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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
----------
Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
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 as of July 20,
2001 was 15,228,171.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, 2001 December 31, 2000
------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 19,073,358 $ 4,484,330
Marketable securities available for sale, at fair market value 37,175,684 28,910,439
Notes receivable - stock subscription and license fee -- 23,000,000
Accounts receivable, net of allowance for doubtful accounts
of $169,431 and $209,659 2,957,232 2,610,683
Interest receivable 417,274 472,201
Inventories 2,787,987 1,940,929
Prepaid expenses and deposits 1,416,461 1,085,070
------------- -------------
Total current assets 63,827,996 62,503,652
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 7,478,584 6,818,372
------------- -------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $2,906,694
and $2,399,431 3,748,208 4,049,104
Deferred finance costs, net of accumulated amortization of $197,742
and $628,379 185,684 800,536
------------- -------------
Other assets, net 3,933,892 4,849,640
------------- -------------
TOTAL ASSETS $ 75,240,472 $ 74,171,664
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,929,231 $ 2,197,980
Interest payable 54,939 215,156
Accrued salaries and payroll taxes 362,857 278,684
Other accrued liabilities 145,035 265,873
Deferred revenue 4,538,294 2,997,154
------------- -------------
Total current liabilities 8,030,356 5,954,847
------------- -------------
DEFERRED REVENUE 28,036,666 24,217,699
CONVERTIBLE SUBORDINATED NOTES PAYABLE 9,711,000 36,190,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized
Series A preferred stock, $.001 par value, 200,000 shares authorized
and no shares issued or outstanding -- --
Series A convertible exchangeable preferred stock, $.001 par value,
20,000 shares authorized; 12,439 and 12,015 shares issued and
outstanding Liquidation preference $12,827,827 and $12,397,505 12 12
Common stock, $.001 par value; 45,000,000 shares authorized; 15,204,402
and 13,341,681 shares issued and outstanding 15,204 13,342
Additional paid-in capital 148,171,512 113,763,660
Accumulated other comprehensive loss (555,204) (471,306)
Accumulated deficit (118,169,074) (105,496,590)
------------- -------------
Total shareholders' equity 29,462,450 7,809,118
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 75,240,472 $ 74,171,664
============= =============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
2001 2000
(RESTATED)
------------ ------------
REVENUE:
Net sales and royalties $ 1,344,803 $ 1,663,336
Contract research and development revenue 2,128,653 222,278
Licensing, marketing rights and milestone revenue 791,812 468,444
------------ ------------
Total revenue 4,265,268 2,354,058
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 609,284 663,860
Research and development 6,340,777 3,609,631
Administrative and marketing 1,431,123 1,187,401
------------ ------------
Total operating expenses 8,381,184 5,460,892
------------ ------------
LOSS FROM OPERATIONS (4,115,916) (3,106,834)
------------ ------------
OTHER INCOME (EXPENSE):
Equity in loss of joint venture (1,016,018) --
Investment income 706,936 373,752
Interest expense (175,839) (646,603)
Debt conversion expense (9,184) --
Other (22,615) 39,400
------------ ------------
Net other expense (516,720) (233,451)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (4,632,636) (3,340,285)
Extraordinary loss on extinguished debt (6,724) --
------------ ------------
NET LOSS BEFORE PREFERRED STOCK DIVIDEND (4,639,360) (3,340,285)
Accretion of dividend on preferred stock (217,086) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (4,856,446) $ (3,340,285)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item $ (.31) $ (.29)
Extraordinary item -- --
------------ ------------
Net loss before preferred stock dividend (.31) (.29)
Accretion of dividend on preferred stock (.01) --
------------ ------------
Net loss applicable to common stock $ (.32) $ (.29)
============ ============
Basic and diluted weighted average common shares 15,127,406 11,463,355
outstanding
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
2001 2000
(RESTATED)
------------ ------------
REVENUE:
Net sales and royalties $ 2,576,323 $ 2,820,652
Contract research and development revenue 3,432,933 760,150
Licensing, marketing rights and milestone revenue 1,509,084 936,888
------------ ------------
Total revenue 7,518,340 4,517,690
------------ ------------
OPERATING EXPENSES:
Cost of goods sold 1,043,486 1,123,084
Research and development 13,104,238 7,330,384
Administrative and marketing 2,701,500 2,211,568
------------ ------------
Total operating expenses 16,849,224 10,665,036
------------ ------------
LOSS FROM OPERATIONS (9,330,884) (6,147,346)
------------ ------------
OTHER INCOME (EXPENSE):
Equity in loss of joint venture (1,516,661) --
Investment income 1,455,979 888,038
Interest expense (490,582) (1,296,460)
Debt conversion expense (2,048,347) --
Other (23,312) 78,122
------------ ------------
Net other expense (2,622,923) (330,300)
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (11,953,807) (6,477,646)
Extraordinary loss on extinguished debt (288,355) --
Cumulative effect of change in accounting principle -- (20,611,526)
------------ ------------
NET LOSS BEFORE PREFERRED STOCK DIVIDEND (12,242,162) (27,089,172)
Accretion of dividend on preferred stock (430,322) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $(12,672,484) $(27,089,172)
============ ============
Basic and diluted earnings per common share:
Loss before extraordinary item and cumulative effect of
change in accounting principle $ (.82) $ (.56)
Extraordinary item (.02) --
Cumulative effect of change in accounting principle -- (1.80)
------------ ------------
Net loss before preferred stock dividend (.84) (2.36)
Accretion of dividend on preferred stock (.03) --
------------ ------------
Net loss applicable to common stock $ (.87) $ (2.36)
============ ============
Basic and diluted weighted average common shares 14,655,378 11,457,533
outstanding
============ ============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 12,015 $ 12 13,341,681 $ 13,342
Comprehensive loss:
Net loss -- -- -- --
Other comprehensive loss:
- Cumulative foreign
currency translation
adjustments -- -- -- --
- Unrealized loss on
investments -- -- -- --
Net comprehensive loss
Issuance of Series A
convertible exchangeable
preferred stock to Elan
for accrued dividends 424 -- -- --
Accretion on preferred stock -- -- -- --
Issuance of common stock
to extinguish debt -- -- 1,482,031 1,482
Issuance of common stock to
MediGene -- -- 233,918 234
Non-qualified stock
compensation -- -- -- --
Exercise of non-qualified
stock options -- -- 5,000 5
Exercise of stock options -- -- 114,074 114
Issuance for employee stock
purchase plan -- -- 1,198 1
Issuance of restricted stock -- -- 26,500 26
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2001 12,439 $ 12 15,204,402 $ 15,204
=========== =========== =========== ===========
Accumulated
Additional Other Total
Paid-in Comprehensive Accumulated Shareholders'
Capital Loss Deficit Equity
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 $ 113,763,660 $ (471,306) $(105,496,590) $ 7,809,118
Comprehensive loss:
Net loss -- -- (12,672,484) (12,672,484)
Other comprehensive loss:
- Cumulative foreign
currency translation
adjustments -- (39,046) -- (39,046)
- Unrealized loss on
investments -- (44,852) -- (44,852)
-------------
Net comprehensive loss (12,756,382)
Issuance of Series A
convertible exchangeable
preferred stock to Elan
for accrued dividends -- -- -- --
Accretion on preferred stock 430,322 -- -- 430,322
Issuance of common stock
to extinguish debt 28,525,865 -- -- 28,527,347
Issuance of common stock to
MediGene 3,779,766 -- -- 3,780,000
Non-qualified stock
compensation 116,524 -- -- 116,524
Exercise of non-qualified
stock options 29,995 -- -- 30,000
Exercise of stock options 1,242,035 -- -- 1,242,149
Issuance for employee stock
purchase plan 16,715 -- -- 16,716
Issuance of restricted stock 266,630 -- -- 266,656
------------- ------------- ------------- -------------
BALANCE, JUNE 30, 2001 $ 148,171,512 $ (555,204) $(118,169,074) $ 29,462,450
============= ============= ============= =============
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
2001 2000
(RESTATED)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stock $(12,672,484) $(27,089,172)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Accretion of dividend on preferred stock 430,322 --
Depreciation and amortization 1,189,378 1,119,817
Equity in loss of joint venture 1,516,661 --
Loss on sale of property, plant and equipment 23,392 5,447
Loss on sale of marketable securities -- 171,583
Provision for bad debts (40,228) --
Write-off of obsolete patents 497 --
Stock compensation 116,524 75,620
Debt conversion expense 2,048,347 --
Extraordinary loss on extinguished debt 288,355 --
Cumulative effect of change in accounting principle -- 20,611,526
Net changes in operating assets and liabilities:
Accounts receivable (358,524) (1,521,309)
Note receivable - license fee 8,000,000 --
Interest receivable 54,927 132,747
Inventories (871,070) (496,645)
Prepaid expenses and deposits (332,118) (636,979)
Accounts payable (531,952) (1,070,472)
Interest payable 136,096 (3,517)
Accrued salaries and payroll taxes 85,547 16,239
Other accrued liabilities (115,559) (50,760)
Deferred revenue 5,360,108 (826,888)
------------ ------------
Net cash provided by (used in) operating activities 4,328,219 (9,562,763)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,323,557) (278,593)
Investments in intangible assets (206,368) (112,867)
Proceeds from sale of property, plant and equipment 904 25
Proceeds from sale of marketable securities -- 7,402,545
Proceeds from maturity of marketable securities 18,740,841 --
Investment in marketable securities (27,066,960) (203,049)
------------ ------------
Net cash provided by (used in) investing activities (9,855,140) 6,808,061
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 5,335,521 402,229
Note receivable - stock subscription 15,000,000 --
------------ ------------
Net cash provided by financing activities 20,335,521 402,229
------------ ------------
NET EFFECT OF EXCHANGE RATE ON CASH (219,572) (3,089)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,589,028 (2,355,562)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,484,330 3,021,869
============ ============
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,073,358 $ 666,307
============ ============
Supplemental cash flow information:
Cash paid for interest $ 354,486 $ 1,292,190
============ ============
Non-cash activities:
During the six months ended June 30, 2001, the Company issued common stock
valued at $28,527,347 to extinguish $26,479,000 of the convertible
subordinated notes.
See notes to the consolidated financial statements.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Atrix
Laboratories, Inc. and subsidiaries have been prepared in accordance with
generally accepted accounting principles for interim consolidated financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments considered necessary (which
consist of normal recurring accruals) for a fair presentation have been
included. These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year ended December 31, 2000, filed with the Securities and Exchange Commission
in the Company's Annual Report on Form 10-K.
Atrix Laboratories, Inc. was formed in August 1986 as a Delaware
corporation. In November 1998, the Company acquired ViroTex. In June 1999, the
Company organized its wholly owned subsidiary Atrix Laboratories Limited, which
is based in London, England. In February 2000, the Company organized its wholly
owned subsidiary Atrix Laboratories GmbH, which is based in Frankfurt, Germany,
to conduct its European operations. Collectively, Atrix Laboratories and its
subsidiaries are referred to as Atrix or the Company. In June 2000, the Company
entered into a research joint venture, Transmucosal Technologies, Ltd., with
Elan International Services, Ltd. ("Elan"), a wholly owned subsidiary of Elan
Corporation, plc, to develop oncology and pain management compounds. Drug
delivery of these compounds will utilize the Company's patented ATRIGEL and BEMA
drug delivery systems and Elan's nanoparticulate delivery technology.
Atrix is an emerging specialty pharmaceutical company focused on
advanced drug delivery. With five unique patented drug delivery technologies,
the Company is currently developing a diverse portfolio of products, including
proprietary oncology, pain management, growth hormone releasing peptide-1 and
dermatology products. The Company also partners with several large
pharmaceutical and biotechnology companies to apply its proprietary technologies
to new chemical entities or to extend the patent life of existing products. The
Company has strategic alliances with several large pharmaceutical companies to
use its drug delivery technologies and expertise in the development of new
products.
On June 29, 2001, Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" was approved by the Financial Accounting
Standards Board (FASB). SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Goodwill and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. The Company is required to
implement SFAS No. 141 on July 1, 2001 and it has not determined the impact, if
any, that this statement will have on its consolidated financial position or
results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
Effective in the fiscal fourth quarter of 2000, the Company changed its
method of accounting for nonrefundable technology access fees and milestone
payments to recognize such payments as revenue over the term of the related
agreements. The change in accounting principle is based on guidance provided in
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 -
Revenue Recognition in Financial Statements. Previously, the Company recognized
$24,100,000 for nonrefundable technology access fees and milestone payments as
revenue when received and when the Company fulfilled all contractual obligations
relating to the fees and milestone payments. There was approximately $20,612,000
cumulative effect for this change in accounting principle that was reported as a
charge in the year ended December 31, 2000. The cumulative effect was recorded
as deferred revenue that will be recognized as revenue over the remaining
contractual terms for each of the specific agreements.
The following represents the Consolidated Statement of Operations for
the three and six months ended June 30, 2000 as previously reported, the
adjustments for the adoption of SAB No. 101, and the resulting Consolidated
Statement of Operations as restated for that adoption.
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AS PREVIOUSLY REPORTED AND RESTATED
(Unaudited)
2000
(AS PREVIOUSLY SAB NO. 101 2000
REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------
REVENUE:
Net sales and royalties $ 1,663,336 $ -- $ 1,663,336
Contract research and development revenue 222,278 -- 222,278
Licensing, marketing rights and milestone revenue 40,000 428,444 468,444
------------ ------------ ------------
Total revenue 1,925,614 428,444 2,354,058
------------ ------------ ------------
OPERATING EXPENSES:
Cost of goods sold 663,860 -- 663,860
Research and development 3,609,631 -- 3,609,631
Administrative and marketing 1,187,401 -- 1,187,401
------------ ------------ ------------
Total operating expenses 5,460,892 -- 5,460,892
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,535,278) 428,444 (3,106,834)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Investment income 373,752 -- 373,752
Interest expense (646,603) -- (646,603)
Other 39,400 -- 39,400
------------ ------------ ------------
Net other expense (233,451) -- (233,451)
------------ ------------ ------------
NET LOSS $ (3,768,729) $ 428,444 $ (3,340,285)
============ ============ ============
Basic and diluted earnings per common share:
Net loss $ (.33) $ (.29)
============ ============ ============
Basic and diluted weighted average common shares 11,463,355 11,463,355
outstanding
============ ============ ============
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ATRIX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AS PREVIOUSLY REPORTED AND RESTATED
(Unaudited)
2000
(AS PREVIOUSLY SAB NO. 101 2000
REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------
REVENUE:
Net sales and royalties $ 2,820,652 $ -- $ 2,820,652
Contract research and development revenue 760,150 -- 760,150
Licensing, marketing rights and milestone revenue 105,000 831,888 936,888
------------ ------------ ------------
Total revenue 3,685,802 831,888 4,517,690
------------ ------------ ------------
OPERATING EXPENSES:
Cost of goods sold 1,123,084 -- 1,123,084
Research and development 7,330,384 -- 7,330,384
Administrative and marketing 2,211,568 -- 2,211,568
------------ ------------ ------------
Total operating expenses 10,665,036 -- 10,665,036
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (6,979,234) 831,888 (6,147,346)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Investment income 888,038 -- 888,038
Interest expense (1,296,460) -- (1,296,460)
Other 78,122 -- 78,122
------------ ------------ ------------
Net other expense (330,300) -- (330,300)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (7,309,534) 831,888 (6,477,646)
Cumulative effect of change in accounting principle -- (20,611,526) (20,611,526)
------------ ------------ ------------
NET LOSS $ (7,309,534) $(19,779,638) $(27,089,172)
============ ============ ============
Basic and diluted earnings per common share:
Income (loss) before cumulative effect of change in
accounting principle $ (.64) $ (.56)
Cumulative effect of change in accounting principle -- (1.80)
------------ ------------ ------------
Net loss $ (.64) $ (2.36)
============ ============ ============
Basic and diluted weighted average common shares 11,457,533 11,457,533
outstanding
============ ============ ============
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NOTE 2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Atrix Laboratories, Inc., and its wholly owned subsidiaries Atrix
Laboratories Limited and Atrix Laboratories, GmbH. All significant intercompany
transactions and balances have been eliminated. While the Company owns 80.1% of
Transmucosal Technologies' outstanding common stock, Elan and its subsidiaries
have retained significant minority investor rights that are considered
"participating rights" as defined in Emerging Issues Task Force Bulletin 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest, but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights." Accordingly, the Company accounts for its investment
in Transmucosal Technologies under the equity method of accounting.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The inventory components at June
30, 2001 and December 31, 2000, are as follows:
June 30, 2001 December 31, 2000
------------- -----------------
Raw materials $1,982,248 $1,616,878
Work in process 495,473 144,723
Finished goods 310,266 179,328
---------- ----------
$2,787,987 $1,940,929
========== ==========
NOTE 4. PROPERTY, PLANT, AND EQUIPMENT
The components of net property, plant and equipment are as follows:
June 30, 2001 December 31, 2000
------------- -----------------
Land $ 1,071,018 $ 1,071,018
Building 3,616,693 3,610,068
Leasehold improvements 580,563 470,002
Furniture and fixtures 561,404 440,534
Machinery 5,756,210 5,038,815
Office equipment 1,100,188 813,317
----------- ------------
Total property, plant and equipment 12,686,076 11,443,754
Accumulated depreciation and
amortization (5,207,492) (4,625,382)
----------- ------------
Property, plant and equipment, net $ 7,478,584 $ 6,818,372
=========== ============
NOTE 5. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share excludes dilution and is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding during the periods presented. Diluted net income (loss) per
common share reflects the potential dilution of securities that could
participate in the earnings. Stock options, warrants outstanding and their
equivalents are included in diluted earnings per share computations through the
"treasury stock method" unless they are antidilutive. Convertible securities are
included in diluted earnings per share computations through the "if converted"
method unless they are antidilutive. The effect of assuming conversion of the
Series A convertible preferred stock is excluded from the diluted earnings per
share computations since the conversion option commences July 18, 2002.
Additionally, since the Company has not drawn any proceeds under the convertible
promissory note agreement with Elan as of June 30, 2001, there was no effect on
earnings per share computations pertaining to this convertible promissory note
for the periods presented. Common share equivalents have been excluded from the
computations in loss periods, as their effect would be antidilutive. For the six
months ended June 30, 2001 and 2000, approximately 1.8 million and 1.9 million
equivalent dilutive securities (primarily convertible notes and common stock
options), respectively, have been excluded from the weighted-average number of
common shares outstanding for the basic and diluted net earnings per common
share computations as they are antidilutive.
NOTE 6. CONVERTIBLE SUBORDINATED NOTES PAYABLE
During the six months ended June 30, 2001, the Company completed a
series of private transactions involving the exchange of 1,482,031 issued common
shares for $26,479,000, or 53% of the original offering amount, of the 7%
convertible subordinated notes. Of the 1,482,031 shares issued, 1,393,629 shares
were valued at the conversion price of $19.00 per share and the remaining 88,402
were valued at the closing market price as of the various exchange dates. As a
result, the Company recognized an extraordinary loss of approximately $288,000,
for the write-off of approximately $585,000 of pro rata unamortized deferred
finance charges net of approximately $297,000 interest expense eliminated as a
result of these exchanges. Additionally, as part of the 88,402 shares issued to
induce conversion, debt conversion expense of approximately $2,048,000 was
recognized in the six months ended June 30, 2001. As of June 30, 2001 and
December 31, 2000, the convertible notes payable balance was $9,711,000 and
$36,190,000, respectively.
NOTE 7. PENDING LEGAL ACTION
The Company has been involved in disputes with Block Drug Corporation,
a wholly owned subsidiary of GlaxoSmithKline, concerning product pricing and the
payments due to the Company upon achievement of milestones under the Company's
commercialization agreement with Block. With
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respect to product pricing, arbitration began in December 2000 to resolve the
issue as to the minimum price Block must pay for products under the agreement.
On April 20, 2001, the Company entered into a settlement agreement with Block
resolving the pricing dispute over Block's sale of Atridox. The settlement
agreement provides for the payment owed to the Company for sales of the product
in 1999. A new pricing schedule for future purchases was also implemented.
With respect to milestone payments, the Company believes that under the
agreement, the milestone for the FDA approval of the Atrisorb-Doxy Barrier
product was achieved in 2000 and the corresponding payment of $1,000,000 is due.
Block has not made this payment. Pursuant to the Company's agreement with Block,
the Company will be entitled to an additional milestone payment of $2,000,000
upon Block's first commercial sale of the Atrisorb-Doxy Barrier product in the
United States. The agreement provides that the first commercial sale of this
product in the U.S. must occur within 120 days after FDA approval, subject to
certain conditions that have been satisfied. The FDA approved the Atrisorb-Doxy
Barrier product in September 2000. The Company has notified Block that it is in
breach of the agreement for failure to commence marketing of the Atrisorb-Doxy
Barrier product and on May 11, 2001 the Company filed a lawsuit in the U.S.
District Court for the District of Colorado seeking injunctive relief based on
Block's breach of the agreement. Block has initiated arbitration, and an
arbitration hearing has been set for November 13, 2001. The Company intends to
vigorously pursue its rights to these milestone payments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion relates to the restated interim amounts for
the period ended June 30, 2000, a result of the change in accounting principle
for the recognition of revenue as discussed in Note 1 to the Consolidated
Financial Statements of this report. The following Management's Discussion and
Analysis of Financial Condition and Results of Operations as well as information
contained elsewhere in this Report, contains statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements include statements regarding the intent, belief or current
expectations of us, our directors or our officers with respect to, among other
things: (i) whether we will receive, and the timing of, regulatory approvals or
clearances to market potential products; (ii) the results of current and future
clinical trials; (iii) the time and expenses associated with the regulatory
approval process for products; (iv) the safety and effectiveness of our products
and technologies; (v) the timing of new product launches; and (vi) expected
future additional equity losses for Transmucosal Technologies, Ltd. The success
of our business operations is in turn dependent on factors such as the receipt
and timing of regulatory approvals or clearances for potential products, the
effectiveness of our marketing strategies to market, our current and any future
products, our ability to manufacture products on a commercial scale, the appeal
of our mix of products, our success at entering into and collaborating with
others to conduct effective strategic alliances and joint ventures, general
competitive conditions within the biotechnology and drug delivery industry and
general economic conditions. Forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors, including those described below under the heading
"Risk Factors."
OVERVIEW
We are an emerging specialty pharmaceutical company focused on advanced
drug delivery. With five unique patented drug delivery technologies, we are
currently developing a diverse portfolio of products, including proprietary
oncology, pain management, growth hormone releasing peptide-1 and dermatology
products. Our drug delivery systems deliver controlled amounts of drugs in time
frames ranging from minutes to months to address a range of therapeutic and
patient needs. ATRIGEL is our original proprietary sustained release
biodegradable polymer drug delivery system. The ATRIGEL system may provide
benefits over traditional methods of drug administration such as: safe and
effective, wide array and ease of applications, site-specific or systemic
delivery, customized release rates and biodegradability. With the acquisition of
ViroTex in November 1998, we added four additional drug delivery systems: BEMA,
MCA, BCP and SMP.
We also partner with large pharmaceutical and biotechnology companies
to apply our proprietary technologies to new chemical entities or to extend the
patent life of existing products. We have strategic alliances with several
pharmaceutical companies including collaborations with Pfizer, Elan,
Sanofi-Synthelabo, MediGene, Geneva Pharmaceuticals, Del Pharmaceuticals,
Pharmacia & Upjohn Animal Health, Block Drug Company/GlaxoSmithKline, and J.B.
Williams Company.
In January 2001, we purchased an exclusive option from Tulane
University Health Science Center to license growth hormone releasing peptide-1,
or GHRP-1, a patented growth-promoting compound. Previously we focused on
reformulating existing compounds in our drug delivery technologies. The GHRP-1
represents our first chemical entity that we would acquire and develop for our
own product portfolio, rather than in conjunction with an external partner.
Possible applications of GHRP-1 include treatment of patients with AIDS or
cancer, promotion of growth in children with short stature, or prevention of
muscle wasting and frailty in aged individuals. We intend to deliver GHRP-1 for
an extended period of time using our patented ATRIGEL drug delivery system.
In April 2001, we entered into an exclusive European marketing
agreement with MediGene AG, a Germany based biotechnology company, for the
Leuprogel products. In the agreement, valued at approximately $20 million, we
received an up-front license fee payment of $2 million in April 2001 and will
receive additional payments for certain clinical, regulatory and sales
milestones. The $2 million license fee from MediGene will be recognized as
revenue over a ten-year period using the straight-line method in accordance with
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 -
Revenue Recognition in Financial Statements. Additionally, MediGene purchased
shares of our common stock for $3.78 million at a premium to the market in April
2001 as part of the agreement, net of $220,000 for issuance costs, and will
provide the resources needed to conduct clinical research and regulatory
activities associated with seeking European marketing approvals.
In June 2001, we received $3 million for the filing of the New Drug
Application, or NDA, for Leuprogel One-month product in accordance with the
exclusive North American marketing agreement entered into with Sanofi-Synthelabo
during December 2000. The agreement is valued at approximately $60 million,
which includes a license fee, research and development support and payments for
certain clinical, regulatory and sales milestones of the Leuprogel products upon
approval for marketing by the FDA.
We continued to devote significant resources during the period ended
June 30, 2001 for the research and development of our Leuprogel prostate cancer
treatment products, our Atrisone acne treatment product, and our new GHRP-1
product. Research and development efforts with third-party partnerships, such as
Pfizer, Geneva Pharmaceuticals, and our joint venture with Elan continued as
well. We anticipate the commitment of significant resources for research and
development activities will continue throughout 2001 for the expeditious
advancement of our various products currently in development.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2000 (RESTATED)
Total revenues for the three months ended June 30, 2001 were
approximately $4,265,000 compared to approximately $2,354,000 for the three
months ended June 30, 2000, representing an 81% increase.
Product net sales and royalty revenue were approximately $1,345,000
during the three months ended June 30, 2001 compared to approximately $1,663,000
for the three months ended June 30, 2000, representing a 19% decrease. This
decrease was primarily related to a reduction of approximately $161,000 in sales
of our Doxirobe periodontal disease product, which is used in companion animals,
as well as a reduction of approximately $121,000 in sales in our contract
manufacturing business.
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Contract research and development revenue represents revenue we
received from grants, from unaffiliated third-parties and from our joint venture
with Elan for performing contract research and development activities using our
various patented drug delivery technologies. Contract research and development
revenue was approximately $2,129,000 for the three months ended June 30, 2001
compared to approximately $222,000 for the three months ended June 30, 2000,
representing an 859% increase. This increase is primarily related to the
recognition of revenue for the three months ended June 30, 2001 of approximately
$1,258,000 for oncology and pain management research activities with our joint
venture, Transmucosal Technologies, Ltd., which commenced in October 2000,
approximately $192,000 for dermatology research activities with Geneva
Pharmaceuticals, which commenced in August 2000, and an increase of
approximately $371,000 for research projects for Pfizer.
Licensing fees, marketing rights and milestone revenue recognized in
accordance with SAB No. 101 for the three months ended June 30, 2001 was
approximately $792,000 compared to approximately $468,000 for the three months
ended June 30, 2000, representing a 69% increase. This increase is primarily
related to the recognition of approximately $295,000 in license fee revenue for
our Leuprogel products under the Sanofi-Synthelabo December 2000 and MediGene
April 2001 agreements. The Block agreement provides for potential milestone
payments totaling up to $50 million to us over a three-to-five year period, as
well as manufacturing margins and royalties on sales. Prior to 2001, we had
received $24.1 million in milestone payments from Block. In February 2001, we
received a $1,000,000 Atridox sales milestone payment from Block. These
milestone payments will be recognized as revenue over a ten-year period using
the straight-line method. We are currently in dispute with Block pertaining to
two ATRISORB-DOXY milestone payments. See Part II, Item 1. Legal Proceedings.
Additionally, the European Leuprogel license fee from MediGene for $2 million
was received in April 2001 and will be recognized over a ten-year period in
accordance with SAB No. 101.
Cost of goods sold recorded for the three months ended June 30, 2001
was approximately $609,000 compared to approximately $664,000 for the three
months ended June 30, 2000, representing an 8% decrease. This decrease in cost
of sales correlates primarily to the decline in sales revenue.
Research and development expenses for the three months ended June 30,
2001 were approximately $6,341,000 compared to approximately $3,610,000 for the
three months ended June 30, 2000, representing a 76% increase. Approximately
$1,149,000 of this increase was related to a progression through clinical trials
for our Leuprogel for prostate cancer treatment products. Approximately $534,000
is related to oncology and pain management research activities with our joint
venture, Transmucosal Technologies, Ltd. Dermatology research and development
activities for Geneva Pharmaceuticals related projects increased approximately
$324,000 for the second quarter of 2001. Additionally, Atrisone research and
development expenditures increased approximately $555,000 for the three months
ending June 30, 2001. Atrisone Phase III patient enrollment commenced in April
2001.
Administrative and marketing expenses for the three months ended June
30, 2001 were approximately $1,431,000 compared to approximately $1,187,000 for
the three months ended June 30, 2000, representing a 21% increase. The increase
was primarily related to an increase in legal expenses associated with general
business planning and activities, including fees for patents/trademark searches
and the Block dispute. See Part II, Item 1. Legal Proceedings.
We recognized a loss of approximately $1,016,000 for the three months
ended June 30, 2001 for our 80.1% equity share in the loss of Transmucosal
Technologies, our joint venture with Elan compared to -0- for the three months
ended June 30, 2000. The joint venture was established in June 2000. Currently,
the joint venture is developing two products using our BEMA drug delivery
system. We expect to record additional equity losses for Transmucosal
Technologies in the foreseeable future.
Investment income for the three months ended June 30, 2001 was
approximately $707,000 compared to approximately $374,000 for the three months
ended June 30, 2000, representing an 89% increase. The increase was primarily
the result of a net increase in our cash and cash equivalents and our marketable
securities of approximately $28,019,000 for the second quarter of 2001 in
comparison to the second quarter 2000. The increase in our cash and investment
balances was primarily the result of receiving an $8 million license fee and a
$15 million purchase of our common stock from Sanofi-Synthelabo in January 2001
in conjunction with the December 2000 agreement. Additionally, we received a $2
million payment from MediGene in April 2001 to license Leuprogel in Europe and a
$3 million payment from Sanofi-Synthelabo in June 2001 for the NDA filing of
Leuprogel One-month product.
Interest expense for the three months ended June 30, 2001 was
approximately $176,000 compared to approximately $647,000 for the three months
ended June 30, 2000, representing a 73% decrease. The reduction in interest
expense was primarily the result of exchanging 1,482,031 shares of common stock
for $26,479,000 of our 7% convertible subordinated notes since the period ended
June 30, 2000.
We issued Series A convertible exchangeable preferred stock to Elan in
July 2000 in connection with the formation of our joint venture with Elan.
Related to this issuance, we recognized approximately $217,000 for accretion of
dividend on preferred stock for the three months ended June 30, 2001.
For the reasons described above, we recorded a net loss applicable to
common stock of approximately $4,856,000, or $.32 per share, for the three
months ended June 30, 2001 compared to a net loss applicable to common stock of
approximately $3,340,000, or $.29 per share, for the three months ended June 30,
2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2000 (RESTATED)
Total revenues for the six months ended June 30, 2001 were
approximately $7,518,000 compared to approximately $4,518,000 for the six months
ended June 30, 2000, representing a 66% increase.
Product net sales and royalty revenue were approximately $2,576,000
during the six months ended June 30, 2001 compared to approximately $2,821,000
for the six months ended June 30, 2000. This 9% decrease was primarily related
to a reduction of sales of approximately $209,000 for our Doxirobe periodontal
disease treatment product, which is used in companion animals, as well as a
reduction in sales of approximately $114,000 for our contract manufacturing
business.
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Contract research and development revenue represents revenue we
received from grants, from unaffiliated third parties and from our joint venture
with Elan for performing contract research and development activities using our
various patented drug delivery technologies. Contract research and development
revenue was approximately $3,433,000 for the six months ended June 30, 2001
compared to approximately $760,000 for the six months ended June 30, 2000,
representing a 352% increase. This increase is primarily related to the
recognition of revenue of approximately $1,883,000 for oncology and pain
management research activities with our joint venture, Transmucosal
Technologies, Ltd., approximately $407,000 for dermatology research activities
with Geneva Pharmaceuticals and approximately $258,000 for research projects
with Pfizer.
Licensing, marketing rights and milestone revenue recognized in
accordance with SAB No. 101 for the six months ended June 30, 2001 was
approximately $1,509,000 compared to approximately $937,000 for the six months
ended June 30, 2000, representing a 61% increase. This increase is primarily
related to the recognition of approximately $495,000 in license fee revenue for
our Leuprogel products under the Sanofi-Synthelabo December 2000 and MediGene
April 2001 agreements. The Block agreement provides for potential milestone
payments totaling up to $50 million to us over a three-to-five year period, as
well as manufacturing margins and royalties on sales. Prior to 2001, we had
received $24.1 million in milestone payments from Block. In February 2001, we
received a $1,000,000 Atridox sales milestone payment from Block. These
milestone payments will be recognized as revenue over a ten-year period using
the straight-line method. We are currently in a dispute with Block pertaining to
two Atrisorb-Doxy milestone payments. See Part II, Item 1. Legal Proceedings.
Additionally, the European Leuprogel license fee from MediGene for $2,000,000
was received in April 2001 and will be recognized over a ten-year period.
Cost of goods sold recorded for the six months ended June 30, 2001 was
approximately $1,043,000 compared to approximately $1,123,000 for the six months
ended June 30, 2000, representing a 7% decrease. This decrease in cost of sales
correlates to the decline in sales revenue.
Research and development expenses for the six months ended June 30,
2001 were approximately $13,104,000 compared to approximately $7,330,000 for the
six months ended June 30, 2000, representing a 79% increase. Approximately
$2,878,000 of this increase was due to the rapid progress in our Leuprogel for
prostate cancer treatment products. Approximately $773,000 is related to
oncology and pain management research activities with our joint venture,
Transmucosal Technologies, Ltd. Dermatology research and development activities
for Geneva Pharmaceuticals related projects increased approximately $739,000. In
January 2001, we purchased an exclusive option from Tulane University Heath
Science Center to license growth hormone releasing peptide-1, or GHRP-1, a
patented growth-promoting compound. Research and development activities for the
GHRP-1 were approximately $818,000 for the six months ended June 30, 2001.
Additionally, Atrisone research and development expenditures increased
approximately $725,000. Atrisone Phase III patient enrollment commenced in April
2001.
Administrative and marketing expenses for the six months ended June 30,
2001 were approximately $2,702,000 compared to approximately $2,212,000 for the
six months ended June 30, 2000, representing a 22% increase. The increase was
primarily related to an increase in legal expenses associated with general
business planning and activities, including fees for patents/trademark searches
and the Block dispute. See Part II, Item 1 Legal Proceedings.
We recognized a loss of approximately $1,517,000 for the six months
ended June 30, 2001 for our 80.1% equity share in the loss of Transmucosal
Technologies, our joint venture with Elan, compared to -0- for the six months
ended June 30, 2000. The joint venture was established in June 2000. Currently,
the joint venture is developing two products using our BEMA drug delivery
system. The BEMA with fentanyl compound targets breakthrough cancer pain and
management of chronic pain. The second compound also utilizes our BEMA
technology with an anti-emetic product, ondansetron, for the prevention of
nausea associated with cancer chemotherapy. We expect to record additional
equity losses for Transmucosal Technologies in the foreseeable future.
Investment income for the six months ended June 30, 2001 was
approximately $1,456,000 compared to approximately $888,000 for the six months
ended June 30, 2000, representing a 64% increase. The increase was primarily the
result of a net increase in our cash and cash equivalents and our marketable
securities of approximately $28,019,000 for the six months ended June 30, 2001
in comparison to the six months ended June 30, 2000. The increase in our cash
and investment balances was primarily the result of receiving an $8,000,000
license fee and a $15,000,000 purchase of our common stock from
Sanofi-Synthelabo in January 2001 in conjunction with the December 2000
agreement. Additionally, we received a $2,000,000 payment from MediGene in April
2001 to license Leuprogel in Europe and a $3,000,000 payment from
Sanofi-Synthelabo in June 2001 for the NDA filing of the Leuprogel One-month
product.
Interest expense for the six months ended June 30, 2001 was
approximately $491,000 compared to approximately $1,296,000 for the six months
ended June 30, 2000, representing a 62% decrease. The reduction in interest
expense was primarily the result of exchanges of common stock for $26,479,000 of
our 7% convertible subordinated notes since the period ended June 30, 2000.
During the six months ended June 30, 2001, we completed a series of
private transactions involving the exchange of 1,482,031 issued common shares
for $26,479,000, or 53% of the original offering amount, of the 7% convertible
subordinated notes. Of the 1,482,031 shares issued, 1,393,629 shares were valued
at the conversion price of $19.00 per share and the remaining 88,402 were valued
at the closing market price as of the various exchange dates. As a result, we
recognized an extraordinary loss of approximately $288,000, for the write-off of
approximately $585,000 of pro rata unamortized deferred finance charges net of
approximately $297,000 interest expense eliminated as a result of these
exchanges. Additionally, as part of the 88,402 shares issued to induce
conversion, debt conversion expense of approximately $2,048,000 was recognized
in the six months ended June 30, 2001. As of June 30, 2001 and December 31,
2000, the convertible notes payable balance was $9,711,000 and $36,190,000,
respectively.
Effective in the fiscal fourth quarter of 2000, we changed our method
of accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements. Previously, we recognized $24,100,000 for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. We recorded approximately $20,612,000 cumulative effect
for this change in accounting principle that was reported as a charge in the
first quarter of 2000.
We issued Series A convertible exchangeable preferred stock to Elan in
July 2000 in connection with the formation of our joint venture with
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Elan. Related to this issuance, we recognized approximately $430,000 for
accretion of dividend on preferred stock for the six months ended June 30, 2001.
For the reasons described above, we recorded a net loss applicable to
common stock of approximately $12,672,000, or $.87 per share, for the six months
ended June 30, 2001 compared to a net loss applicable to common stock of
approximately $27,089,000, or $2.36 per share, for the six months ended June 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, we had cash and cash equivalents of approximately
$19,073,000, marketable securities (at fair market value) of approximately
$37,176,000 and other current assets of approximately $7,579,000 for total
current assets of approximately $63,828,000. Current liabilities totaled
approximately $8,030,000, which resulted in working capital of approximately
$55,798,000.
We have a revolving line of credit with a bank that expires in August
2001. Under the terms of the line of credit, we may borrow up to $1,000,000.
Borrowings under the line bear interest at the prime rate and are subject to
financial covenants requiring us to maintain certain levels of net worth and
liquidity. As of June 30, 2001, we had no outstanding balance under this line of
credit.
In July 2000, Elan and our company formed Transmucosal Technologies, a
joint venture to develop and commercialize oncology and pain management
products. Subject to the satisfaction of certain conditions, Elan has agreed to
loan us up to $8,010,000 under a convertible promissory note agreement in
support of our 80.1% share of the joint venture's research and development
costs. The note has a six-year term, will accrue interest at 7% per annum,
compounded semi-annually and added to principal, and is convertible at Elan's
option into our common stock at a $14.60 conversion price. The note also allows
us to convert this debt into our common stock at the prevailing market price at
maturity. As of June 30, 2001, we had not drawn any amounts under the note.
During the six months ended June 30, 2001, net cash provided by
operating activities was approximately $4,328,000. This was primarily the result
of the net loss for the period of approximately $12,672,000, adjusted for
certain non-cash expenses, and changes in operating assets and liabilities as
set forth in the consolidated statements of cash flows. We received an
$8,000,000 license fee from Sanofi-Synthelabo in January 2001 for payment of the
December 2000 Note Receivable - License Fee. Additionally, we recognized
non-cash charges for debt conversion expense of approximately $2,048,000 and
approximately $288,000 as an extraordinary loss on extinguished debt during the
six months ended June 30, 2001 for the exchange of 1,482,031 shares of our
common stock to extinguish approximately $26,479,000 our convertible
subordinated notes. The increase of approximately $5,360,000 for deferred
revenue included a $1 million payment from Block in February 2001 for an Atridox
sales milestone payment, a $3 million payment in June 2001 from
Sanofi-Synthelabo for our Leuprogel One-month NDA filing and a $2 million
payment in April 2001 from MediGene for the execution of the collaboration
license and supply agreement for exclusive marketing rights in Europe of our
Leuprogel product.
Net cash used in investing activities was approximately $9,855,000
during the six months ended June 30, 2001, primarily as a result of
approximately $27,067,000 for the purchase of six government bond investments
and thirteen corporate note investments. This was offset by proceeds of
approximately $18,741,000 for six called government bond investments.
Net cash provided by financing activities was approximately $20,336,000
during the six months ended June 30, 2001. We received $15,000,000 from
Sanofi-Synthelabo in January 2001 for payment pertaining to Sanofi's common
stock purchase in conjunction with the December 2000 collaboration, license and
supply agreement. We received $3.78 million from MediGene for the issuance of
our common stock in conjunction with the stock purchase agreement in April 2001.
Additionally, approximately $1,242,000 was received for the issuance of common
stock related to employee stock options.
In February 2001, we filed a shelf registration statement on Form S-3
with Securities and Exchange Commission registering 4,000,000 shares of our
common stock for future issuance. The registration statement was declared
effective by the SEC in June 2001.
Our long-term capital expenditure requirements will depend on numerous
factors, including:
o the progress of our research and development
programs,
o the time required to file and process regulatory
approval applications,
o the development of our commercial manufacturing
facilities,
o our ability to obtain additional licensing
arrangements, and
o the demand for our products.
We expect to continue to incur substantial expenditures for research
and development, testing, regulatory compliance, market development in European
countries, possible repurchases of our notes or common stock and to hire
additional management, scientific, manufacturing and administrative personnel.
We will also continue to expend a significant amount of funds in our ongoing
clinical studies. Depending on the results of our research and development
activities, we may determine to accelerate or expand our efforts in one or more
proposed areas and may, therefore, require additional funds earlier than
previously anticipated. Management believes that the existing cash and cash
equivalent assets in addition to marketable security resources will be
sufficient to fund our operations through 2001. However, we cannot assure you
that underlying assumed levels of revenue and expense will prove accurate.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective in the fiscal fourth quarter of 2000, we changed our method
of accounting for nonrefundable technology access fees and milestone payments to
recognize such payments as revenue over the term of the related agreements. The
change in accounting principle is based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements. Previously, we recognized $24,100,000 for
nonrefundable technology access fees and milestone payments as revenue when
received and when we fulfilled all contractual obligations relating to the fees
and milestone payments. We recorded approximately $20,612,000 cumulative effect
for this change in
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accounting principle that was reported as a charge in the year ended December
31, 2000. The cumulative effect was recorded as deferred revenue that will be
recognized as revenue over the remaining contractual terms for each of the
specific agreements. During the year ended December 31, 2000, the impact of the
change in accounting principle increased net loss applicable to common stock by
approximately $18,734,000, or $1.58 per share. This amount is comprised of
approximately $20,612,000, or $1.73 per share, cumulative effect of the change
as described above, net of approximately $1,878,000, or $0.16 per share,
recognized as revenue during the year ended December 31, 2000. The remainder of
the related deferred revenue will be recognized as revenue approximately as
follows: $1,885,000 for each year from 2001 through 2010 and $11,000 for each
year from 2011 through 2015 and $2,000 in 2016.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued which, as amended, was effective for all fiscal
years beginning after June 15, 1999. SFAS No. 133 provides new standards for the
identification, recognition and measurement of derivative financial instruments,
including embedded derivatives. Historically, we have not entered into
derivative contracts to hedge existing risks nor have we entered into
speculative derivative contracts. Although our convertible debt and preferred
stock include conversion features that are considered to be embedded
derivatives, accounting for those instruments is not affected by SFAS No. 133.
The adoption of SFAS No. 133 on January 1, 2001 did not result in a transition
adjustment in the financial statements.
On June 29, 2001, Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" was approved by the Financial Accounting
Standards Board (FASB). SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Goodwill and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. We are required to implement SFAS
No. 141 on July 1, 2001 and we have not determined the impact, if any, that this
statement will have on our consolidated financial position or results of
operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. We are required to implement SFAS No. 142 on January
1, 2002 and we have not determined the impact, if any, that this statement will
have on our consolidated financial position or results of operations.
RISK FACTORS
In addition to the other information contained in this Report, we
caution stockholders and potential investors that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results of operations and could cause our actual results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of our company. The following information is not intended to limit
in any way the characterization of other statements or information under other
captions as cautionary statements for such purpose. These factors include:
o Delay, difficulty, or failure in obtaining regulatory approval or
clearance to market additional products, including delays or
difficulties in development because of insufficient proof of safety
or efficacy.
o Substantial manufacturing and marketing expenses to be incurred in
the commercial launch of the ATRIDOX and ATRISORB products and
commercializing future products.
o Failure of corporate partners to develop or commercialize
successfully our products or to retain and expand markets served by
the commercial collaborations; conflicts of interest, priorities,
and commercial strategies that may arise between our company and
such corporate partners.
o Our limited experience in the sale and marketing of our products;
dependence on Block to establish effective marketing, sales and
distribution capabilities for the ATRIDOX, ATRISORB GTR Barrier,
and ATRISORB-DOXY products in North America. Failure to internally
develop marketing channels for the ATRISORB GTR Barrier,
ATRISORB-DOXY and ATRIDOX products in Europe.
o Outcome of our disputes with Block, fees and expenses associated
therewith and impact upon Block's marketing, sales and distribution
of our products.
o The ability to obtain, maintain and protect intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration or
purchase of another entity.
o Limited experience in manufacturing products on a commercial scale,
failure to manufacture present and future products in compliance
with applicable regulations and at an acceptable cost.
o Product liability or other claims against us which may result in
substantial damages or reduce demand for our products.
o Cancellation or termination of material collaborative agreements
(including the Block agreement) and the resulting loss of research
or other funding, or marketing, sales and distribution
capabilities.
o Access to the pharmaceutical compounds necessary to successfully
commercialize the ATRIGEL system, ATRIDOX and ATRISORB products or
other products and delivery systems currently in development.
o Competitive or market factors that may limit the use or broad
acceptance of our products.
o The ability to attract and retain highly qualified management and
scientific personnel.
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o Difficulties or high costs of obtaining adequate financing to fund
future research, development and commercialization of products.
o The slow rate of acceptance of new products.
o The continued growth and market acceptance of our products and our
ability to develop and commercialize new products in a timely and
cost-effective manner.
o Exchange rate fluctuations that may adversely impact net income
(loss).
o Our ability to enter into strategic alliances or collaborative
arrangements with third parties to market and commercialize our
products on favorable terms, if at all.
o The requirement that we must receive separate regulatory approval
for each of our product candidates in each indication before we can
sell them in North America or internationally.
o Our ability to successfully acquire and integrate technologies and
businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES CONCERNING MARKET RISKS.
We own financial instruments that are sensitive to market risks as part
of our investment portfolio of cash equivalents and marketable securities. The
investment portfolio is used to preserve our capital until it is required to
fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. We do not
own derivative financial instruments in our investment portfolio. Due to the
nature of our investment portfolio, the investment portfolio contains
instruments that are primarily subject to interest rate risk. Our convertible
subordinated notes are also subject to interest rate and equity price risks.
Interest Rate Risk. Our investment portfolio includes fixed rate debt
instruments that are primarily United States government and agency bonds and
corporate notes with maturity dates ranging from one to fifteen years. To
mitigate the impact of fluctuations in cash flow, we maintain substantially all
of our debt instruments as fixed rate. The market value of these bonds is
subject to interest rate risk and could decline in value if interest rates
increase. The portion maintained as fixed rate is dependent on many factors
including judgments as to future trends in interest rates.
Our investment portfolio also includes equity interests in United
States government and agency bond funds. The value of these equity interests is
also subject to interest rate risk.
We regularly assess the above described market risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures. Our investment policy restricts
investments to U.S. Government or government backed securities, or high rated
commercial paper and other high rated investments only. As a result, we do not
anticipate any material credit losses in these areas.
For disclosure purposes, we use sensitivity analysis to determine the
impacts that market risk exposures may have on the fair values of our debt and
financial instruments. The financial instruments included in the sensitivity
analysis consist of all of our cash and cash equivalents and short-term and
long-term debt instruments.
To perform a sensitivity analysis, we assess the risk of loss in fair
values from the impact of hypothetical changes in interest rates on market
sensitive instruments. The fair values are computed based on the present value
of future cash flows as impacted by the changes in the rates attributable to the
market risk being measured. The discount rates used for the present value
computations were selected based on market interest rates in effect at June 30,
2001. The fair values that result from these computations are compared with the
fair values of these financial instruments at June 30, 2001. The differences in
this comparison are the hypothetical gains or losses associated with each type
of risk. The results of the sensitivity analysis at June 30, 2001 are as
follows:
Interest Rate Sensitivity: A 10% decrease in the levels of interest
rates with all other variables held constant would result in an
increase in the fair value of our financial instruments by
approximately $285,000 per year. A 10% increase in the levels of
interest rates with all other variables held constant would result in a
decrease in the fair value of our financial instruments by
approximately $285,000 per year. We maintain a portion of our financial
instruments, including long-term debt instruments of approximately
$7,915,000 at June 30, 2001, at variable interest rates. If interest
rates were to increase or decrease 10%, the impact of such instruments
on cash flows or earnings would not be material.
The use of a 10% estimate is strictly for estimation and evaluation
purposes only. The value of our assets may rise or fall by a greater amount
depending on actual general market performances and the value of individual
securities we own.
The market price of our 7% convertible subordinated notes generally
changes in parallel with the market price of our common stock. When our stock
price increases, the price of these notes generally increases proportionally.
Fair market price of the notes can be determined from quoted market prices,
where available. The fair value of our long-term debt was estimated to be
approximately $12,260,000 at June 30, 2001 and is higher than the carrying value
by approximately $2,549,000. Market risk was estimated as the potential decrease
in fair value resulting from a hypothetical 1% increase in our weighted average
long-term borrowing rate and a 1% decrease in quoted market prices, or
approximately $194,220.
Exchange Rate Risk. We face foreign exchange rate fluctuations,
primarily with respect to the British Pound and the Euro, as the financial
results of our foreign subsidiaries are translated into United States dollars
for consolidation. As exchange rates vary, these results, when translated may
vary from expectations and adversely impact net income (loss) and overall
profitability. The effect of foreign exchange rate fluctuation for the period
ended June 30, 2001 was not material. Based on our overall foreign currency rate
exposure at June 30, 2001, we do not believe that a hypothetical
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10% change in foreign currency rates would materially affect our financial
position.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has been involved in disputes with Block Drug Corporation,
a wholly owned subsidiary of GlaxoSmithKline, concerning product pricing and the
payments due to the Company upon achievement of milestones under the Company's
commercialization agreement with Block. With respect to product pricing,
arbitration began in December 2000 to resolve the issue as to the minimum price
Block must pay for products under the agreement. On April 20, 2001, the Company
entered into a settlement agreement with Block resolving the pricing dispute
over Block's sale of Atridox. The settlement agreement provides for the payment
owed to the Company for sales of the product in 1999. A new pricing schedule for
future purchases was also implemented.
With respect to milestone payments, the Company believes that under the
agreement, the milestone for the FDA approval of the Atrisorb-Doxy Barrier
product was achieved in 2000 and the corresponding payment of $1,000,000 is due.
Block has not made this payment. Pursuant to the Company's agreement with Block,
the Company will be entitled to an additional milestone payment of $2,000,000
upon Block's first commercial sale of the Atrisorb-Doxy Barrier product in the
United States. The agreement provides that the first commercial sale of this
product in the U.S. must occur within 120 days after FDA approval, subject to
certain conditions that have been satisfied. The FDA approved the Atrisorb-Doxy
Barrier product in September 2000. The Company has notified Block that it is in
breach of the agreement for failure to commence marketing of the Atrisorb-Doxy
Barrier product and on May 11, 2001 the Company filed a lawsuit in the U.S.
District Court for the District of Colorado seeking injunctive relief based on
Block's breach of the agreement. Block has initiated arbitration, and an
arbitration hearing has been set for November 13, 2001. The Company intends to
vigorously pursue its rights to these milestone payments.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For the six months ended June 30, 2001, the Company completed a series
of private transactions involving the exchange of 1,482,031 issued common shares
for $26,479,000, or 53% of the original offering amount, of the 7% convertible
subordinated notes. Of the 1,482,031 shares issued, 1,393,629 shares were valued
at the conversion price of $19.00 per share and the remaining 88,402 were valued
at the closing market price as of the various exchange dates. Because these
transactions constituted an exchange of securities by us exclusively with
existing security holders, where no commission or other remuneration was paid or
given for soliciting such exchange, the transactions were exempt from
registration under the Securities Act of 1933 under Section 3(a)(9) of the
Securities Act.
In April 2001, the Company entered into a collaboration, license and
supply agreement with MediGene AG under which MediGene was granted the exclusive
right to market our Leuprogel products in Europe. In connection with the
transaction, MediGene purchased 233,918 shares of our common stock for
approximately $3.78 million, pursuant to a stock purchase agreement. This
transaction was made in reliance on the exemption from the registration
requirements of the Securities Act of 1933 provided by Section 4(2) of the
Securities Act. This transaction was privately negotiated and the Company made
no public solicitation in the placement of these securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual meeting of the stockholders of the Company was held on May 7,
2001, in Fort Collins, Colorado, for the purpose of re-electing David R.
Bethune, Dr. Richard L. Jackson, and Dr. Nicolas G. Bazan to the Board of
Directors as Class B directors, approving the amendment of the 2000 Stock
Incentive Plan, approving the amendment of the Company's Amended and Restated
Certificate of Incorporation increasing the number of authorized capital shares,
and ratifying the appointment of the Company's independent auditors.
The following votes were cast by the stockholders with respect to the
election of directors:
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
---------- ------- -------- --------- ---------
David R. Bethune 13,126,764 689,674 -- -- --
Dr. Richard L. Jackson 13,298,781 517,657 -- -- --
Dr. Nicolas G. Bazan 13,194,906 621,532 -- -- --
The other directors whose term continues after the meeting are John E.
Urheim, Sander A. Flaum, Dr. D. Walter Cohen, C. Rodney O'Connor, H. Stuart
Campbell.
The following votes were cast by the stockholders with respect to the
amendment to the 2000 Stock Incentive Plan.
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
---------- --------- -------- --------- ---------
6,779,223 1,954,619 -- 70,142 --
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The following votes were cast by the stockholders with respect to the
amendment to the Company's Amended and Restated Certificate of Incorporation:
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
---------- ------- -------- --------- ---------
7,766,664 969,846 -- 67,474 --
The following votes were cast by the stockholders with respect to the
resolution to ratify the Board of Directors' selection of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending December 31,
2001:
Shares Shares Shares Shares
Voted Voted Voted Voted Broker
For Against Withhold Abstained Non-Votes
---------- ------- -------- --------- ---------
13,483,954 287,870 -- 44,614 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (incorporated by reference to the Company's Registration Statement
on Form S-3, file number 333-55634).
(b) Reports on Form 8-K. We filed the following Current Reports on
Form 8-K during the quarter ended June 30, 2001:
o Current Report on Form 8-K dated April 4, 2001, filed
with the Securities and Exchange Commission on June
20, 2001, under Item 5. Other Events, and Item 7.
Exhibits.
o Current Report on Form 8-K dated April 20, 2001,
filed with the Securities and Exchange Commission on
April 24, 2001, under Item 5. Other Events, and Item
7. Exhibits.
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.
ATRIX LABORATORIES, INC.
(Registrant)
July 24, 2001 By: /s/ David R. Bethune
-----------------------------------------------
David R. Bethune
Chairman of the Board of Directors and Chief
Executive Officer
July 24, 2001 By: /s/ Brian G. Richmond
-----------------------------------------------
Brian G. Richmond
Chief Financial Officer and Assistant Secretary
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (incorporated by reference to the Company's
Registration Statement on Form S-3, file number 333-55634).