ANTARES PHARMA INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2004

Commission File Number 0-20945

ANTARES PHARMA, INC.


A Minnesota Corporation		IRS Employer ID No. 41-1350192

707 Eagleview Boulevard, Suite 414

Exton, Pennsylvania

19341

(610) 458-6200

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of May 10, 2004, was 37,943,796.

ANTARES PHARMA, INC.

INDEX


			PAGE
PART I.		FINANCIAL INFORMATION

	ITEM 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets, as of December 31, 2003 and March 31, 2004	3

		Consolidated Statements of Operations for the three months ended March 31, 2003 and 2004	4

		Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2004	5

		Notes to Consolidated Financial Statements	6

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	18

	ITEM 4.	Controls and Procedures	19

PART II.		OTHER INFORMATION	20

		SIGNATURES	27

ANTARES PHARMA, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	December 31, 2003			March 31, 2004
Assets
Current Assets:
Cash	$	1,928,815		$	15,079,985
Accounts receivable, net of allowances of $21,500 and $21,000, respectively		481,886			250,573
Other receivables		7,947			127,749
Inventories		225,408			150,561
Prepaid expenses and other assets		61,239			352,941

Total current assets		2,705,295			15,961,809

Equipment, furniture and fixtures, net		801,369			657,763
Patent rights, net		1,214,356			1,213,588
Goodwill, net		1,095,355			1,095,355
Other assets		138,478			147,717

Total Assets	$	5,954,853		$	19,076,232

Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	253,336		$	511,476
Accrued expenses and other liabilities		827,676			794,371
Due to related parties		162,964			81,578
Capital lease obligations – current maturities		36,003			16,257
Deferred revenue		809,945			831,071

Total current liabilities		2,089,924			2,234,753

Deferred revenue – long term		3,557,835			3,318,570

Total liabilities		5,647,759			5,553,323

Shareholders’ Equity:
Series A Convertible Preferred Stock: $0.01 par; authorized 10,000 shares; 1,450 issued and outstanding at December 31, 2003 and March 31, 2004		15			15
Series D Convertible Preferred Stock: $0.01 par; authorized 245,000 shares; 243,749 issued and outstanding at December 31, 2003 and March 31, 2004		2,437			2,437
Common Stock: $0.01 par; authorized 100,000,000 shares; 19,831,296 and 37,898,796 issued and outstanding at December 31, 2003 and March 31, 2004, respectively		198,313			378,988
Additional paid-in capital		77,771,149			92,613,298
Accumulated deficit		(74,126,619	)		(76,021,046	)
Prepaid license discount		(2,894,677	)		(2,845,614	)
Deferred compensation		(23,688	)		—
Accumulated other comprehensive loss		(619,836	)		(605,169	)

		307,094			13,522,909

Total Liabilities and Shareholders’ Equity	$	5,954,853		$	19,076,232

See accompanying notes to consolidated financial statements.

ANTARES PHARMA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	For the Three Months Ended March 31,
	2003			2004
Revenues:
Product sales	$	679,035		$	471,446
Development revenue		24,661			75,308
Licensing fees		161,448			160,362
Royalties		44,982			18,705

		910,126			725,821

Cost of sales		502,476			345,483

Gross margin		407,650			380,338

Operating Expenses:
Research and development		714,775			663,973
Sales and marketing		110,865			110,052
General and administrative		1,498,332			1,429,175

		2,323,972			2,203,200

Net operating loss		(1,916,322	)		(1,822,862	)

Other income (expense):
Loss on debt extinguishments		(885,770	)		—
Gains on common stock warrants		115,711			—
Interest income		3,882			12,669
Interest expense		(310,480	)		(78,119	)
Foreign exchange losses		(28,559	)		(1,467	)
Other, net		4,087			(4,648	)

		(1,101,129	)		(71,565	)

Net loss	$	(3,017,451	)	$	(1,894,427	)

Basic and diluted net loss per common share	$	(0.26	)	$	(0.07	)

Basic and diluted weighted average common shares outstanding		11,736,291			28,627,275

See accompanying notes to consolidated financial statements.

ANTARES PHARMA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the Three Months Ended March 31,
	2003			2004
Cash flows from operating activities:
Net loss	$	(3,017,451	)	$	(1,894,427	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		220,785			175,357
Noncash interest expense		252,333			75,388
Stock-based compensation expense		239,600			296,623
Provision for doubtful accounts		57,675			—
Loss on debt extinguishments		741,570			—
Gains on common stock warrants		(115,711	)		—
Amortization of prepaid license discount		—			49,062
Changes in operating assets and liabilities:
Accounts receivable		(78,093	)		231,313
Other receivables		(558,707	)		(119,802	)
Inventories		(55,614	)		74,847
Prepaid expenses and other assets		(101,866	)		(291,701	)
Accounts payable		328,330			258,140
Accrued expenses and other		625,356			(33,304	)
Deferred revenue		1,251,310			(218,139	)
Liabilities to related parties		2,108			(81,385	)
Other		(1,772	)		(9,240	)

Net cash used in operating activities		(210,147	)		(1,487,268	)

Cash flows from investing activities:
Purchases of equipment, furniture and fixtures		(1,160	)		(8,753	)
Additions to patent rights		(60,707	)		(42,234	)

Net cash used in investing activities		(61,867	)		(50,987	)

Cash flows from financing activities:
Proceeds from sales of common stock, net		—			13,853,400
Proceeds from exercise of warrants		—			821,100
Proceeds from loans from shareholders		130,000			—
Proceeds from loan from debenture holder		621,025			—
Principal payments on convertible debentures		(464,000	)		—
Principal payments on capital lease obligations		(37,281	)		(18,980	)

Net cash provided by financing activities		249,744			14,655,520

Effect of exchange rate changes on cash and cash equivalents		(51,677	)		33,905

Net increase (decrease) in cash and cash equivalents		(73,947	)		13,151,170
Cash and cash equivalents:
Beginning of period		267,945			1,928,815

End of period	$	193,998		$	15,079,985

Cash paid during the period for interest	$	16,811		$	2,731

See accompanying notes to consolidated financial statements

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

March 31, 2003 and 2004

1.	Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003, as amended. Operating results for the three-month period ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The Company has identified certain of its significant accounting policies that it considers particularly important to the portrayal of the Company’s results of operations and financial position and which may require the application of a higher level of judgment by the Company’s management, and as a result are subject to an inherent level of uncertainty. These are characterized as “critical accounting policies” and they address revenue recognition, foreign currency translation, valuation of long-lived and intangible assets and goodwill and accounting for debt and equity instruments, each more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended. The Company has made no changes to these policies during 2004.

2.	Inventories

Inventories consist of the following:


	December 31, 2003		March 31, 2004
Raw material	$	40,420	$	38,643
Finished goods		184,988		111,918

	$	225,408	$	150,561

3.	Product Warranty

The Company provides a warranty on its needle-free injector devices. Warranty terms for devices sold to end-users by dealers and distributors are included in the device instruction manual included with each device sold. Warranty terms for devices sold to corporate customers who provide their own warranty terms to end-users are included in the contracts with the corporate customers. The Company is obligated to repair or replace, at the Company’s option, a device found to be defective due to use of defective materials or faulty workmanship. The warranty does not apply to any product that has been used in violation of instructions as to the use of the product or to any product that has been neglected, altered, abused or used for a purpose other than the one for which it was manufactured. The warranty also does not apply to any damage or defect caused by unauthorized repair or the use of unauthorized parts. Warranty periods on devices range from 12 to 30 months from either the date of retail sale of the device by

ANTARES PHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

March 31, 2003 and 2004

3.	Product Warranty (Continued)

a dealer or distributor or the date of shipment to a customer if specified by contract. The Company recognizes the estimated cost of warranty obligations at the time the products are shipped based on historical claims incurred by the Company. Actual warranty claim costs could differ from these estimates. Warranty liability activity is as follows:

Balance at

Beginning of

Year

Warranty
Provisions

Warranty

Claims

Balance at

March 31

2003

179,000

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