<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 September 30, 1997
Commission file number 1-9613
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Pacific Pharmaceuticals, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3258753
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(State of incorporation) (I.R.S. Employer Identification No.)
6730 Mesa Ridge Rd., Suite A, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
(619) 550-3900
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(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 November 13, 1997, there were 9,972,282 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. Financial Statements (unaudited)
Consolidated Balance Sheets -
September 30, 1997 and March 31, 1997......................... 2
Consolidated Statements of Operations -
Three Months and Six Months Ended
September 30, 1997 and 1996 and from
September 23, 1983 (Inception) to
September 30, 1997............................................ 3
Consolidated Statements of Stockholders' Equity-
Six Months Ended September 30, 1997 and 1996.................. 4
Consolidated Statements of Cash Flows -
Six Months Ended September 30, 1997 and 1996
and from September 23, 1983 (Inception) to
September 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 2. Changes in Securities......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........... 13
Item 6. Exhibits and Reports on Form 8-K.............................. 14
SIGNATURE .............................................................. 14
<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, the Registration
Statement on Form S-3 declared effective on September 4, 1997, and this
Quarterly Report on Form 10-Q.
1
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
SEPTEMBER 30, 1997 March 31, 1997
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,406,511 $1,784,599
Short-term investments 3,493,220 4,981,435
Accounts receivable, net 14,187 99,066
Inventory 69,572 41,677
Prepaid expenses 161,381 87,311
- -------------------------------------------------------------------------------
Total current assets 5,144,871 6,994,088
Property and equipment, net 83,188 82,563
Patent costs, net 124,810 157,597
- -------------------------------------------------------------------------------
TOTAL ASSETS $5,352,869 $7,234,248
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- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $538,063 $723,523
Accrued expenses 219,835 161,574
Current portion of capitalized leases 3,871 4,670
- -------------------------------------------------------------------------------
Total current liabilities 761,769 889,767
- -------------------------------------------------------------------------------
Capital leases, net of current portion 24,666 13,072
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value,
2,000,000 shares authorized;
44,120 and 50,002 shares issued and
outstanding at September 30 and March 31,
1997, respectively (liquidation
preference $13,000,390) 1,102,988 1,250,038
Common stock, $.02 par value, 100,000,000
shares authorized;
9,732,698 and 8,151,029 shares issued and
outstanding at September 30 and March 31,
1997, respectively 194,654 163,021
Capital in excess of par value 41,339,024 38,274,539
Deficit accumulated during the
development stage (38,070,232) (33,356,189)
- -------------------------------------------------------------------------------
Total stockholders' equity 4,566,434 6,331,409
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,352,869 $7,234,248
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
2
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30 September 23, 1983
-------------------- ------------------- (inception) to
1997 1996 1997 1996 September 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ - $ 7,672 $ 700 $ 12,697 $ 1,950,931
License fees and royalties 92 - 187 - 481,394
Contract research - 17,700 - 21,672 268,063
Marketing rights - - - - 1,311,500
Interest and other 65,171 5,726 165,659 21,561 1,805,772
- ------------------------------------------------------- -----------------------------------------
Total revenues 65,263 31,098 166,546 55,930 5,817,660
- ------------------------------------------------------- -----------------------------------------
COSTS AND EXPENSES
Cost of product sales 21,319 11,398 35,321 21,168 3,033,256
Product development 661,365 567,933 1,022,264 1,289,421 15,986,792
General and administrative 663,469 261,561 1,198,244 554,050 16,963,742
Business development
and marketing 48,382 71,791 122,240 129,883 3,680,526
Interest and other 929 14,383 54,127 16,771 609,922
- ------------------------------------------------------- -------------------------------------------
Total costs and expenses 1,395,464 927,066 2,432,196 2,011,293 40,274,238
- ------------------------------------------------------- -------------------------------------------
Net loss before convertible
preferred stock dividends (1,330,201) (895,968) (2,265,650) (1,955,363) (34,456,578)
- ------------------------------------------------------- -------------------------------------------
Convertible preferred stock
dividends 1,152,031 - 2,448,393 - 3,613,654
Net loss applicable to
common shareholders $(2,482,232) $(895,968) $(4,714,043) $(1,955,363) $(38,070,232)
- ------------------------------------------------------- -------------------------------------------
Net loss per share
of common stock ($0.29) ($0.11) ($0.56) ($0.24)
- ------------------------------------------------------- -----------------------------
Weighted average common
stock outstanding 8,566,292 8,108,027 8,363,374 8,095,769
- ------------------------------------------------------- -----------------------------
</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>
<CAPTION>
Convertible Preferred Common Deficit
Stock Stock Capital Accumulated
--------------------- ------------------- in Excess During the
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 68,750 1,375 63,250 64,625
Issuance of warrants 25,000 25,000
Net loss (1,955,363) (1,955,363)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30,1996 8,119,779 $162,396 $29,768,840 ($30,248,925) ($317,689)
====================================================================================================================================
BALANCE AT MARCH 31, 1997 50,002 $1,250,038 8,151,029 $163,021 $38,274,539 ($33,356,189) $6,331,409
EXERCISE OF WARRANTS 356,250 7,125 327,750 334,875
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK (5,882) (147,050) 1,225,419 24,508 122,542 -
PREFERRED STOCK UNIT PURCHASE OPTION AS -
COMPENSATION FOR FINANCIAL ADVISORY SERVICES 165,800 165,800
CONVERTIBLE PREFERRED STOCK DIVIDENDS 2,448,393 (2,448,393) -
NET LOSS (2,265,650) (2,265,650)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 44,120 $1,102,988 9,732,698 $194,654 $41,339,024 ($38,070,232) $4,566,434
====================================================================================================================================
See Notes To Consolidated Financial Statements.
</TABLE>
4
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
Six Months Ended
September 30, September 23, 1983
---------------------------- (inception) to
1997 1996 September 30, 1997
- ----------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,265,650) $ (1,955,363) $(34,456,578)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 43,324 55,620 1,627,068
Non-cash expense upon issuance of common stock
options, common stock and warrants 165,800 25,000 686,096
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 84,879 (27) (14,188)
Inventory (27,895) 5,587 (69,575)
Prepaid expenses and other assets (74,070) (145,908) (172,356)
Accounts payable (185,460) 366,364 538,063
Accrued expenses 58,261 (42,362) 75,812
Customer advances - - 140,863
Other liabilities - (2,976) (4,866)
- ---------------------------------------------------------------------------------- ------------
Net cash used by operating activities (2,142,277) (1,694,065) (31,825,811)
INVESTING ACTIVITIES
Purchases of short-term investments - - (10,461,867)
Maturities of short-term investments 1,488,215 1,288,106 6,968,647
Capital expenditures (12,776) (3,865) (844,203)
Patent costs (44,208) (7,865) (956,635)
Other - - 7,829
- ---------------------------------------------------------------------------------- ------------
Net cash provided (used) by investing activities 1,431,231 1,276,376 (5,286,229)
FINANCING ACTIVITIES
Issuance of notes payable - 218,966 2,183,868
Repayment of notes payable - (71,090) (1,965,124)
Repayment of capitalized lease obligations (1,917) (10,281) (181,524)
Long-term customer advances - - 100,000
Issuance of common and preferred stock 334,875 64,625 38,318,831
Issuance of warrants - - 62,500
- ---------------------------------------------------------------------------------- ------------
Net cash provided by financing activities 332,958 202,220 38,518,551
- ---------------------------------------------------------------------------------- ------------
Net increase (decrease) in cash
and cash equivalents (378,088) (215,469) 1,406,511
Cash and cash equivalents at beginning of period 1,784,599 409,651 -
- ---------------------------------------------------------------------------------- ------------
Cash and cash equivalents at end of period $ 1,406,511 $ 194,182 $ 1,406,511
- ---------------------------------------------------------------------------------- ------------
</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 Statement of
Financial Accounting Standards ("SFAS") No. 7. Among the disclosures required
by SFAS No. 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 September 30, 1997 and March 31, 1997, and the
results of operations for the three months and six months ended September 30,
1997 and 1996 and from September 23, 1983 (inception) to September 30, 1997.
The results of operations for the three months and six months ended September
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.
In February 1997, the Financial Accounting Standards Board issued 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 the 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".
6
<PAGE>
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 an agreement 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.
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 is recording 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 six months ended September 30, 1997 and 1996, the Company advanced
$586,000 and $429,000, respectively to BTI and such advances are included in
product development expense. During the Option Period, the Company has
advanced $1,869,000 to BTI.
7
<PAGE>
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 six months ended September 30, 1997, the Company recognized a
non-cash Dividend to Preferred Stockholders of $1,165,000 and $2,448,000,
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 was registered with the
Securities and Exchange Commission. A Registration Statement on Form S-3
became effective on September 5, 1997 and 25% of the underlying common stock
is eligible for trading, and 25% will become unlocked in each 90 day interval
following the effective date of the registration statement.
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 six months ended September 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
$340,000 of convertible preferred stock dividends, or $.04 per common share
for the six months ended September 30, 1997. The registration statement was
declared effective on September 4, 1997.
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
No. 123. The Company recorded $166,000 in general and administrative expenses
as amortization of such value for the six months ended September 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, which totaled $181,000 during the six months
ended September 30, 1997. 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 in May 1997 was paid back in September 1997.
8
<PAGE>
7. CHANGE IN AUTHORIZED CAPITAL
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
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
Total revenues aggregated $65,000 for the quarter ended September 30, 1997, a
$34,000 increase from revenues of $31,000 recorded during the same period of the
prior year. Current quarter revenues relate primarily to interest income
generated on the Company's cash balances. In the prior year quarter, the Company
had product sales and contract research revenue related to its Kephra products.
Cost of product sales was $21,000, relating to quality assurance and patent
amortization expenses on the Company's Periodontal Tissue Monitor (PTM) product.
The Company completed product validation studies required by the FDA during the
quarter and began producing PTM kits in anticipation of the U. S. product launch
in October 1997.
Product development costs totaled $661,000 for the current quarter, an increase
of $93,000 or 16% over the prior year second quarter costs of $568,000. The
increase relates to the following areas: (i) an increase of $250,000 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) an increase of $3,000 in expenses related to Cancer Immunotherapy
technology for the treatment of cancer; (iii) a decrease of $94,000 in expenses
related PTM product development, as the PTM product was approved by the FDA
during the prior quarter and has moved out of the product development phase; and
(iv) a decrease of $66,000 in product development expenses related to the
Company's Kephra product line and general product development costs. The Company
is not actively seeking licensing opportunities or making product development
expenditures for the Kephra product line.
General and administrative expenses for the current quarter were $663,000, an
increase of $402,000 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). The
Company also incurred $181,000 of relocation expenses during the current quarter
in connection with the relocation of its Chairman, President and Chief Executive
Officer from New Jersey to California (See Note 6). There were no such costs
incurred during the same period of the prior year.
Business development costs for the current quarter totaled $48,000, a decrease
of $23,000, or 33%, from the same quarter of the prior year.
10
<PAGE>
Net loss before convertible preferred stock dividends for the quarter ended
September 30, 1997 totaled $1,330,000 or a 48% increase over the prior year's
first quarter loss of $896,000. This increase is a result of greater product
development expenses and general and administrative expenses. Net loss per share
of common stock for the quarter ended September 30, 1997 was $.29 compared to
$.11 in the same quarter in the previous year. During the quarter ended
September 30, 1997, the Company recognized a non-cash convertible preferred
stock dividend of $1,152,000 (See Note 4). No such recognition occurred during
the same quarter of the prior year.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
Total revenues aggregated $167,000 for the six months ended September 30, 1997,
a $111,000 increase from revenues of $56,000 recorded during the same period of
the prior year. Current year revenues relate primarily to interest income of
$165,000 generated on the Company's cash balances. In the prior year, the
Company had product sales of $13,000 and contract research revenue of $22,000
related its Kephra products.
Cost of product sales was $35,000, relating to quality assurance and patent
amortization expenses on the Company's Periodontal Tissue Monitor (PTM) product.
The Company completed product validation studies required by the FDA during in
the current year and began producing PTM kits in anticipation of the U. S.
product launch in October 1997.
Product development costs for the current year were $1,022,000, a decrease of
$267,000 or 21% over the prior year costs. The decrease relates primarily to the
following areas: (i) an increase of $178,000 in funding of BTI's product
development expenses related to PDT; (ii) a decrease of $73,000 in expenses
related to Cancer Immunotherapy technology for the treatment of cancer; (iii) a
decrease of $204,000 in expenses related to PTM product development; and (iv) a
decrease of $170,000 in product development expenses related to the Company's
Kephra product line and general product development expenses.
General and administrative expenses for the current year were $1,198,000, an
increase of $644,000 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). The
Company also incurred $181,000 in relocation expenses during the six months
ended September 30, 1997 in connection with the relocation of its Chairman,
President and Chief Executive Officer from New Jersey to California (See Note
6). There were no such costs incurred during the same period of the prior year.
Business development costs for the current year totaled $122,000, a decrease of
$8,000, or 6%, from the same period of the prior year.
Net loss before convertible preferred stock dividends for the six months ended
September 30, 1997 totaled $2,266,000 or a 16% increase over the prior year loss
of $1,955,000. This increase is a result of greater general and administrative
expenses offset by lower product development costs. Net loss per share of common
stock for the six months ended September 30, 1997 was $.56 compared to $.24 in
the same period in the previous year. During the six months ended September 30,
1997, the Company recognized a non-cash convertible preferred stock dividend of
$2,448,000 (See Note 4). No such recognition occurred during the same period of
the prior year.
11
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at September 30, 1997 totaled
$4,900,000, a $1,866,000 decrease from the March 31, 1997 balance. Working
capital at September 30, 1997 decreased by $1,721,000 from March 31, 1997 to
$4,383,000. These decreases were primarily due to the net loss before
convertible preferred stock dividends for the six months ended September 30,
1997 and pay down of certain current liabilities.
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 September
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 August 1997, the Company signed 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 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 has incurred $464,000 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 September 1996 the Company entered into an agreement which granted the
Company the option to acquire Binary Therapeutics, Inc. ("BTI"). Under the
agreement as amended, the Company has spent $1,869,000 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).
12
<PAGE>
PART II-OTHER INFORMATION
Item 2. Changes in Securities
On August 7, 1997, the Company amended its Certificate of Incorporation to
increase the authorized number of shares of common stock from 30,000,000 to
100,000,000, and to increase the authorized number of shares of preferred
stock from 300,000 to 2,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on August 7, 1997, the following
matters were voted on and approved:
1. Six Directors were elected to the Board of Directors to hold office for a
one-year term or until their successors are elected and qualified. The
following persons were elected: Dr. H. Laurence Shaw, Mr. Jack Halperin,
Mr. John G. Kringel, Mr. Elliott H. Vernon, Mr. Jerry A. Weisbach and
Mr. Michael S. Weiss. 15,054,217 voting shares voted in favor of all of the
Directors, or 96.8%, and 497,408, or 3.2% abstained.
2. An amendment to the Company's Certificate of Incorporation increasing the
number of authorized shares of Common Stock of the Company from 30,000,000
to 100,000,000, and increasing the number of authorized shares of Preferred
Stock of the Company from 300,000 to 2,000,000. 10,078,639 voting shares
voted in favor of the amendment, or 90.5%, 954,640 voting shares voted
against the amendment, or 8.6%, and 106,674, or 1.0% abstained.
3. An amendment to the Company's Certificate of Incorporation to change the
name of the Company to Pacific Pharmaceuticals, Inc. 15,188,312 voting
shares voted in favor of the amendment, or 97.7%, 296,233 voting shares
voted against the amendment, or 1.9%, and 66,580, or .4% abstained.
4. Adoption of the Company's Equity Incentive Stock Option plan for key
employees and consultants. 15,514,054 voting shares voted in favor, or
92.0%, 1,235,233 voting shares voted against, or 7.3%, and 117,114,
or .7% abstained.
5. Adoption of the Company's Stock Option Plan for Non-Employee Directors.
10,444,843 voting shares voted in favor, or 88.0%, 1,323,661 voting shares
voted against, or 11.2%, and 97,928, or .8% abstained.
6. To ratify the Board of Directors selection of Deloitte & Touche LLP as the
Company's independent public accountants for the fiscal year ending
March 31, 1998. 15,273,917 voting shares voted in favor, or 98.2%, 233,883
voting shares voted against, or 1.5%, and 43,325, or .3% abstained.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
B.) REPORTS ON FORM 8-K
Date of Report Item Reported Financial Statements Filed
- --------------- ------------- --------------------------
September 24, 1997 News release dated August 26, No
1997, announcing that the
Company signed a five-year
renewable distribution
agreement with Steri-Oss, Inc.
to exclusively distribute the
Periodontal Tissue Monitor in
North America and other
countries not covered by other
distribution agreements.
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: November 13, 1997 /s/ James Hertzog
------------------------------
James Hertzog
Chief Accounting Officer
(Principal Accounting Officer and Officer
duly authorized to sign this report on
behalf of the registrant)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 INTERM FINANCIAL STATEMENTS. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,406,511
<SECURITIES> 3,493,220
<RECEIVABLES> 14,187
<ALLOWANCES> 0
<INVENTORY> 69,572
<CURRENT-ASSETS> 5,144,871
<PP&E> 285,141
<DEPRECIATION> (201,954)
<TOTAL-ASSETS> 5,352,869
<CURRENT-LIABILITIES> 761,769
<BONDS> 24,666
0
1,102,988
<COMMON> 194,654
<OTHER-SE> 41,339,024
<TOTAL-LIABILITY-AND-EQUITY> 5,352,869
<SALES> 700
<TOTAL-REVENUES> 166,546
<CGS> 35,321
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,396,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,265,650)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,265,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,448,393<F1>
<NET-INCOME> (4,714,043)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
<FN>
<F1>Includes Convertible Preferred Stock Dividends
</FN>
</TABLE>
