<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 JUNE 30, 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.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1755527
------------------------ ------------------------------
(State of incorporation) (IRS Employer Identification No.)
111 Rock Rd. Horsham, PA 19044
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 442-1700
------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of August 10, 1999, there were outstanding 3,691,841 shares of Common Stock,
$.001 par value per share.
<PAGE>
FORM 10-Q
QUARTERLY REPORT
-------------------
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three-month and
six-month periods ended June 30, 1999 and 1998 and for the period
from June 12, 1990 (inception) to June 30, 1999 4
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 1999 and 1998 and for the period
from June 12, 1990 (inception) to June 30, 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 2. Changes in Securities and use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,215,798 $ 2,470,359
Prepaid expenses and other assets 45,661 14,719
------------ ------------
Total current assets 1,261,459 2,485,078
Fixed assets, net 35,007 152,536
Other assets:
License agreements, net of amortization
of $112,349 in 1999 and $105,870 in 1998 2,439 8,918
Restricted Cash 96,180 94,448
------------ ------------
$ 1,395,085 $ 2,740,980
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 379,694 $ 528,090
------------ ------------
Total current liabilities 379,694 528,090
------------ ------------
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 (66,838) (100,443)
Deficit accumulated during the development stage (27,537,911) (26,306,807)
------------ ------------
Total stockholders' equity 1,015,391 2,212,890
------------ ------------
$ 1,395,085 $ 2,740,980
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Period From
June 30, June 30, June 12, 1990
(Inception) to
June 30,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
Revenue:
<S> <C> <C> <C> <C> <C>
Grant, contract and license fee income $ 74,589 $ 271,600 $ 207,349 $ 415,852 $ 1,102,832
Interest income 15,091 64,323 38,162 141,068 1,308,627
------------ ------------ ------------ ------------ ------------
Total revenue 89,680 335,923 245,511 556,920 2,411,459
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development 248,776 961,717 1,051,063 1,893,294 17,643,481
General and administrative 257,674 326,872 588,002 611,439 9,170,426
Gain on sale of fixed assets (162,450) -- (162,450) -- (162,450)
Charge for acquired research
and development -- -- -- -- 3,297,913
------------ ------------ ------------ ------------ ------------
Net loss $ (254,320) $ (952,666) $ (1,231,104) $ (1,947,813) $(27,537,911)
============ ------------ ------------ ============ ============
Basic and diluted net loss per share $ (.07) $ (.28) $ (.33) $ (.59)
============ ============ ============ ============
Basic and diluted weighted average
number of shares outstanding (Note 2) 3,691,841 3,414,072 3,690,110 3,302,261
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPARTA PHARMACEUTICALS, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30, Period from June 12,
----------------------------- 1990 (Inception) to
1999 1998 June 30, 1999
------------ ------------ --------------------
Operating activities:
<S> <C> <C> <C>
Net loss $ (1,231,104) $ (1,947,813) $(27,537,911)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on investments -- -- 3,316
Depreciation and amortization 86,458 101,241 1,226,355
Gain on sale of fixed assets (162,450) -- (162,450)
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 -- 45,430 288,022
Compensation expense related to stock options
and warrants granted 33,605 33,605 535,799
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 (30,942) (89,963) (45,661)
Restricted cash (1,732) (3,682) 151,169
Accounts payable and accrued expenses (148,396) (234,574) 229,694
------------ ------------ ------------
Net cash used in operating activities (1,454,561) (2,095,756) (21,731,413)
------------ ------------ ------------
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)
Proceeds from sale of fixed assets 200,000 -- 200,000
Acquisition of license agreements -- -- (160,078)
------------ ------------ ------------
Net cash provided by (used in) investing
activities 200,000 1,468,929 (240,179)
------------ ------------ ------------
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 (1,254,561) (626,827 ) 1,215,798
Cash and cash equivalents at beginning of period 2,470,359 4,767,317 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,215,798 $ 4,140,490 $ 1,215,798
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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"). At the Special Meeting of Stockholders held on August 10, 1999,
the Stockholders of Sparta Pharmaceuticals, Inc. approved the Merger and related
amendments to Sparta's Certificate of Incorporation. As of the effective date of
the Merger, Sparta will become a wholly-owned subsidiary of SuperGen. The
Company's common stock will be de-registered and will discontinue trading on the
OTC Bulletin Board.
Due to the pending 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 six months ended June 30, 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.
<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 June 30, 1999, the Company's accumulated deficit was $27,537,911.
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. At the Special Meeting of Stockholders held on August
10, 1999, the stockholders of Sparta approved the Merger and related amendments
to Sparta's Certificate of Incorporation. As of the effective date of the
Merger, Sparta will become a wholly-owned subsidiary of SuperGen. The Company's
common stock will be de-registered and will discontinue trading on the OTC
Bulletin Board.
Sparta stockholders will receive a combination of SuperGen common stock and
warrants to purchase SuperGen Common Stock in exchange for all shares of Sparta
common stock and Sparta preferred stock that they own. The SuperGen common stock
underlying the purchase price will aggregate 650,000 shares, with the exact
number of shares of SuperGen common stock and SuperGen warrants to purchase
common stock determined by reference to the average closing price of SuperGen's
common stock over the 30 trading days immediately preceding the completion of
the merger.
Results of Operations
Three Months Ended June 30, 1998 and 1999
Revenue decreased from $335,923 for the three months ended June 30, 1998 to
$89,680 for the three months ended June 30, 1999 due to a lower level of
interest income, grant income and license fee income. The Company recorded grant
income of $121,600 and $74,589 for the three months ended June 30, 1998 and
1999, respectively, under two Small Business Innovation Research grants awarded
in 1997 and 1998. The Company also recorded license fee income from
Schering-Plough Ltd. and Schering Corporation of $150,000 for the three months
ended June 30, 1998. Interest income decreased from $64,323 in the second
quarter of 1998 to $15,091 in the second quarter of 1999 due to a lower level of
funds available for investment as the Company has consumed funds for continuing
operations.
Research and development expenses decreased from $961,717 in the second
quarter of 1998 to $248,776 in the second quarter of 1999. This decrease is
attributable to decreased (a) personnel expenses, (b) clinical trial expenses,
(c) license agreement expenses, and (d) office expenses. 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 decreased from $326,872 in the second
quarter of 1998 to $257,674 in the second quarter of 1999. This decrease is
principally due to a decrease in (a) investor/public relations expense, (b) bank
and financial fees, (c) non-legal professional fees, (d) office expenses, and
(e) insurance expenses, offset by costs associated with the Merger.
<PAGE>
The Company recognized a gain of $162,450 related to the disposition of
certain leasehold improvements and equipment located at its Horsham facility
during the second quarter of 1999.
Six Months Ended June 30, 1998 and 1999
Revenue decreased from $556,920 for the six months ended June 30, 1998 to
$245,511 for the six months ended June 30, 1999 due to a lower level of interest
income, grant income and license fee income. The Company recorded grant income
of $265,852 and $207,349 for the six months ended June 30, 1998 and 1999,
respectively, under two Small Business Innovation Research grants awarded in
1997 and 1998. The Company also recorded license fee income of $150,000 for the
six months ended June 30, 1998. Interest income decreased from $141,068 in the
first six months of 1998 to $38,162 in the first six months of 1999 due to a
lower level of funds available for investment as the Company has consumed funds
for continuing operations.
Research and development expenses decreased from $1,893,294 in the first
six months of 1998 to $1,051,063 in the first six months of 1999. This decrease
is attributable to decreased (a) personnel expenses, (b) clinical trial
expenses, (c) legal expenses, primarily for patent filings, (d) license
agreement expenses, (e) office expenses, and (f) insurance expenses. 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 decreased from $611,439 in the second
quarter of 1998 to $588,002 in the second quarter of 1999. This decrease is
principally due to decreases in (a) investor/public relations expense, (b) bank
and financial fees, (c) non-legal professional fees, (d) office expenses, and
(e) insurance expenses, offset by costs associated with the proposed Merger.
The Company recognized a gain of $162,450 related to the disposition of
certain leasehold improvements and equipment located at its Horsham facility
during the second quarter of 1999.
Liquidity and Capital Resources
The Company has used $21,731,413 to fund operations from inception through
June 30, 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 August 10, 1999.
The Company is a party to several research agreements, clinical trial
production contracts and agreements with clinical research organizations which
require future payments of approximately $193,000 during the terms of the
agreements that were in effect as of August 10, 1999. In addition, the Company
is a party to certain severance agreements that will require payments in the
aggregate of approximately $320,000 by the Company.
As of June 30, 1999, the Company had cash and cash equivalents of
$1,215,798, accounts payable and accrued expenses of $379,694, and working
capital of $881,765.
<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. Although the Company expects that the Merger will be
completed on or about August 12, 1999, subject to fulfillment of certain
conditions of closing, if the proposed Merger is not 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
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.
<PAGE>
PART II-OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.
As a condition to the Merger, at the Special Meeting of
Stockholders held on August 10, 1999, the Sparta stockholders approved
amendments to Sparta's certificate of incorporation which increased the
conversion rate for the Series B' Convertible Preferred Stock to 16.4 from
2.666667 in exchange for the elimination of the liquidation preference for that
preferred stock. These amendments will become effective shortly before the
effective time of the Merger.
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: None
<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.
August 10, 1999 By: /s/ Jerry B. Hook
- ---------------- ----------------------------------
Date Jerry B. Hook, Ph.D.
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
August 10, 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 JUNE 30, 1999 REPORT ON FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,215,798
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,261,459
<PP&E> 103,938
<DEPRECIATION> 68,931
<TOTAL-ASSETS> 1,395,085
<CURRENT-LIABILITIES> 379,694
<BONDS> 0
0
814
<COMMON> 3,692
<OTHER-SE> 1,010,885
<TOTAL-LIABILITY-AND-EQUITY> 1,395,085
<SALES> 0
<TOTAL-REVENUES> 245,511
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,476,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,231,104)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,231,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,231,104)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
