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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
Commission File No. 0-24972
INKINE PHARMACEUTICAL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
New York 13-3754005
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1787 Sentry Parkway West
Building 18, Suite 440
Blue Bell, PA 19422
(Address of principal executive offices)
215-283-6850
(Registrant's telephone number)
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
--- ---
At November 11, 2002, the registrant had outstanding 35,155,230 shares of
common stock, par value $.0001 per share.
INKINE PHARMACEUTICAL COMPANY, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS - as of September 30, 2002 (unaudited) and
December 31, 2001...............................................................................3
STATEMENTS OF OPERATIONS (unaudited) - for the Three and Nine-Months
Ended September 30, 2002 and 2001...............................................................4
STATEMENTS OF CASH FLOWS (unaudited) - for the Nine-Months
Ended September 30, 2002 and 2001...............................................................5
NOTES TO FINANCIAL STATEMENTS (unaudited).......................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................13
Item 4. Controls and Procedures........................................................................13
PART II - OTHER INFORMATION......................................................................................14
Item 6. Exhibits and Reports on Form 8-K...............................................................14
SIGNATURES.......................................................................................................15
CERTIFICATIONS...................................................................................................16
EXHIBITS INDEX...................................................................................................18
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INKINE PHARMACEUTICAL COMPANY, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ....................................... $ 7,442 $ 7,379
Short-term investments .......................................... -- 4,787
Accounts receivable ............................................. 570 400
Inventory ....................................................... 592 204
Prepaid expenses and other current assets ....................... 148 89
-------- --------
Total current assets ........................................ 8,752 12,859
Deposits and other long-term assets .................................. 34 607
Fixed assets ......................................................... 315 399
-------- --------
Total assets ................................................ $ 9,101 $ 13,865
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,627 $ 2,027
Accrued expenses ................................................ 2,335 1,523
Line of credit .................................................. 2,409 2,401
Current portion of convertible subordinated notes ............... 9,903 --
-------- --------
Total current liabilities ................................... 16,274 5,951
Convertible subordinated notes ....................................... -- 9,801
-------- --------
Total liabilities ........................................... 16,274 15,752
Shareholders' deficit:
Preferred stock, $.0001 par value; authorized 5,000,000
shares; none issued and outstanding ......................... -- --
Common stock, $.0001 par value; authorized 75,000,000
shares; issued 35,000,010 and 34,777,720 shares, respectively 4 3
Less common stock held in treasury (16,515 shares) .............. (37) (37)
Additional paid-in capital ...................................... 58,767 58,302
Deferred compensation ........................................... (58) (115)
Accumulated deficit ............................................. (65,849) (60,040)
-------- --------
Total shareholders' deficit ................................. (7,173) (1,887)
-------- --------
Total liabilities and shareholders' deficit ................. $ 9,101 $ 13,865
======== ========
See accompanying notes to unaudited financial statements.
3
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three-Months Ended Nine-Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Product revenue .................................... $ 2,222 $ 465 $ 5,143 $ 3,820
Other revenue ...................................... -- 500 63 500
-------- -------- -------- --------
Total revenue ............................... 2,222 965 5,206 4,320
Cost of goods sold ................................. (445) (226) (1,234) (1,650)
-------- -------- -------- --------
Gross profit ................................. 1,777 739 3,972 2,670
Research and development ........................... 459 1,576 2,931 3,515
Sales and marketing ................................ 1,698 2,732 4,078 6,959
General and administrative ......................... 541 887 1,711 2,871
-------- -------- -------- --------
Operating expenses ........................... 2,698 5,195 8,720 13,345
-------- -------- -------- --------
Loss from operations ......................... (921) (4,456) (4,748) (10,675)
Interest income .................................... 28 136 92 404
Interest and other expense ......................... (306) (303) (875) (432)
Modification of convertible subordinated notes ..... (278) -- (278) --
-------- -------- -------- --------
Net loss ..................................... $ (1,477) $ (4,623) $ (5,809) $(10,703)
======== ======== ======== ========
Net loss per share - basic and diluted ....... $ (0.04) $ (0.13) $ (0.17) $ (0.31)
Weighted average shares outstanding -
basic and diluted .......................... 34,948 34,444 34,895 34,179
See accompanying notes to unaudited financial statements.
4
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine-Months Ended
September 30,
2002 2001
---- ----
Operating activities:
Net loss ............................................................. $ (5,809) $(10,703)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation ..................................................... 125 126
Amortization of deferred compensation ............................ 57 885
Stock issued for interest earned on convertible
subordinated notes ........................................... 275 --
Loss on sale of fixed asset ...................................... -- 6
Amortization of warrant value .................................... 102 40
Changes in operating assets and liabilities:
(Increase) in accounts receivable .............................. (170) (142)
(Increase) decrease in inventory ............................... (388) 382
(Increase) decrease in prepaid expenses and other assets ....... 514 (351)
Increase in accounts payable and accrued expenses .............. 412 2,537
-------- --------
Net cash used in operating activities .............................. (4,882) (7,220)
Investing activities:
Purchases of investments ............................................. -- (493)
Proceeds from maturities and sales of investments .................... 4,787 9,773
Proceeds from sale of fixed asset .................................... -- 12
Capital expenditures ................................................. (41) (133)
-------- --------
Net cash provided by investing activities ......................... 4,746 9,159
Financing activities:
Net proceeds from exercise of options and warrants .................. 191 713
Borrowings, net of repayments on line of credit ..................... 8 614
Proceeds from sale of convertible subordinated notes ................ -- 10,000
-------- --------
Net cash provided by financing activities .......................... 199 11,327
-------- --------
Net increase in cash and cash equivalents ............................... 63 13,266
Cash and cash equivalents - beginning of period ......................... 7,379 2,240
-------- --------
Cash and cash equivalents - end of period ............................... $ 7,442 $ 15,506
======== ========
See accompanying notes to unaudited financial statements.
5
INKINE PHARMACEUTICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared by InKine Pharmaceutical Company, Inc. (the "Company") in accordance
with accounting principles generally accepted in the United States.
Certain information and footnote disclosures normally included in the
Company's audited annual financial statements have been condensed or omitted in
the Company's interim financial statements. In the opinion of management, the
interim financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair representation of the results for
the interim periods presented.
The results of operations for the interim periods may not necessarily
be indicative of the results of operations expected for the full year, although
the Company expects to incur a loss for the year ending December 31, 2002. These
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 2001, which are contained
in the Company's most recent Annual Report on Form 10-K.
2. Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date(s) of the financial statements and the reported amounts
of revenues and expenses during the reporting period(s). Actual results could
differ from those estimates.
3. Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
4. Allowance for Sales Returns
The Company maintains an allowance for potential future sales returns.
This allowance is evaluated on a quarterly basis based on product
characteristics, industry averages, wholesaler stocking patterns, and
prescription trends. At September 30, 2002, the Company had a $269,000 returns
allowance that was included in accrued expenses on the balance sheet. The
following is an analysis of the sales returns allowance for the nine-months
ended September 30, 2002:
Allowance at December 31, 2001 $ 441,000
Provision for estimated sales returns 519,000
Actual sales returns (691,000)
---------
Allowance at September 30, 2002 $ 269,000
=========
5. Deferred Revenue
To date, the Company has not recognized any revenue from the sale of
IBStat(TM). The Company has deferred approximately $494,000 in IBStat(TM)
revenue that is included in accrued expenses on the balance sheet. The Company
will recognize this revenue as data becomes available that indicates that the
product has achieved adequate prescription levels and distribution to retail
outlets, which the Company expects to occur in the fourth quarter of 2002.
6
6. Line of Credit
The Company maintains a $7,500,000 line of credit with a financial
institution which expires January 31, 2003. Monthly interest-only payments are
made at a variable per annum rate of 2.20% plus the 30-day Dealer Commercial
Paper Rate. Amounts outstanding under this credit line were $2,409,000 and
$2,401,000 at September 30, 2002 and December 31, 2001, respectively. Average
interest rates for the nine and twelve-month periods ended September 30, 2002
and December 31, 2001, respectively, were 3.95% and 6.06%, respectively.
7. Convertible Subordinated Notes
On June 15, 2001, the Company completed a private placement of
$10,000,000 of 5.50% convertible subordinated notes due June 2003 together with
265,487 warrants. The notes are convertible into the Company's common stock at a
conversion price of $4.52 per share and the warrants have an exercise price of
$5.42 per share. The conversion price of $4.52 is subject to weighted average
anti-dilution provisions if the Company were to issue or sell its common stock
below the $4.52 conversion price. In accordance with APB Opinion No. 14, the
Company allocated the fair value of the proceeds to the debt and warrants
issued. The warrants were valued using the Black-Scholes valuation methodology.
The allocation was determined based upon the relative fair values of the two
securities at the time of issuance.
On October 1, 2002, the Company completed a restructuring of its
$10,000,000 of convertible subordinated notes due June 2003. Pursuant to the
restructuring, the terms of the notes were revised to, among other things,
remove the requirement that the Company's common stock be listed on the Nasdaq
National Market. In connection with the restructuring, the Company paid a
restructuring fee of $170,000, increased the coupon from 5.5% to 10.0%, and
issued to the noteholders additional warrants to purchase an aggregate of
500,000 shares of the Company's common stock at an exercise price of $1.00 per
share, subject to adjustment in certain circumstances. If the notes are not
converted into the Company's common stock, the notes are redeemable at a 25% to
30% premium. The premium on the unpaid principal will be amortized over the
remaining life of the notes. The Company incurred a $278,000 non-cash charge
resulting from acceleration of the amortization of deferred financing costs
related to the amendment of the notes. Under the original terms of the notes,
these charges would have been amortized through June 2003. This modification of
debt is reflected in the other income and expense section of the Company's
statement of operations, as the Company had to expense the deferred costs
associated with the original financing. Additionally, the Company agreed to,
upon request, file a registration statement for the resale of the common stock
issuable upon exercise of the warrants. At September 30, 2002, the Company had
$10,000,000 of these notes outstanding, net of $97,000 of deferred warrant
costs.
The Company is currently evaluating its future short and long-term
capital requirements, which are highly dependent on its ability to restructure,
refinance, convert and/or redeem the current outstanding convertible
subordinated notes.
8. Shareholders Equity
During the nine-months ended September 30, 2002, the Company received
net proceeds of approximately $191,000 from the exercise of stock options and
warrants.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical facts or statements of current condition,
this report contains some forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
provide our current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress on our research
programs, development of potential pharmaceutical products, interpretation of
clinical results, prospects for regulatory approval, manufacturing development
and capabilities, market prospects for our products, sales and earnings
projections, and other statements regarding matters that are not historical
facts. You may identify some of these forward-looking statements by the use of
words in the statements such as "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe" or other words and terms of similar meaning. Our
performance and financial results could differ materially from those reflected
in these forward-looking statements due to general financial, economic,
regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those set forth in our report on Form 10-K filed with the Securities and
Exchange Commission. Given these risks and uncertainties, any or all of these
forward-looking statements may prove to be incorrect. Therefore, you should not
rely on any such factors or forward-looking statements. Furthermore, we do not
intend (and we are not obligated) to update publicly any forward-looking
statements.
General
We are a biopharmaceutical company engaged in the research, development
and commercialization of products that may be used in the diagnosis and
treatment of cancer and autoimmune diseases. We have pursued these objectives
through products and technology platforms consisting of Visicol(TM), IBStat(TM),
the FcReceptor Technology (Colirest(TM) and Hematrol(TM)) and the Thrombospondin
Technology.
We began generating sales revenue in January 2001 with the commercial
introduction of our lead product, Visicol(TM). During the quarter ended June 30,
2002, we launched a new Visicol(TM) formulation and IBStat(TM), our second
commercial product. Operations were previously funded primarily from the
proceeds of public and private placements of securities. We have incurred net
losses in each year since our inception, and expect to incur additional losses
for at least the remainder of 2002 and the first half of 2003. Prospectively, we
expect that losses will decline each quarter over the next year and that
profitability may be achieved in 2003. At September 30, 2002, our accumulated
deficit was approximately $65,849,000.
Critical Accounting Policies and Practices
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires that we make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate judgments and estimates
made, including those related to stock options, revenue recognition,
inventories, income taxes, contingencies and litigation. We base our judgments
and estimates on historical experience and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing our
financial statements and the uncertainties that could impact results of
operations, financial condition, and cash flows.
Stock Options. It is our policy, which is consistent with most public
company policies, to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", to account for our stock option
plans rather than Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). Had we applied SFAS
No. 123, our net loss for the three and nine-months ended September 30, 2002 and
2001 would have been larger.
8
Revenue Recognition. We recognize product revenues when our products
are delivered to our customer's location when an established script pattern or
ability to determine market size is available. The Company has deferred the
initial shipments of IBStat(TM) until such data is available. Product revenues
are recorded net of estimated allowances for discounts and returns. Estimated
discount and return rates are calculated based on actual experience and our
monitoring of distribution channels taking into account the expiration dating
and prescription trends of our products. Product discount and return rates are
periodically updated to reflect actual experience in and changes to other
factors affecting future product discounts and returns.
Inventory. Our inventories are valued at the lower of cost or market,
determined on a first-in, first-out basis, and include the cost of raw
materials, manufacturing, distribution and royalties. Our inventories are
subject to expiration dating. We continually evaluate the carrying value of our
inventories and when factors indicate that impairment has occurred, either a
reserve is established against the inventories' carrying value or the
inventories are completely written off. Our opinion as to whether impairment has
occurred is based on inventory levels on hand in relation to forecasted product
demand and expiration dating. Although we make every effort to ensure the
accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand could have a significant impact on the carrying
value of our inventories and reported operating results.
Income Taxes. We have incurred significant losses to date and as a
result have generated sizeable federal and state tax net operating loss ("NOL")
carryforwards. Generally accepted accounting principles require that we record a
valuation allowance against the deferred tax asset associated with these NOL
carryforwards if it is more likely than not that the we will not be able to
utilize the NOL carryforwards to offset future taxes. Due to the size of the NOL
carryforwards in relation to historical prescription trends, we have not
recognized any of this net deferred tax asset. It is possible that we could be
profitable in the future at levels that could cause us to conclude that it is
more likely than not that the we will be able to realize all or a portion of the
NOL carryforwards. Upon reaching such a conclusion, we would immediately record
the estimated net realizable value of the deferred tax asset at that time and
would then begin to provide for income taxes at a rate equal to the our combined
federal and state effective rates, which we believe would approximate 40%.
Subsequent revisions to the estimated net realizable value of the deferred tax
asset could cause our provision for income taxes to vary significantly from
period to period.
Contingencies and Litigation. In the ordinary course of business, we
have entered into various contractual relationships with strategic corporate
partners, customers, universities, licensors, licensees, suppliers, vendors and
other parties. As such, we could be subject to litigation, claims or assessments
arising from any or all of these relationships. We account for contingencies
such as these in accordance with Statement of Financial Accounting Standards
("SFAS") No. 5, "Accounting for Contingencies". SFAS No. 5 requires us to record
an estimated loss contingency when information available prior to issuance of
our financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies arising from contractual or legal proceedings requires that we
use our best judgment in estimating an accrual related to such contingencies. As
additional information becomes known, such accrual for a loss contingency could
fluctuate, thereby creating variability in our reported results of operations
from period to period. Likewise, an actual loss arising from a loss contingency
which significantly exceeds the amount accrued for in our financial statements
could have a material adverse impact on our reported operating results for the
period in which such actual loss becomes known.
Results of Operations
We incurred losses of $1,477,000 and $5,809,000 or $0.04 and $0.17 per
share for the three and nine-month periods ended September 30, 2002, as compared
to $4,623,000 and $10,703,000 or $0.13 and $0.31 per share for the three and
nine-month periods ended September 30, 2001, respectively. The reduced loss per
share was driven by the combination of increased product sales and ongoing cost
control measures. We expect to incur losses for the remainder of the year as we
continue to introduce our newly formulated Visicol(TM) tablets and our second
commercial product, IBStat(TM).
Our gross profit was $1,777,000 and $3,972,000 for the three and
nine-months ended September 30, 2002, as compared to $739,000 and $2,670,000 for
the same periods a year ago. Gross profit as a percentage of sales for product
revenue were 80% and 77% for the three and nine-month periods ended September
30, 2002 as compared to 51% and 57% for the same periods a year ago. Gross
profit and gross profit as a percent of sales for product revenue are expected
to increase for the remainder of 2002 as a result of increasing product revenues
along with decreased manufacturing and distribution costs.
9
We incurred research and development expenses of $459,000 and
$2,931,000 for the three and nine-months ended September 30, 2002 as compared to
$1,576,000 and $3,515,000 for the same periods a year ago. The decreases were
the result of less development costs associated with Visicol(TM) and the
internalized management of previously outsourced functions related to the
ongoing Colirest(TM) clinical trial. We expect that research and development
costs will continue to decrease due to the scale back and internalization of
certain activities related to the Colirest(TM) clinical trial.
Sales and marketing costs of $1,698,000 and $4,078,000 were incurred
for the three and nine-months ended September 30, 2002 as compared to $2,732,000
and $6,959,000 for the same periods a year ago. Sales and marketing costs relate
to the introduction of the new and old Visicol(TM) formulations and the launch
of IBStat(TM). During the third quarter 2002, we continued with the expansion of
the internal sales force to complement the Visicol(TM) sales efforts of Procter
and Gamble Pharmaceuticals and detail IBStat(TM) to the gastroenterology
community. We currently employ 30 sales representatives and two district
managers and expect to hire an additional six representatives in early 2003.
Additionally, we will continue our marketing campaigns, which include targeted
direct to consumer advertising.
General and administrative expenses were $541,000 and $1,711,000 for
the three and nine-months ended September 30, 2002 as compared to $887,000 and
$2,871,000 for the same periods a year ago. The decreases were the result of
significant payroll reductions, reduced fees paid to outside vendors and
consultants and reduced deferred compensation. Included in general and
administrative expenses was amortization of deferred compensation of $57,000 and
$885,000 for the nine-months ended September 30, 2002 and 2001, respectively.
Decreased interest income compared to the same periods a year ago were
the result of significantly reduced interest rates and decreased average cash
and investment balances for the three and nine-months ended September 30, 2002.
Increased interest expense compared to the same period a year ago was the result
of interest related to our June 2001 placement of $10,000,000 in convertible
subordinated notes.
We incurred a $278,000 non-cash charge resulting from acceleration of
the amortization of deferred financing costs related to the October 1, 2002
amendment of our outstanding convertible subordinated notes due June 2003. Under
the original terms of the notes, these charges would have been amortized through
June 2003. The costs will be replaced by the amortization of the costs to modify
this debt, which could be up to $3,200,000, including the $2,500,000 to
$3,000,000 premium obligation if the notes are not converted into our common
stock.
Liquidity and Capital Resources
At September 30, 2002, we had cash and cash equivalents of $7,442,000,
which includes net proceeds from warrant and option exercises during the
nine-months ended September 30, 2002 of $191,000.
We believe that our financial resources are adequate for our operations
until June 15, 2003, the maturity date of our convertible subordinated notes.
Our future short and long-term capital requirements will depend on numerous
factors, including our ability to refinance, extend and/or payoff our
convertible subordinated notes and continued marketplace acceptance and revenue
growth for Visicol(TM) and marketplace acceptance of IBStat(TM).
In addition to our outstanding convertible subordinated notes and
market acceptance and revenue growth for our commercial products, other factors
which cannot be quantified and many of which we cannot control will also impact
our short and long-term capital requirements, including: continued commercial
costs of Visicol(TM) and IBStat(TM), continued progress in our research and
development activities and clinical trials, prosecuting and enforcing patent
claims, technological and market developments, the ability to establish product
development arrangements, the cost of manufacturing development, effective
marketing activities and arrangements, and licensing or acquisition activity.
10
We are currently conducting a clinical trial of Colirest(TM) in Crohn's
disease and continue to market and sell Visicol(TM) and IBStat(TM) to
distributors and drug store chains. During the next 12-months, we expect to
spend approximately $400,000 on the Colirest(TM) study, and over $5.0 million on
Visicol(TM) and IBStat(TM) sales and marketing costs. These activities will be
funded by our current cash balance and future product sales. If product sales
fall short of current expectations or other factors negatively impact our cash
balance, we may seek to obtain additional funds through equity or debt
financing, collaborative or other arrangements with corporate partners, and from
other sources. No assurance can be given that necessary additional financing
will be available on terms acceptable to us, if at all. If adequate additional
funds are not available when required, we may have to delay, scale-back or
eliminate certain of our research, drug discovery or development activities or
certain other aspects of our operations and our business will be materially and
adversely affected.
We anticipate that we will incur additional losses for at least the
remainder of 2002. Prospectively, we expect that losses will decline and that
profitability will be achieved in 2003. To achieve profitability, we, alone or
with others, must successfully develop and commercialize our technologies and
products, maintain required regulatory compliance and successfully manufacture
and market such technologies and products. Our ability and the time required to
reach profitability is highly uncertain, and there can be no assurance that we
will be able to achieve profitability on a sustained basis, if at all.
In June 2001, we completed a private placement of $10,000,000 of 5.50%
convertible subordinated notes due June 2003 together with 265,487 warrants. The
notes are convertible into our common stock at a conversion price of $4.52 per
share and the warrants have an exercise price of $5.42 per share. The conversion
price of $4.52 is subject to weighted average anti-dilution provisions if we
were to issue or sell its common stock below the $4.52 conversion price. In
October 2002, we completed a restructuring of our $10,000,000 of convertible
subordinated notes due June 2003. Pursuant to the restructuring, the terms of
the notes were revised to remove the requirement that our common stock be listed
on the Nasdaq National Market. In connection with the restructuring, we paid a
restructuring fee of $170,000, increased the coupon from 5.5% to 10.0%, and
issued to the noteholders warrants to purchase an aggregate of 500,000 shares of
our common stock at an exercise price of $1.00 per share, subject to adjustment
in certain circumstances. If the notes are not converted into the Company's
common stock, the notes are redeemable at a 25% premium. We will amortize the
premium on the unpaid principal over the remaining life of the notes.
Additionally, we agreed to, upon request, file a registration statement for the
resale of the common stock issuable upon exercise of the warrants.
We are currently evaluating our future short and long-term capital
requirements, which are highly dependent on our ability to restructure,
refinance, convert and/or redeem our current outstanding convertible
subordinated notes.
Research and Development Programs
We have three significant research and development projects relating
to: (i) Visicol(TM); (ii) the Fc Receptor Technology (which includes
Colirest(TM) and Hematrol(TM)); and (iii) the Thrombospondin Technology.
Visicol(TM). We have focused our Visicol(TM) research and development
on cleansing of the colon prior to colonoscopy. In addition, we are studying
Visicol(TM) for cleansing of the colon prior to abdominal surgery and treating
constipation. The current status of these projects are as follows: (i) for
cleansing of the colon prior to colonoscopy, the United States Food and Drug
Administration, or FDA, has approved both our New Drug Application as well as
our Supplemental New Drug Application for a new formulation with reduced
microcrystalline cellulose (MCC); (ii) for cleansing of the colon prior to
abdominal surgery, we plan to initiate a Phase IV study in 2003; and (iii) for
treating constipation, we plan to initiate a Phase IV study in 2003. We are
presently marketing Visicol(TM) for cleansing of the colon prior to colonoscopy.
As of September 30, 2002, we have incurred total costs of approximately
$11,195,000 in connection with our Visicol(TM) research and development. During
the three months ended September 30, 2002, we incurred an aggregate of $459,000
in research and development expenses, approximately $195,000 of which is
attributable to Visicol(TM).
Fc Receptor Technology. Our Fc Receptor technology includes two product
candidates: Colirest(TM) for treatment of IBD and Hematrol(TM) for treatment of
idiopathic thrombocytopenic purpura, or ITP. With respect to Colirest(TM), we
11
have completed a Phase II study in Crohn's disease and a Phase II study in
ulcerative colitis. In June 2001, we began a Colirest(TM) Phase IIb study in
Crohn's disease. We anticipate completing an interim analysis of the ongoing
Phase IIb study in late 2003. With respect to Hematrol(TM), we have completed a
Phase II and a single dose pharmacokinetic study. Our Phase III study of
Hematrol(TM) has been terminated in order to focus our efforts on
gastrointestinal products. We are currently considering sublicensing
Hematrol(TM) to other pharmaceutical companies that have a hematology focus. If
this strategy is not successful, we will consider resuming clinical development
of Hematrol(TM). In the third quarter of 2002, we completed a spin-off of all of
our FcReceptor technology other than Colirest(TM) and Hematrol(TM) to a newly
formed corporation, ZaBeCor Pharmaceutical Company. We currently have a 47.5%
interest in ZaBeCor, but will not be responsible for any future operating costs.
This transition was undertaken to conserve resources for our marketed and
pipeline gastrointestinal products. As of September 30, 2002, we have incurred
total costs of approximately $6,435,000 in connection with our Fc Receptor
Technology research and development. During the three months ended September 30,
2002, we incurred an aggregate of $459,000 in research and development expenses,
approximately $35,000 of which is attributable to the Fc Receptor Technology.
Thrombospondin Technology. As of December 1, 2002 we will return the
Thrombospondin technology to its licensor, Drexel University. After that date,
we will bear no expenses relating to the development of this technology and will
have no rights to it. The Thrombospondin technology relates to early stage
cancer research. The decision to discontinue the support of this technology was
made based on our strategic gastrointestinal focus, the length of time to
develop and cost constraints. As of September 30, 2002, we have incurred total
costs of approximately $2,000,000 in connection with the Thrombospondin
Technology research and development. During the three months ended September 30,
2002, we incurred an aggregate of $459,000 in research and development expenses,
a de minimus amount of which is attributable to the Thrombospondin Technology.
Indirect Costs. In addition to the direct costs related to the
development of our technologies, we incurred indirect non-technology specific
overhead costs. These expenses include the salaries and administrative costs of
managing our research and development projects.
Recently Issued Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 required the recognition of a
liability for an asset retirement in the period in which it is incurred. A
retirement obligation is defined as one in which a legal obligation exists in
the future resulting from existing laws, statutes or contracts. The standard is
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
143 has not had any impact on our financial statements.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. In August 2001, the FASB issued
SFAS No. 144, which supercedes both SFAS 121, "Accounting for the Impairment of
Long -Lived Assets to be Disposed Of, " and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a business segment (as previously defined in
APB No. 30). SFAS No. 144 retains the fundamental provisions in SFAS No. 121.
For example, SFAS No. 144 provides guidance on how long-lived assets that are
used as part of a group should be evaluated for impairment, establishes criteria
for when a long-lived asset is held for sale, and prescribes the accounting for
a long-lived asset that will be disposed of other than by sale. SFAS No. 144
retains the basic provisions of APB No. 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike SFAS No.
121, an impairment assessment under SFAS No. 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS
No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS No. 144
for assets held for use did not have any impact on our financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections. The Statement updates, clarifies and simplifies existing accounting
pronouncements. The rescission of FASB Statement No.4, Reporting Gains and
Losses from Extinguishment of Debt, and FASB Statement No. 64, Extinguishment of
Debt Made to Satisfy Sinking-Fund Requirements, which amended Statement 4, will
12
effect income statement classification of gains and losses from extinguishment
of debt. Statement 4, required all gains and losses from extinguishment of debt
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result of the rescission, the criteria in
Opinion 30 will now be used to classify those gains and losses. This is a result
of the changed marketplace that now utilizes the extinguishment of debt as part
of day-to-day risk management strategies. Statement 44 was issued to establish
accounting requirements for the effects of transition to the provisions of the
Motor Carrier Act of 1980. Because the transition is completed, Statement 44 is
no longer necessary. Statement 145 amends Statement 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The standard was effective for fiscal years beginning after May 15, 2002 with
early adoption of the provisions related to the rescission of Statement 4
encouraged. The adoption of SFAS 145 did not have any impact on our financial
statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No, 146
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 also addresses recognition of certain costs related to terminating a
contract that is not capital lease, costs to consolidate facilities or relocate
employees, and termination of benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred compensation
contract. The adoption of SFAS 146 did not have any impact on our financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to market risk associated with changes in interest rates
on our line of credit and certain investments. We do not manage the risk of
fluctuations in interest rates associated with the line of credit, as it is a
short-term borrowing with a maturity date in 2003. The interest rate on the line
of credit has fluctuated from 3.81% to 4.24% over the past nine-months and the
outstanding balance at September 30, 2002 was approximately $2,409,000.
Typically, a substantial portion of our assets are investment grade
debt instruments such as direct obligations of the U.S. Treasury, securities of
federal agencies which carry the direct or implied guarantee of the U.S.
government and bank certificates of deposit. The market value of such
investments fluctuates with current market interest rates. In general, as rates
increase, the market value of a debt instrument would be expected to decrease.
The opposite is also true. To minimize such market risk, we have in the past
and, to the extent possible, will continue in the future to hold such debt
instruments to maturity at which time the debt instrument will be redeemed at
its stated or face value. Due to the short duration and nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk related to our investment portfolio. At September 30, 2002, all of our
investments had matured and the proceeds from such maturities were held in cash
and cash equivalents, typically government backed money market funds.
We do not anticipate any material changes in our primary market risk
exposures in 2002. We do not hold or issue any derivatives.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. We evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of a date within 90 days of the filing date of this quarterly
report (the Evaluation Date). Our disclosure controls and procedures are
designed to ensure that information required to be disclosed by the us in the
reports that are filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that these controls and procedures are effective as of the Evaluation
Date.
Changes in internal controls. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date, including any corrective actions
with regard to significant deficiencies or material weaknesses.
13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None.
14
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.
INKINE PHARMACEUTICAL
COMPANY, INC.
Date: November 14, 2002 By: /s/ Robert F. Apple
-------------------
Robert F. Apple
Chief Financial Officer, (Authorized Officer
and Principal Financial Officer)
Date: November 14, 2002 By: /s/ Leonard S. Jacob, M.D., Ph.D.
---------------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
15
CERTIFICATION
-------------
I, Leonard S. Jacob, M.D., Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of InKine
Pharmaceutical Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Leonard S. Jacob, M.D., Ph.D.
---------------------------------
Leonard S. Jacob, M.D., Ph.D.
Chairman of the Board and
Chief Executive Officer
16
CERTIFICATION
-------------
I, Robert F. Apple, certify that:
1. I have reviewed this quarterly report on Form 10-Q of InKine
Pharmaceutical Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Robert F. Apple
-------------------
Robert F. Apple
Executive Vice President and
Chief Financial Officer
17
Exhibits Index
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
18