<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
March 31, 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.
26941 CABOT ROAD, SUITE 128, LAGUNA HILLS, CALIFORNIA 92653
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(714) 582-7644
- --------------------------------------------------------------------------------
(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 12,589,648
- ----------------------------- ----------------
Title of Class Number of Shares
Outstanding at
March 31, 1996
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Condensed consolidated balance sheets,
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 1
Condensed consolidated statements of operations,
three months ended March 31, 1996 and 1995 . . . . . . . . . 2
Condensed consolidated statement of equity,
three months ended March 31, 1996 . . . . . . . . . . . . . 3
Condensed consolidated statements of cash
flows, three months ended March 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to condensed consolidated financial
statements . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 13
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 15
<PAGE>
PART I - FINANCIAL INFORMATION
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
ASSETS 1996 1995
--------- ---------
Current assets:
Cash $ 41,727 $ 166,500
Deferred financing costs 27,198 241,900
Note Receivable 598,443 0
Other 13,630 10,000
----------- ----------
Total current assets 680,998 418,400
Furniture and equipment, net 0 2,700
Deferred offering costs 0 50,000
Other assets 5,022 2,200
----------- ----------
$ 686,020 $ 473,300
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 417,310 $ 50,900
Notes payable 1,387,113 645,000
----------- ----------
Total current liabilities 1,804,423 695,900
----------- ----------
Redeemable preferred stock - Series B
face value $100; 200,000 shares authorized;
2,000 shares issued and outstanding 200,000 200,000
----------- ----------
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 $.0001 per
share; 12,765,765 and 10,645,000
shares issued and outstanding at
March 31, 1996 and March 31, 1995,
respectively 1,278 1,110
Additional paid-in capital 3,751,184 2,816,400
Deficit accumulated during
development stage (5,070,870) (3,240,100
----------- ----------)
Total stockholders' deficiency (1,318,403) (422,600)
----------- ----------
$ 686,020 $ 473,300
----------- ----------
----------- ----------
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 March 31, 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 104,714 100,900
Rent 5,052 6,300
Other selling, general and
administrative expenses 150,077 197,000
----------- -----------
Total other costs and expenses 259,843 304,200
----------- -----------
Operating loss (259,843) (304,200)
Interest expense (295,104) (91,100)
Other income 13,091 1,200
----------- -----------
Loss before income taxes (541,856) (394,100)
Income taxes (800) (800)
----------- -----------
Net loss $ (542,656) $ (394,900)
----------- -----------
----------- -----------
See accompanying notes to condensed
consolidated financial statements
2
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For The Three Months Ended March 31, 1996
<TABLE>
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>
Balance, 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) 1,129,857 113 280,668 280,781
Common stock issued
ending March, 1996
in connection with
exercise of warrants
(Note 6) 55,000 6 2,744 2,750
Warrants issued ending
March, 1996 at an exercise
price of $.05 per share in
connection with private
placement offering
(Notes 4 and 6) 143,363 143,363
Net loss (542,656) (542,656)
--------- ------ ----- --- ---------- ----------- ------------
Balance, March 31, 1996 12,765,765 $1,278 5,000 $5 $3,751,184 $(5,070,870) $(1,318,403)
--------- ------ ----- --- ---------- ----------- ------------
--------- ------ ----- --- ---------- ----------- ------------
</TABLE>
See accompanying notes to condensed
consolidated financial statements
3
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31, 1996 and 1995
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (542,656) $ (394,900)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of discounts on notes payable 261,436 80,600
Changes in operating assets and liabilities:
Other current assets (2,650) (10,000)
Accounts payable and accrued liabilities 81,330 62,400
---------- ----------
Net cash used in operating activities (202,540) (386,700)
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment 0 (300)
Other assets 0 (400)
Increase in note receivable (598,443) 0
---------- ----------
Net cash provided by (used in) investing activities (598,443) (700)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 807,500 465,000
Payments on notes payable (10,000) 0
Deferred offering costs 0 (50,000)
Proceeds from sale of common stock 2,750 0
---------- ----------
Net cash provided by financing activities 800,250 415,000
---------- ----------
Net change in cash (733) 27,600
Cash at beginning of period 42,460 138,900
---------- ----------
Cash at end of period 41,727 166,500
---------- ----------
---------- ----------
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) 707,500 0
Issuance of common stock for conversion of notes
payable (Notes 4) 280,781 0
</TABLE>
See accompanying notes to condensed
consolidated financial statements
4
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three Months Ended March 31, 1996 and 1995
NOTE 1 - QUARTERLY INFORMATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with SEC requirements 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.
See accompanying notes to condensed
consolidated financial statements
5
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 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 March 31, 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 $1,984,000 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.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
DEFERRED FINANCING COSTS
The Company capitalized certain loan costs incurred in connection with its
financing activities (see Note 4) and these costs are amortized over the
expected term of the related debt using the effective interest method.
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.
See accompanying notes to condensed
consolidated financial statements
6
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 1996 and 1995
FIRST PRIVATE PLACEMENT, CONTINUED
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 March 31, 1996, the unamortized discount related to
these notes amounted to $87,545.
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 $89,756 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
March 31, 1996, the unamortized discount related to these warrants amounted to
$29,918.
At March 31, 1996, $726,375 of these notes payable had been extended until May
15, 1996 and another $220,125 had been converted into 694,302 shares of the
Company's common stock (see Note 4). At March 31, 1996, $170,000 of these
unit notes were 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.
See accompanying notes to condensed
consolidated financial statements
7
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 1996 and 1995
SECOND PRIVATE PLACEMENT, CONTINUED
Through March 31, 1996, the Company issued 153.5 units for $767,500 in cash
and warrants to purchase 767,500 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 $154,913 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. Of these notes, $72,500 have been converted
into 435,555 shares of common stock. As of March 31, 1996, the unamortized
discount related to these warrants amounted to $68,518.
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 March 31, 1996, there had been no units
sold under this amended private placement.
NOTE 5 - NOTE RECEIVABLE
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; 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 for an
additional $50,000 based upon the reaching of certain milestones.
NOTE 6 - COMMON STOCK
From January 1, 1996 to March 31, 1996, the Company issued warrants to
purchase 707,500 shares of the Company's common stock at an exercise price of
$.05 per share as part of the second private placement.
In February, 1996, the Company issued warrants to purchase shares of the
Company's common stock as follows: 100,000 shares at $0.25; 100,000 shares
at $1.00; and 100,000 shares at $2.50 in connection with the note
receivable as discussed above.
See accompanying notes to condensed
consolidated financial statements
8
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 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.
SERIES A PREFERRED STOCK
Of the 1,000,000 authorized shares of preferred stock, 800,000 shares have
been designated as Series A preferred stock. The Series A preferred
stockholders are entitled to vote on all matters on which holders of common
stock are entitled to vote, at a rate of two hundred votes per share. The
Series A preferred stock is noncumulative, noninterest-bearing, nonredeemable
and nonconvertible. In connection with the stock-for-stock exchange, 5,000
shares of Series A preferred stock have been issued and are outstanding and
are held by two officers of the Company.
SERIES B PREFERRED STOCK
Of the 1,000,000 authorized shares of preferred stock, 200,000 shares have
been designated as Series B preferred stock. The Series B preferred stock
has a face value of $100 and is redeemable by the holders five years from
date of issuance, or by the Company, in its sole discretion, on any date
prior to five years after issuance. The 10% preferred Series B
preferred stock is nonvoting, noncumulative and nonconvertible. In
connection with the debt settlement agreement with Clay-Park, all 2,000
shares of Series B preferred stock have been issued and are outstanding.
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 note
is secured by the common stock of Oakmont. 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, Oakmont
decided to discontinue negotiations regarding the proposed Merger and
subsequently terminated such negotiations with the Company.
See accompanying notes to condensed
consolidated financial statements
9
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 1996 and 1995
NOTE 8 - PROPOSED MERGER, CONTINUED
Under the terms of the Note, the Company shall 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. The Company
also did not renew, in the light of the above events, its investment banking
Agreement with Avonwood Capital Corporation and Liberty Merchant Group, the
finders of the Company's merger candidate, which agreement expired on March 9,
1996. There can be no guarantee that such monies will be repaid or that the
stock securing the monies loaned could be liquidated to adequately satisfy the
amount lent. The non-repayment of these amounts to the Company would have a
serious material effect on its financial position.
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 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.
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.
See accompanying notes to condensed
consolidated financial statements
10
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 1996 and 1995
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
March 31, 1996, the Company owes a total of $92,083 in accrued salaries.
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 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.
See accompanying notes to condensed
consolidated financial statements
11
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three Months Ended March 31, 1996 and 1995
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.
See accompanying notes to condensed
consolidated financial statements
12
<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 MARCH 31, 1996 AND 1995
Salaries and consulting increased $4,714 or 4% from $100,900 in 1995 to
$104,714 in 1996.
Other selling, general and administrative expenses decreased $46,923 or 24%
from $197,000 in 1995 to $150,077 in 1996 primarily as a result of no
contracts with outside services.
Interest expense increased $204,004 from 91,100 in 1995 to $295,104 in 1996
due to the issuance of interest bearing notes payable in 1996 and the
amortization of discounts on notes payable.
See accompanying notes to condensed
consolidated financial statements
13
<PAGE>
HYGENICS PHARMACEUTICALS, INC.
(A Development-Stage Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
From January 1, 1996 to March 31, 1996, the Company issued 153.5 units at
$5,000 per unit under a private placement. Each unit consisted of a $5,000
convertible note and 5,000 warrants of the Company's common stock.
As of March 31, 1996, current liabilities exceeded current assets by
$1,150,623. 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 (see the preceding paragraph) and ultimately to attain
profitable operations.
See accompanying notes to condensed
consolidated financial statements
14
<PAGE>
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.
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: May 13, 1996 By: /s/
-------------------------------------
John S. Budd, Chief Executive Officer
/s/
-------------------------------------
Charles Newman, President
See accompanying notes to condensed
consolidated financial statements
15
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 41,727
<SECURITIES> 0
<RECEIVABLES> 598,443
<ALLOWANCES> 0
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<CURRENT-ASSETS> 680,998
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<CURRENT-LIABILITIES> 1,804,423
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205,000
<COMMON> 1,278
<OTHER-SE> (1,319,686)
<TOTAL-LIABILITY-AND-EQUITY> 686,020
<SALES> 0
<TOTAL-REVENUES> 0
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<OTHER-EXPENSES> 259,843
<LOSS-PROVISION> 0
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