<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, 1998
Commission file number 1-9613
--------
Pacific Pharmaceuticals, 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, 1998, there were 11,271,856 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
<TABLE>
<S> <C>
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, 1998 and March 31, 1998 ....................................2
Consolidated Statements of Operations Three Months Ended June
30, 1998 and 1997 (as restated) and from September 23, 1983
(Inception) to
June 30, 1998........................................................3
Consolidated Statements of Stockholders' Equity/(Deficiency) -
Three Months Ended June 30, 1998 and 1997 (as restated)..............4
Consolidated Statements of Cash Flows Three Months Ended June
30, 1998 and 1997 and from September 23, 1983 (Inception) to
June 30, 1998........................................................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 6. Exhibits and Reports on Form 8-K....................................13
SIGNATURE ....................................................................13
</TABLE>
<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, 1998 and this Quarterly Report on Form 10-Q.
1
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
JUNE 30, 1998 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,007,767 $ 3,290,176
Accounts receivable, net 11,333 -
Inventory 54,587 38,637
Prepaid expenses 128,061 85,053
- ------------------------------------------------------------------------------------------------------------------
Total current assets 5,201,748 3,413,866
Property and equipment, net 68,907 71,840
Patent costs, net 154,105 104,981
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,424,760 $ 3,590,687
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 663,756 $ 661,371
Accrued expenses 211,300 201,125
Current portion of capital leases 4,167 4,066
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 879,223 866,562
- ------------------------------------------------------------------------------------------------------------------
Capital leases 21,504 22,584
Minority interest 4,806,063 -
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY/(DEFICIENCY):
Convertible preferred stock, $25 par value, 2,000,000 shares authorized; 38,446
and 40,090 issued and outstanding at June 30,1998
and March 31, 1998, respectively 961,188 1,002,288
(liquidation preference $9,995,960 and $10,423,400, respectively)
Commonstock, $.02 par value, 100,000,000 shares authorized; 11,357,021 and
10,777,234 shares issued and outstanding at
June 30, 1998 and March 31, 1998, respectively 227,138 215,545
Capital in excess of par value 48,100,899 46,969,197
Deficit accumulated during the development stage (49,571,255) (45,485,489)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity/(deficiency) (282,030) 2,701,541
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICENCY) $ 5,424,760 $ 3,590,687
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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
June 30, September 23, 1983
-------------------------------- (inception) to
1998 1997 June 30, 1998
- ------------------------------------------------------------------------ ----------------------
(as restated)
<S> <C> <C> <C>
REVENUES
Product sales $ 4,016 $ 700 $ 2,023,757
License fees and royalties - 95 486,612
Contract research - - 268,063
Marketing rights - - 1,311,500
Interest and other 42,141 100,488 1,955,799
- ------------------------------------------------------------------------ --------------------
Total revenues 46,157 101,283 6,045,731
- ------------------------------------------------------------------------ --------------------
COSTS AND EXPENSES
Cost of product sales 20,017 14,002 3,158,412
Product development 385,643 360,899 17,546,604
General and administrative 401,330 534,775 18,253,077
Business development
and marketing 17,825 73,858 3,794,714
Interest and other 12,727 53,198 646,701
- ------------------------------------------------------------------------ --------------------
Total costs and expenses 837,542 1,036,732 43,399,507
- ------------------------------------------------------------------------ --------------------
Net loss (791,385) (935,449) (37,353,776)
- ------------------------------------------------------------------------ --------------------
Convertible preferred stock
dividends 3,294,381 1,815,050 12,217,477
Net loss applicable to
common shareholders $(4,085,766) $(2,750,499) $(49,571,253)
- ------------------------------------------------------------------------ --------------------
Net loss per share
of common stock-basic and diluted ($0.37) ($0.34)
- ------------------------------------------------------------------------
Weighted average common
stock outstanding 11,068,068 8,158,227
- ------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY) (unaudited)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------------------- ---------------------------------
Shares Par Value Shares Par Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997 50,000 $ 1,250,038 8,151,029 $163,021
Exercise of warrants 41,250 825
Preferred stock unit purchase option
compensation for financial advisory services
Convertible preferred stock dividends (as restated)
Net loss
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (as restated) 50,000 $ 1,250,038 8,192,279 $163,846
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 40,090 $ 1,002,288 10,777,234 $215,545
EXERCISE OF WARRANTS 1,563 31
COMMON STOCK ISSUED FOR SERVICES 100,000 2,000
PREFERRED STOCK UNIT PURCHASE OPTION AS
COMPENSATION FOR FINANCIAL ADVISORY SERVICES
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK (1,644) (41,100) 478,224 9,562
CONVERTIBLE PREFERRED STOCK DIVIDENDS
PROCEEDS FROM SUBSIDIARY PREFERRED STOCK ISSUANCE
NET LOSS
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 38,446 $ 961,188 11,357,021 $227,138
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Deficit
Accumulated
Capital During the
in Excess Development
of Par Value Stage Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 $38,274,539 ($33,356,189) $6,331,409
Exercise of warrants 37,950 38,775
Preferred stock unit purchase option
compensation for financial advisory services 82,900 82,900
Convertible preferred stock dividends (as restated) 1,815,050 (1,815,050) -
Net loss (935,449) (935,449)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (as restated) $40,210,439 ($36,106,688) $5,517,635
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $46,969,197 ($45,485,489) $2,701,541
EXERCISE OF WARRANTS 1,438 1,469
COMMON STOCK ISSUED FOR SERVICES 73,000 75,000
PREFERRED STOCK UNIT PURCHASE OPTION AS
COMPENSATION FOR FINANCIAL ADVISORY SERVICES 82,900 82,900
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK 31,538 -
CONVERTIBLE PREFERRED STOCK DIVIDENDS 374,056 (3,294,381) (2,920,325)
PROCEEDS FROM SUBSIDIARY PREFERRED STOCK ISSUANCE 568,770 568,770
NET LOSS (791,385) (791,385)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $48,100,899 ($49,571,255) ($282,030)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</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
1998 1997 June 30, 1998
- ---------------------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($791,385) ($935,449) ($37,353,776)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 17,587 24,393 1,682,588
Non-cash expense upon issuance of common stock
options, common stock and warrants 82,900 82,900 934,761
Net book value of asset disposals - 58,534 241,692
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable (11,333) (273,242) (11,333)
Inventory (15,950) (726) (54,590)
Prepaid expenses and other assets (43,008) (134,252) (139,036)
Accounts payable 2,385 (200,852) 663,756
Accrued expenses 10,175 56,765 67,277
Customer advances - - 140,863
Other liabilities 102 73 (4,764)
- ---------------------------------------------------------------------------------------------- ----------------------
Net cash used by operating activities (748,527) (1,321,856) (34,232,562)
INVESTING ACTIVITIES
Purchases of short-term investments - (4,629) (10,461,867)
Maturities of short-term investments - - 10,461,867
Capital expenditures (3,627) (2,545) (851,556)
Patent costs (60,151) (17,614) (1,037,523)
Other - - 7,829
- ---------------------------------------------------------------------------------------------- ----------------------
Net cash provided used by investing activities (63,778) (24,788) (1,881,250)
FINANCING ACTIVITIES
Issuance of notes payable - - 2,183,867
Repayment of notes payable - - (1,965,124)
Repayment of capital lease obligations (1,081) (1,259) (184,628)
Long-term customer advances - - 100,000
Issuance of common and preferred stock 645,239 38,775 39,101,726
Minority interest investment in subsidiary 1,885,738 - 1,885,738
- ---------------------------------------------------------------------------------------------- ----------------------
Net cash provided by financing activities 2,529,896 37,516 41,121,579
- ---------------------------------------------------------------------------------------------- ----------------------
Net increase (decrease) in cash
and cash equivalents 1,717,591 (1,309,128) 5,007,767
Cash and cash equivalents at beginning of period 3,290,176 1,784,599 -
- ---------------------------------------------------------------------------------------------- ----------------------
Cash and cash equivalents at end of period $5,007,767 $ 475,471 $ 5,007,767
- ---------------------------------------------------------------------------------------------- ----------------------
</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.,
XYX Acquisition Corp. and BG Development Corp., a majority owned subsidiary,
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
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, 1998 and March 31, 1998, results of
operations for the three months ended June 30, 1998 and 1997 and from
September 23, 1983 (inception) to June 30, 1998 and cash flows for the three
months ended June 30, 1998 and 1997 and from September 23, 1983 (inception)
to June 30, 1998. The results of operations for the three months ended June
30, 1998 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, 1998.
The Company adopted 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 "Diluted EPS" on
the face of the statement of operations. In general, Basic EPS is a function
of weighted average number of common shares outstanding for the periods.
Diluted EPS does reflect the potential dilution created by stock issuable
pursuant to outstanding options, warrants, convertible debt or equity
securities and other contingently issuable shares. The requirements of SFAS
128 have been applied retroactively to all periods presented. There was no
impact on reported net loss per common share as a result of the adoption of
this SFAS.
2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST
During the quarter ended June 30, 1998, the Company entered into a placement
agency agreement with Paramount Capital Inc. ("Paramount). Under the terms of
the agreement, Paramount was to use its best efforts to sell up to 60 Units
(with an overallotment option for an additional 40 Units) for $100,000 each,
which consist of 50,000 shares of Series A Convertible Preferred Stock ("BGDC
Units"), valued at $2.00 per share of BG Development Corp. ("BGDC"). The BGDC
6
<PAGE>
Units are redeemable in cash by BGDC. The BGDC Units may be exchanged for
common stock of the Company under certain circumstances. Pursuant to the
subscription agreement, seventy-five percent of the net proceeds are
allocated to BGDC for development costs associated with O6 Benzylguanine
technology. Twenty-five percent of the net proceeds of the BDGC private
placement went to the Company to be used for general purposes.
The BGDC Units accrue dividends as follows:
<TABLE>
<CAPTION>
Dividend Date Dividend Amount
------------- ---------------
<S> <C>
Upon final closing $1.99 per share
30-36 months after closing $0.82 per share
36-42 months after closing $0.82 per share
42-48 months after closing $1.16 per share
48-60 months after closing $1.16 per share
After 60 months Compounded rate of 35%
</TABLE>
On June 22, 1998, the Company completed a closing on 29.35 BGDC Units of the
private placement for gross proceeds of $2,900,000 (net proceeds of
$2,455,000). Paramount, who is affiliated with certain significant
shareholders of the Company, received an aggregate dollar commission of
$264,000 and a non-accountable expense allowance of $117,000 as compensation
for the BGDC private placement. Additionally, Paramount received warrants to
purchase 10% of the number of BGDC Units issued in private placement at
$110,000 per unit. BGDC and Paramount also entered into a 24 month Financial
Advisory Services Agreement in which BDGC will pay Paramount $3,000 per month
for such services plus warrants to purchase 15% of the number of BGDC Units
issued in the private placement at $110,000 per Unit.
Subsequent to the closing of the private placement, BGDC Preferred
Stockholders own 16.4% of voting rights in BGDC. This minority interest, as
reflected in the accompanying Consolidated Balance Sheet as of June 30, 1998,
includes the initial net preceeds to BGDC of $1,886,000, plus the initial
dividend of $2,920,000, or $1.99 per preferred share outstanding.
BGDC and the Company have entered into a one-year renewable Corporate
Services and Management Agreement pursuant to which the Company will provide
financial/accounting, administrative, advisory and managerial support to
BGDC. For such services, the Company will receive from BGDC a management fee
equal to $500,000 per year, payable in equal monthly installments. The
Company does not expect any further closings to occur for the private
placement.
3. POTENTIAL DELISTING FROM THE AMERICAN STOCK EXCHANGE
On June 24, 1998, the Company received notice from the American Stock
Exchange ("AMEX") that Amex intends to take action to remove the Company's
Common Stock from the AMEX because the Company no longer satisfies all of the
financial guidelines of the AMEX for continued listing. The Company notified
the Board of Governors of AMEX that it intends to appeal the decision to
remove the Company's Common Stock from the AMEX. There can be no assurance
that the appeal by the Company will be successful, and that the listing will
be continued. The Company is taking measures to ensure that in the event of
an unsuccessful appeal, an orderly transition will occur and that its Common
Stock will commence trading on the NASD Electronic Bulletin Board.
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDENDS
In fiscal year 1997, the Company completed a private equity financing ("1997
Private Placement") in two stages with the initial closing completed on
December 19, 1996 (the "Initial Closing") and the final
7
<PAGE>
closing completed on March 7, 1997 (the "Final Closing") in which it raised
$8,542,000, net of offering expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit of
$100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 detachable Common
Stock Purchase Warrants ("Warrants"), to accredited individuals and
institutional investors pursuant to Regulation D under the Securities Act of
1933, as amended. Each Warrant entitles the holder to purchase one share of
Common Stock at a price of $1 per share and may be exercised until March 7,
2007.
The initial conversion ratio for the Preferred Stock was 208.33 shares of
Common Stock for each share of Preferred Stock. The 1997 Private Placement
contained an adjustment provision to reset the conversion ratio under certain
conditions. For Preferred Stock converted after March 7, 1998, the new
conversion ratio is 290.89 shares of common stock for each share of Preferred
Stock.
The subscribers to the Private Placement purchased the Units at a discount
from the closing prices of the Company's common stock on the Initial Closing
date of 23% and the Final Closing date of 36%. The detachable stock purchase
warrants issued as part of the Units had a fair value at the date of issuance
of $1,967,000. The aggregate value of the beneficial conversion feature and
warrants at the date of issuance was $6,721,000 and has been 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 was eligible for
conversion into Common Stock. The reset of the conversion ratio during March
1998 generated an additional non-cash dividend of $2,576,000.
As discussed in Note 2, the BGDC private placement includes a provision that
the subscribers are entitled to receive $1.99 per share dividends declared by
to Board of Directors of BGDC. The dividends of $2,920,000, which were
credited to minority interest during the three months ended June 30, 1998,
accumulate until paid in cash or common stock by BGDC.
Below is a summary of Preferred Stock Dividends recognized during the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, September 23, 1983
-------------------------------------- (inception) to
1998 1997 June 30, 1998
----------------- ------------------ -----------------------
<S> <C> <C> <C>
(as restated)
Dividend from beneficial conversion feature 128,036 1,296,362 4,754,075
Dividend from reset of conversion 194,752 - 2,576,077
Dividend from warrant valuation 51,268 518,688 1,967,000
Dividends from BGDC preferred stock 2,920,325 - 2,920,325
----------------- ------------------ -----------------------
Total 3,294,381 1,815,050 12,217,477
----------------- ------------------ -----------------------
----------------- ------------------ -----------------------
</TABLE>
8
<PAGE>
5. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
Preferred Stock issued in the fiscal year did not reflect the value of the
detachable stock purchase warrants issued in connection with the 1997 Private
Placement described in Note 4. The fair value of such warrants, as calculated
by an independent valuation consulting firm, was $1,967,000, and is being
recorded as a return to the Preferred Stockholders from the date of issue of
the Preferred Stock to the date in which the Preferred Stock was eligible for
conversion into Common Stock. As a result, net loss applicable to Common
Shareholders and net loss per share for the quarter ended June 30, 1997 have
been restated from the amounts previously reported. Such restatement also
resulted in a $518,688 increase in both capital in excess of par value and
the deficit accumulated in development stage.
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
Quarter Quarter
ended ended
June 30, 1997 June 30, 1997
As Previously As
Reported Restated
---------------- ----------------
<S> <C> <C>
Convertible
preferred stock
Dividends $ 1,296,362 $ 1,815,050
---------------- ----------------
Net loss applicable
to common
Shareholders $(2,231,811) $(2,750,499)
---------------- ----------------
Net loss per
share of
common stock-
basic and diluted $ (0.27) $ (0.34)
---------------- ----------------
</TABLE>
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 $46,000 for the first quarter of FY 1999, a $55,000
decrease from revenues of $101,000 recorded during the same period of the
prior year. Current year revenue decreased over the prior year because
interest income decreased during the current period because invested cash was
lower in the current period compared to the same period of the prior year.
The Company continued work on its first human clinical trial for its
Photodynamic Therapy (PDT) cancer treatment, Boronated Porphyrin (BOPP). The
Company also continued its evaluation and due diligence of a compound
acquired during FY 1998, O6 Benzlyguanine ("BG"). Product development costs
for the first quarter of FY 1999 increased by $25,000 or 7% to $386,000
compared to the same period of the prior year. The increase related to the
following areas: (i) a decrease of $78,000 in funding of product development
expenses for BOPP; (ii) an increase of $129,000 on expenses for the
acquisition and evaluation of BG (iii) $21,000 increase in expenses related
to Cancer Immunotherapy technology; (iv) a decrease of $47,000 in expenses
related to PTM product development, as the PTM product was approved by the
FDA during the first quarter of the prior year and has moved out of the
product development phase.
Business development costs for the first quarter of FY 1999 totaled $18,000,
a decrease of $56,000, or 76%, from the same quarter of the prior year.
Expenses decreased as the Company spent less time and resources in developing
corporate partnerships for its various products compared to the prior year.
General and administrative expenses for the first quarter of FY 1999
decreased 25% to $401,000 from the same period of the prior year. During the
first quarter of FY 1998, the Company incurred significant legal and
accounting fees related to the registration of the securities sold in the
1997 Private Placement. No such expenses were incurred during the first
quarter of FY 1999. Also, personnel costs attributable to general and
administrative expenses were lower in the first quarter of FY 1999 compared
to the same period of the prior year.
Interest and other expenses were $13,000 for the first quarter of FY 1999
compared to $53,000 for the same period of the prior year. The prior year
included a charge relating to the write-off of the remaining unamortized
portion of Kephra patent costs. No such cost was incurred during the current
year.
Net loss was $791,000 for the first quarter of FY 1999, a decrease of
$144,000 over the same period of the prior year. Net loss applicable to
common stockholders was $4,086,000 for the first quarter of FY 1999 compared
to $2,750,000 (as restated) in the same period of the prior year. Non-cash
convertible preferred stock dividends of $3,294,000 were recorded during the
current quarter compared to $1,815,000 in the first quarter of FY 1998 (as
restated), in conjunction with a private equity financing completed during FY
1997.
10
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at June 30, 1998 totaled $5,008,000, an increase of
$1,718,000 from the March 31, 1998 balance. Working capital at June 30, 1998
increased by $1,775,000 from March 31, 1998 to $4,323,000. These increase
were primarily due to the closing on net proceeds of $2,455,000 of the BGDC
private placement financing offset by the net loss before convertible
preferred stock dividends for the three month period ending June 30, 1998.
Seventy five percent of the net proceeds of the BGDC private placement will
be used by BGDC for development costs associated with BG and 25 % will go to
the Company to be used for general purposes.
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 March 1999, based on a continuation of the pattern of
expenses which have prevailed during fiscal years 1998 and 1997.
Unanticipated expenses or working capital requirements could, however,
shorten that period.
The Company has two distribution agreements with Steri-Oss, Inc. to
distribute the Company's Periodontal Tissue Monitor kit ("PTM") worldwide,
except Japan. 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 March 1998, the Company signed a license agreement for the drug compound
O6 Benzylguanine ("BG") with the owners of the patents: Pennsylvania State
University, the National Institutes of Health (NIH), the University of
Chicago, and Case Western Reserve University, (collectively, the
"Co-Owners"), and in turn, assigned it to its subsidiary BGDC.
The Company entered into a Cooperative Research and Development Agreement
("CRADA") with the NIH to fund studies and clinical trials. Under the terms
of the CRADA, the Company would be obligated to provide funding of $125,000
per year for five years for joint research. If the Company elects to continue
to develop the BG technology, it would be obligated to make additional
milestone, royalty and patent reimbursement payments to the Co-Owners during
the term of the License Agreement. The agreement also has a provision in
which the Company may make certain portions of the aforementioned payments in
common stock of the Company.
In connection with the license agreement for BG, the Company entered into an
introduction agreement with Paramount Capital Investments LLC ("PCI"). The
Company paid PCI a commission of $100,000 plus 100,000 shares of the
Company's common stock valued at $75,000 and reimbursed PCI $100,000 for its
expenses in connection with the acquisition of the BG technology. The Company
is obligated to make milestone payments to
11
<PAGE>
PCI in the Company's common stock of up to 900,000 shares if the BG compound
successfully reaches certain milestones. The Company recorded $129,000 in
product development expenses during first quarter of FY 1999 and $429,000
since inception of the program to develop the BG technology.
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 recorded
expenses of $173,000 during the first quarter of FY 1999 and $3,078,000 since
inception of the agreement, and is currently funding substantially all
expenses of BTI. The company 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.
The Company has an agreement with Wound Healing of Oklahoma ("WHO") under
which it acquired an exclusive license to certain proprietary technology for
Cancer Immunotherapy. The Company incurred $65,000 during the first quarter
of FY 1999 and $693,000 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.
The Company received notice from the American Stock Exchange ("AMEX") that
AMEX intends to take action to remove the Company's Common Stock from the
AMEX because the Company no longer satisfies all of the financial guidelines
of the AMEX for continued listing. The Company notified the Board of
Governors of AMEX that it will appeal the decision to remove the Company's
Common Stock from the AMEX. There can be no assurance that the appeal by the
Company will be successful, and that the listing will be continued. The
Company is taking measures to ensure that in the event of an unsuccessful
appeal, an orderly transition will occur and that its Common Stock will
commence trading on the NASD Electronic Bulletin Board. If the Company were
to lose it's listing on the AMEX, the Company's ability to raise additional
capital might be impaired.
YEAR 2000 COMPLIANCE. The Company recognizes the need to ensure its
operations will not be adversely impacted by the inability of the Company's
systems to process data having dates on or after January 1, 2000 ("Year
2000"). Processing errors due to software failure arising from calculations
using the Year 2000 date are recognized as a risk. The Company is currently
addressing the risk, with respect to the availability and integrity of its
financial systems and the reliability of its operating systems, and is in the
process of communicating with suppliers, customers, financial institutions
and others with whom it conducts business to assess whether they are or will
be Year 2000 compliant. While the Company believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no assurance that
the systems of other companies on which the Company's systems and operations
rely will be converted on a timely basis and will not have a material effect
on the Company. In addition, the potential impact of the Year 2000 on others
with whom the Company does business and any resulting effects on the Company
cannot be reasonably estimated at this time. The cost of the Company's Year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
12
<PAGE>
PART II-OTHER INFORMATION
ITEM 2.CHANGES IN SECURITIES
(c) RECENT SALES OF UNREGISTERED SECURITIES
On June 22, 1998, the Company's subsidiary, BG Development Corp. ("BGDC"),
issued 1,467,500 shares of Series A Convertible Preferred Stock (the "BGDC
Convertible Stock") for gross proceeds of $2,900,000 (net proceeds of
$2,600,000) in a private placement to accredited investors, exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) and Regulation D thereunder. The BGDC Convertible Stock may be
converted at the option of the holder into shares of BGDC common stock at an
initial conversion price of $2.00 per share of BGDC common stock (the
"Conversion Price"). The Initial Conversion Price is subject to adjustment
upon the occurrence of issuances of BGDC securities at below market price or
below the Conversion Price, a merger, reorganization, consolidation,
reclassification, stock dividend or stock split which results in an increase
or decrease in the number of BGDC common stock outstanding. Additionally, the
Conversion Price is subject to adjustment in the event that BGDC securities
are subject to an underwritten initial public offering or otherwise commence
trading on a national securities exchange or on the National Association of
Securities Dealers, Inc. Automated Quotation System. Paramount Capital Inc.
served as the placement agent in the offering. See Note 2 to the Consolidated
Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Date of Report Item Reported Financial Statements Filed
- ----------------- ------------------ ----------------------------------
<S> <C> <C>
June 26, 1998 Item 5-Other Events (Announcing notice No
From AMEX)
</TABLE>
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, 1998 /s/ James Hertzog
-------------------
James Hertzog
Controller
(Principal Accounting Officer and
duly authorized to sign this report
on behalf of the registrant)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
PHARMACEUTICALS FIRST QUARTER FY 1999 CONSOLIDATED 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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,007,767
<SECURITIES> 0
<RECEIVABLES> 11,333
<ALLOWANCES> 0
<INVENTORY> 54,587
<CURRENT-ASSETS> 5,201,748
<PP&E> 292,629
<DEPRECIATION> (223,723)
<TOTAL-ASSETS> 5,424,760
<CURRENT-LIABILITIES> 879,223
<BONDS> 21,504
0
5,767,251<F2>
<COMMON> 227,138
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,424,760
<SALES> 4,016
<TOTAL-REVENUES> 46,157
<CGS> 20,017
<TOTAL-COSTS> 837,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,728
<INCOME-PRETAX> (791,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> (791,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,294,381<F1>
<CHANGES> 0
<NET-INCOME> (4,085,766)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
<FN>
<F1>Convertible Preferred Stock Dividends
<F2>Includes Minority Interest of 4,806,063
</FN>
</TABLE>
