Kosp used part of the BMS settlement to pay down credit facilities. They say these facilities should be sufficient to reach cash flow positive in 2003. I am a user of their drugs and am very happy with the results. From the last quarterly report.
Liquidity and Capital Resources
At March 31, 2002, the Company had cash and cash equivalents totaling $0.9 million and had a working capital deficiency of $5.0 million. The Company’s primary uses of cash to date have been in operating activities to fund selling, general and administrative expenses, and research and development expenses, including clinical trials. As of March 31, 2002, the Company’s investment in equipment and leasehold improvements, net of depreciation and amortization, was $6.9 million. During the three months ended March 31, 2002, the Company spent $2.6 million in capital expenditures and deposits on fixed assets to be acquired. The Company expects to spend about $6 million in capital expenditures during the remainder of the year ending December 31, 2002.
On July 1, 1998, the Company entered into a $30-million credit facility (the “Credit Facility”) with Michael Jaharis, Chairman Emeritus of the Company’s Board of Directors and its principal shareholder. On January 15, 2002, in order to reduce interest costs, the Company utilized $10 million of the BMS Payment to pay off borrowings made under the Credit Facility. In connection with this loan repayment, Mr. Jaharis agreed to continue to make available to the Company the full original borrowing capacity of the Credit Facility provided that future Company borrowings from Mr. Jaharis be first made from the existing borrowing capacity of Mr. Jaharis’ other credit lines with Kos. All other terms of the Credit Facility remain in full force and effect. The Credit Facility bears interest at the prime rate (4.75% as of March 31, 2002), and matures on December 31, 2002. There are no borrowings outstanding under the Credit Facility at March 31, 2002.
On September 1, 1999, the Company formally agreed to the terms of an additional $50 million funding arrangement initially entered into with Michael Jaharis on October 7, 1998 (the“Supplemental Credit Facility”). On July 21, 2001, the Company replaced its existing $50 million promissory note payable to Mr. Jaharis with two, $25 million, promissory notes, one payable in the name of Mr. Jaharis and the other payable in the name of Mr. Jaharis’ wife. With this promissory note replacement, all of Mr. Jaharis’ existing rights and obligations under the Supplemental Credit Facility, with respect to one-half of the outstanding amount, have been transferred to Mrs. Jaharis, and subsequently to her transferee. All other terms and conditions of the Supplemental Credit Facility remain unchanged. Borrowings under the Supplemental Credit Facility totaled $50 million as of March 31, 2002, bear interest at the prime rate, are convertible (at $4.91 per share) into shares of the Company’s Common Stock, and will be due December 31, 2003. Although no amounts borrowed under the Supplemental Credit Facility had been converted as of March 31, 2002, the conversion of amounts borrowed under such credit facility into shares of the Company’s Common Stock would have resulted in the issuance of 10,183,299 additional shares of the Company’s Common Stock, which would have resulted in material dilution to existing shareholders of the Company.
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On December 21, 1999, Mr. Jaharis agreed to extend another $50-million loan to the Company (the “Standby Facility”). On January 15, 2002, in order to further reduce interest costs, the Company utilized $15 million of BMS Payment to pay off borrowings made under the Standby Facility. Borrowings made under the Standby Facility totaled $30 million as of March 31 2002, are due June 20, 2005, and are also subject to most of the terms and conditions of borrowings made under the Supplemental Credit Facility. Borrowings made under the Standby Facility are not, however, convertible into shares of the Company’s Common Stock. In lieu of a conversion feature, the Company granted to Mr. Jaharis non-detachable warrants to purchase up to 6,000,000 shares of the Company’s Common Stock at $5.00 per share, which approximates the market value of the Company’s Common Stock on the effective date of the Standby Facility. The warrants are exercisable at any time until June 30, 2006.
The Company recorded $1.0 million and $1.6 million of interest expense for the three months ended March 31, 2002 and 2001, respectively, related to its credit facilities with Mr. Jaharis and his transferees.
In January 2002, the Securities and Exchange Commission declared effective a shelf registration statement filed by the Company for the sale, from time to time, of up to $200 million of its Common Stock, Preferred Stock, stock options, warrants and other rights to purchase Common Stock or Preferred Stock. Proceeds from any offerings are expected to be used to fund an expanded launch of the Company’s Advicor product, and for research and development and general corporate purposes. At March 31, 2002, the Company had not issued any securities under this registration statement.
Although the Company currently anticipates that, including the capital available to the Company under the Credit Facility, the Supplemental Credit Facility and the Standby Facility, it has or has access to an amount of working capital that will be sufficient to fund the Company’s operations until it has positive cash flows from operations, which we expect to achieve during the second half of 2003, the Company’s cash requirements during this period will be substantial and may exceed the amount of working capital available to the Company. The Company’s ability to fund its operating requirements and maintain an adequate level of working capital until it achieves positive cash flows from operations will depend primarily on its ability to generate substantial growth in sales of its Niaspan and Advicor products. Further, during this period, the Company’s ability to fund its operating requirements may, among other things, be affected by its ability to control its operating expenses. The Company’s failure to generate substantial growth in the sales of Niaspan and Advicor , control operating expenses, or meet the conditions necessary for the Company to obtain funding under the Credit Facility, the Supplemental Credit Facility and the Standby Facility, and other events — including the progress of the Company’s research and development programs; the costs and timing of seeking regulatory approvals of the Company’s products under development; the Company’s ability to obtain regulatory approvals; the Company’s ability to manufacture products at an economically feasible cost; costs in filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights; the extent and terms of any collaborative research, manufacturing, marketing, joint venture, or other arrangements; and changes in economic, regulatory, or competitive conditions or the Company’s planned business — could cause the Company to require additional capital prior to achieving positive cash flows. In the event that the Company must raise additional capital to fund its working capital needs, it may seek to raise such capital through loans or the issuance of debt securities that would require the consent of the Company’s current lender, or through the issuance of equity securities. To the extent the Company raises additional capital by issuing equity securities or obtaining borrowings convertible into equity, ownership dilution to existing shareholders will result, and future investors may be granted rights superior to those of existing shareholders. Moreover, additional capital may be unavailable to the Company on acceptable terms, or at all.
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