<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1999; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____ TO ____ .
Commission File Number
0-23076
Sparta Pharmaceuticals, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 56-1755527
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(State of incorporation) (IRS Employer Identification No.)
111 Rock Rd. Horsham, PA 19044
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(Address of principal executive offices, including zip code)
(215) 442-1700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 14, 1999, there were outstanding 3,691,841 shares of Common Stock,
$.001 par value per share.
1
<PAGE>
FORM 10-Q
QUARTERLY REPORT
--------------
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
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<S> <C> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three-month
periods ended March 31, 1999 and 1998 and for the period
from June 12, 1990 (inception) to March 31, 1999 4
Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 1999 and 1998 and for the period
from June 12, 1990 (inception) to March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
2
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,532,163 $ 2,470,359
Prepaid expenses and other assets 70,516 14,719
------------ ------------
Total current assets 1,602,679 2,485,078
Fixed assets, net 105,553 152,536
Other assets:
License agreements, net of amortization
of $109,109 in 1999 and $105,870 in 1998 5,679 8,918
Restricted Cash 95,120 94,448
------------ ------------
$ 1,809,031 $ 2,740,980
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 556,123 $ 528,090
------------ ------------
Total current liabilities 556,123 528,090
------------ ------------
Stockholders' equity:
Preferred Stock, not designated, $.001 par value;
authorized and unissued 8,882,731 shares --- ---
Series B' Convertible Preferred Stock, $.001 par value;
authorized 2,117,269 shares; issued and outstanding
813,741 shares in 1999 and 828,741 shares in 1998 814 829
Common Stock, $.001 par value; authorized 72,000,000
shares; issued and outstanding 3,691,841 shares in
1999 and 3,651,843 shares in 1998 3,692 3,652
Additional paid-in capital 28,682,301 28,682,326
Stock subscriptions receivable (66,667) (66,667)
Deferred compensation (83,641) (100,443)
Deficit accumulated during the development stage (27,283,591) (26,306,807)
------------ ------------
Total stockholders' equity 1,252,908 2,212,890
------------ ------------
$ 1,809,031 $ 2,740,980
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------- Period From
June 12, 1990
(Inception) to
March 31,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue:
Grant income and contract revenue $ 132,760 $ 144,252 $ 1,028,243
Interest income 23,071 76,745 1,293,536
----------- ---------- ------------
Total revenue 155,831 220,997 2,321,779
----------- ---------- ------------
Operating expenses:
Research and development 802,287 931,577 17,394,705
General and administrative 330,328 284,567 8,912,752
Charge for acquired research
and development ---- ---- 3,297,913
----------- ---------- ------------
Net loss $ (976,784) $ (995,147) $(27,283,591)
=========== ========== ============
Basic and diluted net loss per share $ (.26) $ (.31)
=========== ==========
Basic and diluted weighted average
number of shares outstanding (Note 2) 3,688,360 3,189,207
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31, Period from June 12, 1990
-------------------------------------- (Inception) to
1999 1998 March 31, 1999
------------------ ---------------- ---------------------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................ $ (976,784) (995,147) (27,283,591)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on investments......................... - - 3,316
Depreciation and amortization............... 50,222 50,937 1,190,119
Write down of license agreement............. - - 45,200
Acquired research & development............. - - 3,197,913
Issuance of convertible notes for services.. - - 220,474
Issuance of stock for services.............. - 45,431 288,022
Compensation expense related to stock options
and warrants granted...................... 16,802 16,803 518,996
Compensation expense related to forgiveness
of stock subscriptions receivable......... - - 116,667
Changes in operating assets and liabilities,
net of effect from acquisition:
Prepaid expenses and other assets......... (55,797) (153,571) (70,516)
Restricted cash........................... (672) (1,209) 152,229
Accounts payable and accrued expenses..... 28,033 (111,585) 406,123
------------ ------------ -------------
Net cash used in operating activities .. (938,196) (1,148,341) (21,215,048)
------------ ------------ -------------
Investing activities:
Payment of acquisition related fees & expenses.. - - (128,842)
Purchases of available-for-sale securities...... - - (2,576,468)
Maturities of available-for-sale securities..... - 1,473,275 2,573,152
Purchases of fixed assets....................... - (4,346) (147,943)
Acquisition of license agreements............... - - (160,078)
------------ ------------ -------------
Net cash provided by (used in) investing
activities............................ - 1,468,929 (440,179)
------------ ------------ -------------
Financing activities:
Proceeds from issuance of convertible notes
and notes payable............................. - - 4,488,650
Repayment of notes payable...................... - - (640,000)
Proceeds from issuance of Common Stock.......... - - 4,992,031
Repurchase of Common Stock...................... - - (45)
Proceeds from issuance of Preferred Stock....... - - 14,816,704
Increase in debt issuance costs................. - - (469,950)
------------ ------------ -------------
Net cash provided by financing
activities .......................... - - 23,187,390
------------ ------------ -------------
Increase (Decrease) in cash and cash equivalents (938,196) 320,588 1,532,163
Cash and cash equivalents at beginning of period 2,470,359 4,767,317 -
------------ ------------ -------------
Cash and cash equivalents at end of period...... $ 1,532,163 $ 5,087,905 $ 1,532,163
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Unaudited)
1. Company Background
Sparta Pharmaceuticals, Inc. (and together with its subsidiary, the
"Company"), a development stage biopharmaceutical company incorporated in 1990,
is engaged in the business of acquiring rights to, and developing for
commercialization, technologies and drugs for the treatment of a number of life
threatening diseases, including cancer, cardiovascular disorders, chronic
metabolic diseases and inflammation.
In January 1999, the Company and SuperGen, Inc. ("SuperGen") entered into
an Agreement and Plan of Reorganization (the "Reorganization Agreement")
pursuant to which a subsidiary of SuperGen will merge with and into the Company
(the "Merger"). If the Merger and related amendments to Sparta's Certificate of
Incorporation are approved by Sparta's stockholders, after the Merger, Sparta
will operate as a wholly owned subsidiary of SuperGen.
Due to the proposed merger with SuperGen, further clinical development will
be minimized until such time as the Company's portfolio of compounds has been
integrated into SuperGen's portfolio and the priority for all compounds has been
established.
2. Basis of Presentation
The consolidated financial statements include the accounts of Sparta
Pharmaceuticals, Inc. and Orizon Pharmaceuticals, Inc., a 95% owned subsidiary.
The Company recognizes 100% of Orizon's net loss in its consolidated results of
operations. All intercompany balances and transactions have been eliminated.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation,
have been included in the accompanying unaudited financial statements. For more
complete financial information, these financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998. Results for the interim periods are not necessarily indicative of the
results for any other interim period or for the full fiscal year. All common
stock and per share amounts in the accompanying Consolidated Financial
Statements, for periods prior to May 13, 1998, have been retroactively restated
to reflect the one-for-five reverse stock split of its common stock.
Basic EPS is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise or conversion of securities into common stock. For
the three months ended March 31, 1999 and 1998, the effects of the (i) exercise
of outstanding stock options and warrants and (ii) conversion of the outstanding
shares of convertible preferred stock (as if converted on their dates of
issuance) were excluded from the calculation of diluted EPS because their effect
was antidilutive.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sparta is a development stage pharmaceutical company engaged in the
business of acquiring rights to, and developing for commercialization,
technologies and drugs for the treatment of a number of life-threatening
diseases including cancer, cardiovascular disorders, chronic metabolic diseases
and inflammation. Sparta has not derived revenues from the sale of any products
and expects to incur substantial operating losses for the foreseeable future. As
of March 31, 1999, the Company's accumulated deficit was $27,283,591.
General
In January 1999, the Company and SuperGen, Inc. entered into an Agreement
and Plan of Reorganization pursuant to which a subsidiary of SuperGen will merge
with and into the Company. If the Merger and related amendments to Sparta's
Certificate of Incorporation are approved by Sparta's stockholders, after the
Merger, Sparta will operate as a wholly-owned subsidiary of SuperGen. In the
Merger, the Company's stockholders will receive 650,000 shares of SuperGen
Common Stock (subject to adjustment) in exchange for all shares of Common Stock
and Series B' Convertible Preferred Stock of Sparta ("Series B' Preferred
Stock") that they own.
This number of shares is subject to adjustment. The Company's stockholders
will receive:
o Fewer shares, if the average closing price per share of SuperGen Common
Stock as reported on The Nasdaq National Market during a specified period
before the closing of the Merger (the "Average Closing Price") is greater
than $12.00. In that event, the Company's stockholders will receive a
number of shares of SuperGen Common Stock equal to $7,800,000 divided by
the Average Closing Price. Moreover, to the extent that the number of
shares issuable pursuant to the Merger decreases below 650,000 due to
such downward adjustment, SuperGen will issue to the Company's
stockholders warrants exercisable for SuperGen Common Stock in the amount
of such decrease and exercisable at the Average Closing Price.
o More shares, if the Average Closing Price is less than $5.00. In that
event, the Company's stockholders will receive a number of shares of
SuperGen Common Stock equal to $3,250,000 divided by the Average Closing
Price.
The Company expects a special meeting of the Company's stockholders to vote
on the Merger and related matters ("Special Meeting") will occur in the third
quarter of 1999. At the Special Meeting, stockholders will be asked to adopt and
approve the Reorganization Agreement and approve the Merger. In addition, Sparta
stockholders will be asked to approve certain amendments to the Company's
Certificate of Incorporation. The Amendments will increase the conversion rate
in effect for the Sparta Series B' Preferred Stock so that each full share of
such preferred stock will be convertible into 16.4 shares of Sparta Common Stock
(instead of 2.666667 shares of Sparta Common Stock). In exchange for this
increase in the conversion rate, the Amendments will eliminate the liquidation
preference to which the holders of Sparta Series B' Preferred Stock are
currently entitled. In addition to approval by Sparta's stockholders, these
transactions also remain subject to, among other things, the effectiveness of a
registration statement and proxy statement and other customary closing
conditions.
7
<PAGE>
Results of Operations
Three Months Ended March 31, 1998 and 1999
Revenue decreased from $220,997 for the three months ended March 31, 1998
to $155,831 for the three months ended March 31, 1999 due primarily to a lower
level of interest income. The Company recorded grant income of $144,252 and
$132,760 for the three months ended March 31, 1998 and 1999, respectively, under
two Small Business Innovation Research grants awarded in 1997 and 1998. Interest
income decreased from $76,745 in the first quarter of 1998 to $23,071 in the
first quarter of 1999 due to a lower level of funds available for investment as
the Company has consumed funds for continuing operations. Interest income is
likely to decrease in subsequent quarters unless the Company is able to secure
additional funding.
Research and development expenses decreased from $931,577 in the first
quarter of 1998 to $802,287 in the first quarter of 1999. This decrease is
attributable to decreased (a) personnel expenses, (b) legal expenses, primarily
for patent filings, (c) license agreement expenses, (d) office expenses, and (e)
insurance expenses, partially offset by a small increase in clinical trial
expenses. Due to (and assuming the closing of) the proposed merger with
SuperGen, further clinical development will be minimized until such time as the
Company's portfolio of compounds has been integrated into SuperGen's portfolio
and the priority for all compounds has been established.
General and administrative expenses increased from $284,567 in the first
quarter of 1998 to $330,328 in the first quarter of 1999. This increase is
principally due to an increase in (a) costs associated with the proposed Merger
including legal expenses, and (b) personnel expenses, partially offset by
decreases in (a) investor/public relations expense, (b) bank fees, (c) non-legal
professional fees, (d) office expenses, and (e) insurance expenses.
Liquidity and Capital Resources
The Company has used $21,215,048 to fund operations from inception through
March 31, 1999. The Company has financed its operations to date from the
proceeds of its private placements concluded in 1996, its initial public
offering in 1994, prior placements of equity and convertible debt securities and
investment income. In 1999, the Company is obligated under its license
agreements to make minimum royalty payments and an annual maintenance fee in the
aggregate amount of $177,000, of which $2,000 had been paid as of April 26,
1999.
The Company is a party to several research agreements, clinical trial
production contracts and agreements with clinical research organizations which
require future payments in cash, and under the terms of one agreement, with a
combination of cash and common stock. The Company anticipates making aggregate
payments of approximately $473,000 during the terms of the agreements that were
in effect as of April 26, 1999. Provided that there is adequate financing, the
amount of the Company's obligations under research agreements can be expected to
increase. In addition, the Company is a party to employment agreements with two
of its executive officers as well as certain consulting agreements which provide
for aggregate annual, minimum payments of $346,000 and $130,000, respectively,
of which approximately $318,000 is still owed as of April 26, 1999. The Company
is a party to an operating lease agreement which will require the Company to
make payments of approximately $65,000 in 1999, of which approximately $37,000
has already been paid. The agreement also requires the Company to pay a certain
amount of contingent rentals based upon operating, maintenance, management, and
repair expenses incurred by the lessor. The agreement expires in July, 1999. The
Company is currently negotiating to remain in its leased facility at least
through the time of the Merger.
As of March 31, 1999, the Company had cash and cash equivalents of
$1,532,163, accounts payable and accrued expenses of $556,123, and working
capital of $1,046,556.
8
<PAGE>
The Company currently anticipates that the available cash, cash
equivalents, and investments will be sufficient to fund operations through the
third quarter of 1999. If the proposed Merger with SuperGen is not approved and
completed, the Company will be left in a precarious financial position requiring
the immediate infusion of additional capital in order to survive as a going
concern. At this time, the Company has no other viable strategic alternatives to
the Merger and no current commitment to obtain additional funding and is unable
to state the amount or potential source of such additional funds. There can be
no assurance that the Company will be able to obtain additional funding when
needed, or that such funding, if available, will be obtainable on reasonable
terms. Any such additional funding would be reasonably likely to result in
significant dilution to existing stockholders. If adequate funds are not
available when needed, the Company will need to significantly scale back its
activities and eventually cease operations altogether. In that case, if Sparta
were required to liquidate, it is likely that the holders of Sparta preferred
stock would receive significantly less than their liquidation preference and
holders of common stock would receive nothing.
Impact of Year 2000
The "Year 2000 issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. Some computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in systems failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
Based on a recent assessment, the Company believes that the exposure of its
internal systems to the Year 2000 issue is immaterial, as internal systems are
Year 2000 compliant. The Company continues to assess compliance of its
significant contractors to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. To date, the Company is unaware of any situations of noncompliance that
would adversely affect its operations. However, there can be no assurance that a
failure to convert by another company would not have a material adverse effect
on the Company.
If significant contractor's software applications prove to be
non-compliant, Sparta may experience difficulties after January 1, 2000. Sparta
has not yet clearly identified its most reasonably likely worst case scenario
and therefore a contingency plan has not yet been developed.
- ----------
This quarterly report contains certain forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, including without limitation, the potential Merger with
SuperGen and the length of time that available cash and equivalents will be
sufficient to fund operations. Such statements are made based on management's
current expectations and beliefs, and actual results may vary from those
currently anticipated based upon a number of factors, including failure to
receive stockholder approval of, or to otherwise consummate, the Merger,
uncertainties inherent in the drug development process, progress in the
Company's research and development programs, including preclinical and clinical
trials, costs of filing and prosecuting patent applications and, if necessary,
enforcing issued patents or obtaining additional licenses of patents, competing
technological and market developments, the cost and timing of regulatory
approvals, the ability of the Company to establish collaborative relationships,
and the cost of establishing manufacturing, sales and marketing capabilities.
The Company undertakes no obligation to release publicly any revisions which may
be made to reflect events or circumstances after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not have any material market risk sensitive financial
instruments.
9
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PART II-OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
27 -- Financial Data Schedule.
---------------
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter:
On January 20, 1999, a report on form 8-K dated January 19, 1999 was
filed with the Securities and Exchange Commission announcing the execution of a
definitive merger agreement under which SuperGen, Inc. will acquire all of the
outstanding capital stock of Sparta Pharmaceuticals, Inc. in exchange for
650,000 newly issued shares of SuperGen common stock (subject to adjustments
under certain circumstances). The acquisition is subject to the approval of
Sparta stockholders and other customary closing conditions.
10
<PAGE>
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.
Sparta Pharmaceuticals, Inc.
May 17, 1999 By: /s/ Jerry B. Hook
- ------------ -------------------------------------------------
Date Jerry B. Hook, Ph.D.
Chairman of the Board, President and Chief Executive
Officer (principal executive officer)
May 17, 1999 By: /s/ Ronald H. Spair
- ------------ -------------------------------------------------
Date Ronald H. Spair
Sr. Vice President and Chief Financial
Officer (principal financial officer)
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
Number Description Page
- ------ ----------- ----
27 -- Financial Data Schedule. 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S MARCH 31, 1999 REPORT ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,532,163
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,602,679
<PP&E> 716,523
<DEPRECIATION> 610,970
<TOTAL-ASSETS> 1,809,031
<CURRENT-LIABILITIES> 556,123
<BONDS> 0
0
814
<COMMON> 3,692
<OTHER-SE> 1,248,402
<TOTAL-LIABILITY-AND-EQUITY> 1,809,031
<SALES> 0
<TOTAL-REVENUES> 155,831
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,132,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (976,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (976,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (976,784)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
