<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to ____________ .
Commission file number 000-31253
PHARSIGHT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0401273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 WEST EL CAMINO REAL, MOUNTAIN VIEW, CA 94040
(Address of principal executive offices,
including zip code)
(650) 314-3800
(Registrant's telephone number, including area code)
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
--------- ----------
As of October 31, 2000 there were 18,247,512 outstanding shares of the
Registrant's common stock, $.001 par value.
<PAGE>
PHARSIGHT CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2000
and March 31, 2000......................................................................3
Condensed Statements of Operations for the
Three and Six Months Ended September 30, 2000 and 1999..................................5
Condensed Statements of Cash Flows for the
Six Months Ended September 30, 2000 and 1999............................................7
Notes to Condensed Financial Statements.................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................................23
Item 6. Exhibits and Report on Form 8-K
Exhibits...............................................................................23
Reports on Form 8-K....................................................................23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARSIGHT CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 19,065 $ 5,286
Short-term investments............................................. 10,613 11,196
Accounts receivable, net of allowance for bad debts of $104 at
September 30, 2000 and $27 at March 31, 2000..................... 2,543 2,000
Recognized income not yet billed................................... 28 225
Prepaids and other current assets.................................. 806 685
--------------- --------------
Total current assets.................................................. 33,055 19,392
Property and equipment, net........................................... 1,646 1,191
Intangible assets, net
Core technology.................................................... 222 442
Other.............................................................. 58 148
--------------- --------------
280 590
Other assets.......................................................... 179 147
--------------- --------------
Total assets.......................................................... $ 35,160 $ 21,320
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................... $ 286 $ 315
Accrued interest................................................... -- 166
Accrued expenses................................................... 855 396
Accrued compensation............................................... 1,333 1,088
Deferred revenue................................................... 1,899 1,925
Current portion of notes payable................................... 495 2,293
Current obligations under capital leases........................... 391 372
--------------- --------------
Total current liabilities............................................. 5,259 6,555
Obligations under capital leases...................................... 489 708
Commitments
Redeemable convertible preferred stock, $0.001 par value
Authorized shares--none at September 30, 2000 and 5,512
at March 31, 2000; Issued and outstanding shares--none at
September 30, 2000 and 5,455 at March 31, 2000..................... -- 18,582
(continued)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
3
<PAGE>
PHARSIGHT CORPORATION
CONDENSED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
--------------- --------------
(unaudited)
<S> <C> <C>
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value
Authorized shares--none at September 30, 2000 and 5,253
at March 31, 2000; Issued and outstanding shares--none at
September 30, 2000 and 5,232 at March 31, 2000................... -- 6
Preferred stock, $0.001 par value
Authorized shares--5,000 at September 30, 2000 and
none at March 31, 2000; Issued and outstanding shares--none at
September 30, 2000 and March 31, 2000............................ -- --
Common stock, $0.001 par value
Authorized shares--120,000 at September 30, 2000
and 19,235 at March 31, 2000; Issued and outstanding shares--
18,242 at September 30, 2000 and 4,055 at March 31, 2000......... 18 4
Additional paid-in capital......................................... 75,372 28,843
Deferred stock compensation........................................ (9,409) (3,459)
Accumulated deficit................................................ (36,417) (29,761)
Accumulated other comprehensive loss............................... (13) (23)
Notes receivable from stockholders................................. (139) (135)
--------------- --------------
Total stockholders' equity (deficit).................................. 29,412 (4,525)
--------------- --------------
Total liabilities and stockholders' equity (deficit).................. $ 35,160 $ 21,320
=============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
4
<PAGE>
PHARSIGHT CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
License and renewal.................. $ 874 $ 617 $ 1,708 $ 1,164
Services............................. 2,135 1,581 3,762 2,422
---------------- --------------- ---------------- ----------------
Total revenues.......................... 3,009 2,198 5,470 3,586
Costs and expenses:
License and renewal (1).............. 186 184 447 316
Services (2)......................... 1,121 795 2,257 1,420
Research and development (3)......... 2,121 1,292 4,102 2,429
Sales and marketing (4).............. 1,501 1,019 2,737 1,677
General and administrative (5)....... 929 492 1,693 890
Amortization of deferred stock
compensation....................... 2,022 517 4,118 776
Amortization of intangible assets.... 141 245 309 489
---------------- --------------- ---------------- ----------------
Total costs and expenses................ 8,021 4,544 15,663 7,997
---------------- --------------- ---------------- ----------------
Loss from operations.................... (5,012) (2,346) (10,193) (4,411)
Other income (expense):
Interest expense..................... (44) (132) (126) (280)
Interest income and other, net....... 369 87 558 128
---------------- --------------- ---------------- ----------------
325 (45) 432 (152)
---------------- --------------- ---------------- ----------------
Net loss................................ (4,687) (2,391) (9,761) (4,563)
Accretion on Series C and Series D
redeemable convertible preferred
stock................................ (133) (311) (443) (621)
---------------- --------------- ---------------- ----------------
Net loss attributable to common
stockholders......................... $ (4,820) $ (2,702) $ (10,204) $ (5,184)
================ =============== ================ ================
Basic and diluted net loss per share
attributable to common stockholders.. $ (0.40) $ (0.88) $ (1.28) $ (1.72)
================ =============== ================ ================
Shares used to compute basic and
diluted net loss per share
attributable to common stockholders.. 12,029 3,082 7,946 3,016
================ =============== ================ ================
Pro forma basic and diluted net loss per
share................................ $ (0.28) $ (0.63)
================ ================
Shares used to compute pro forma basic
and diluted net loss per share....... 16,560 15,554
================ ================
(continued)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
5
<PAGE>
PHARSIGHT CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Excluding amortization of deferred stock compensation as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
(1) License and renewal.............. $ 117 $ 28 $ 245 $ 32
(2) Services......................... 261 139 561 203
(3) Research and development......... 940 94 1,827 176
(4) Sales and marketing.............. 476 106 967 194
(5) General and administrative....... 228 150 518 171
---------------- --------------- ---------------- ----------------
$ 2,022 $ 517 $ 4,118 $ 776
================ =============== ================ ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
6
<PAGE>
PHARSIGHT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------------- --------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $ (9,761) $ (4,563)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred stock compensation........................ 4,118 776
Depreciation....................................................... 385 205
Amortization....................................................... 309 489
Changes in operating assets and liabilities:
Accounts receivable.............................................. (543) (1,648)
Recognized income not yet billed................................. 196 13
Prepaids and other current assets................................ (121) (27)
Other assets..................................................... (32) (9)
Accounts payable................................................. (29) 84
Accrued expenses................................................. 459 (10)
Accrued compensation............................................. 245 331
Deferred revenue................................................. (26) 550
Accrued interest and other....................................... (166) (22)
--------------- --------------
Net cash used in operating activities................................. (4,966) (3,831)
INVESTING ACTIVITIES
Purchases of property and equipment................................... (841) (389)
Purchases of short-term investments................................... (7,408) (4,001)
Maturities of short-term investments.................................. 8,001 2,000
--------------- --------------
Net cash used in investing activities................................. (248) (2,390)
FINANCING ACTIVITIES
Proceeds from lease line.............................................. -- 259
Principal payments on notes payable................................... (1,798) (1,774)
Principal payments on capital lease obligations....................... (200) (130)
Payments to holders of Series C preferred stock...................... (6,109) --
Proceeds from the issuance of convertible preferred stock, net........ -- 19,967
Proceeds from the issuance of common stock............................ 27,100 74
--------------- --------------
Net cash provided by financing activities............................. 18,993 18,396
Net increase in cash and cash equivalents............................. 13,779 12,175
Cash and cash equivalents at the beginning of the period.............. 5,286 4,148
--------------- --------------
Cash and cash equivalents at the end of the period.................... $ 19,065 $ 16,323
=============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Property and equipment acquired under capital leases.................. $ -- $ 259
=============== ==============
Accretion of preferred stock.......................................... $ 443 $ 620
=============== ==============
Conversion of preferred stock to common stock......................... $ 9,373 $ --
=============== ==============
Reversal of preferred stock accretion upon conversion................. $ 3,548 $ --
=============== ==============
Issuance of common stock for notes.................................... $ -- $ 23
=============== ==============
Deferred stock compensation........................................... $ 10,070 $ 3,224
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................ $ 227 $ 214
=============== ==============
Cash paid for taxes................................................... $ 2 $ --
=============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
FINANCIAL STATEMENTS.
7
<PAGE>
PHARSIGHT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Pharsight Corporation develops and markets integrated products and services that
help pharmaceutical and biotechnology companies improve the drug development
process. Pharsight's solution combines proprietary computer-based simulation,
statistical and data analysis tools with the sciences of pharmacology, drug and
disease modeling, human genetics and biostatistics. Pharsight was incorporated
in California in April 1995 and was reincorporated in Delaware in June 2000.
The accompanying condensed financial statements of Pharsight have been prepared
without audit in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in accordance with these
rules and regulations. The information included in this report should be read in
conjunction with Pharsight's financial statements and related notes thereto
included in its Registration Statement on Form S-1 filed with the SEC, as
amended on August 4, 2000.
In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary to summarize fairly Pharsight's financial position,
results of operations and cash flows for the interim periods presented. The
operating results for the six months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2001 or for any other future period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 2. INITIAL PUBLIC OFFERING OF COMMON STOCK
On August 14, 2000, Pharsight closed the sale of a total of 3,000,000 shares of
its common stock in an initial public offering ("IPO") at a price of $10.00 per
share, raising $30.0 million in gross proceeds. After underwriters' discounts
and commissions of $2.1 million and $1.5 million in related expenses, net
proceeds were $26.4 million. As required by the terms of the Series C preferred
stock, approximately $6.1 million was paid by Pharsight to the holders of its
Series C preferred stock from these net proceeds.
8
<PAGE>
PHARSIGHT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of vested
outstanding shares of common stock. Diluted net loss per share is computed using
the weighted-average number of shares of vested common stock outstanding and,
when dilutive, unvested common stock outstanding, potential common shares from
options and warrants to purchase common stock using the treasury stock method
and from convertible securities using the as-if-converted basis. All potential
common shares have been excluded from the computation of diluted net loss per
share for all periods presented because the effect would be antidilutive.
In accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration, prior to the effective date of Pharsight's IPO, are included in
the calculation of basic and diluted net loss per share as if they were
outstanding for all periods presented. Pharsight did not have any issuances or
grants for nominal consideration.
Basic and diluted pro forma net loss per share have been computed as described
above and give effect to the automatic conversion of preferred stock into common
stock effective upon the closing of Pharsight's IPO as if their conversion
occurred at the original date of issuance.
The following table presents the calculation of basic and diluted and pro forma
basic and diluted net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Basic and diluted:
Net loss............................. $ (4,687) $ (2,391) $ (9,761) $ (4,563)
Accretion of preferred stock......... (133) (311) (443) (621)
---------------- --------------- ---------------- ----------------
Net loss attributable to common
stockholders....................... $ (4,820) $ (2,702) $ (10,204) $ (5,184)
================ =============== ================ ================
Weighted average common shares
outstanding........................ 12,407 3,771 8,339 3,678
Less weighted average common
shares subject to repurchase....... (378) (689) (393) (662)
---------------- --------------- ---------------- ----------------
Shares used to compute basic and
diluted net loss per share......... 12,029 3,082 7,946 3,016
================ =============== ================ ================
Basic and diluted net loss per common
share.............................. $ (0.40) $ (0.88) $ (1.28) $ (1.72)
================ =============== ================ ================
Pro forma basic and diluted:
Net loss............................. $ (4,687) $ (2,391) $ (9,761) $ (4,563)
================ =============== ================ ================
Shares used above.................... 12,029 7,946
Weighted average convertible
preferred stock outstanding, as if
converted.......................... 4,531 7,608
---------------- ----------------
Shares used to compute pro forma
basic and diluted net loss per
common share....................... 16,560 15,554
================ ================
Pro forma basic and diluted net loss
per common share................... $ (0.28) $ (0.63)
================ ================
</TABLE>
9
<PAGE>
PHARSIGHT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The number of unvested and potential common shares excluded from the calculation
of diluted net loss per share is detailed in the following table (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Preferred stock....................................................... -- 10,687
Shares subject to repurchase.......................................... 349 666
Outstanding options................................................... 2,974 1,778
Warrants.............................................................. 275 303
--------------- --------------
3,598 13,434
=============== ==============
</TABLE>
xxxx
These instruments were excluded because their effect would be antidilutive.
NOTE 4. SEGMENT INFORMATION
Revenues from sales to customers by major geographic area were (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
United States........................... $ 2,211 $ 1,663 $ 4,061 $ 2,622
Europe.................................. 674 433 1,206 804
Other................................... 124 102 203 160
---------------- --------------- ---------------- ----------------
$ 3,009 $ 2,198 $ 5,470 $ 3,586
================ =============== ================ ================
</TABLE>
No other foreign country accounted for 10% or more of Pharsight's total revenues
in any of the periods presented. All of Pharsight's significant assets are
located within the United States.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND THE RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q. THIS
REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS ARE USUALLY
ACCOMPANIED BY WORDS LIKE "BELIEVE," "ANTICIPATE," "PLAN," "SEEK," "EXPECT,"
"INTEND" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS,
WHICH INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS." WE
CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENT'S ANALYSIS, JUDGEMENT, BELIEF OR EXPECTATION ONLY AS OF
THE DATE HEREOF.
OVERVIEW
We develop and market integrated products and services that help pharmaceutical
and biotechnology companies improve the drug development process. Our solution
combines proprietary computer-based simulation, statistical and data analysis
tools with the sciences of pharmacology, drug and disease modeling, human
genetics and biostatistics.
During the period from our inception in April 1995 through March 1997, we were a
development stage enterprise. Our operating activities during this period
related primarily to developing products, building our corporate infrastructure
and raising capital. In December 1997, we acquired Scientific Consulting, Inc.
and the model workbench family of products. In the second quarter of fiscal
1998, we released our first version of software for trial simulation and started
offering our scientific and decision services.
The majority of our sales activities are conducted through a dedicated direct
sales organization located in the United States and Europe. In addition, our
technical support personnel and scientific consultants conduct sales and
marketing activities.
In fiscal 2000, we entered into licensing agreements with three organizations,
Duke University, Lovelace Respiratory Research Institute and Protocare Sciences,
Inc., to gain access to their proprietary medical data on a royalty basis for
use in our information products. In the future, we expect to enter into
alliances and license arrangements to gain access to other medical data on a
royalty basis. We expect this data to provide the foundation for our information
products. We intend to provide these products to our customers on a subscription
basis.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. License and renewal revenues increased 42% to $874,000 in the three
months ended September 30, 2000 from $617,000 in the three months ended
September 30, 1999, and increased 47% to $1.7 million in the six months ended
September 30, 2000 from $1.2 million in the same period of the prior year. For
the three month period, approximately $150,000 of the increase was due to a 46%
increase in the number of licenses sold, and approximately $107,000 reflected an
increase in annual renewal revenues due to the growth in the installed base. For
the six month period, approximately $287,000 of the increase was due to a 56%
increase in the number of licenses sold, and approximately $257,000 reflected an
increase in annual renewal revenues due to the growth in the installed base.
Service revenues increased 35% to $2.1 million in the three months ended
September 30, 2000 from $1.6 million in the three months ended September 30,
1999, and increased 55% to $3.8 million from $2.4 million in the same six month
period of the prior year. We view this as evidence of our customer's acceptance
of our methodologies. As of September 30, 2000, we were engaged with 13 of the
top 20 major pharmaceutical
11
<PAGE>
companies. We expect the percentage of service revenues to decline as a
percentage of total revenues as we release new software products, including our
information products.
In the future, we expect to enter into alliances and license arrangements to
gain access to other medical data on a royalty basis. We expect this data to
provide the foundation for our information products. We intend to provide these
products to our customers on a subscription basis.
COST OF REVENUES. Cost of license and renewal revenues increased 1% to
$186,000 in the three months ended September 30, 2000 from $184,000 in the
three months ended September 30, 1999, and increased 41% to $447,000 in the
six months ended September 30, 2000 from $316,000 in the same period of the
prior year. The increases during these periods were due primarily to higher
volume of product shipments. In addition, new versions of products shipped in
the three and six months ended September 30, 2000 contained a slightly higher
royalty expense component than the older versions. The increase from these
factors in the three months ended September 30, 2000 were offset by a
reduction in salary-related expenses during the period. Cost of license and
renewal revenues consists of royalty expense and cost of materials for both
initial and product updates provided for in our annual license agreements.
Cost of license and renewal revenues as a percentage of license and renewal
revenues was 21% for the three months, and 26% for the six months, ended
September 30, 2000 compared to 30% and 27% in the comparable periods in 1999.
Cost of services revenues increased 41% to $1.1 million in the three months
ended September 30, 2000 from $795,000 in the three months ended September 30,
1999, and increased 59% to $2.3 million in the six months ended September 30,
2000 from $1.4 million in the same period of the prior year. The increase was
due primarily to increased services personnel in scientific and decision
services. There is a direct relationship between personnel and projects
undertaken. Cost of services as a percentage of services revenues was 53% for
the three months, and 60% for the six months, ended September 30, 2000 compared
to 50% and 59% in the comparable periods in 1999. Because of the direct
relationship of personnel to projects undertaken, we anticipate that as we take
on new projects, cost of services revenues will reflect changes in total
services revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 64% to
$2.1 million in the three months ended September 30, 2000 from $1.3 million in
the three months ended September 30, 1999, and increased 69% to $4.1 million
from $2.4 million in the same period of the prior year. The increase resulted
primarily from an increase in the number of software developers and the use of
outside contractors. In particular, we dedicated considerable resources to the
development of the clinical workbench and information products. Research and
development expenses as a percentage of revenues were 70% for the three months,
and 75% for the six months, ended September 30, 2000 compared to 59% and 68% in
the comparable periods in 1999. The decrease in research and development
expenses as a percentage of total revenues primarily reflects the greater
increase in revenues relative to the increase in research and development staff.
We believe that our research and development expenses will increase in absolute
dollars as we continue to expand our product offerings.
SALES AND MARKETING. Sales and marketing expenses increased 47% to $1.5 million
in the three months ended September 30, 2000 from $1.0 million in the three
months ended September 30, 1999, and increased 63% to $2.7 million from $1.7
million in the same period of the prior year. The increase in sales and
marketing expenses is related primarily to an expansion in our sales force
personnel. Sales and marketing expenses as a percentage of total revenues were
50% for both the three and six months ended September 30, 2000 compared to 46%
and 47% in the comparable periods in 1999. The increase in marketing and sales
expenses as a percentage of total revenues reflects the rapid growth in both our
revenues and the professionals selling and marketing our products and services.
We expect our sales and marketing expenses to increase as we continue expansion
of our field sales force in both the United States and Europe.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 89%
to $929,000 in the three months ended September 30, 2000 from $492,000 in the
three months ended September 30, 1999, and increased 90% to $1.7 million in the
six months ended September 30, 2000 from $890,000 in the same period of the
prior year. The increase in general and administrative expenses is related to
growth in management and administrative support staff as well as professional
fees. General and administrative expenses as a percentage of
12
<PAGE>
total revenues were 31% for the three and six months ended September 30, 2000
compared to 22% and 25% in the comparable periods in 1999. We expect that
expenses will grow as we incur the costs of being a public company.
DEFERRED STOCK COMPENSATION.
During the years ended March 31, 1999 and 2000, and the six months ended
September 30, 2000, Pharsight recorded aggregate deferred compensation of
$296,000, $5.4 million and $10.1 million, respectively, representing the
difference between the exercise price of stock options granted and the then
deemed fair value of Pharsight's common stock. The amortization of deferred
compensation is charged to operations over the vesting period of the options
using the graded method for employee options, and the straight line method for
non-employee options. The amount of deferred compensation relating to stock
options issued to employees and consultants to be amortized in future fiscal
periods, ending March 31, is as follows:
<TABLE>
<S> <C>
Last six months of 2001................. $3,757
2002.................................... 3,418
2003.................................... 1,563
2004.................................... 412
Thereafter.............................. 0
</TABLE>
The amount of deferred compensation expense to be recorded in future periods
may decrease if unvested options for which deferred compensation has been
recorded are subsequently canceled.
OTHER INCOME (EXPENSE). Other income (expense) increased to income of $325,000
in the three months ended September 30, 2000 from expense of $45,000 in the
three months ended September 30, 1999 and increased to income of $432,000 in the
six months ended September 30, 2000 from expense of $152,000 in the same period
of the prior year. This change occurred as a result of higher interest income on
a larger average balance of cash and short-term investments as well as lower
interest expense as we reduced the outstanding balance of our notes payable.
PROVISION FOR INCOME TAXES. As a result of our cumulative net operating losses,
no provision for income taxes was recorded for the three and six months ended
September 30, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have funded operations through the private sale of
preferred stock, with net proceeds of approximately $38 million, limited
borrowings and equipment leases. In August 2000, we completed the initial public
offering of 3,000,000 shares of our common stock at a price of $10.00 per share,
all of which shares were issued and sold by us for aggregate proceeds of $26.4
million, net of underwriting discounts of and commissions of $2.1 million and
expenses of $1.5 million. Payment of $6.1 million was made to the holders of our
Series C preferred stock at the closing of the offering as required by the terms
of the Series C preferred stock. This payment resulted in net proceeds to us of
$20.3 million.
As of September 30, 2000, we had $29.7 million in cash, cash equivalents and
short-term investments, an increase of $13.2 million from cash, cash equivalents
and short-term investments held as of March 31, 2000. As of September 30, 2000,
there were no borrowings under our line of credit. Our working capital, defined
as current assets less current liabilities, at September 30, 2000 was $27.8
million, an increase of $15.0 million in working capital from March 31, 2000.
The increase in the working capital is attributable to the cash proceeds from
our initial public offering, partially offset by increased operational spending
and additional equipment purchases.
Net cash used in operating activities was $5.0 million in the six months ending
September 30, 2000. The cash used was primarily attributable to the net loss of
$9.8 million for the six months ending September 30, 2000, partially offset by
non-cash charges totaling $4.8 million related to deferred stock compensation,
depreciation and amortization.
Net cash used in investing activities was $248,000 in the six months ending
September 30, 2000. Net cash used in investing activities consisted of purchases
of capital equipment partially offset by the proceeds from maturities of short
term investments, net of purchases of short term investments.
Net cash provided by financing activities was $19.0 million in the six months
ending September 30, 2000. Cash was provided primarily from the proceeds of our
initial public offering. This was partially offset by the payment to our Series
C stockholders and principal payments on notes payable and capital leases.
We believe that our existing cash reserves, the proceeds from our initial
public offering and our available borrowing capacity will be sufficient to
support our planned operations for the next 20 - 24 months. However, we may
need to raise additional funds sooner through public or private financing or
other sources to fund our operations and for potential acquisitions. We may
not be able to obtain adequate or favorable financing at that time. Failure
to raise capital when needed could harm our business. If we raise additional
funds through the issuance of equity securities, the percentage of ownership
of our stockholders would be reduced. Furthermore, these equity securities
might have rights, preferences or privileges senior to our common stock. In
addition, the necessity of raising additional funds could force us to incur
debt on terms that could restrict our ability to make capital expenditures
and incur additional indebtedness.
13
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods for
accounting for derivative financial instruments and hedging activities related
to those instruments, as well as other hedging activities. Because we do not
currently hold any derivative instruments and do not engage in hedging
activities, the adoption of SFAS 133 is not expected to have a significant
impact on our financial position, results of operations or cash flows. We will
be required to implement SFAS 133, as amended, for the quarter beginning April
1, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." We do not believe the adoption of
SAB 101 will materially change our financial position, results of operations or
cash flows.
In January, 2000, the Emerging Issues Task Force issued EITF 00-2, "Accounting
for Web Site Development Costs." We do not believe its adoption will materially
change our financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation: an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES THAT WE EXPECT WILL CONTINUE, AND WE MAY NOT BE ABLE
TO GENERATE SUFFICIENT REVENUES TO ACHIEVE PROFITABILITY.
We commenced our operations in April 1995 and have incurred net losses since
that time. As of September 30, 2000, we had an accumulated deficit of $36.4
million. We expect our net losses to continue as we increase our research and
development costs and other costs to develop our business. Since the amounts we
may determine to invest to grow our business are uncertain, we are unable to
predict when, if ever, we may become profitable. We cannot assure you that we
will ever generate sufficient revenues to achieve profitability. If our losses
exceed the expectations of investors, the price of our common stock may decline.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET
THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD CAUSE OUR
STOCK PRICE TO DECLINE.
We expect our quarterly operating results may fluctuate in the future, and may
vary from securities analysts' and investors' expectations, depending on a
number of factors described below and elsewhere in this "Risk Factors" section
of this Quarterly Report on Form 10-Q, including:
- variances in demand for our products and services;
- timing of the introduction of new products or services and enhancements
of existing products or services;
- changes in research and development expenses;
14
<PAGE>
- our ability to complete fixed-price service contracts without
committing additional resources; and
- changes in industry conditions affecting our customers.
As a result, quarterly comparisons may not indicate reliable trends of future
performance.
We also expect to increase activities and spending in substantially all of our
operational areas. We base our expense levels in part upon our expectations
concerning future revenues, and these expense levels are relatively fixed in the
short term. If we have lower revenues, we may not be able to reduce our spending
in the short term in response. Any shortfall in revenues would have a direct
impact on our results of operations. For these and other reasons, we may not
meet the earnings estimates of securities analysts or investors, and the price
of our common stock may decline.
BECAUSE OUR SALES AND IMPLEMENTATION CYCLES ARE LONG AND UNPREDICTABLE, OUR
REVENUES ARE DIFFICULT TO PREDICT AND MAY NOT MEET OUR EXPECTATIONS OR THOSE OF
OUR INVESTORS.
The lengths of our sales and implementation cycles are difficult to predict and
depend on a number of factors, including the type of product or services being
provided, the nature and size of the potential customer and the extent of the
commitment being made by the potential customer. Our sales cycle is
unpredictable and may take six months or more. Our implementation cycle is also
difficult to predict and can be longer than one year. Each of these can result
in delayed revenues, increased selling expenses and difficulty in matching
revenues with expenses, which may contribute to fluctuations in our results of
operations and cause our stock price to be volatile. A key element of our
strategy is to market our product and service offerings to large organizations.
These organizations can have elaborate decision-making processes and may require
evaluation periods which could extend the sales and implementation cycle.
Moreover, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our product and service
offerings, which may cause additional delays during the evaluation and
acceptance process. We therefore have difficulty forecasting the timing and
recognition of revenues from sales of our product and service offerings.
OUR REVENUES ARE CONCENTRATED IN A FEW CUSTOMERS, AND IF WE LOSE ANY OF THESE
CUSTOMERS OUR REVENUES MAY DECREASE SUBSTANTIALLY.
We receive a substantial majority of our revenues from a limited number of
customers. In fiscal year 2000 and the first six months of fiscal year 2001,
sales to our top customer, Johnson & Johnson, accounted for a substantial
portion of our revenues and sales to our top five customers accounted for 50.4%
and 50.2% of our revenues, respectively. We expect that a significant portion of
our revenues will continue to depend on sales to a small number of customers. If
we do not generate as much revenues from these major customers as we expect to,
or if we lose any of them as customers, our total revenues may be significantly
reduced.
IF WE ARE UNABLE TO GENERATE ADDITIONAL SALES FROM EXISTING CUSTOMERS AND
GENERATE SALES TO NEW CUSTOMERS, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT
REVENUES TO BECOME PROFITABLE.
Our success depends on our ability to develop our existing customer
relationships and establish relationships with additional pharmaceutical and
biotechnology companies. If we lose any significant relationships with existing
customers or fail to establish additional relationships, we may not be able to
execute our business plan and our business will suffer. As of September 30,
2000, we have only performed a limited number of projects with thirteen of the
twenty largest pharmaceutical companies and a number of smaller companies.
Developing customer relationships with pharmaceutical companies can be difficult
for a number of reasons. These companies are often very large organizations with
complex decision-making processes that are difficult to change. In addition,
because our products and services relate to the core technologies of these
companies, these organizations are generally cautious about working with outside
companies. Some potential customers may also resist working with us until our
products and services have achieved more widespread market acceptance. Our
existing customers could also reassess their
15
<PAGE>
commitment to us, not renew existing agreements or choose not to expand the
scope of their relationship with us.
OUR REVENUES AND RESULTS OF OPERATIONS WOULD BE ADVERSELY AFFECTED IF A CUSTOMER
CANCELS A CONTRACT FOR SERVICES WITH US.
Our services agreements can be canceled upon prior notice by our customers.
Additionally, due to the nature of our services engagements, customers sometimes
delay projects because of timing of the clinical trials and the need for data
and information that prevent us from proceeding with our projects. These delays
and contract cancellations cannot be predicted with accuracy and we cannot
assure you that we will be able to replace any delayed or canceled contracts
with the customer or other customers. If we are unable to replace those
contracts, our revenues and results of operations would be adversely affected.
WE MAY LOSE EXISTING CUSTOMERS OR BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO
NOT DEVELOP NEW PRODUCTS AND SERVICES OR IF OUR OFFERINGS DO NOT KEEP PACE WITH
TECHNOLOGICAL CHANGES.
The successful growth of our business depends on our ability to develop new
products and services and incorporate new capabilities into our existing
offerings on a timely basis. If we cannot adapt to changing technologies,
emerging industry standards, new scientific developments and increasingly
sophisticated customer needs, our products and services may become obsolete and
our business could suffer. We have suffered product delays in the past,
resulting in lost product revenues. In addition, early releases of software
often contain errors or defects. We cannot assure you that, despite our
extensive testing, errors will not be found in our products before or after
commercial release, which could result in product redevelopment costs and loss
of, or delay in, market acceptance. Furthermore, a failure by us to introduce
new products or services on schedule could harm our business prospects. Any
delay or problems in the installation or implementation of new products or
services may cause customers to forego purchases from us.
IF THE SECURITY OF OUR CUSTOMERS' DATA IS COMPROMISED, WE COULD BE LIABLE FOR
DAMAGES AND OUR REPUTATION COULD BE HARMED.
As part of implementing our products and services, we inherently gain access to
certain highly confidential proprietary customer information. It is critical
that our facilities and infrastructure remain secure and are perceived by the
marketplace to be secure. Despite our implementation of a number of security
measures, our infrastructure may be vulnerable to physical break-ins, computer
viruses, programming errors, attacks by third parties or similar disruptive
problems. We do not have insurance to cover us for losses incurred in many of
these events. If we fail to meet our customers' security expectations, we could
be liable for damages and our reputation could suffer.
IF WE ARE REQUIRED TO COMMIT UNANTICIPATED RESOURCES TO COMPLETE FIXED-PRICE
SERVICE CONTRACTS, WE MAY INCUR LOSSES ON THESE CONTRACTS, WHICH COULD CAUSE OUR
OPERATING RESULTS TO DECLINE.
A significant portion of revenues from our short-term agreements has been
derived from service contracts that are billed on a fixed-price basis. These
contracts specify certain obligations and deliverables to be met by us
regardless of our actual costs incurred. Our failure to accurately estimate the
resources required for a fixed-price service contract could cause us to commit
additional resources to a project, which could cause our operating results to
decline. We cannot assure you that we can successfully complete these contracts
on budget, and our inability to do so could harm our business.
IF WE ARE UNABLE TO COMPLETE A PROJECT DUE TO SCIENTIFIC LIMITATIONS OR
OTHERWISE MEET OUR CUSTOMERS' EXPECTATIONS, OUR REPUTATION MAY BE ADVERSELY
AFFECTED AND WE MAY NOT BE ABLE TO GENERATE NEW BUSINESS.
Because our projects may contain scientific risks that are difficult to foresee,
we cannot guarantee that we will always be able to complete them. Any failure to
meet our customers' expectations could harm our reputation and ability to
generate new business. On a few occasions, we have encountered scientific
limitations and been unable to complete a project. In each of these cases, we
have been able to successfully
16
<PAGE>
renegotiate the terms of the project with the particular customer. We cannot
assure you that we will be able to renegotiate our customer agreements if such
circumstances occur in the future. Moreover, even if we complete a project, we
may not meet our customers' expectations regarding the quality of our products
and services or the timeliness of our services.
IF WE ARE UNABLE TO HIRE ADDITIONAL SPECIALIZED PERSONNEL, WE WILL NOT BE ABLE
TO GROW OUR BUSINESS.
Growth in the demand for our products and services will require additional
personnel, particularly qualified scientific and technical personnel. We
currently have limited personnel and other resources to staff and complete
projects. In addition, as we grow our business, we expect an increase in the
number of complex projects and large deployments of our products and services,
which require a significant amount of personnel for extended periods of time.
However, there is currently a shortage of these personnel worldwide, and
competition for these personnel from numerous companies and academic
institutions may limit our ability to hire these persons on commercially
reasonable terms. Staffing projects and deploying our products and services will
also become more difficult as our operations and customers become more
geographically diverse. If we are not able to adequately staff and complete our
projects, we may lose customers and our reputation may be harmed. Any
difficulties we may have in completing customer projects may impair our ability
to grow our business.
IF WE LOSE KEY MEMBERS OF OUR MANAGEMENT, SCIENTIFIC OR DEVELOPMENT STAFF, OR
OUR SCIENTIFIC ADVISORS, OR WE ARE UNABLE TO HIRE SALES AND OTHER PERSONNEL
NEEDED TO GROW OUR BUSINESS, OUR REPUTATION MAY BE HARMED AND WE MAY LOSE
BUSINESS.
We are highly dependent on the principal members of our management, scientific
and development staff. However, we only carry key man insurance on our chief
executive officer, Arthur H. Reidel, in the amount of $1.0 million dollars. We
do not believe that the proceeds from this insurance would be sufficient to
cover the loss that our business would suffer as a result of the loss of his
services. Our reputation is also in part based on our association with key
scientific advisors. The loss of any of these personnel might adversely impact
our reputation in the market and harm our business. We also need to hire
additional personnel, including sales personnel, in order to grow our business.
Competition for qualified sales and other personnel meeting our requirements is
intense, and we may be unable to attract and retain these people. Failure to
attract and retain key management, sales, scientific and technical personnel
would prevent us from growing our business, achieving our strategy and
developing our products and services.
WE HAVE ONLY RECENTLY UNDERTAKEN DEVELOPMENT OF OUR INFORMATION PRODUCTS, AND
OUR FUTURE REVENUES AND OPERATING RESULTS COULD BE HARMED IF THESE PRODUCTS DO
NOT ACHIEVE COMMERCIAL SUCCESS.
An important component of our business strategy relates to our information
products. We have only recently undertaken to develop these products and, as of
September 30, 2000, we had generated no revenues from them. We expect to release
the initial versions of these products later this year, although we cannot
guarantee you that we will be able to release these products on time. In
addition, because the market for these products is new and emerging, it is
difficult to predict the level of market acceptance. Our future business could
be harmed if we do not release these products on time or if they do not achieve
commercial success.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT DATA FROM THIRD-PARTY PROVIDERS, OUR
INFORMATION PRODUCTS WILL NOT BE ATTRACTIVE TO CUSTOMERS.
As of September 30, 2000, we have only established relationships with three
organizations to provide data for inclusion in our information products. We may
not be able to enter into additional agreements with content providers on
commercially favorable terms, if at all. If we are unable to obtain adequate
data, our information products will not be attractive to customers and,
therefore, may not achieve commercial success. In addition, we cannot assure you
that our existing or prospective data providers will not reassess their
commitment to us in the future or develop competitive products internally.
17
<PAGE>
IF THERE IS A SYSTEM FAILURE OR NATURAL DISASTER AT OUR HOSTING FACILITY, WE MAY
NOT BE ABLE TO PROVIDE ACCESS TO OUR INFORMATION PRODUCTS AND OUR BUSINESS COULD
SUFFER.
Our information products data are stored at a third party's computer data
facility located in Santa Clara, California, an area prone to earthquakes. We
currently have no backup systems at other sites. Accordingly, there is a
significant risk to our ability to provide access to our information products
from a natural disaster or system failure at such facility. Although we carry
insurance to cover us in the event of losses caused by natural disasters such as
earthquakes, depending on the amount of damage this insurance may not be
sufficient to cover our losses. Furthermore, any interruption in our services
could damage our reputation and, therefore, our ability to conduct business in
the future. We do not carry insurance that protects us from losses caused as a
result of damage to our reputation.
OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE UNABLE
TO ADEQUATELY PROTECT THEM, OUR COMPETITIVE POSITION WILL SUFFER.
Our intellectual property is important to our competitive position. We protect
our proprietary information and technology through a combination of trademark,
trade secret and copyright law, confidentiality agreements and technical
measures. We may also seek to protect our intellectual property through patents.
We have filed two patent applications, but do not currently have any patents
issued. We cannot assure you that the steps we have taken will prevent
misappropriation of our proprietary information and technology, nor can we
guarantee that we will be successful in obtaining any patents or that the rights
granted under such patents will provide a competitive advantage.
Misappropriation of our intellectual property could harm our competitive
position. We may also need to engage in litigation in the future to enforce or
protect our intellectual property rights or to defend against claims of
invalidity, and we may incur substantial costs as a result. In addition, the
laws of some foreign countries provide less protection of intellectual property
rights than the laws of the United States and Europe. As a result, we may have
an increasingly difficult time adequately protecting our intellectual property
rights as our sales in foreign countries grow.
IF WE BECOME SUBJECT TO INFRINGEMENT CLAIMS BY THIRD PARTIES, WE COULD INCUR
UNANTICIPATED EXPENSE AND BE PREVENTED FROM PROVIDING OUR PRODUCTS AND SERVICES.
We cannot assure you that infringement claims by third parties will not be
asserted against us or, if asserted, will be unsuccessful. These claims, whether
or not meritorious, could be expensive and divert management resources from
operating our company. Furthermore, a party making a claim against us could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief that could block our ability to provide products or services,
unless we obtain a license to such technology. In addition, we cannot assure you
that licenses for any intellectual property of third parties that might be
required for our products or services will be available on commercially
reasonable terms, or at all.
FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
DILUTE STOCKHOLDER VALUE.
In order to expand our product and service offerings and reach new customers, we
may continue to acquire products, technologies or businesses that we believe are
complementary. Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations, services, products and personnel of the
acquired company, the diversion of management's attention from other business
concerns, the potential loss of key employees of the acquired company and our
inability to maintain the goodwill of the acquired businesses. We also cannot
predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed.
Future acquisitions may result in:
- potentially dilutive issuances of equity securities;
- the incurrence of additional debt;
- the assumption of known and unknown liabilities; and
18
<PAGE>
- the write-off of software development costs, and the amortization of
expenses related to goodwill and other intangible assets and charges
against earnings.
Any of the above factors, if they occur, could harm our business.
RISKS RELATED TO OUR INDUSTRY
OUR MARKET MAY NOT DEVELOP AS QUICKLY AS EXPECTED, AND COMPANIES MAY ENTER OUR
MARKET, THEREBY INCREASING THE AMOUNT OF COMPETITION AND IMPAIRING OUR BUSINESS
PROSPECTS.
Because our products and services are new and still evolving, there is
significant uncertainty and risk as to the demand for, and market acceptance of,
these products and services. As a result, we are not able to predict the size
and growth rate of our market with any certainty. In addition, other companies,
including potential strategic partners, may enter our market. Our existing
customers may also elect to terminate our services and internally develop
products and services similar to ours. If our market fails to develop, grow more
slowly than expected or become saturated with competitors, our business
prospects will be impaired.
LAWS PROTECTING THE PRIVACY OF CONFIDENTIAL PATIENT INFORMATION MAY LIMIT THE
RANGE OF SERVICES WE CAN PROVIDE AND, IF WE VIOLATE ANY OF THESE LAWS, COULD
SUBJECT US TO CIVIL AND CRIMINAL PENALTIES.
The healthcare industry is regulated by a number of federal, state, local and
international governmental entities. These entities may enact laws that limit
our operations or the operations of our customers. In particular, state laws
aimed at protecting the privacy of confidential patient health information,
including information regarding conditions like AIDS, substance abuse and mental
illness, vary widely. The application of these laws in the context of research
and internet health services is evolving. While these laws primarily are
directed at healthcare providers, facilities and payors, and generally do not
apply to the "anonymized" data we use, from which patient identifiable
information has been removed, some of these laws could be applied to aspects of
our business or to limit providers' ability to provide us with access to such
data. We cannot predict which laws might be found applicable to our business, or
assure you that our operations would be found to be in full compliance.
Compliance with regulatory laws may be expensive and may limit our ability to
provide a full range of services. In addition, a challenge under any of these
laws could result in adverse publicity and, if successful, imposition of civil
and criminal penalties, any of which could harm our business.
EXISTING OR FUTURE LAWS THAT APPLY TO COMMUNICATIONS AND COMMERCE OVER THE
INTERNET COULD HARM OUR BUSINESS.
Laws and regulations that specifically apply to communications and commerce over
the Internet are becoming more prevalent. Existing laws and regulations as well
as new laws and regulations could place restrictions or impose costs on us that
adversely affect our business. The United States Congress has passed laws
regarding, among other things, Internet privacy, copyrights and taxation. The
Federal Trade Commission has recently recommended that Congress enact further
federal legislation protecting consumer privacy on the Internet. The European
Union has also enacted its own directive regarding privacy in relation to the
Internet. We have not fully assessed how these laws and regulations may affect
our business. However, we have access to, manage, transmit and store sensitive
customer information that may be subject to these privacy and other laws and
regulations. As a result, in the future we may be subject to claims associated
with invasion of privacy or inappropriate disclosure, use or loss of this
information. Any imposition of liability, particularly liability that is not
covered by insurance or is in excess of insurance coverage, could harm our
reputation and our business. In addition, these laws may make it more costly to
enter into, or prevent us from entering into, additional license agreements with
information providers for our information products.
Laws regulating communications and commerce over the Internet remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, content, libel and taxation apply to the
Internet. The adoption or modification of laws or regulations relating to the
Internet, or interpretations of existing law, could harm our business.
19
<PAGE>
GOVERNMENT REGULATION OF THE PHARMACEUTICAL INDUSTRY MAY RESTRICT OUR OPERATIONS
OR THE OPERATIONS OF OUR CUSTOMERS AND, THEREFORE, ADVERSELY AFFECT OUR
BUSINESS.
The pharmaceutical industry is regulated by a number of federal, state, local
and international governmental entities. Although our products and services are
not directly regulated by the United States Food and Drug Administration or
comparable international agencies, the use of some of our analytical software
products by our customers may be regulated. We currently provide assistance to
our customers in achieving compliance with these regulations. The regulatory
agencies could enact new regulations or amend existing regulations with regard
to these or other products that could restrict the use of our products or the
business of our customers, which could harm our business.
CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY COULD CAUSE DISRUPTIONS OF OUR
CUSTOMER RELATIONSHIPS AND INTERFERE WITH OUR ABILITY TO ENTER INTO NEW CUSTOMER
RELATIONSHIPS.
In recent years, the worldwide pharmaceutical industry has undergone substantial
consolidation. If any of our customers consolidate with another business, they
may delay or cancel projects, lay off personnel or reduce spending, any of which
could cause our revenues to decrease. In addition, our ability to complete sales
or implementation cycles may be impaired as these organizations undergo internal
restructuring.
REDUCTION IN THE RESEARCH AND DEVELOPMENT BUDGETS OF OUR CUSTOMERS MAY IMPACT
OUR SALES.
Our customers include researchers at pharmaceutical and biotechnology companies,
academic institutions and government and private laboratories. Fluctuations in
the research and development budgets of these researchers and their
organizations could have a significant effect on the demand for our products.
Research and development budgets fluctuate due to changes in available
resources, spending priorities, internal budgetary policies and the availability
of grants from government agencies. Our business could be harmed by any
significant decrease in research and development expenditures by pharmaceutical
and biotechnology companies, academic institutions or government and private
laboratories.
RISKS RELATED TO OWNING OUR STOCK
THE PUBLIC MARKET FOR OUR COMMON STOCK MAY BE VOLATILE.
We expect the market price of our common stock to be highly volatile and to
fluctuate significantly in response to various factors, including:
- actual or anticipated variations in our quarterly operating results;
- announcements of technological innovations or new services or products by
us or our competitors;
- timeliness of our introductions of new products;
- changes in financial estimates by securities analysts; and
- changes in the conditions and trends in the pharmaceutical market.
In addition, the stock markets, including the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many technology companies. These fluctuations
have often been unrelated or disproportionate to operating performance. These
broad market factors may materially affect the trading price of our common
stock. General economic, political and market conditions, such as recessions and
interest rate fluctuations, may also have an adverse effect on the market price
of our common stock.
20
<PAGE>
WE MAY HAVE SUBSTANTIAL SALES OF OUR COMMON STOCK BEGINNING IN FEBRUARY 2001
THAT COULD CAUSE OUR STOCK PRICE TO FALL.
Sales of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could reduce the market price of our
common stock. These sales also might make it more difficult for us to raise
funds through future offerings of common stock.
At September 30, 2000, we have approximately 18.2 million shares outstanding. Of
these shares, the 3.0 million shares sold in our IPO are freely transferable
without restriction or further registration under the Securities Act of 1933,
except for shares purchased by our "affiliates," as defined in Rule 144 under
the Securities Act. The remaining shares of common stock outstanding are
"restricted securities" as defined in Rule 144. These restricted securities may
be sold in the future without registration under the Securities Act to the
extent permitted under Rule 144, Rule 701 or another exemption under the
Securities Act.
We and our officers, directors and stockholders holding approximately 14.6
million shares of common stock have agreed not to, without the prior written
consent of Donaldson, Lufkin & Jenrette, the lead underwriting in our IPO,
directly or indirectly sell, offer, contract to sell, transfer the economic risk
of ownership in, make any short sale, pledge or otherwise dispose of any shares
of common stock or any securities convertible into, or exchangeable, or
exercisable for, or any other rights to purchase or acquire shares of common
stock owned by them until February 6, 2001. Some of the shares subject to the
lockup agreements may be released from this restriction earlier depending on the
trading price of our common stock, or earlier if Donaldson, Lufkin & Jenrette
permits it.
BECAUSE OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL CONTROL OF OUR
VOTING STOCK, TAKEOVERS NOT SUPPORTED BY THEM WILL BE MORE DIFFICULT, POSSIBLY
PREVENTING YOU FROM OBTAINING OPTIMAL SHARE PRICE.
The control of a significant amount of our stock by insiders could adversely
affect the market price of our common stock. Our executive officers and
directors beneficially own or control approximately 41.0% of the outstanding
common stock. If our executive officers and directors choose to act or vote
together, they will have the power to significantly influence all matters
requiring the approval of our stockholders, including the election of directors
and the approval of significant corporate transactions. Without the consent of
these stockholders, we could be prevented from entering into transactions that
could result in our stockholders receiving a premium for their stock.
OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE
TAKE-OVER ATTEMPTS AND MAY REDUCE OUR STOCK PRICE.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the preferences, rights and privileges of those
shares without any further vote or action by the stockholders. The rights of the
holders of common stock may be harmed by the rights of the holders of any
preferred stock that may be issued in the future. Other provisions of our
certificate of incorporation and bylaws may make it more difficult for a third
party to acquire control of us without the consent of our board of directors,
even if the changes were favored by a majority of the stockholders. These
include provisions that provide for a staggered board of directors, prohibit
stockholders from taking action by written consent and restrict the ability of
stockholders to call special meetings.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operated primarily in the United States and all funding activities and
sales have been denominated in U.S. dollars. Accordingly, we have not had any
exposure to foreign currency rate fluctuations.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
believe that there is no material market risk exposure. As of September 30,
2000, our cash, cash equivalents and short-term investments consisted primarily
of demand deposits, money market funds, treasury instruments and commercial
paper.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Upon the closing of our initial public offering on August 14, 2000, all of the
then outstanding shares of Series A preferred stock, Series B preferred stock,
Series C redeemable preferred stock, Series D redeemable preferred stock and
Series E preferred stock were automatically converted on a one-for-one basis
into shares of our common stock, in accordance with the terms of our certificate
of incorporation. In addition, we paid to the holders of Series C redeemable
preferred stock an aggregate of approximately $6.1 million in accordance with
the terms of the Series C redeemable preferred stock. Following the conversion,
Pharsight filed an Amended and Restated Certificate of Incorporation that
reflects the deletion of provisions relating to those series of preferred stock.
(c) Sales of Unregistered Securities
During the three months ended September 30, 2000, we issued and sold 55,376
shares of common stock to our directors, employees, and consultants upon
exercise of stock options at a weighted average price of $1.67 per share. We
also issued 19,328 shares of common stock to William Kirsch and Glen McLaughlin
upon the net exercise of warrants.
The sales and issuances of securities upon exercise of stock options described
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 promulgated thereunder in that they were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
The issuance of securities upon the net exercise of warrants described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 3(a)(9) of the Securities Act.
(d) Use of Proceeds from Sales of Registered Securities.
On August 14, 2000, Pharsight closed the sale of a total of 3,000,000 shares of
our common stock, par value $0.001 per share, at a price of $10.00 per share in
a firm commitment underwritten public offering.
Of the $20.3 million in aggregate net proceeds raised by us in the offering,
after deducting underwriting discounts and commissions, offering expenses and
the repayment of $6.1 million to our holders of Series C preferred stock:
1. approximately $1.3 million was used to fund ongoing operations, including
research and development of new and existing products; and
2. the remainder of the proceeds from the offering, approximately $19.0
million, remain invested in investment grade securities.
This application of the proceeds from the initial public offering did not
represent a material change from the use of proceeds as described in the
prospectus for the initial public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
See Exhibit Index on page 26 hereof.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by Pharsight during the quarter ended
September 30, 2000.
23
<PAGE>
SIGNATURE
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.
PHARSIGHT CORPORATION
Date: November 13, 2000 By: /s/ Robin A. Kehoe
-------------------------------
Robin A. Kehoe
Senior Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24
<PAGE>
EXHIBIT INDEX
Exhibit
-------
3.2* Amended and Restated Certificate of Incorporation of Pharsight
Corporation
3.3* Bylaws of Pharsight Corporation
27 Financial Data Schedule
* Incorporated by reference to the like-numbered exhibit to Pharsight's
Registration Statement on Form S-1, Registration No. 333-34896, as
amended.
25
