<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission File Number 0-13304
CHANTAL PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2276346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12121 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 207-1950
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 twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding as of November
15, 1996 was 18,190,516.
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1
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Part I: Financial Information (unaudited) Page Number
- ------------------------------------------ -----------
<S> <C>
Item 1 - Financial Statements
-----------------------------
Consolidated Balance Sheets as of September 30, 1996
and June 30, 1996....................................... 3
Consolidated Statements of Operations for the three months
ended September 30, 1996 and September 30, 1995......... 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and September 30, 1995......... 5
Notes to Consolidated Financial Statements................... 6
Item 2 Management's Discussion and Analysis
------ of Financial Condition and Results of Operations.... 9
Part II: Other Information
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K.................... 11
Signatures................................................... 12
</TABLE>
2
<PAGE>
Item 1. Financial Statements
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 278,066 $ 305,668
Short-term investment 27,926 27,926
Accounts receivable, trade, net 1,601,064 2,023,911
Inventory, net 7,068,737 6,888,416
Prepaid expenses and other current
assets 371,345 46,411
------------ ------------
Total current assets 9,347,138 9,292,332
Property and equipment, at cost:
Equipment and machinery 1,854,109 1,841,964
Furniture, fixtures and leasehold
improvements 824,423 823,992
Less accumulated depreciation and
amortization (1,583,151) (1,520,032)
------------ ------------
Net property and equipment 1,095,381 1,145,924
License rights, net of accumulated
amortization of $1,350,344
and $1,141,856 6,989,201 7,197,689
Patents and trademarks, net of
accumulated amortization of
$62,022 and $60,298 55,092 56,816
Prepaid royalties, net of accumulated
amortization of $133,265 and $112,032 716,110 737,343
Deposits and other assets 209,389 213,251
Organization cost, net of accumulated
amortization of $62,780 and $54,932 94,170 102,018
------------ ------------
TOTAL ASSETS $ 18,506,481 $ 18,745,373
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 5,754,693 $ 5,422,239
Accrued liabilities 2,574,771 1,447,291
Royalties payable 652,668 652,668
Current portion of long-term capital
lease obligation 59,697 59,697
Short-term borrowings 242,880 -
Note Payable 250,000 -
------------ ------------
Total current liabilities 9,534,709 7,581,895
Long term liabilities
Capital lease obligation, less current
portion 368,844 384,882
------------ ------------
Total liabilities 9,903,553 7,966,777
Commitments and contingencies
Minority interest 1,286,328 1,406,897
Stockholders' equity
Preferred stock, $.10 par value;
1,000,000 shares authorized; 500,000
Preferred Series C shares issued and
outstanding
Liquidation preference of $500,000 50,000 50,000
Common stock, $.01 par value;
20,000,000 shares authorized;
18,190,516 shares issued and
outstanding at September 30, 1996 and
June 30, 1996 181,905 181,905
Additional paid-in capital-preferred
stock 2,204,000 2,204,000
Additional paid-in capital - common
stock 51,159,860 51,159,860
Accumulated deficit (46,279,165) (44,224,066)
------------ ------------
Total stockholders' equity 7,316,600 9,371,699
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 18,506,481 $ 18,745,373
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1996 and September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
1996 1995
------------ -----------
<S> <C> <C>
Revenues:
Product sales, net $ 1,829,006 $ 5,169,484
License fees and other income 80,630 31,092
----------- -----------
Total revenues 1,909,636 5,200,576
Costs of goods sold 328,163 832,452
----------- -----------
Gross profit 1,581,473 4,368,124
Marketing and other expenses related
to cosmetic line 1,874,509 2,194,912
General and administrative 1,625,014 1,018,557
Amortization of license rights 229,723 229,723
Research and development 2,344 155,291
----------- -----------
Income (loss) from operations (2,150,117) 769,641
Other income (expense):
Interest income 1,382 40,962
Interest expense: (26,933) (25,158)
----------- -----------
Income (loss) before income taxes and
minority interest (2,175,668) 785,445
Income taxes - -
Minority interest 120,569 (4,029)
----------- -----------
Net income (loss) $(2,055,099) $ 781,416
=========== ===========
Net income (loss) per share $(0.11) $0.04
=========== ===========
Weighted average shares outstanding 18,190,516 17,817,183
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 1996 and September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,055,099) $ 781,416
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 304,686 307,891
Provisions for sales return - 123,005
Minority interest (120,569) 4,029
Common stock issued in
satisfaction of
consulting and legal fee - 120,420
Changes in operating assets and
liabilities:
Accounts receivable, trade 422,847 (1,579,852)
Inventory (180,321) (959,075)
Prepaid expenses (324,934) (29,171)
Other assets 1,588 (252,859)
Accounts payable and accrued
liabilities 1,459,934 474,684
----------- -----------
Net cash used in operating activities (491,868) (1,009,512)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (12,576) (151,980)
----------- -----------
Net cash provided by (used in)
investing activities (12,576) (151,980)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of short-term
borrowings and notes payable 559,917 4,021
Payments on short-term borrowings (67,037) -
Payments on capital lease obligation (16,038) (32,671)
Proceeds from issuance of common stock - 4,508,700
Proceeds from issuance of preferred
stock, net - 2,254,000
Net cash provided by financing ----------- -----------
activities 476,842 6,734,050
----------- -----------
Net increase (decrease) in cash and
cash equivalents (27,602) 5,572,558
Cash and cash equivalents:
At beginning of period 305,668 2,824,644
----------- -----------
At end of period $ 278,066 $ 8,397,202
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
- ----------------
The accompanying consolidated financial statements of Chantal Pharmaceutical
Corporation (the "Company") have been prepared without audit pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make information
presented not misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of September 30, 1996 and the results of
its operations for the three months ended September 30, 1996 and 1995 and the
cash flows for the three months ended September 30, 1996 and 1995 have been
included. The results of operations for the interim periods are not necessarily
indicative of the results which may be realized for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's latest Annual Report on Form 10-K.
Under the Company's revenue recognition policy adopted with respect to fiscal
1996 relating to sales by the Company to its U.S. distributor, Stanson
Marketing, Inc. ("Stanson"), revenue was recognized upon shipment to Stanson
with respect to products which were not distributed on an autoship basis, and
revenue is recognized with respect to products distributed on an autoship basis
upon sale by Stanson to its customer. The Company considers all products
shipped to Stanson after November 21, 1995 as being subject to distribution on
an autoship basis. This revenue recognition policy complies with FASB 48
"Revenue Recognition when Rights of Return Exists".
For the three month period ended September 30, 1995 revenue from Stanson
consisted of products to be distributed on a non auto-ship basis and were
recognized upon shipment to Stanson and for the three months ended September 30,
1996 revenue from Stanson consisted of products to be distributed on an auto-
ship basis and were recognized upon sale by Stanson to its customer.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and its 90% owned subsidiary, Chantal Skin Care
Corporation ("Chantal Skin Care"). All significant intercompany accounts and
transactions have been eliminated.
Net income (loss) per share
- ---------------------------
The computation of income or loss per share for the three month periods ended
September 30, 1995 and 1996 are based on the weighted average number of common
and common equivalent shares outstanding. When dilutive, stock option, warrants
and convertible Preferred Stock are included as share equivalents using the
treasury stock method. Primary and fully diluted earnings per share are the
same for each of the periods presented.
6
<PAGE>
NOTE 2 - INVENTORY
- ------------------
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventory consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- ----------
<S> <C> <C>
Finished goods $3,986,748 $4,067,510
Compound 1,336,105 855,761
Work in progress 1,056,052 1,380,017
Raw materials and componentry 1,285,240 1,180,536
---------- ----------
7,664,145 7,483,824
Inventory reserve (595,408) (595,408)
---------- ----------
$7,068,737 $6,888,416
========== ==========
</TABLE>
Included in inventory are products sold to the Company's U.S. distributor which
in accordance with the revenue recognition policy discussed above are not being
recognized as revenue for accounting purposes.
NOTE 3 - LITIGATION
- -------------------
The Company and Chantal Burnison are defendants in an action titled Marksman
--------
Partners, L.P., on behalf of itself and all others similarly situated vs Chantal
- --------------------------------------------------------------------------------
Pharmaceutical Corporation and Chantal Burnison, filed on February 7, 1996 in
- -----------------------------------------------
the United States District Court, Central District of California, Western
Division, Case No. 96-0872. Several other actions asserted on behalf of a class
were commenced and are being consolidated under the Marksman Partners, L.P.
caption. This action is a securities class action on behalf of all persons who
purchased or otherwise acquired the common stock of the Company between July 10,
1995 and January 5, 1996, inclusive. (A similar, non-class action case also has
been filed by an individual in a California Municipal court, seeking an
insubstantial amount.)
The Marksman Partners action is based on a contention that the Company's
-----------------
accounting for sales revenue, because of the nature of its distribution
agreement with Stanson Marketing, Inc. overstated its revenues for fiscal (June
30) 1995 and for the September 30, 1995 quarter ($3 million and $10 million,
repectively), which, the action claims, violated generally accepted accounting
principles and the Federal securities laws. The complaint notes that Chantal
Burnison sold 300,000 shares during the class period (the sales were actually
made by CBD Pharmaceutical Corporation.) The complaint appears to rely on
details of the contractual relationship with the distributor to contend that the
revenues should not have been booked by the Company based on shipped orders from
the distributor, since among other reasons, plaintiffs allege that Stanson,
during the relevant time period, has the right to require the Company to
purchase Stanson on a formula dependent on its income from the Company's
products' sales, and the Company did not have a substantial history of selling
through the distributor and the distribution system. The action seeks monetary
damages in an unspecified amount. The amount sought on the basis stated in the
complaint would be in excess of the Company's current net worth.
The Company believes its financial reports were correctly presented under
generally accepted accounting principles. A motion to dismiss the Marksman
--------
Partners action was denied, and pre-trial discovery in the Marksman Partners
- -------- -----------------
action has commenced. The Company plans to vigorously defend itself against the
claims asserted in the litigation. The likelihood of an unfavorable outcome and
range of possible loss, if any, cannot be determined and accordingly no amounts
are accrued at September 30, 1996.
In addition, a derivative action based on many of the same contentions as made
in Marksman has been filed against the Company and certain directors of the
Company. The action, entitled Baruch Singer and Dorothea E. Wakefield vs.
-------------------------------------------
Chantal Burnison and Robert Pinco, defendants, and Chantal Pharmaceutical
- -------------------------------------------------------------------------
Corporation, nominal defendant, was filed in the Superior Court of the State of
- ------------------------------
California, the County of Los Angeles, case No. BC 147327. Ms. Burnison and Mr.
Pinco are named defendants as directors of the Company. Mr. Pinco subsequently
7
<PAGE>
has been dismissed as a defendent from the action. The likelihood of an
unfavorable outcome and range of possible loss, if any, cannot be determined and
accordingly no amounts are accrued at September 30, 1996.
The Company is also a defendant in a lawsuit entitled Amado Institute, Inc., an
-------------------------
Arizona Corporation, Plaintiff, vs. Chantal Pharmaceutical Corp., a Delaware
- ----------------------------------------------------------------------------
Corp., Defendants, filed in January 1996 in Arizona Superior Court, Santa Cruz
- -----------------
County, No. CV-96-018. The suit names the Company as a defendant as well as the
Chief Executive Officer of the Company, Chantal Burnison. In the lawsuit, the
plaintiff disputes the rescission by the Company of the July 1995 transaction
under which the Company acquired land and building for an agreed value of
$1,500,000, payable in cash or approximately 270,000 shares of common stock,
subject to certain conditions. The plaintiff seeks damages in the sum of
$2,981,312, alleged to be the value of 269,485 shares of Company common stock on
October 27, 1995, or in the alternative, the issuance of 269,485 shares of
registered common stock in the Company, together with interest, attorney's fees
and costs. The Company believes the rescission was timely pursuant to an
express right in the contract of purchase and is vigorously defending the
action. The likelihood of an unfavorable outcome and range of possible loss, if
any, cannot be determined and accordingly no amounts are accrued at September
30, 1996.
NOTE 4 - SUBSEQUENT EVENTS
- --------------------------
In October 1996, Chantal Pharmaceutical Corporation completed the sale of $5.2
million principal amount of 8% Convertible Debentures due September 30, 1998.
The Company received net proceeds of $4,882,500 after payment of placement fees
and expenses. The debentures were sold to investors qualifying as "non-U.S.
persons" in an offering completed under Regulation S.
The debentures are convertible into shares of common stock of the Company as to
one-third of the principal amount of each debenture after 45 days from the date
of issuance, an additional one-third after 75 days from the date of issuance and
the balance after 90 days from the date of issuance. The conversion price is the
lesser of $3.91 or 80% of the average closing bid price of the Company's common
stock for the five business days immediately preceding the conversion date.
8
<PAGE>
CHANTAL PHARMACEUTICAL CORPORATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net revenues for the three months ended September 30, 1996 decreased to
$1,909,636 from $5,200,576 for the three months ended September 30, 1995. These
revenues are primarily comprised of the Company's sales of Ethocyn-based Chantal
skin care products. Lower revenues during the first quarter were consistent with
the industry pattern of lower sales of skin care products during the summer
months.
Under the Company's revenue recognition policy adopted with respect to fiscal
1996 relating to sales by the Company to its U.S. distributor, Stanson
Marketing, Inc. ("Stanson"), revenue was recognized upon shipment to Stanson
with respect to products which were not distributed on an autoship basis, and
revenue is recognized with respect to products distributed on an autoship basis
upon sale by Stanson to its customer. The Company considers all products
shipped to Stanson after November 21, 1995 as being subject to distribution on
an autoship basis. This revenue recognition policy complies with FASB 48
"Revenue Recognition when Rights of Return Exists".
For the three month period ended September 30, 1995 revenue from Stanson
consisted of products to be distributed on a non auto-ship basis and were
recognized upon shipment to Stanson and for the three months ended September 30,
1996 revenue from Stanson consisted of products to be distributed on an auto-
ship basis and were recognized upon sale by Stanson to its customer.
Cost of goods sold as a percentage of revenues from product sales during the
three months ended September 30, 1996 was 18% of revenues as compared with 16%
of revenues for the three month period ended September 30, 1995.
Marketing and other expenses related to cosmetic sales decreased in the three
months ended September 30, 1996 to $1,874,509 from $2,194,912 in the three
months ended September 30, 1995. These expenses resulted from the marketing and
promoting of the Ethocyn-based skin care products and decreased from the prior
period primarily due to the additional expenditures incurred in the first
quarter of fiscal 1996 due to the launching of the Ethocyn-based skin care
products.
General and administrative expenses increased to $1,625,014 for the three months
ended September 30, 1996 from $1,018,557 for the three months ended September
30, 1995. The increase in the three month period resulted principally from an
increase in professional fees.
Research and development expenditures decreased to $2,344 in the three months
ended September 30, 1996 from $155,291 in the three months ended September 30,
1995. Research and development activities continue to decrease, with the launch
of the Chantal Ethocyn-based skin care product line in August 1994. The
research and development represents ongoing stability and clinical testing of
the Ethocyn-based Chantal Skin Care cosmetic products, continued analysis of
data and test results of Cyoctol generated by The Upjohn Company, and Ethocyn
scale-up synthesis and isomer resolution research.
Interest expense increased slightly for the three months ended September 30,
1996 as compared with the three months ended September 30, 1995 due to an
increase in short term borrowings during the September 1996 quarter.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company used net cash flows in operations of $491,868 for the three months
ended September 30, 1996 principally due to the net loss offset by the increase
in the accounts payable and accrued liabilities balance.
During the three months ended September 30, 1996, the Company received $559,917
in proceeds from the issuance of short-term debt.
On October 30, 1996, Chantal Pharmaceutical Corporation completed the sale of
$5.2 million principal amount of 8% Convertible Debentures due September 30,
1998. The Company received net proceeds of $4,882,500 after payment of
placement fees and expenses. The debentures were sold to investors qualifying
as "non-U.S. persons" in an offering completed under Regulation S.
The debentures are convertible into shares of common stock of the Company as to
one-third of the principal amount of each debenture after 45 days from the date
of issuance, an additional one-third after 75 days from the date of issuance and
the balance after 90 days from the date of issuance. The conversion price is the
lesser of $3.91 or 80% of the average closing bid price of the Company's common
stock for the five business days immediately preceding the conversion date.
The Company believes that its existing cash balances, the recent net proceeds of
$4,882,500 as described above and cash flow from operations will be sufficient
to meet its cash requirements through fiscal 1997. The Company launched the
Ethocyn-based Chantal Skin Care products into the Pacific Rim territory in
November 1996 and is currently working on the European launch. The
international launches along with the introduction of new products into the U.S.
market will assist in the growth of cash flow from operations in the current
year. In addition, to the extent the Company experiences growth in the future,
or its cash flows from operations is less than anticipated, the Company may be
required to secure additional sources of cash.
In the long term, the Company expects to incur additional costs as it evaluates
additional marketing and distribution channels for its Ethocyn-based cosmetic
products and continues to develop certain of its compounds to pharmaceutical
market approvals, both U.S. and foreign. In this regard, the Company may be
required to obtain additional funds to complete the research and development and
commercialization of such products. Such funds are expected to be obtained from
one or more of the following sources: (i) sales of Ethocyn-based cosmetics
products (ii) amounts to be received pursuant to the Company's license
agreements, including royalties from anticipated sales of Ethocyn-based and
Cyoctol-based products; (iii) strategic alliances with other companies,
including joint venture, joint development or license agreements; and (iv)
additional equity or debt offerings. However, there can be no assurance that
the Company will be successful in obtaining additional funds from any of the
foregoing sources.
The Company, at this time, does not have any material commitments for capital
expenditures.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on 8-K
Change in Registrant's Certifying Accountant dated August 5, 1996 as
amended
Change in Registrant's Certifying Accountant dated September 16, 1996
11
<PAGE>
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.
CHANTAL PHARMACEUTICAL CORPORATION
---------------------------------
(Registrant)
December 5, 1996 BY: /s/ CHANTAL BURNISON
--------------------
CHANTAL BURNISON
Chairman of the Board
and Chief Executive Officer
/s/ YVETTE LAMPRECHT
--------------------
YVETTE LAMPRECHT
Chief Financial Officer
(Principal Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 278,066
<SECURITIES> 0
<RECEIVABLES> 1,601,064
<ALLOWANCES> 0
<INVENTORY> 7,068,737
<CURRENT-ASSETS> 9,347,138
<PP&E> 2,678,532
<DEPRECIATION> 1,583,151
<TOTAL-ASSETS> 18,506,481
<CURRENT-LIABILITIES> 9,534,709
<BONDS> 0
0
50,000
<COMMON> 181,905
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,506,481
<SALES> 1,829,006
<TOTAL-REVENUES> 1,909,636
<CGS> 328,163
<TOTAL-COSTS> 4,057,753
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,933
<INCOME-PRETAX> (2,175,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,055,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,055,099)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
