<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
September 30, 1996 Number 0-22806
HYGENICS PHARMACEUTICALS, INC.
- ----------------------------------------------------------------------------
(Exact Name of Small Business Issuer as specified in its Charter)
Delaware 33-0120490
- -------------------------------- ------------------
State or Other Jurisdiction I.R.S. Employer
of Incorporation or Organization Identification No.
26012 Marguerite Parkway #H132- Mission Viejo, California 92692
- -----------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(503) 225-1929
- --------------------------------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (i) 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 (of for such shorter period that the
Registrant was required to file such reports) and (ii) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date.
Common Stock, $.001 par value 13,814,931
- ----------------------------- -------------
Title of Class Number of Shares
Outstanding at
September 30, 1996
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
ITEM 1 - FINANCIAL STATEMENTS
Condensed consolidated balance sheet,
September 30, 1996 ............................................1
Condensed consolidated statements of operations,
three months ended September 30, 1996 and 1995 ................2
Condensed consolidated statements of operations,
nine months ended September 30, 1996 and 1995 .................3
Condensed consolidated statement of equity,
nine months ended September 30, 1996 ..........................4
Condensed consolidated statements of cash
flows, nine months ended September 30, 1996
and 1995 ......................................................5
Notes to condensed consolidated financial
statements ....................................................6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ......................16
<PAGE>
PART I - FINANCIAL INFORMATION
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
ASSETS 1996
--------------
Current assets:
Cash $ 132
Deferred financing costs ---
Note Receivable 683,752
Other 13,630
--------------
Total current assets $ 697,514
Furniture and equipment, net ---
Other assets ---
--------------
$ 697,514
==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 617,800
Notes payable 1,543,094
--------------
Total current liabilities 2,160,894
--------------
Redeemable preferred stock - Series B
face value $100; 200,000 shares authorized;
2,000 shares issued and outstanding 200,000
--------------
Stockholders' equity (deficiency):
Preferred stock - Series A, par value
$.001 per share; 800,000 shares
authorized; 5,000 shares issued and
outstanding 5
Common stock, par value $.001 per
share; 13,114,931 and 11,065,500
shares issued and outstanding at
September 30, 1996 2,013
Additional paid-in capital 3,800,680
Deficit accumulated during
development stage (5,465,378)
--------------
Total stockholders' deficiency (1,662,680)
--------------
$ 697,514
==============
See accompanying notes to condensed
consolidated financial statements
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended September 30, 1996 and 1995
1996 1995
----------- ----------
Revenues
Sales $ --- $ ---
Research and development --- ---
Royalties --- ---
----------- ----------
Total Revenues --- ---
Cost of sales --- ---
----------- ----------
Gross profit --- ---
----------- ----------
Other costs and expenses:
Salaries and consulting 99,375 189,019
Rent 3,502 6,528
Other selling, general and
administrative expenses (52,129) 89,686
----------- ----------
Total other costs and expenses 50,748 285,233
----------- ----------
Operating loss ( 50,748) (285,233)
Interest expense ( 39,080) (194,754)
Other income 67,654 222
----------- ----------
Loss before income taxes ( 22,174) (479,765)
Income taxes --- ---
----------- ----------
Net loss $ ( 22,174) $(479,765)
=========== ==========
Net loss per common share $ (.002) $ ---
=========== ==========
Weighted average number of common
shares outstanding 13,138,264 ---
=========== ==========
See accompanying notes to condensed
consolidated financial statements
2
<PAGE>
HYGENICS PHARMACUETICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Nine Months Ended September 30, 1996 and 1995
1996 1995
---------- ----------
Revenues
Sales $ --- $ ---
Research and development --- ---
Royalties --- ---
---------- ----------
Total Revenues --- ---
Cost of sales --- ---
---------- ----------
Gross profit --- ---
Other costs and expenses:
Salaries and consulting 305,090 417,919
Rent 14,307 19,228
Other selling, general and
administrative expenses 136,916 507,086
---------- ----------
Total other costs and expenses 456,313 944,233
---------- ----------
Operating loss (456,313) (944,233)
Interest expense (578,611) (456,454)
Other income 98,560 2,322
---------- ----------
Loss before income taxes (480,051) (1,398,365)
Income taxes (800) (800)
---------- -----------
Net loss $(480,851) $(1,399,165)
========== ============
Net loss per common share $ (.037) $ ---
========== ============
Weighted average number of common
shares outstanding 12,680,162 ---
=========== ============
See accompanying notes to condensed
consolidated financial statements
3
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For The Nine Months Ended September 30, 1996
Deficit
<CAPTION>
Accumulated
Additional During The Total
Common Stock Preferred Stock A Paid-In Development Stockholders'
Shares Amount Shares Amount Capital Stage Deficiency
------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 11,580,908 $ 1,159 5,000 $ 5 $3,324,409 $(4,528,214) $(1,202,641)
Issuance of common stock
for conversion of
notes payable
(Notes 4 and 6) 1,476,523 148 325,633 325,781
Common stock issued
in connection with
exercise of warrants
(Note 6) 57,500 6 2,869 2,875
Common stock issued to
officer for services 700,000 700 700
Warrants issued
at an exercise
price of $.05 per share in
connection with private
placement offering
(Notes 4 and 6) 144,019 144,019
Warrants issued
at an exercise
price of $.05 per share in
connection with extension
of bridge notes (Note 4) 3,750 3,750
Net loss (937,164) (936,464)
---------- -------- ------ ------ ----------- ------------ ------------
Balances, Sept. 30, 1996 13,814,931 $ 2,013 5,000 $ 5 $3,800,680 $(5,465,378) $(1,662,680)
========== ======== ====== ====== =========== ============ ============
</TABLE>
See accompanying notes to condensed
consolidated financial statements
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 1996 and 1995
1996 1995
------------ ------------
Cash flows from operating activities:
Net loss $ (480,851) $(1,399,165)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of discounts on notes payable 27,730 425,423
Services paid through issuance of common stock --- 10,000
Changes in operating assets and liabilities:
Other current assets (2,650) (10,400)
Accounts payable and accrued liabilities (281,820) (88,807)
------------ -------------
Net cash used in operating activities (173,951) (885,335)
------------ -------------
Cash flows from investing activities:
Purchase of furniture and equipment --- (300)
Other assets --- (900)
Increase in note receivable (683,752) ---
------------ -------------
Net cash used in investing activities (683,752) (1,200)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 822,500 865,500
Payments on notes payable (10,000) ---
Deferred offering costs --- (117,865)
Proceeds from sale of common stock 2,875 ---
------------ -------------
Net cash provided by financing activities 815,375 747,635
------------ -------------
Net change in cash (42,328) (138,900)
Cash at beginning of period 42,460 138,900
------------ -------------
Cash at end of period 132 ---
============ =============
See accompanying notes to condensed
consolidated financial statements
5
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
NOTE 1 - QUARTERLY INFORMATION
- ------------------------------
The accompanying condensed consolidated financial statements have been
prepared in accordance with requirements of the Security and Exchange
Commission for interim financial statements. Therefore, they do not include
all disclosures that would be presented in the Company's Annual Report on
Form 10-KSB. The financial statements should be read in conjunction with the
financial statements contained in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
The information furnished reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for
a fair presentation of financial position for the interim period. The
results are not necessarily indicative of results to be expected for the full
year.
NOTE 2 - ORGANIZATION AND BUSINESS
- ----------------------------------
Brian Pharmaceuticals, Inc. (BPI), a California corporation, was incorporated
on December 3, 1984. On November 14, 1994, BPI consummated a stock-for-stock
exchange with Diversified Food Manufacturers, Ltd. (DFML), a publicly-held
Delaware corporation. As part of the exchange, DFML issued 7,610,000 shares
of its common stock, 5,000 shares of its Series A preferred stock and 2,000
shares of its Series B preferred stock in exchange for all of the outstanding
shares of BPI. The exchange has been accounted for as a reverse acquisition
because stockholders of BPI maintain control of the surviving entity, BPI.
Accordingly, for financial reporting purposes, the shares issued by DFML are
considered outstanding based on the date of their original issuance by BPI,
and the 1,800,000 shares of common stock retained by the stockholders of DFML
are reflected as consideration issued to consummate the stock-for-stock
exchange. No value was ascribed to the shares retained by the stockholders
of DFML since, at the date of exchange, DFML had nominal assets and
stockholders' equity and had no operations. On January 3, 1995, DFML changed
its name to Hygenics Pharmaceuticals, Inc. (the Company).
The Company is considered a development-stage company and is involved in the
research and development of antimicrobial skin cleansing/care formulations
based upon Chlorhexidine Gluconate (CHG). The Company is preparing to market
its only product, Surgique(tm), 4%, CHG solution, is preparing several new
CHG products for submission to the U.S. Food and Drug Administration (FDA)
for approval and is outsourcing an extensive range of non-CHG products for
marketing under its own label.
6
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates,
among other things, the realization of assets and satisfaction of liabilities
in the normal course of business. The Company's status as a development-
stage company, and its recurring losses from operations through September 30,
1996 raise substantial doubt about its ability to continue as a going
concern. Successful marketing of its existing product, development and
marketing of new products and its transition, ultimately, to the attainment
of profitable operations are dependent upon the Company obtaining adequate
financing. The Company has received $1,999,000 in connection with private
placements of debt securities. Management plans to continue the development
of new products, initiate marketing of its FDA approved product as part of a
full line of antimicrobial products and seek additional equity capital. The
accompanying condensed consolidated financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
NOTE 4 - NOTES PAYABLE
- ----------------------
First Private Placement
- -----------------------
In December 1994, the Company offered up to 70 convertible units at $5,000
per unit under a private placement. Each convertible unit consisted of a
$5,000 convertible note and 5,000 shares of the Company's common stock.
Each convertible note bears interest payable monthly at 10% per annum, was
due on November 15, 1995 (subject to six 30-day extensions at sole option of
holder), may be prepaid by the Company at any time without penalty, and is
convertible at any time at the option of the holder into shares of the
Company's common stock at a conversion price equal to 75% of the closing bid
price of the Company's common stock on the business day immediately preceding
each such conversion. The notes are collateralized by substantially all of
the assets of the Company and by all of the common stock and preferred stock
of the Company owned by its two major stockholders.
Through December 31, 1995, the Company had issued approximately 223.3 units
for $1,116,500 in cash and 1,116,500 shares of its common stock. The Company
ascribed a value to such shares of $556,375 based on the market value,
discounted for transferability restrictions, and reflected such value as an
original issue discount to these notes (see Note 4) in the accompanying
balance sheet. As of September 30, 1996, the discount related to these notes
has been amortized in full.
7
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
FIRST PRIVATE PLACEMENT, continued
- ----------------------------------
In November 1995, when the Company determined that it did not have the
ability to repay these obligations by the original maturity date, the Company
requested an extension of the maturity date of these notes payable, for a
six-month period, to May 15, 1996. As consideration for the extension, each
stockholder who extended their note payable received warrants to purchase
2,500 shares of the Company's common stock for each note unit of $5,000 held
by the stockholder at an exercise price of $.05 per share exercisable for two
years. The Company ascribed a value to these warrants of $93,506 based on
the market value of its common stock, discounted for transferability
restrictions, less the exercise price of the warrants. Management reflected
such value as a discount to the notes (see Note 4) in the accompanying
balance sheet. As of September 30, 1996, the discount related to these
warrants has been amortized in full.
Through September 30, 1996, $373,406 of these unit notes have been converted
into 1,450,376 shares of the Company's common stock (see Note 4). At
September 30, 1996, $743,094 of these unit notes which remain outstanding are
currently in default.
SECOND PRIVATE PLACEMENT
- ------------------------
On November, 1995, and subsequent to the closing of the First Private
Placement, the Company increased the offering up to 240 convertible units at
$5,000 per unit under a private placement (the "Second Private Placement").
Each convertible unit consists of a $5,000 convertible unsecured note and a
warrant exercisable for two years to purchase 5,000 shares of the Company's
common stock at an exercise price of $.05 per share, subject to adjustment
under certain circumstances. The warrants are callable at any time by the
Company with six months prior written notice.
Each convertible note bears interest payable monthly at 10% per annum, is due
on May 15, 1996 (subject to six 30-day extensions at sole option of the
holder) and is unsecured. Each note may be prepaid by the Company at any
time without penalty, and is convertible at any time, at the option of the
holder, into shares of the Company's common stock at a conversion price equal
to 75% of the closing bid price of the Company's common stock on the business
day immediately preceding such conversion.
8
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
Second Private Placement, continued
- -----------------------------------
Through September 30, 1996, the Company issued 156.5 units for $782,500 in
cash and warrants to purchase 782,500 shares of the Company's common stock.
In addition, the Company issued warrants to certain investors in the Second
Private Placement with the same terms as described above, to purchase 50,000
shares of the Company's common stock. The Company ascribed a total value to
these warrants of $155,569 based on the market value of the common stock,
discounted for transferability restrictions, less the exercise price of the
warrants and reflected such value as a discount to the notes (see Note 6) in
the accompanying balance sheet. As of September 30, 1996, $710,000 of these
unit notes are in default and $72,500 have been converted into 435,555 shares
of common stock. As of September 30, 1996, the discount related to these
warrants has been amortized in full.
Under the terms of the agreements, the Company shall use its best efforts to
register the shares issued under the First and Second Private Placements, as
well as any conversion changes with the Securities and Exchange Commission.
In March, 1996, the Company amended the terms of the Second Private Placement
to increase the cost of each convertible unit to $20,000, to decrease the
maximum number of units available to 60 and to extend the term of the related
unit note to twelve months. As of September 30, 1996, the company has
retracted this offer.
NOTE 5 - NOTE PAYABLE
- ---------------------
In February, 1996, the Company issued notes totaling $100,000 plus warrants
to purchase 100,000 shares of common stock at an exercise price of $.25 per
share (the estimated fair market value of its common stock in February,
1996); warrants to purchase 100,000 shares of common stock at an exercise
price of $1.00 per share; and warrants to purchase 100,000 shares of common
stock at an exercise price of $2.50 per share in connection with the note
receivable. In addition, the Company may be obligated to pay $50,000 for
interest costs in connection with these loans if certain milestones were
achieved. Through September 30, 1996, notes totaling $10,000 have been
repaid, and at September 30, 1996, $90,000 remained outstanding.
NOTE 6 - COMMON STOCK
- ---------------------
From January 1, 1996 to September 30, 1996, the Company issued warrants,
valued at $144,019, to purchase 722,500 shares of the Company's common stock
at an exercise price of $.05 per share as a part of the second private
placement.
On September 26, 1996, the company issued 700,000 shares of common stock to
an officer for his services.
9
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
NOTE 7 - PREFERRED STOCK
- ------------------------
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of the preferred stock, $.001
par value. Subject to previously designated series of preferred stock, the
Board of Directors of the Company has authority to issue all or any portion
of the authorized but unissued additional preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences and the number of shares constituting
any series or the designation of such series.
NOTE 8 - PROPOSED MERGER
- ------------------------
On January 15, 1996, the Company entered into a letter of intent with Oakmont
Pharmaceuticals, Inc., a Delaware corporation ("Oakmont"), which provided for
the merger of the Company and Oakmont on or before May 31, 1996, upon
fulfillment of certain conditions including the execution of the merger
Agreement (the "Merger"). In connection with the proposed Merger, the
Company loaned to Oakmont $588,470 from proceeds raised in the Second Private
Placement in 1996. The Company has received from Oakmont a 12% secured note
(the"Note") for the amount not exceeding $750,000. The proceeds of the Note
were to be used by Oakmont to acquire certain assets of Pennex
Pharmaceuticals, Inc. before the Merger of the Company and Oakmont. On March
11, 1996, negotiations regarding the proposed Merger with the Company were
terminated.
Under the terms of the Note, the Company was to receive the principal amount
and any unpaid interest thereby on June 30, 1996. In addition, the Company
demanded, pursuant to the terms of the Note, the issuance of an option to
purchase 25% of the issued and outstanding shares of Oakmont. There can be
no guarantee that such monies will be repaid. The non-repayment of these
amounts to the Company would have a serious material effect on its financial
position. As of September 30, 1996, no monies have been received from the
Oakmont note.
As of July 25, 1996, Oakmont Pharmaceuticals and Hygenics settled the dispute
over the amount of warrants or options Hygenics is to receive and additional
penalty interest due Hygenics. The agreement is for Oakmont is to issue
650,000 warrants or options of common stock, exercisable at a price of $.05
per share for a period of eighteen months from January 15, 1996 and pay a
monthly extension fee of $50,000 per month beginning September 1, 1996 for
every month that all the principal and interest is not paid. This monthly
extension fee will be proportionately reduced based upon the portion paid
against the principal and the number of remaining days on a per diem basis.
As of September 30, 1996, no warrants have been issued to Hygenics nor has
the extension fee been paid.
10
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Consulting
- ----------
In October 1991, the Company entered into certain agreements with certain
medical advisors whereby BPI engaged the medical advisors to act as
consultants for a period of three years following the Company's completion of
an initial public offering, which was anticipated to occur in 1991. HPI
intends to fulfill the contractual obligation. The related annual obligation
is as follows:
1996 66,000
1997 44,000
---------
$ 110,000
=========
Trademark Infringement
- ----------------------
On June 27, 1995, the Company received notice from an unrelated entity
objecting to the use of the name Hygenics Pharmaceuticals, Inc. as an
infringement on an existing trademark, which is applied to a line of dental
supplies and accessories. The Company's trademark law firm registered a
disagreement as to a potential conflict and no further action has been taken
by either party. The Company does not believe that an infringement exists
and will vigorously defend its position; however, there can be no assurance
that the Company will prevail in this matter.
Joint Venture Letter of Intent
- ------------------------------
On October 24, 1995, Hygenics signed a letter of intent to form a joint
venture with Biocontrol, Inc. to develop topical antimicrobials using
Biocontrol's patented drug delivery system. The original term of this letter
of intent, entered into on February 29, 1996, was extended to June 30, 1996.
As of September 30, 1996, this letter of intent to form a joint venture has
not been extended and Biocontrol is waiting for the reorganization of
Hygenics before renewing this agreement. The Company cannot guarantee that a
joint venture will be formed with Biocontrol, Inc., or, if so, that the joint
venture will be successful in developing products for commercialization by
the Company, or that, even if such products are developed, that the Company
will be successful in commercializing them.
11
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
NOTE 9 - COMMITMENTS AND CONTINGENCIES, continued
- -------------------------------------------------
Employment Contracts
- --------------------
The Company entered into three-year employment contracts with two officers
and stockholders of the Company and a two-year agreement with a director
commencing on June 1, 1995. The contracts provide for annual compensation to
the two officers of $110,000 and $135,000 of which approximately $2,917 per
month of one officer's compensation was deferred to July 1, 1995. The other
officer was to receive an increase in his annual salary to $110,000 on July
1, 1995. Neither officer has received a full salary since July 1995. As of
September 30, 1996, the Company owes a total of $196,975 for accrued salaries
to these officers.
On September 26, 1996, the Board of Directors adopted an unanimous resolution
by written consent approving an Employment Agreement employing Mr. William
Goedecke as Chief Executive Officer with a compensation proving for 700,000
shares of restricted Rule 144 stock and $100,000 per year in deferred salary.
Research
- --------
In November 1992, the Company entered into an agreement with Medi-Flex
Hospital Products, Inc. (Medi-Flex), an unrelated entity, whereby the Company
agreed to assist Medi-Flex to obtain FDA approvals for a certain product and
a manufacturing plan, and granted Medi-Flex a worldwide license to
manufacture, market and sell 4% CHG in the Product Packages (as defined).
The license is an exclusive license for the initial five-year term of the
agreement; thereafter, the Company at its option may convert the license to a
non-exclusive license if and only if Medi-Flex has not achieved certain
cumulative sales levels (as defined). The Company has received $317,500 from
Medi-Flex related to this contract.
On June 7, 1994, Medi-Flex informed the Company of Medi-Flex's termination of
its agreement with the Company whereby, for certain "good faith" and
technology transfer fees and future royalties, the Company was to develop a
number of products for Medi-Flex. Medi-Flex claims that the Company is in
default of the Agreement and, in its June 7, 1994 notification, offered to
provide the Company with a full release if the Company returned to Medi-Flex
$317,000 of fees paid to the Company by June 20, 1994. The Company believes
that Medi-Flex's allegations are completely without merit. On July 11, 1994,
the Company informed Medi-Flex of its denial of all of its allegations and
offered to meet with Medi-Flex to attempt to resolve the issues and concerns
raised by each party and stated that, if Medi-Flex continued to pursue their
unfounded allegations, the Company would respond with legal action. To date,
neither the Company, nor Medi-Flex, have taken legal action against the other
in this matter. While the Company believes that Medi-Flex's allegations are
completely without merit and intends to take all available remedies at law to
have its rightful claims to all
12
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended September 30, 1996 and 1995 and
For The Nine Months Ended September 30, 1996 and 1995
Research, continued
- -------------------
fees and royalties as provided in the Agreement with Medi-Flex satisfied,
there is no certainty that the Company will prevail in this matter, or that
the other party will not prevail in its claims of financial damage.
Moreover, should Medi-Flex prevail in this matter, the impact could have a
serious material effect on the Company's financial position. Even if the
Company should prevail in any such litigation, the attorneys fees and other
litigation costs of such litigation could be a serious economic burden for
the Company.
NOTE 10 - CONCENTRATION OF CREDIT RISK
- --------------------------------------
At times, the Company maintains cash balances at certain financial
institutions in excess of the federally insured amounts.
13
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Brian Pharmaceuticals, Inc. (BPI), a California corporation, was incorporated
on December 3, 1984. On November 14, 1994, BPI consummated a stock-for-stock
exchange with Diversified Food Manufacturers, Ltd. (DFML), a publicly-held
Delaware corporation. As part of the exchange, DFML issued 7,610,000 shares
of its common stock, 5,000 shares of its Series A preferred stock and 2,000
shares of its Series B preferred stock in exchange for all of the outstanding
shares of BPI. The exchange has been accounted for as a reverse acquisition
because stockholders of BPI maintain control of the surviving entity, BPI.
Accordingly, for financial reporting purposes, the shares issued by DFML are
considered outstanding based on the date of their original issuance by BPI,
and the 1,800,000 shares of common stock retained by the stockholders of DFML
are reflected as consideration issued to consummate the stock-for-stock
exchange. No value was ascribed to the shares retained by the stockholders
of DFML since, at the date of exchange, DFML had nominal assets and
stockholders' equity and had no operations. On January 3, 1995, DFML changed
its name to Hygenics Pharmaceuticals, Inc. (the Company).
The Company is considered a development-stage company and is involved in the
research and development of antimicrobial skin cleansing/care formulations
based upon Chlorhexidine Gluconate (CHG). The Company is preparing to market
its only product, Surgique(tm), 4%, CHG solution, is preparing several new
CHG products for submission to the U.S. Food and Drug Administration (FDA)
for approval and is outsourcing an extensive range of non-CHG products for
marketing under its own label.
The Company does not anticipate generating sales of its products until 1996
and expects its products to be sold domestically and internationally.
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
- --------------------------------------------------------------------
Salaries and consulting decreased $89,644 or 47% from $189,019 in 1995 to
$99,375 in 1996.
Other selling, general and administrative expenses decreased from $89,686 in
1995 to $(52,129) in 1996 primarily as a result of no contracts with outside
services related to the bridge financing.
Interest expense increased $195,326 from $194,754 in 1995 to $390,080 in 1996
due to the issuance of interest bearing notes payable in 1996.
14
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
- ----------------------------------------------------------------------------
Salaries and consulting decreased $112,829 or 27% from $417,919 in 1995 to
$305,090 in 1996.
Other selling, general and administrative expenses decreased $370,170 or 73%
from $507,086 in 1995 to $136,916 in 1996 primarily as a result of no
contracts with outside services related to the bridge financing.
Interest expense increased $122,157 from $456,454 in 1995 to $578,611 in 1996
due to the issuance of interest bearing notes payable in 1996 and the
amortization of discounts on notes payable.
Liquidity and Capital Resources
- -------------------------------
From January 1, 1996 to September 30, 1996, the Company issued 144.5 units at
$5,000 per unit under a private placement for a total of $722,500. Each unit
consisted of a $5,000 convertible note and a warrant to purchase 5,000 shares
of the Company's common stock at an exercise price of $.05.
As of September 30, 1996, current liabilities exceeded current assets by
$1,463,380. This liquidity issue, among other things, raises substantial
doubt about the Company's ability to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to
obtain additional financing and ultimately to attain revenues which exceed
its cost structure operations. In addition, the Company must take measures
to successfully collect its note receivable from Oakmont. The Company is
seeking to collect the funds owed and is pursuing all legal rights and
remedies. There are no assurances that management's plans will be effective
in a manner which will enable the Company to continue as a going concern.
Events
- ------
On July 8, 1996, all members of the Company's Board of Directors and existing
officers tendered resignation from their positions as directors of the
Company effective as of July 1, 1996, following the Company's announcement
that it will be unable to renew the officers and directors liability
insurance policy, which expired on June 30, 1996. No director or officer
furnished any statement of disagreement as to the policies of the Company as
part of such resignations.
Prior to tendering such resignations, the Board of Directors elected Dean
Bradley as sole Director, Chief Executive Officer, Secretary and Chief
Financial Officer of the Company. Mr. Bradley is not the owner of any
securities of the Company.
On September 26, 1996, the shareholders resolved by unanimous written consent
to remove Dean Bradley as a sole Director, Chief Executive Officer, Secretary
and Chief Financial Officer of the company. In Mr. Bradley's place, the
shareholders elected Charles H. Newman as President and a Director and Ronald
Pellett as a Director. Mr. William Goedecke was then elected by an unanimous
vote by the Board of Directors as the Chief Executive Officer on September
26, 1996 and issued 700,000 shares of common stock and $100,000 annual
deferred compensation for his services.
15
<PAGE>
PART II - OTHER INFORMATION
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
There were Form 8-K reports filed during the quarter.
Effective July 8, 1996, a Form 8-K was filed stating that the Board of
Directors and existing officers tendered their resignations as directors
following the announcement that the officers and directors liability
insurance policy expired.
On September 26, 1996, a Form 8-K was filed stating that Dean Bradley was
removed as a sole Director, Chief Executive Officer, Secretary and Chief
Financial Officer of the Company. In Mr. Bradley's place, the shareholders
elected Charles H. Newman as the President and a Director and Ronald Pellett
as a Director.
On September 26, 1996, the Directors adopted an unanimous resolution by
written consent approving an Employment Agreement employing Mr. William
Goedecke as Chief Executive Officer with a compensation providing for 700,000
shares of restricted Rule 144 stock and $100,000 per year in deferred salary.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HYGENICS PHARMACEUTICALS, INC.
Date: November 20, 1996 By: S/S
William Goedecke, CEO
S/S
Charles H. Newman, President
16
Agreement by and between Oakmont
Pharmaceuticals, Inc. and Hygenics
Pharmaceuticals, Inc. dated July 23, 1996.
The parties agree as follows:
1. The principal amount of the Note is $573,500.25, plus interest on each
advance thereof from the date of advance to payment.
2. Oakmont will assume the remaining $65,000 obligation of Hygenics to
Messrs. Vochringer and Cabana, plus interest thereon.
3. Oakmont will deliver to Hygenics a check in amount of $10,000.00 in
partial payment of the accrued interest on the Note, which check shall not be
presented for payment by Hygenics unless and until Oakmont advises Hygenics
that there are sufficient funds to cover said check.
4. Oakmont shall reduce the principal balance of the Note from the proceeds
of the equity and for debt raised by Oakmont as the requirements of paying
Rexall and Great Valley and the costs of commencing operations at the Verona
Plant may permit.
5. Oakmont shall bring the accrued interest on the Note current from the
proceeds of the prospective $1 million bridge loan or other similar
financing, as if and when such financing closes.
6. Oakmont will issue warrants or options to purchase Oakmont common stock
equal to 650,000 shares of common stock, exercisable at a price of $.05 per
share for a period of eighteen months from January 15, 1996.
7. Hygenics may obtain a term life insurance policy on the life of Arthur
Michaelis in the amount of $600,000.00 with a carrier reasonably acceptable
to Oakmont and Dr. Michaelis. Upon payment of the Note, Hygenics shall use
its reasonable efforts to cause such policy to be assigned to Oakmont. The
proceeds of the policy shall be used to retire the principal and interest of
the Note and the costs of the policy. Any balance of the proceeds will be
paid to Oakmont.
8. The principal and the interest on the Note shall be paid on or before
September 1, 1996. In the event that all of the principal and interest shall
not be paid by such date, Oakmont shall pay Hygenics a monthly extension fee
of $50,000.00.
9. To the extent that the above principal amount shall be reduced from time
to time by partial payment, the $50,000.00 monthly extension fee shall be
proportionately reduced based upon the portion paid for the number of
remaining days on a per diem basis.
10. In the event that Oakmont is unable to obtain the necessary financing to
pay Rexall for the Verona plant on a timely basis, Oakmont shall give
Hygenics 30 days notice of the anticipated inability to do so. Hygenics
shall have the right to raise such funds to pay Rexall for a fee to be
negotiated between the parties.
11. Hygenics shall withdraw and repudiate the written statement of John Budd
dated May 9, 1996 with respect to the actions of Oakmont, Liberty Merchant
Group, and their respective principals.
12. Oakmont, Hygenics and their respective officers, directors,
representatives, and consultants (excluding Avonwood Capital) shall exchange
mutual releases. Hygenics shall use its best efforts to obtain John Budd's
and Charles Newman's releases, provided, however, such releases shall not be
a condition to this agreement or the parties' performance under this
paragraph.
13. The parties agree to carry out such acts and execute such additional
documents as may be reasonably necessary to carry out the intentions of the
parties hereunder.
14. This agreement has been executed in the Commonwealth of Pennsylvania and
shall be interpreted in accordance with the laws of said state.
This agreement is executed on July 25, 1996 by the duly and properly
authorized officers of the respective parties hereto.
Hygenics Pharmaceuticals Inc.
/s/ Dean Bradley, Chairman,
President and CEO
Oakmont Pharmaceuticals, Inc.
/s/ Art Michaelis, Ph.D.
Chairman and CEO
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 132
<SECURITIES> 0
<RECEIVABLES> 683,752
<ALLOWANCES> 0
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<CURRENT-ASSETS> 697,514
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205,000
<COMMON> 2,013
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