<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended June 30, 1997
Commission file number 1-9613
------
PACIFIC PHARMACEUTICALS, INC. (FORMERLY NAMED XYTRONYX, INC.)
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3258753
- -------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
6730 Mesa Ridge Road, Suite A, San Diego, CA 92121
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 550-3900
----------------------------------------------------
(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 August 14, 1997, there were 8,392,279 shares of the registrant's Common
Stock, $.02 par value outstanding.
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
INDEX
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . . . 1
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
June 30, 1997 and March 31, 1997 . . . . . . . . . . . . . . 2
Consolidated Statements of Operations -
Three Months Ended
June 30, 1997 and 1996 and from
September 23, 1983 (Inception) to
June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Stockholders' Equity -
Three Months Ended June 30, 1997 and 1996. . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended June 30, 1997 and 1996
and from September 23, 1983 (Inception) to
June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 12
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the "Notes to Consolidated Financial Statements", as well
as oral statements that may be made by the Company or by officers, directors
or employees of the Company acting on the Company's behalf, that are not
historical fact constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to,
the risk that the Company may not be able to obtain additional financing, if
necessary; the risk that the Company may not be able to maintain its listing
on the American Stock Exchange; and the risk that the Company may not be able
to continue the necessary development of its operations on a profitable
basis. In addition, the Company's business, operations and financial
condition are subject to reports and statements filed from time to time with
the Securities and Exchange Commission, including the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 and this Quarterly
Report on Form 10-Q.
1
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
JUNE 30, 1997 March 31, 1997
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 475,471 $ 1,784,599
Short-term investments 4,986,064 4,981,435
Accounts receivable, net 72,308 99,066
Receivable from officer 300,000 -
Inventory 42,403 41,677
Prepaid expenses 221,561 87,311
------------ ------------
Total current assets 6,097,807 6,994,088
Property and equipment, net 68,409 82,563
Patent costs, net 108,985 157,597
------------ ------------
TOTAL ASSETS $ 6,275,201 $ 7,234,248
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 522,671 $ 723,523
Accrued expenses 218,339 161,574
Current portion of capitalized leases 4,743 4,670
------------ ------------
Total current liabilities 745,753 889,767
------------ ------------
Capital leases, net of current portion 11,813 13,072
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 2,000,000
shares authorized; 50,001.5 issued and outstanding
at June 30,1997 and March 31, 1997 (liquidation
preference $13,000,390) 1,250,038 1,250,038
Common stock, $.02 par value, 100,000,000 shares
authorized; 8,192,279 and 8,151,029 shares
issued and outstanding at June 30, 1997 and
March 31, 1997 163,846 163,021
Capital in excess of par value 39,691,751 38,274,539
Deficit accumulated during the development stage (35,588,000) (33,356,189)
------------ ------------
Total stockholders' equity 5,517,635 6,331,409
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,275,201 $ 7,234,248
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
Three Months Ended
June 30, September 23, 1983
------------------------- (inception) to
1997 1996 June 30, 1997
----------- ----------- ------------------
<S> <C> <C> <C>
REVENUES
Product sales $ 700 $ 5,025 $ 1,950,931
License fees and royalties 95 - 481,302
Contract research - 3,972 268,063
Marketing rights - - 1,311,500
Interest and other 100,488 15,835 1,740,601
----------- ----------- ------------
Total revenues 101,283 24,832 5,752,397
----------- ----------- ------------
COSTS AND EXPENSES
Cost of product sales 14,002 9,770 3,011,937
Product development 360,899 721,487 15,325,427
General and administrative 534,775 292,489 16,300,273
Business development
and marketing 73,858 58,092 3,632,144
Interest and other 53,198 2,389 608,993
----------- ----------- ------------
Total costs and expenses 1,036,732 1,084,227 38,878,774
----------- ----------- ------------
Net loss before convertible
preferred stock dividends (935,449) (1,059,395) (33,126,377)
----------- ----------- ------------
Convertible preferred stock
dividends 1,296,362 - 2,461,623
Net loss applicable to
common shareholders $(2,231,811) $(1,059,395) $(35,588,000)
----------- ----------- ------------
Net loss per share
of common stock ($0.27) ($0.13)
----------- -----------
Weighted average common
stock outstanding 8,158,227 8,083,378
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
Deficit
Accumulated
Convertible Preferred Stock Common Stock Capital During the
--------------------------- ------------------- in Excess of Development
Shares Par Value Shares Par Value Par Value Stage Total
-------- ---------- --------- --------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 8,051,029 $161,021 $29,680,590 $(28,293,562) $ 1,548,049
Exercise of warrants 37,500 750 34,500 35,250
Net loss (1,059,395) (1,059,395)
-------- ---------- --------- -------- ----------- ------------ -----------
Balance at June 30,1996 8,088,529 $161,771 $29,715,090 $(29,352,957) $523,904
-------- ---------- --------- -------- ----------- ------------ -----------
-------- ---------- --------- -------- ----------- ------------ -----------
BALANCE AT MARCH 31, 1997 50,001.5 $1,250,038 8,151,029 $163,021 $38,274,539 $(33,356,189) $ 6,331,409
EXERCISE OF WARRANTS 41,250 825 37,950 38,775
PREFERRED STOCK UNIT PURCHASE OPTION
COMPENSATION FOR FINANCIAL ADVISORY SERVICES 82,900 82,900
CONVERTIBLE PREFERRED STOCK DIVIDENDS 1,296,362 (1,296,362) -
NET LOSS (935,449) (935,449)
-------- ---------- --------- -------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1997 50,001.5 $1,250,038 8,192,279 $163,846 $39,691,751 $(35,588,000) $5,517,635
-------- ---------- --------- -------- ----------- ------------ -----------
-------- ---------- --------- -------- ----------- ------------ -----------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, September 23, 1983
------------------ (inception) to
1997 1996 June 30, 1997
---- ---- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(935,449) $(1,059,395) $(33,126,377)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 24,393 30,547 1,608,137
Non-cash expense upon issuance of common stock
options, common stock and warrants 82,900 - 603,196
Net book value of disposal of long term assets 58,534 - 223,850
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable (273,242) (6,426) (372,309)
Inventory (726) 4,426 (42,406)
Prepaid expenses and other assets (134,252) (181,198) (232,538)
Accounts payable (200,852) 163,223 522,671
Accrued expenses 56,765 (75,670) 74,316
Customer advances - - 140,863
Other liabilities 73 (2,976) (4,793)
----------- ----------- ------------
Net cash (used) by operating activities (1,321,856) (1,127,469) (31,005,390)
INVESTING ACTIVITIES
Purchases of short-term investments (4,629) (256,116) (10,466,496)
Maturities of short-term investments - 992,825 5,480,432
Capital expenditures (2,545) (3,353) (833,972)
Patent costs (17,614) (4,754) (930,041)
Other - - 7,829
----------- ----------- ------------
Net cash provided (used) by investing activities (24,788) 728,602 (6,742,248)
FINANCING ACTIVITIES
Issuance of notes payable - 218,966 2,183,868
Repayment of notes payable - - (1,965,124)
Repayment of capital lease obligations (1,259) (9,192) (180,866)
Long-term customer advances - - 100,000
Issuance of common and preferred stock 38,775 35,250 38,022,731
Issuance of stock warrants - - 62,500
----------- ----------- ------------
Net cash provided by financing activities 37,516 245,024 38,223,109
----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents (1,309,128) (153,843) 475,471
Cash and cash equivalents at beginning of period 1,784,599 409,651 -
----------- ----------- ------------
Cash and cash equivalents at end of period $ 475,471 $ 255,808 $ 475,471
----------- ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
------------------------------------------------------
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Pacific
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc. and
XYX Acquisition Corp. (collectively the "Company"). All significant
intercompany balances and transactions have been eliminated. On August 7,
1997, the Company's stockholders approved a name change to Pacific
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial
Accounting Standards Board Statement No. 7 ("FAS 7"). Among the disclosures
required by FAS 7 are that the Company's financial statements be identified
as those of a development stage enterprise, and that certain consolidated
financial statements disclose activity since the date of the Company's
inception.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual
results may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial
statements contain all of the adjustments, consisting only of normal
recurring adjustments and accruals, necessary to present fairly the financial
position of the Company as of June 30, 1997 and March 31, 1997, results of
operations for the three months ended June 30, 1997 and 1996 and from
September 23, 1983 (inception) to June 30, 1997 and cash flows for the three
months ended June 30, 1997 and 1996 and from September 23, 1983 (inception)
to June 30, 1997. The results of operations for the three months ended June
30, 1997 are not necessarily indicative of the results to be expected in
subsequent periods or for the year as a whole. For further information,
refer to the consolidated financial statements and footnotes thereto as set
forth in the Company's Annual Report on Form 10-K for the year ended March
31, 1997.
Loss per share of common stock is computed by dividing the net loss
applicable to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Common stock equivalents have not
been included as they are antidilutive.
6
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE (EPS).
This statement requires the presentation of earnings per share to reflect
both "Basic EPS" as well as "Dilutive EPS" on the face of the statement of
operations. In general, Basic EPS excludes dilution created by stock
equivalents and is a function of weighted average number of common shares
outstanding for the periods. Diluted EPS does reflect the potential dilution
created by stock equivalents as if such equivalents are converted into common
stock and is calculated in substantially the same manner as fully Diluted EPS
illustrated in Accounting Principals Board Opinion No. 15 "EARNINGS PER
SHARE".
The Company will be required to adopt the new method of reporting EPS
starting with the quarter ended December 31, 1997. Based on the Company's
historical results and capital structure, the anticipated results of
implementing SFAS No. 128 would reflect net loss per share in materially the
same manner as currently reported.
2. PRODUCT APPROVAL AND DISTRIBUTION AGREEMENT
On June 23, 1997, the Company received approval from the United States Food
and Drug Administration ("FDA") to begin commercial sales and distribution in
the United States for its Periodontal Tissue Monitor ("PTM") product. The
Company also signed a letter of intent with Steri-Oss, a leading dental
implant company, for the exclusive five-year distribution of PTM in North
America and other countries, excluding Europe and Japan.
3. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary
Therapeutics, Inc. ("BTI") under which the Company was granted an option to
acquire BTI, a development stage company with certain technologies in the
area of Photodynamic Therapy ("PDT") treatment for cancer. The agreement, as
amended, gives the Company the right to acquire BTI by a merger of BTI into
a wholly-owned subsidiary of the Company. In February 1997, the Company and
BTI agreed to extend the period during which the Company may exercise its
option to acquire BTI from April 30, 1997 until such time as BTI has
completed human clinical trials of Boronated Porphyrin Compound ("BOPP") at
an agreed upon dose level (the "Option Period"). The Option Period was
extended at the Company's request to enable BTI to complete pre-clinical
studies, to commence clinical trials in humans and to demonstrate that a
given dose level of BOPP in humans would not cause certain adverse events.
Accordingly, the Company has deferred its election to exercise the option.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued will be determined based
upon the market value of the Company's common stock prior to the date of
exercise, although the value of the common stock cannot be less than $2.00 or
more than $6.00 per share. The agreement has been approved by a majority of
the stockholders of BTI. The Board of Directors voted to approve the merger,
however the merger is also subject to shareholder approval for the issuance
of additional shares of common stock. One of the Company directors is also a
director of BTI.
7
<PAGE>
Under the agreement, the Company will assist BTI during the option period in
preparing the PDT products for advancement into human clinical trials. In order
to exercise its rights to consummate the merger, the Company will have to
satisfy certain conditions, including funding expenses incurred by BTI during
the option period. These expenses represent the majority of BTI's expenditures
for the option period and are comprised primarily of product development costs.
The Company is also required to advance to BTI funds to repay $628,000 in
indebtedness, including accrued interest as part of the acquisition price of
BTI. Certain holders of such indebtedness are shareholders of the Company. In
exchange for such funding BTI will issue convertible notes to the Company which
may be converted into BTI equity at the Company's option. The Company has
elected to record all advances to BTI as product development expense in the
period incurred due to uncertainties regarding the ultimate value to be realized
from the convertible notes. During the quarters ended June 30, 1997 and 1996,
the Company advanced $208,000 and $201,000, respectively to BTI and such
advances are included in product development expense. During the Option Period,
the Company advanced $1,490,000 to BTI.
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDEND
In fiscal year 1997, the Company did a private placement of Premium Preferred
Units ("Units"), each Unit consisting of 500 shares of Convertible Preferred
Stock ("Preferred Stock"), par value $25.00 per share, and 50,000 Common
Stock Purchase Warrants ("Warrants"). Subscribers to the private placement
purchased the Units at a discount from the closing prices of the Company's
common stock on December 19, 1996 and March 7, 1997. The resulting discount
of $4,754,000 is considered a non-cash dividend ("Dividend") and is
recognized as a return to the Preferred Stockholders from the date of
issuance of the Preferred Stock to the date in which the Preferred Stock is
eligible for conversion into Common Stock. During the year ended March 31,
1997 and the quarter ended June 30, 1997, the Company recognized a non-cash
Dividend to Preferred Stockholders of $1,165,000 and $1,296,000,
respectively. All of the subscribers to the Private Placement entered into a
Lock-up Agreement ("Lock-up") with the Company. In the Lock-up, each
subscriber agreed not to sell or exercise any of the securities contained in
the Units until the underlying common stock is registered with the Securities
and Exchange Commission. When the registration statement becomes effective,
25% of the securities become unlocked and 25% become unlocked in each 90 day
interval following the effective date of the registration statement required
to register the underlying common stock with the Securities and Exchange
Commission.
The Preferred Stock is convertible into Common Stock upon issuance, except
that most of the subscribers to the Private Placement signed a letter
amending the initial Subscription Agreement, in which they agreed not to
convert any of the Preferred Stock until the underlying Common Stock is
registered. The amendment provides that they may convert the Preferred Stock
into Common Stock in accordance with the Lock-up mentioned in the prior
paragraph. For the three months ended June 30, 1997, the estimated effective
date of the registration statement was revised from July 1, 1997 to September
1, 1997. This change in estimate resulted in the reduction of $482,000 of
convertible preferred stock dividends, and $.06 of net loss per common share
for the quarter ended June 30, 1997.
8
<PAGE>
5. FINANCIAL ADVISORY SERVICES
Under the terms of the Placement Agency agreement the Company signed with
Paramount Capital Inc.("Paramount"), Paramount will provide financial
advisory services to the Company for an 18 month period beginning March 8,
1997. The Company will pay Paramount $2,500 per month and has agreed to sell
to Paramount 2.5 Units at a price equal to 110% of the unit price paid by
investors in the 1997 Private Placement. The convertible Preferred Stock
contained in the Units converts into 260,417 shares of the Company's common
stock ("Advisory Stock"). There are also warrants ("Advisory Warrants") to
purchase 125,000 shares of the Company's common stock at $1.00 per share
attached to the Units, which are exercisable until March 7, 2007. The market
price of the Company's common stock on March 7, 1997 was $1.50 per share. The
Company valued the Advisory Stock at $335,000 and the Advisory Warrants at
$162,000 using a generally accepted valuation program in accordance with SFAS
123. The Company recorded $83,000 in general and administrative expenses as
amortization of such value for the three months ended June 30, 1997 related
to this agreement.
6. RELATED PARTY TRANSACTION
Under the terms of the employment agreement with the Company's Chairman and
President, Dr. H. Laurence Shaw, the Company is required to pay all of Dr.
Shaw's relocation expenses. In that regard, the Board of Directors approved
an interest free bridge loan of $300,000 to Dr. Shaw for the purpose of
acquiring a new residence in California prior to the sale of his New Jersey
residence. The loan, which was made on May 13, 1997, will be paid back upon
the earlier of (i) the sale of Dr. Shaw's New Jersey residence or (ii)
December 17, 2001.
As of August 14, 1997, the New Jersey residence has been sold and is in
escrow pending the close of the transaction. Accordingly, the Company has
classified the loan as a current asset and has not recorded any imputed
interest due to immateriality.
7. SUBSEQUENT EVENTS
On August 7, 1997, the Company's stockholders approved an increase in the
authorized number of common stock from 30,000,000 to 100,000,000 shares and
preferred stock from 300,000 to 2,000,000 shares.
9
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues were $101,000 for the quarter ended June 30, 1997, a $76,000
increase from revenues of $25,000 recorded during the same period of the
prior year. Current year revenue increased over the prior year due to
increased interest income of $66,000 and gain on sale of fixed assets during
the quarter of $18,000.
Product development costs totaled $361,000 for the quarter, a decrease of
$360,000 or 50% over the prior year first quarter costs of $721,000. The
majority of the decrease relates to the following areas: (i) decrease of
$70,000 in funding of product development expenses in accordance with the
Agreement and Plan of Merger with Binary Therapeutics, Inc. ("BTI"), the
holder of certain technologies in the area of Photodynamic Therapy ("PDT")
for the treatment of cancer; (ii) decrease of $77,000 in expenses related to
Photodynamic Immunotherapy-TM- ("PDIT-TM-") technology for the treatment of
cancer; (iii) decrease of $110,000 in expenses related PTM product
development, as the PTM product was approved by the FDA during the current
quarter and (iv) a $90,000 decrease in product development expenses related
to the Company's Kephra product line. The Company is not actively seeking
licensing opportunities or making product development expenditures for these
products.
Business development costs for the current quarter totaled $74,000, an
increase of $16,000, or 27%, from the same quarter of the prior year.
Expenses increased as the Company spent more time and resources in developing
corporate partnerships for its various products.
General and administrative expenses for the three month period ended June 30,
1997 increased 83% to $535,000 from the same period of the prior year. The
Company incurred significant legal and accounting fees related to the
registration of the securities sold in the recent private placement and began
the recognition of an 18 month financial advisory agreement in which the
Company has granted a preferred stock purchase option in exchange for such
services (see Note 5). There were no such costs incurred during the same
period of the prior year.
Interest and other expenses include a $50,000 charge relating to the
remaining unamortized portion of Kephra patent costs.
Net loss before convertible preferred stock dividends for the quarter ended
June 30, 1997 totaled $935,000 or a 12% decrease over the prior year's first
quarter loss of $1,059,000. This decrease is a result of less product
development expenses associated with the Company's products under
development. Net loss per share of common stock for the quarter ended June
30, 1997 was $.27 compared to $.13 in the same quarter in the previous year.
During the quarter ended June 30, 1997, the Company recognized a non-cash
convertible preferred stock dividend of $1,296,000 (See Note 4). No such
recognition occurred during the same quarter of the prior year.
10
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at June 30, 1997 totaled
$5,462,000, a $1,304,000 decrease from the March 31, 1997 balance. Working
capital at June 30, 1997 decreased by $752,000 from March 31, 1997 to
$5,352,000. These decreases were primarily due to the net loss before
convertible preferred stock dividends for the three month period ending June
30, 1997, pay down of certain current liabilities and a relocation bridge
loan made to an officer of the Company for $300,000 (See Note 6). Prepaid
expenses increased by $134,000 as a result of the prepayment of annual
insurance premiums.
Since inception, the Company has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate that negative
cash flow from operations will continue for the foreseeable future, and that
outside sources of funding will continue to be required. Without significant
future revenues, the Company's financial resources are anticipated to be
adequate through June 1998, based on a continuation of the pattern of
expenses which have prevailed during fiscal years 1997 and 1998.
Unanticipated expenses or working capital requirements could, however,
shorten that period.
In May 1996 the Company entered into an agreement with Hawe-Neos Dental to
distribute the PTM in Europe. In January 1995 the Company entered into an
agreement with Shofu Dental Company for distribution of the PTM in Japan.
Shofu is currently conducting Japanese clinical trials of the PTM. The
Company signed a letter of intent for an exclusive five year renewable
distribution agreement with Steri-Oss, Inc. to distribute the Company's PTM
product in the United States and other countries not covered by an existing
distribution agreement (See Note 2). In the event the Company begins selling
material quantities of the PTM, the Company may need additional working
capital, and additional personnel and space, all of which may cause an
increase in the net utilization of cash. However, there can be no assurance
that any of its existing or future marketing partners will order the PTM
products in significant quantities.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which it acquired an
exclusive license to certain proprietary technology in the PDIT treatment of
cancer. The Company incurred $367,000 in product development expenses since
the acquisition of the license and expects to continue funding such efforts
associated with the commercialization of the licensed technology, including
the commencement of human clinical trials, which will increase the Company's
net utilization of cash. However, there can be no assurance that FDA and
other regulatory approval required to commence such trials will be
forthcoming.
In June 1996 the Company entered into an agreement which granted the Company
the option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately
held, development stage enterprise holding certain technologies for the PDT
treatment of cancer. Under the agreement as amended, the Company has spent
$1,490,000 and is currently funding substantially all expenses of BTI, which
consist primarily of product development expenses, and expects to continue
funding such expenses until the Company determines if it will elect to
exercise its option to acquire BTI. There can be no assurance that the
Company will exercise its option to acquire BTI (See Note 3).
11
<PAGE>
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
DATE OF REPORT ITEM REPORTED FINANCIAL STATEMENTS FILED
- --------------- ------------- --------------------------
June 10, 1997 No
News release dated June 6, 1997,
announcing that the Company received
an approvable letter from the U.S.
Food and Drug Administration (FDA)
for a premarket application (PMA) for
the Periodontal Tissue Monitor (PTM).
The approval is contingent upon certain
manufacturing requirements and labeling
issues.
News release dated May 29, 1997,
announcing that the Company signed a
letter of intent with Steri-Oss, a leading
dental implant company, for the
distribution of the Company's Periodontal
Tissue Monitor (PTM). Under the proposed
five year agreement, Steri-Oss would be
the exclusive distributor of PTM in North
America and other countries, excluding
Europe and Japan
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.
Pacific Pharmaceuticals, Inc.
Date: August 14, 1997 /s/ JAMES HERTZOG
----------------------------------
James Hertzog
Controller
(Principal Accounting Officer and
duly authorized to sign this report
on behalf of the registrant)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1997 INTERIM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 475,471
<SECURITIES> 4,986,064
<RECEIVABLES> 372,308
<ALLOWANCES> 0
<INVENTORY> 42,403
<CURRENT-ASSETS> 6,097,807
<PP&E> 685,422
<DEPRECIATION> (508,028)
<TOTAL-ASSETS> 6,275,201
<CURRENT-LIABILITIES> 745,753
<BONDS> 11,813
0
1,250,038
<COMMON> 163,846
<OTHER-SE> 39,691,751
<TOTAL-LIABILITY-AND-EQUITY> 6,275,201
<SALES> 700
<TOTAL-REVENUES> 101,283
<CGS> 14,002
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,022,730
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (935,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (935,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,296,362<F1>
<NET-INCOME> (2,231,811)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
<FN>
<F1>Includes Convertible Preferred Stock Dividends.
</FN>
</TABLE>
