shares of Common Stock
Roger G. Harrison, Ph.D., was appointed to the position of Chief Executive
Officer of Antares Pharma, Inc., effective March 12, 2001. TheIn accordance
with the terms of the employment agreement with Dr. Harrison, include an annual salary of $275,000 and up to
216,00040,000
restricted shares of common stock which will bewere granted afterto him on March 12, 2002,
his first anniversary with the achievement of certain time-based and performance-based milestones. In
addition, if within twelve months of the commencement of his employment the
Company sells all or substantially all of the Company's assets to an
unaffiliated third party, or merges with or into an unaffiliated third
party in which the Company is not the surviving entity, then the Company
will pay to Dr. Harrison either (i) two percent of the aggregate cash
securities or other consideration received by the Company from the sale, or
(ii) an amount, in cash, equal to
10
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
September 30, 2000 and 2001
6. EMPLOYMENT AGREEMENT WITH ROGER G. HARRISON, PH.D.(Continued)
two percent of the value of the aggregate cash, securities or other
consideration distributed to the Company's shareholders in the merger;
provided, however, that the Company shall have no obligation to make any
payment to Dr. Harrison if he is employed as the chief executive or chief
operating officer of the acquiring or surviving entity in the transaction.
The Company anticipates the time-based milestones will be achieved and has
recorded deferred compensation expense related to 48,000 shares which were
issued to Dr. Harrison in April 2001 and 40,000 shares expected to be
earned in April 2002. The shares vest over a three-year period and had an
aggregate market value of $341,000 at the measurement date. Compensation
expense is being recognized ratably over the three-year vesting period.
Through September 30, 2001 compensation expense of $61,568 has been
recognized in connection with these shares.
7. NEW ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible AssetsCompany.
8. New Accounting Pronouncements
In July 2001, the FASBFinancial Accounting Standards Board issued Statement No.SFAS 141,
"Business Combinations," and Statement No.SFAS 142, "Goodwill and Other Intangible
Assets." StatementSFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchaseSFAS 142
changes the accounting for goodwill from an amortization method
business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an
assembled
workforce may not be accounted for separately. Statement 142 will require
thatimpairment-only approach. Thus, amortization of goodwill, and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least annuallyincluding
goodwill recorded in accordance with the provisions of Statement 142. Statement 142 will also
require that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121, "
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore,
goodwill and intangible assets determined to have an indefinite useful life
acquired in a purchase business combination completed after June 30, 2001,
but before Statement 142 is adopted in full, will not be amortized, but
will continue to be evaluated for impairment in accordance with the
appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired inpast business combinations, completed before July
1, 2001 will continue to be amortized and tested for impairment in
accordance with the appropriate pre-Statement 142 accounting literature
prior to the full adoption of Statement 142.
11
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
September 30, 2000 and 2001
7. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Statement 141 will requireceased upon adoption of
Statementthat Statement. The Company adopted SFAS 142 thatin the Company
evaluatefirst quarter of fiscal
2002 and accordingly evaluated its existing intangible assets and goodwill
that were acquired in a prior purchase business combinations,combination, and determined
that $1,935,588 representing the unamortized portion of the amount
allocated to make any necessary
reclassifications in order to conform withother intangible assets on the new criteria in Statement
141 for recognition apart fromdate of adoption, should be
reclassified as goodwill. These amounts were previously classified as
workforce, ISO certification and clinical studies. Upon adoption of StatementSFAS
142, the Company will be required to reassessreassessed the useful lives and residual values of all
intangible assets
acquired, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an assessment
of whether there is an indication that goodwill is impaired as of the date
of adoption. To accomplish this the Company must identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company
will then have up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the carrying amount of
the reporting unit. To the extent the carrying amount of a reporting unit
exceeds the fair value of the reporting unit, an indication exists that the
reporting unit goodwill may be impaired and the Company must perform the
second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit goodwill
with the carrying amount of the reporting unit goodwill, both of which
would be measured as of the date of adoption. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit
to all of the assets (recognized and unrecognized) and liabilities of the
reporting unit in a manner similar to a purchase price allocation, in
accordance with Statement 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. This
second step is required to be completed as soon as possible, but no later
than the end of the year of adoption. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting principle
in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $1,159,766, and unamortized identifiable
intangible assets of $1,935,588, all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $177,963 and $173,317 for the year ended December
31, 2000, and the nine months ended September 30, 2001, respectively.
129
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(CONTINUED)
(UNAUDITED)
September 30, 2000 and 2001
7. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Because of the extensive effort needed to comply with adopting Statements
141 and 142, it is not practicable to reasonably estimate the impact of
adopting these Statements on the Company's financial statements at the date
of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
Classification of Preferred Stock
In July of 2001, the Securities and Exchange Commission (SEC) issued Staff
Topic No. D-98 which provides the staff's views on the classification and
measurement of redeemable equity securities. This announcement provides
clarification about the balance sheet classification and measurement of
securities subject to either mandatory redemption features or whose
redemption is outside the control of the issuer. The Company's Series A
preferred stock which was issued in November 1998, was previously
classified outside of permanent equity in mezzanine equity due to its
mandatory redemption upon liquidation or sale of substantially all of the
Company's common stock or assets. After evaluating the guidance of Topic
No. D-98, the Company has concluded that its Series A preferred stock which
aggregates $1,200,000 should be reclassified as permanent equity as the
holders of the Series A stock do not have voting control of the shareholder
group or on the board of directors. The Company has chosen to adopt the
provisions of Topic D-98 during the quarter ended September 30, 2001 and
has reclassified the $1,200,000 Series A preferred stock previously
reported in mezzanine equity to permanent equity. The Company's March 31,
2002 and June 30, 2002 quarterly reports on form 10-Q, will reflect the
reclassification of the $1,200,000 Series A preferred stock, as of
March 31, 2001 and June 30,2002
8. New Accounting Pronouncements (Continued)
acquired in purchase business combinations, and determined that there were
no amortization period adjustments necessary.
The Company adopted SFAS 141 during 2001 to permanent equity.
8. SUBSEQUENT EVENT
In October 2001,and adopted SFAS 142 effective
January 1, 2002. As of the date of adoption of SFAS 142, after
reclassification of other intangible assets as goodwill, the Company entered intohad
approximately $3,095,355 of unamortized goodwill subject to the transition
provisions of SFAS 141 and 142. The Company is evaluating whether any
impairment of goodwill may exist in accordance with the provisions of SFAS
142. Adoption of SFAS 142 is expected to decrease amortization expenses in
2002 by approximately $410,000 as a technology acquisition
agreement with Endoscoptic, Inc. ("Endoscoptic"), a French Company, to
purchase certain patents, patent applications, trademarks, trade secrets,
know-howresult of ceasing amortization of
goodwill and other related technology incorporating or relating tointangible assets reclassified as goodwill. For the
Hiprin single-use, needle-free, pre-filled, disposable syringe technology.
The purchase price forthree-month period ended March 31, 2002, the technology includes (i) cashadoption of $250,000, (ii)
50,000 shares ofSFAS 142 reduced
amortization expense by $102,396 and decreased the Company'snet loss per common
stock,share by $0.01 per share.
For the quarters ended March 31, 2001 and (iii)2002, the acquisition of
Endoscoptic notes payable from two creditors in the total amount of
2,600,000 French Francs (approximately $361,000) payable in approximately
131,000 shares of the Company's common stock. In addition, the Company will
pay to Endoscoptic (i) 50,000 shares of the Company's common stock upon the
executiongoodwill amortization,
adjusted net loss and delivery of a license agreement between the Companybasic and a
pharmaceutical partner incorporating the Endoscoptic technology, (ii) a
three-year warrant to purchase 50,000 shares of the Company's common stock
at $5.86diluted loss per share uponare as follows:
For the executionThree Months Ended
March 31,
--------------------------------
2001 2002
--------------- ---------------
Net loss as reported ................ $ (7,968,072) $ (2,146,640)
Addback goodwill amortization ....... 68,264 -
--------------- ---------------
Adjusted net loss ................... $ (7,899,808) $ (2,146,640)
=============== ===============
Basic and delivery, before
13
ANTARES PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
September 30, 2000 and 2001
8. SUBSEQUENT EVENT (Continued)
October 2006, of license agreements which incorporate the Endoscoptic
technology with either a new pharmaceutical partner or an existing partner
for a new product, and (iii) 100,000 shares of the Company's common stock
upon the first approval or registration for marketing of a product
incorporating the Endoscoptic technology in the United Kingdom, France,
Germany, Spain, Italy, United States, Canada or Japan.
The Endoscoptic notes payable totaling 2,600,000 French Francs
(approximately $361,000) which will be exchanged are payable to the
Company's Chairman of the Board and major shareholder in the amount of
1,600,000 French Francs (approximately $222,000), and to a company who's
CEO is a member of the Company's board of directors in the amount of
1,000,000 French Francs (approximately $139,000).
In October 2001, the Company also entered into a development and consulting
agreement under which Endoscoptic will provide development and consulting
services in connection with the technology acquired by the Company in the
technology acquisition agreement. The Company will pay to Endoscoptic
$20,000diluted loss per month for an initial term of 24 months beginning in July 2001,
with the right to extend the term of the agreement for two 12 month
periods.
14share:
Net loss as reported ............ (1.14) (0.23)
Goodwill amortization ........... 0.01 -
--------------- ---------------
Adjusted net loss .................. $ (1.13) $ (0.23)
=============== ===============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
In July 2000, Medi-Ject Corporation, now known as Antares Pharma, Inc.
("Antares") entered into a Purchase Agreement with Permatec to purchase three
subsidiaries from Permatec. Pursuant to the Purchase Agreement, Antares
purchased all of the outstanding shares of each subsidiary. In exchange, Antares
issued 2,900,000 shares of Antares common stock to Permatec. The Share
Transaction was consummated on JanuaryThree Months Ended March 31, 2001 and was accounted for as a
reverse acquisition since Permatec held approximately 67% of the outstanding
common stock of Antares immediately after the Share Transaction. Effective with
the consummation of the Share Transaction the financial statements and related
disclosures that were previously reported as Medi-Ject's were replaced with the
Permatec financial statements and disclosures. Accordingly, operating results of
Permatec are included in the September 30, 2000 and 2001 financial statements as
well as the results of Antares since January 31, 2001.
The Medi-Ject operations which were acquired by Permatec consisted primarily of
the development, marketing and sale of 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 below as Antares/Minnesota. The Permatec operations are located
primarily in Basel, Switzerland and consist of administration and facilities for
the research and development of transdermal and transmucosal drug delivery
products. Permatec's operations have historically been focused on research and
development. In the past two years Permatec has signed a number of license
agreements with pharmaceutical companies for the application of its drug
delivery systems. Permatec generated revenue starting in 1999 with the
recognition of license revenues and commenced the sale of licensed products in
2000. Permatec's operations are referred to below as Antares/Switzerland.
Three and Nine Months Ended September 30, 2000 and 20012002
Revenues
Total revenues for the three and nine months ended September 30,March 31, 2001 and 2002 were $596,757$587,169
and $2,290,079, respectively, reflecting increases over the same
periods of the prior year of $462,776 and $1,899,954, or 345% and 487%,$668,971, respectively. The increase in revenues of $81,802, or 14% is
primarily the result of an increase in product sales in the three and nine-month periods of $304,241 and $1,379,768, respectively,
attributable to the Antares/Minnesota operations. Antares/Switzerland had no$66,636, or 14%. The
product sales increase was mainly due to increased sales made to licensees in
the first nine-months of 2000 comparedconnection with product sales in
the threeclinical studies and nine-month periods ended September 30, 2001 of $153,314 and
$362,518, respectively.other development activities under license
agreements.
Licensing and product development fee income increased by $5,221$15,166 or 4%, and
$157,668 or 40% in13% for the
three and nine-month periodsmonths ended September 30, 2001,
respectively,March 31, 2002 as compared to the prior-year periods.period. The
increase inresults from the nine-month period is primarily due to $150,000receipt of Antares/Minnesota development
fee revenue recognized in the second quarterapproximately $725,000 of 2001. The balance of the
licensinglicense and
product development fees since March 31, 2001 that have been deferred and are
being recognized over various periods, partially offset by a reduction in
monthly revenue is mainly attributablerecognition in 2002 compared to recognizing
previously deferred2001 on contracts existing at
March 31, 2001 due to a change in estimated revenue on licensing and product development contracts that
were deferred
15
when the Company adopted the cumulative deferral methodrecognition periods.
Cost of accounting on January
1, 2000. In April 2001, the Company entered into an exclusive agreement to
license certain drug-delivery technology to SciTech Medical Product Pte Ltd
("SciTech") in various Asian countries with options to other countries if
certain conditions are met. The Company will receive an aggregate license fee of
$600,000 in milestone payments upon the occurrence of certain events. In
addition to the license fees, the Company will receive a 5% royalty from the
sale of licensed products. At June 30, 2001 $200,000 had been recorded in
accounts receivable and deferred revenue in connection with the SciTech
agreement. In the third quarter the agreement was amended to change the due date
of the initial $200,000 payment from June 30, 2001 to December 31, 2001. As a
result, the Company recorded an adjustment in the third quarter to reduce the
accounts receivable and deferred revenue by $200,000 to reflect the revised
billing terms.Sales
The cost of product sales inof $293,872 and $661,424 for the thirdfirst quarter of 2001
and first nine-months of $373,190
and $1,093,116,2002, respectively, are primarily attributablerelated to injection devicedevices and
disposable products. Cost of sales as a percentage of product sales increased
from 62% for the first quarter of Antares/Minnesota.2001 to 123% for the first quarter of 2002.
The significant increase during the 2002 period was primarily due to
approximately $282,000 of inventory write-offs and inventory reserve adjustments
related to the launch of the Medi-Ject Vision ("MJ7") device into new markets.
Approximately $171,000 of this amount was due to a design defect in one of the
disposable components discovered after product costing approximately $146,000
was sold to a distributor during the quarter. These sales were reversed during
the quarter and the product was written-off to cost of sales. The design defect
was immediately corrected and the Company expects to ship the majority of the
replacement product to the distributor during the second quarter. The remaining
$111,000 of inventory written-off was due to a production problem encountered in
connection with another disposable component. The Company expects to incur only
minor additional expenses associated with testing and making the required
production modifications.
Research and Development
Research and development expenses excludingtotaled $570,951 and $731,128 in the write-offthree
months ended March 31, 2001 and 2002, respectively. The increase of acquired
in-process research and development$160,177 or
28% is primarily due to the inclusion of three months of Antares/Minnesota
expenses in 2002 compared with only two months in 2001 totaled $685,894following the business
combination on January 31, 2001, and $2,080,673 in
the third quarter and first nine-months of 2001, respectively, compared to
$236,206 and $646,434 in the same periods of the prior year. The increases of
$449,688 or 190% and $1,434,239 or 222% in the third quarter and first
nine-months, respectively, are primarily due to research employee additions at
Antares/Switzerland for increased research activitiesactivities.
11
Sales and Marketing
Sales and marketing expenses totaled $260,298 and $158,421 in the research costs
incurredthree months
ended March 31, 2001 and 2002, respectively. This decrease of $101,877 or 39% is
primarily due to a decrease in consulting expenses offset by three months of
Antares/Minnesota sinceexpenses in 2002 compared with only two months in 2001
following the business combination on January 31, 2001. In connectionThe decrease in
consulting expenses results from a management decision to reduce utilization of
outside consulting services.
General and Administrative
General and administrative expenses totaled $1,184,175 and $1,277,329 in the
three months ended March 31, 2001 and 2002, respectively. The increase of
$93,154 or 8% is primarily due to the inclusion of three months of
Antares/Minnesota expenses in 2002 compared with only two months in 2001
following the Share Transactionbusiness combination on January 31, 2001, the Company
acquired in-process research and development projects having an estimated fair
value of $948,000, that had not yet reached technological feasibility and had no
alternative future use. Accordingly, this amount was immediately expensedoffset by decreases in
the
Consolidated Statement of Operations.
Marketing and salesprofessional services, expenses in the three and nine-month periods ended September
30, 2001, totaled $363,050 and $1,007,057, respectively, compared to $315,883
and $888,769 in the same periods of the prior year. The increase in the quarter
of $47,167 or 15% and increase in the nine-month period of $118,288 or 13% are
both primarily duerelated to the additionbusiness combination and
amortization expense of Antares/Minnesota marketing and sales
expenses since January 31, 2001, partially offset by a decrease in outside
marketing travel and consulting expenses in Antares/Switzerland.
General and administrative expenses in$37,700 from the three and nine-month periods ended
September 30, 2001, totaled $1,334,437 and $3,719,477, respectively, compared to
$401,904 and $1,693,317 in the same periodsadoption of the prior year. The increases of
$932,533 or 232% and $2,026,160 or 120% in the third quarter and nine-month
period, respectively, are primarily due to the addition of Antares/Minnesota
general and administrative costs since January 31, 2001, plus an increase in
Antares/Switzerland administrative personnel, partially offset by a decrease in
Antares/Switzerland restructuring costs.
16
SFAS 142.
Other Income (Expense)
Net other income (expense) changeddecreased $3,489 from net expensesother income of $138,886 and $418,394$16,180 in
the thirdfirst quarter and first nine-months of 2000, respectively,2001 to net other income of $2,924 and $68,684$12,691 in the same periodsfirst quarter of
this year.2002. The three and nine-month
periods of 2000 werefirst quarter 2001 other income (expense) is primarily composed of
currency losses of
Antares/Switzerland and interest expense. The same periods of 2001 were
primarily composed$129,387 of interest incomeearnings on funds received in ourthe private placement of
equity offset by currency losses of $27,095 and interest expense of $84,204. The
first quarter 2002 other expensesincome (expense) is primarily composed of exchange
gains of $18,538 and interest income of $3,232, offset by interest expense of
$8,362. The decrease in interest income of $126,155 results from a lower average
cash balance during the first quarter of 2002 compared to 2001. Substantially
all of the private placement funds received in the thirdfirst quarter of 2001 have
been used to fund operations and interestcapital expenditures since March 31, 2001.
Interest expense in the first nine-months.quarter of 2001 included interest expense on
outstanding notes incurred by Antares/Switzerland in January 2001 prior to the
business combination, which accounts for nearly all of the $75,842 interest
expense decrease from 2001 to 2002.
Cash Flows
Operating Activities
Net cash used in operating activities increaseddecreased by $3,526,362$426,185, from $2,371,926$2,356,827 for
the first quarter of 2001 to $1,930,642 for the first quarter of 2002. This was
the result of net losses of $2,653,947 and $2,146,640 in the first nine-monthsquarter of
2000 to $5,898,2882001 and 2002, respectively, adjusted by noncash expenses and changes in
operating assets and liabilities.
Net noncash expenses of $1,262,288 in the same periodfirst quarter of 2001. This
increase is2001 were mainly due
to depreciation and amortization of $312,236 and in-process research and
development of $948,000. 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.
The change in operating assets and liabilities in the first quarter of 2001
resulted in a net decrease to cash of $965,168, comprised mainly of reductions
in accounts payable, accrued expenses and deferred revenue of $523,781, $124,350
and $199,998, respectively. In the first quarter of 2002, the change in
operating assets and liabilities caused a decrease in cash of $64,227, primarily
due to the higher net loss from operationsincrease in 2001 after considering
the cumulative effectaccounts
12
receivable and prepaid expenses of change$75,239 and $148,999, respectively, along
with a decrease in accounting principleliabilities to related parties of $112,481, offset by a
decrease in 2000,inventories of $133,931 and the net
reductionan increase in current liabilities after private placement equity funds were
received in 2001.deferred revenue of
$149,183.
Investing Activities
Net cash used in investing activities increased $197,551decreased $150,020, from $446,453$299,584 in 2000the
first quarter of 2001 to $644,004$149,564 in the same period of 2002. In 2001, due primarily to increased capital expenditures in 2001 and
cash of
$602,756 was loaned to Medi-Ject before the closing of the Share Transaction,business combination and was offset
by the cash balance of $355,578 in Medi-Ject whenat the Share Transaction closed and a reduction
in cash outlaystime of the business
combination. In addition, in 2001 the Company received proceeds of $91,699 from
the sale of equipment, furniture and fixtures. Purchases of equipment, furniture
and fixtures in the first quarter of 2001 and 2002 totaled $61,239 and $68,431,
respectively, and expenditures for deferredpatent acquisition costs.and development totaled
$82,866 and $81,133, respectively.
Financing Activities
Net cash provided by financing activities increased $8,439,362decreased $10,104,437 from $2,648,813$11,083,660
in 2000the first quarter of 2001 to $11,088,175$979,223 in 2001the same period of 2002, due
primarily to net proceeds of $9,994,549 received in the private placement of
common stock equity during the first quarter of 2001.
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. The note bears interest at the
three month Euribor Rate as of the date of each advance, plus 5%. The principal
and accrued interest is due on the earlier of (i) August 20, 2002, or (ii) the
closing of a private placement of equity by the Company that results in net
change in cash increased $4,333,166 between periods from a net decreaseproceeds of $200,463 in 2000 to a net increase$5,000,000.
Liquidity
The Company had negative working capital of $4,132,703 in 2001.
Liquidity
As reflected in the accompanying financial statements, Antares$11,712 and $2,037,811 at December
31, 2001 and March 31, 2002, respectively, and incurred a net operating loss of $6,489,560$2,146,640
for the nine monthsquarter ended September 30, 2001.March 31, 2002. In addition, Antaresthe Company has incurredhad net
losses and has had negative cash flows from operating activities since
inception. As further described above, Medi-Ject
Corporation acquired three subsidiariesThe Company expects to report a net loss for the year ending December
31, 2002, as marketing and development costs related to bringing future
generations of Permatec in a transaction accounted
for as a reverse acquisitionproducts to market continue. Long-term capital requirements will
depend on January 31, 2001. Upon consummationnumerous factors, including the status of this
transaction, subordinated loanscollaborative arrangements,
the progress of $13,173,497 were converted to equityresearch and development programs and the net liabilitiesreceipt of two subsidiaries, which aggregate $537,683, not purchased by
Medi-Ject, were assumed by Dr. Jacques Gonella. Through March 5, 2001,revenues
from sales of products.
After consideration of the proceeds of $1,000,000 from the shareholder loan
received in April 2002, the Company raised $10,000,000has sufficient cash through private placements of common stock. To
provide the Company with sufficient liquidity throughJune 2002 management believes
that along with projected product development and license revenues it
will be necessaryrequired to raise additional working capital. Thecapital to continue to exist.
Management intends to raise this additional capital through alliances with
strategic corporate partners, equity offerings, and/or borrowing from the
Company's majority shareholder. There can be no assurance that the Company will
ever become profitable or that adequate funds will be available when needed or
on acceptable terms. If for any reason the Company is currently
considering different equity raising possibilities.
17unable 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.
13
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.
New Accounting Pronouncements
In July 2001, the FASBFinancial Accounting Standards Board issued Statement No.SFAS 141,
"Business Combinations," and Statement No.SFAS 142, "Goodwill and Other Intangible Assets."
StatementSFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchaseSFAS 142 changes the
accounting for goodwill from an amortization method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require thatimpairment-only
approach. Thus, amortization of goodwill, and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annuallyincluding goodwill recorded in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
The Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Furthermore, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before Statement 142 is
adopted in full, will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Goodwill and intangible assets acquired inpast
business combinations, completed before July 1, 2001 will continue to be amortized and tested for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature prior to the full adoption of Statement 142.
Statement 141 will requireceased upon adoption of Statementthat Statement. The Company
adopted SFAS 142 thatin the Company
evaluatefirst quarter of fiscal 2002 and accordingly evaluated
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and determined that $1,935,588 representing the
unamortized portion of the amount allocated to make any necessary reclassifications
in order to conform withother intangible assets on the
new criteria in Statement 141 for recognition apart
fromdate of adoption, should be reclassified as goodwill. These amounts were
previously classified as workforce, ISO certification and clinical studies. Upon
adoption of StatementSFAS 142, the Company will be required to
reassessreassessed the useful lives and residual
values of all intangible assets acquired in purchase business combinations, and
make any necessarydetermined that there were no amortization period adjustments by the endnecessary.
The Company adopted SFAS 141 during 2001 and adopted SFAS 142 effective January
1, 2002. As of the first
interim perioddate of adoption of SFAS 142, after adoption. In addition,reclassification of other
intangible assets as goodwill, the Company had approximately $3,095,355 of
unamortized goodwill subject to the extent an intangible assettransition provisions of SFAS 141 and 142.
The Company is identified as having an indefinite useful life, the Company will be required to
test the intangible asset forevaluating whether any impairment of goodwill may exist in
accordance with the provisions of StatementSFAS 142. Adoption of SFAS 142 within the first interim period. Any impairment loss will be
measuredis expected to
decrease amortization expenses in 2002 by approximately $410,000 as a result of
the dateceasing amortization of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and other intangible assets to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the carrying amount of the reporting unit. To the extent the carrying
amount of a reporting unit exceeds the fair value of the reporting unit, an
indication exists that the reporting unit goodwill may be impaired and the
18
Company must perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the reporting
unit goodwill with the carrying amount of the reporting unit goodwill, both of
which would be measured as of the date of adoption. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to all
of the assets (recognized and unrecognized) and liabilities of the reporting
unit in a manner similar to a purchase price allocation, in accordance with
Statement 141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $1,159,766, and unamortized identifiable intangible assets of
$1,935,588, all of which will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $177,963
and $173,317 for the year ended December 31, 2000, and the nine months ended
September 30, 2001, respectively. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether it will be required to
recognize any transitional impairment losses as the cumulative effect of a
change in accounting principle.
In July of 2001, the Securities and Exchange Commission (SEC) issued Staff Topic
No. D-98 which provides the staff's views on the classification and measurement
of redeemable equity securities. This announcement provides clarification about
the balance sheet classification and measurement of securities subject to either
mandatory redemption features or whose redemption is outside the control of the
issuer. The Company's Series A preferred stock which was issued in November
1998, was previously classified outside of permanent equity in mezzanine equity
due to its mandatory redemption upon liquidation of sale of substantially all of
the Company's common stock or assets. After evaluating the guidance of Topic No.
D-98, the Company has concluded that its Series A preferred stock which
aggregates $1,200,000 should be reclassified as
permanent equity asgoodwill. For the holders
of the Series A stock do not have voting control of the shareholder group or on
the board of directors. The Company has chosen to adopt the provisions of Topic
D-98 during the quarterthree-month period ended September 30, 2001 and has reclassified the
$1,200,000 Series A preferred stock previously reported in mezzanine equity to
permanent equity. The Company's March 31, 2002, the adoption of SFAS
142 reduced amortization expense by $102,396 and June 30,decreased the net loss per
common share by $0.01 per share.
For the quarters ended March 31, 2001 and 2002, quarterly
reports on form 10-Q, will reflect the reclassification of the $1,200,000 Series
A preferred stock to permanent equity.
19goodwill amortization,
adjusted net loss and basic and diluted loss per share are as follows:
For the Three Months Ended
March 31,
------------------------------------
2001 2002
------------- -------------
Net loss as reported ................................. $ (7,968,072) $ (2,146,640)
Addback goodwill amortization ........................ 68,264 --
------------- -------------
Adjusted net loss .................................... $ (7,899,808) $ (2,146,640)
============= =============
Basic and diluted loss per share:
Net loss as reported ............................. (1.14) (0.23)
Goodwill amortization ............................ 0.01 --
------------- -------------
Adjusted net loss ................................... $ (1.13) $ (0.23)
============= =============
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosure
MarketThe Company's primary market risk since December 31, 2000, has been reduced dueexposure is foreign exchange rate fluctuations
of the Swiss Franc to the conversionU.S. dollar as the financial position and operating
results of subordinated loansthe 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 shareholderstransferring funds to its Swiss subsidiaries in
Swiss Francs. Most of $13,173,497the Company's sales and notes receivable from
Medi-Jectlicensing fees are denominated in
U.S. dollars, thereby significantly mitigating the risk of $5,500,000 into equityexchange rate
fluctuations on trade receivables. The effect of foreign exchange rate
fluctuations on the Company's financial results for the quarters ended March 31,
2001 and 2002 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.
The Company's exposure to interest rate risk is limited to $1,000,000 borrowed
on March 12, 2002 and $1,000,000 borrowed on April 24, 2002 under a $2,000,000
Term Note agreement with its majority shareholder dated February 20, 2002. The
note bears interest at the three month Euribor Rate as of the date of each
advance, plus 5%. The principal and accrued interest is due on the infusionearlier of
cash from(i) August 20, 2002, or (ii) the closing of a private placement of common stockequity by the
Company that results in net proceeds of $10,000,000.
Currency Exposure
The Company is subject$5,000,000. Due to foreign currency exposure, primarily with the Swiss
Franc andshort-term nature
of the Euro. At September 30, 2001,note, the Company's exposure to foreign
currency fluctuationsinterest rate risk is not significantbelieved to be
material. The Company does not use derivative financial instruments to manage
interest rate risk. All other existing debt agreements of the Company bear
interest at fixed rates, and primarily relatedare therefore not subject to the Company's
translation adjustment to convert its Antares/Switzerland financial information
into U.S. dollars.
20exposure from
fluctuating interest rates.
15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is filed as an exhibit to Part I of this Form 10-Q:
Exhibit No. Description
----------- ---------------------------------------------------------------------
10.28 $2,000,000 Term Note with Dr. Jacques Gonella dated February 20, 2002
(b) Reports on Form 8-K
NoThere were no reports on Form 8-K were filed during the quarter ended September
30, 2001.
21March
31, 2002.
16
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.authorized
ANTARES PHARMA, INC.
November 8, 2001May 13, 2002 /s/ Roger G. Harrison, Ph.D.
-----------------------------------------------------------------------------------------
Roger G. Harrison, Ph.D.
President and Chief Executive Officer November 8, 2001and President
May 13, 2002 /s/ Lawrence M. Christian
-----------------------------------------------------------------------------------------
Lawrence M. Christian
Chief Financial Officer, Vice President - Finance
Chief
Financial Officer and Secretary
2217