<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
June 30, 1996 Number 0-22806
HYGENICS PHARMACEUTICALS, INC.
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(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.
26941 Cabot Road, Suite 128, Laguna Hills, California 92653
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(714) 582-7644
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(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 13,112,431
- ----------------------------- ------------------
Title of Class Number of Shares
Outstanding at
June 30, 1996
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
PART I - FINANCIAL INFORMATION PAGE
ITEM 1 - FINANCIAL STATEMENTS
Condensed consolidated balance sheet,
June 30, 1996 ......... . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed consolidated statements of operations,
three months ended June 30, 1996 and 1995 . . . . . . . . . . . . . . 2
Condensed consolidated statements of operations,
six months ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . 3
Condensed consolidated statement of equity,
six months ended June 30, 1996. . . . . . . . . . . . . . . . . . . . 4
Condensed consolidated statements of cash
flows, six months ended June 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
June 30,
ASSETS 1996
--------------
Current assets:
Cash $ 426
Deferred financing costs 27,198
Note Receivable 616,098
Other 13,630
------------
Total current assets 657,352
Furniture and equipment, net ---
Other assets 5,022
------------
$ 662,374
------------
------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 560,611
Notes payable 1,543,094
------------
Total current liabilities 2,103,705
------------
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; 13,112,431 and 10,976,500
shares issued and outstanding at
June 30, 1996 1,313
Additional paid-in capital 3,800,555
Deficit accumulated during
development stage (5,443,204)
------------
Total stockholders' deficiency (1,641,331)
------------
$ 662,374
------------
------------
See accompanying notes to condensed
consolidated financial statements
1
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended June 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 101,001 128,000
Rent 5,753 6,400
Other selling, general and
administrative expenses 38,968 220,400
---------- -----------
Total other costs and expenses 145,722 354,800
---------- -----------
Operating loss (145,722) (354,800)
Interest expense (244,427) (170,600)
Other income 17,815 900
---------- -----------
Loss before income taxes (372,334) (524,500)
Income taxes --- ---
---------- -----------
Net loss $ (372,334) $ (524,500)
---------- -----------
---------- -----------
Net loss per common share $ (.03) $ (.06)
---------- -----------
---------- -----------
Weighted average number of common
shares outstanding 13,025,765 8,143,250
---------- -----------
---------- -----------
See accompanying notes to condensed
consolidated financial statements
2
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six Months Ended June 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 205,715 228,900
Rent 10,805 12,700
Other selling, general and
administrative expenses 189,045 417,400
---------- ----------
Total other costs and expenses 405,565 659,000
---------- ----------
Operating loss (405,565) (659,000)
Interest expense (539,531) (261,700)
Other income 30,906 2,100
---------- ----------
Loss before income taxes (914,190) (918,600)
Income taxes ( 800) (800)
---------- ----------
Net loss $ (914,990)$ (919,400)
---------- ----------
---------- ----------
Net loss per common share $ (.07) $ (.09)
---------- ----------
---------- ----------
Weighted average number of common
shares outstanding 12,451,444 10,601,000
---------- ----------
---------- ----------
See accompanying notes to condensed
consolidated financial statements
3
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For The Six Months Ended June 30, 1996
Deficit
Accumulated
Common Stock Preferred Stock A Additional During The Total
--------------------- ------------------ 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) 55,000 6 2,744 2,750
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 ( 914,990) ( 914,990)
---------- ------ ----- ------- --------- ---------- ------------
Balances, June 30, 1996 13,112,431 $ 1,313 5,000 $ 5 $3,800,555 $(5,443,204) $( 1,641,331)
---------- ------ ----- ------- --------- ---------- ------------
---------- ------ ----- ------- --------- ---------- ------------
</TABLE>
See accompanying notes to condensed
consolidated financial statements
4
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 1996 and 1995
1996 1995
--------- --------
Cash flows from operating activities:
Net loss $ (914,990) $(919,400)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of discounts on notes payable 451,823 239,200
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 224,631 (69,900)
--------- --------
Net cash used in operating activities (241,186) (750,500)
--------- --------
Cash flows from investing activities:
Purchase of furniture and equipment --- (300)
Other assets --- (900)
Increase in note receivable (616,098) ---
--------- --------
Net cash used in investing activities (616,098) (1,200)
Cash flows from financing activities:
Proceeds from issuance of notes payable 822,500 776,500
Payments on notes payable (10,000) ---
Deferred offering costs --- (93,100)
Proceeds from sale of common stock 2,750 ---
--------- --------
Net cash provided by financing activities 815,250 683,400
--------- --------
Net change in cash ( 42,034) (68,300)
Cash at beginning of period 42,460 138,900
--------- --------
Cash at end of period 426 70,600
--------- --------
--------- --------
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Income taxes --- ---
--------- --------
--------- --------
Interest --- ---
--------- --------
--------- --------
Supplemental schedule of noncash financing activities:
Issuance of warrants accounted for as discounts on
notes payable (Notes 4 and 6) 144,019 ---
Issuance of common stock for conversion of notes
payable (Note 4) 325,781 ---
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 June 30, 1996 and 1995 and
For The Six Months Ended June 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 June 30, 1996 and 1995 and
For The Six Months Ended June 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 June 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 June 30, 1996, the discount related to these notes has been
amortized in full.
7
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended June 30, 1996 and 1995 and
For The Six Months Ended June 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 June 30, 1996, the
discount related to these warrants has been amortized in full.
Through June 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 June 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-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended June 30, 1996 and 1995 and
For The Six Months Ended June 30, 1996 and 1995
SECOND PRIVATE PLACEMENT, CONTINUED
Through June 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 June 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 June
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 June 30, 1996, there had been no units sold under this
amended private placement.
NOTE 5 - NOTE PAYABLE
In February, 1996, the Company issued notes totalling $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 June
30, 1996, notes totalling $10,000 have been repaid, and at June 30, 1996,
$90,000 remained outstanding.
NOTE 6 - COMMON STOCK
From January 1, 1996 to June 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.
9
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended June 30, 1996 and 1995 and
For The Six Months Ended June 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 June 30, 1996, no monies have been received from the Oakmont note.
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
---------
---------
10
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended June 30, 1996 and 1995 and
For The Six Months Ended June 30, 1996 and 1995
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. 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.
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 June 30, 1996, the
Company owes a total of $135,725 for accrued salaries to these officers.
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.
11
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended June 30, 1996 and 1995 and
For The Six Months Ended June 30, 1996 and 1995
RESEARCH, CONTINUED
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 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 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED
LEASES
The Company leases its corporate facilities under a month-to-month lease.
NOTE 10 - CONCENTRATION OF CREDIT RISK
At times, the Company maintains cash balances at certain financial institutions
in excess of the federally insured amounts.
12
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended June 30, 1996 and 1995 and
For The Six Months Ended June 30, 1996 and 1995
NOTE 11 - SUBSEQUENT 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 presently is not the owner of any
securities of the Company.
13
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Salaries and consulting decreased $26,999 or 21% from $128,000 in 1995 to
$101,001 in 1996.
Other selling, general and administrative expenses decreased $181,432 or 82%
from $220,400 in 1995 to $38,968 in 1996 primarily as a result of no contracts
with outside services related to the bridge financing.
Interest expense increased $73,827 from $170,600 in 1995 to $244,427 in 1996 due
to the issuance of interest bearing notes payable in 1996 and the amortization
of discounts on notes payable.
14
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Salaries and consulting decreased $23,185 or 10% from $228,900 in 1995 to
$205,715 in 1996.
Other selling, general and administrative expenses decreased $228,355 or 45%
from $417,400 in 1995 to $189,045 in 1996 primarily as a result of no contracts
with outside services related to the bridge financing.
Interest expense increased $277,831 from $261,700 in 1995 to $539,531 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 June 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 June 30, 1996, current liabilities exceeded current assets by $1,446,353.
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. Management has received commitments to receive
$100,000 for working capital from an officer and certain shareholders of the
Company. Such funding will enable management to operate 30 to 60 days until
such time the Company may collect on its note receivable from Oakmont totalling
approximately $616,000. On September 1, 1996, in the event the Company does not
collect its note receivable, the Company will be assigned rights to certain
assets consisting of land and a production facility, and the assumption of
approximately $6,000,000 in long term debt. Should the Company receive the
assignment of assets, and assume the obligation, management intends to operate
the production facility, manufacture proprietary and nonproprietary products and
raise additional capital to service its obligations in a timely manner.
Management could also sell the assets, repay the obligation and retain proceeds,
if any, from this transaction. 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.
15
<PAGE>
PART II - OTHER INFORMATION
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
There were no 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.
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: August 5, 1996 By: s/s
-------------------------------------
Dean Bradley, Chief Executive Officer
s/s
-------------------------------------
Dean Bradley, President
16
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 426
<SECURITIES> 0
<RECEIVABLES> 616,098
<ALLOWANCES> 0
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<COMMON> 1,313
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<TOTAL-LIABILITY-AND-EQUITY> 662,374
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