<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
___ 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: 0-21134
HEAVENLYDOOR.COM, INC.
----------------------
(FORMERLY PROCEPT, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
DELAWARE 04-2893483
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
369 LEXINGTON AVENUE, NEW YORK, NEW YORK 10017
------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (212) 453-3111
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___
Number of shares outstanding of each of the issuer's classes of common stock, as
of latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AS OF AUGUST 11, 2000
----- ---------------------------------
</TABLE>
<TABLE>
<S> <C>
Common Stock, $.01 par value 32,491,172
</TABLE>
Exhibit Index Appears on Page 21
1
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
June 30, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations (Unaudited) 4
Three and six months ended
June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows (Unaudited) 5-6
Six months ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial 13-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
2
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000
ASSETS (UNAUDITED) DECEMBER 31, 1999
--------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,801,125 $ 4,074,525
Investment in Aquila -- 269,976
Prepaid expenses and other current assets 536,002 223,065
------------- -------------
Total current assets 5,337,127 4,567,566
Property and equipment, net of accumulated depreciation of
$1,001,257 and $1,901,797 at June 30, 2000 and
December 31, 1999, respectively 325,275 50,553
Goodwill and other intangibles, net of accumulated
amortization of $2,061,055 at June 30, 2000 22,521,605 --
Deferred charges -- 321,544
Other assets 85,848 7,150
------------- -------------
Total assets $ 28,269,855 $ 4,946,813
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 267,272 $ 119,826
Notes payable 94,981 --
Accrued compensation 133,873 84,961
Accrued professional services 158,876 243,962
Other current liabilities 103,488 200,870
Deferred rent -- 67,317
Current portion of capital lease obligations 46,958 4,832
------------- -------------
Total current liabilities 805,448 721,768
------------- -------------
Capital lease obligations 113,063 14,384
------------- -------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized:
Series A, 0 shares designated at June 30, 2000 and December 31, 1999; 0
shares issued and outstanding at June 30, 2000 and
December 31, 1999 -- --
Common stock, $.01 par value; 75,000,000 shares authorized;
32,491,172 and 14,970,818 shares issued at June 30, 2000 and
December 31, 1999, respectively 324,912 149,709
Additional paid-in capital 154,634,972 87,194,700
Deferred compensation (49,768) (2,187,710)
Accumulated deficit (127,558,772) (81,044,361)
Accumulated other comprehensive income -- 98,323
------------- -------------
Total shareholders' equity 27,351,344 4,210,661
------------- -------------
Total liabilities and shareholders' equity $ 28,269,855 $ 4,946,813
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenue:
Interest income 83,231 73,527 132,401 155,380
--------------- ---------------- ------------------ -------------
Total revenue 83,231 73,527 132,401 155,380
--------------- ---------------- ------------------ -------------
Costs and operating expenses:
Research and development (excludes $3,746,836 of
non-cash stock based compensation charges in 429,043 364,737 775,270 584,230
2000)
Sales and marketing 222,806 - 378,056 -
General and administrative (excludes $15,435,688
of non-cash stock based compensation charges
in 2000) 1,201,755 487,907 1,979,644 977,988
Non-cash stock based compensation charges - - 19,182,524 -
Amortization of goodwill and other intangibles 1,466,289 - 2,049,805 -
Charge for purchased in-process research and
Development - - - 9,405,671
Other operating (income) expense, net (157,042) 7,419 (394,442) (35,973)
--------------- ----------------------------------------------------
Total costs and operating expenses 3,162,851 860,063 23,970,857 10,931,916
--------------- ----------------------------------------------------
Loss from operations (3,079,620) (786,536) (23,838,456) (10,776,536)
Other income 500,000 - 500,000 -
--------------- ----------------------------------------------------
Net loss (2,579,620) (786,536) (23,338,456) (10,776,536)
Less: Incremental charge associated with the
conversion of the minority interest in a
subsidiary, net - 501,455 - 501,455
--------------- ----------------------------------------------------
Net loss available to common shareholders (2,579,620) (1,287,991) $ (23,338,456) $ (11,277,991)
=============== ====================================================
Basic and diluted net loss per common share (.08) (.12) $ (.80) $ (1.54)
=============== ====================================================
Weighted-average number of common
shares outstanding - basic and diluted 32,491,172 10,946,591 29,325,782 7,333,035
=============== ====================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDING JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(23,338,456) $ (10,776,536)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,102,549 76,279
Gain on sale of property and equipment (329,381) (24,550)
Charge for purchased in-process research - 9,405,671
Compensation charge associated with stock options 14,729,024 -
Compensatory stock and stock option expense 4,466,483 95,923
Deferred rent (67,317) (48,494)
Changes in operating assets and liabilities, net of acquisition:
Prepaid expenses and other current assets (258,587) (98,058)
Deposits (70,432) 183,465
Accounts payable 128,843 (212,205)
Accrued compensation 48,912 (25,028)
Other current liabilities (320,963) (660,537)
-------------- --------------
Net cash used in operating activities (2,909,325) (2,084,070)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (133,025) -
Proceeds from sale of equipment 137,975 29,119
Proceeds from sale of investment 405,753 -
Proceeds from maturity of marketable securities - 989,086
Cash acquired in acquisitions 17,831 2,750,097
------------- -------------
Net cash provided by investing activities 428,534 3,768,302
------------- -------------
Cash flows from financing activities:
Proceeds from the exercise of common stock options 153,888 -
Proceeds from the exercise of common stock warrants 3,292,790 187,500
Principal payments on notes payable (235,019) (85,000)
Principal payments on capital leases (4,268) (1,752)
-------------- --------------
Net cash provided by financing activities 3,207,391 100,748
------------- -------------
Net change in cash and cash equivalents 726,600 1,784,980
Cash and cash equivalents at beginning of period 4,074,525 2,885,165
------------- -------------
Cash and cash equivalents at end of period $ 4,801,125 $ 4,670,145
============= =============
</TABLE>
(Continued on Page 6)
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from Page 5)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDING JUNE30,
2000 1999
---- ----
<S> <C> <C>
Supplement disclosure of cash flow information:
Cash paid for interest $ 12,003 $ 970
============= =============
Supplemental disclosure of non-cash transactions:
Fair value of common stock issued to acquire
Heaven's Door Corporation $ 23,935,275 $ --
============= =============
Debt assumed from the acquisition of Heaven's Door Corporation $ 330,000 $ --
============= =============
Fair value of common stock issued to acquire
minority interest in subsidiary $ -- $ 4,160,363
============= =============
Fair value of common stock issued to acquire
Pacific Pharmaceuticals $ -- $ 3,766,913
============= =============
Fair value of common stock issued in exchange
for certain contractual obligations $ 23,020,955 $ --
============= =============
Fair value of common stock issued to consultants $ 4,453,500 $ --
============= =============
Fair value of common stock options assumed in the
Pacific Acquisition $ -- $ 965,835
============= =============
Fair value of common stock issued to pay off loans $ -- $ 441,870
============= =============
Fair value of common stock issued in settlement of legal action $ -- $ 135,002
============= =============
Fair value of common stock issued for services $ -- $ 35,000
============= =============
Capital lease obligation incurred for the
acquisition of equipment $ 145,072 $ --
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
NATURE OF BUSINESS
From its inception in 1985 through 1999, HeavenlyDoor.com, Inc. (formerly
"Procept, Inc." or the "Company") operated as a biopharmaceutical company
engaged in the development and commercialization of novel drugs with a
product portfolio focused on infectious diseases and oncology. In March 1999,
the Company acquired Pacific Pharmaceuticals, Inc. ("Pacific"), which became
a subsidiary of the Company. In January 2000, the Company consummated a major
strategic change in its business by acquiring Heaven's Door Corporation
("HDC"), a company that provides business-to-business and
business-to-consumer products and services for the funeral service industry
over the Internet. Effective with the acquisition of HDC, the Company's name
was changed from Procept, Inc. to HeavenlyDoor.com, Inc. and the name of the
Company's subsidiary, Pacific, was changed to Procept, Inc. The Company
expects to grow its Internet business through internal development as well as
through strategic alignments and/or potential acquisitions. The Company will
also endeavor to maximize the value of its biotechnology assets through
out-license or disposition.
The Company is subject to risks common to companies in the Internet and
biotechnology industries including but not limited to the Company's ability
to enter into strategic agreements with and/or acquisitions of third parties,
the market acceptance of the Company's products, the development by the
Company or its competitors of new technological innovations, dependence on
key personnel, protection of proprietary technology, compliance with United
States Food and Drug Administration ("FDA") government regulations and the
ability to obtain adequate financing.
PLAN OF OPERATIONS
Since its inception in 1985 through 1999, the Company devoted its principal
efforts to drug discovery and research. Since 1998, the Company has devoted its
principal efforts to drug development, human clinical trials and partnership
commercialization of PRO 2000 Gel and O6-Benzylguanine ("BG").
The Company, through its web site www.HeavenlyDoor.com, provides a range of
products and services specifically related to the funeral service industry. The
Company's current web site provides consumers access to information concerning
the arrangement and handling of funeral related services from the privacy of
their own homes. In addition, the Company's web site offers funeral homes and
other service providers the ability to have an Internet presence through a
customized, linked web site designed by the Company for the funeral home or
other service provider.
From inception through June 30, 2000, the Company generated no revenue from
product sales, has not
7
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
been profitable, and has incurred an accumulated deficit of $127.6 million.
Losses have resulted primarily from costs incurred in research and development
activities related to the Company's efforts to develop drug candidates and from
the associated administrative costs. The Company expects to continue to incur
significant operating losses in connection with its ongoing efforts to
develop its new Internet business.
In January 2000, the Company received proceeds of $400,000 from the sale of
113,674 common shares of Aquila Biopharmaceuticals, Inc. ("Aquila"). In
connection with the sale, the Company recorded a gain of $200,000,
representing the difference between the proceeds of the sale of $400,000 less
the carrying cost of the investment of $200,000. As of June 30, 2000, the
Company had liquidated all securities it held in Aquila.
On March 28, 2000, the Company received proceeds of $3.1 million from the
exercise of Class C Warrants to purchase approximately 1.3 million shares of
common stock. These warrants were exercised at a price of $2.40 per warrant
representing a discount of $0.88 to the contractual exercise price of $3.28 per
warrant. Accordingly, in the first quarter of 2000, a charge of $200,000 was
recorded directly to equity which represents the fair market value of the
discount given to holders of certain exercised Class C warrants. The Company
expects that its current funds along with the proceeds generated through the
exercise of these warrants and interest income will be sufficient to fund the
Company's operations over the next twelve months.
The accompanying financial statements as of and for the three and six months
ended June 30, 2000 are unaudited and in the the opinion of management,
reflect all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the results for the interim period ended
June 30, 2000. The consolidated balances as of December 31, 1999 were derived
from audited financial statements but do not include all disclosures required
by generally accepted accounting principles. The accompanying condensed
consolidated financial statements have been prepared in accordance with
accounting standards for interim financial statements and should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, which are contained in the Company's 1999 Annual Report on Form
10-K. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
2. SHAREHOLDERS' EQUITY
On December 31, 1999, the Company had a total of 14,970,818 shares of common
stock outstanding.
8
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the quarter ended March 31, 2000, the Company issued 17,520,354 new
shares of common stock. These issuances resulted from the acquisition of HDC,
termination of certain contractual obligations, the issuance of common stock
to consultants, and the exercise of warrants and options for common stock.
There were no issuances of common stock for the second quarter ended June 30,
2000.
In connection with the acquisition of HDC in January 2000, each share of HDC
stock was converted into approximately 0.81 shares of the Company's common stock
or a total of 10,920,000 shares of the Company. In accordance with the merger
agreement, the Company also issued 3,876,887 shares of common stock with a fair
value of $23,020,955 to investors in the Company's 1998 private placement,
former preferred stockholders of Pacific, and certain other common stockholders,
in exchange for the elimination of the certain contractual obligations incurred
in connection with the 1998 private placement, the Pacific acquisition and other
transactions. This transaction was accounted for by recording a charge of
$23,020,955 directly to equity, which represents the fair market value of the
shares issued to those shareholders who relinquished their contractual rights.
In addition, the Company issued 546,000 common shares as consideration for the
fee due to the placement agent involved in the HDC transaction and the fair
value of these securities were included in the purchase price.
In February 2000, the Company issued a total of 76,560 shares of its common
stock for proceeds of $153,888 in connection with the exercise of common stock
options.
In February and March 2000, the Company issued a total of 59,241 shares of
its common stock for proceeds of $192,790 in connection with the exercise of
warrants for common stock.
On February 28, 2000, the Company issued a total of 750,000 shares of its common
stock with a fair value of $4,453,500 to consultants and, accordingly, a charge
of $4,453,500 was recorded during the quarter ended March 31, 2000.
On March 28, 2000, the Company issued 1,291,666 shares of its common stock for
proceeds of $3,100,000 in connection with the exercise of Class C Warrants.
These warrants were exercised at a discount to the contractual exercise price
and, accordingly, a charge of $155,000 was recorded directly to equity during
the quarter ended March 31, 2000.
3. BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing income available to
common shareholders by
9
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the weighted average number of common shares outstanding for the period. Diluted
net loss per common share is based upon the weighted average number of common
shares outstanding during the period plus the additional weighted average common
equivalent shares during the period. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
anti-dilutive. Common equivalent shares result from the assumed exercises of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding stock options using the treasury
stock method. For the three and six month periods ended June 30, 2000 and 1999,
there were no dilutive securities.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes the net loss and accumulated other
comprehensive income (loss), which consists of the change in unrealized gain on
investments. Comprehensive income (loss) is calculated as follows:
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (2,579,620) $ (786,536) (23,338,456) $ (10,776,536)
-------------- ----------- ----------- --------------
Change in unrealized gain
on investments - (51,543) (98,323) (259,520)
Comprehensive loss $ (2,579,620) $ (838,079) (23,436,779) $ (11,036,056)
============== =========== =========== ==============
Unrealized gain on investments:
Balance, beginning of period $ - 64,611 98,923 272,588
Change during the period - (51,543) (98,923) (259,520)
-------------- ----------- ----------- --------------
Balance at June 30, 2000 and 1999 $ - 13,068 - 13,068
============== =========== =========== ==============
</TABLE>
5. ACQUISITION OF HEAVEN'S DOOR CORPORATION.
Heaven's Door Corporation, a Delaware corporation engaged in providing a range
of funeral-related products and services through its web site
www.HeavenlyDoor.com, was acquired by the Company in January 2000.
The acquisition of HDC was accounted for utilizing the purchase method of
accounting. The aggregate purchase price of $22.8 million (10,920,000 shares
with a fair value of $2.09 per share) plus the estimated acquisition costs of
$1.6 million and assumed net liabilities of $100,000, were allocated to the
acquired tangible and intangible assets. As a result of this acquisition, the
Company has recorded goodwill of $24.5 million, which represents the excess
cost over the fair value of net liabilities acquired, which will be amortized
over a period of five years. Pursuant to the Merger Agreement with HDC, each
share of HDC was converted into approximately .81 shares of the Company's
common stock, or a total of 10,920,000 shares.
In addition, the Company assumed all of the HDC notes payable obligations that
were outstanding on the date of the acquisition. The notes are payable by the
Company on demand of the note holder, and bear a 10% annual interest rate.
In accordance with the Merger Agreement, the Company also issued 3,876,887
shares to investors in the
10
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1998 private placement, former holders of Pacific preferred stock and certain
other common stockholders in exchange for the elimination of certain contractual
rights held by such investors. This transaction was accounted for by recording a
charge of $23,020,955 directly to equity during the first quarter of 2000.
On January 28, 2000, concurrent with the merger with HDC, in accordance with the
original terms of certain outstanding stock options (1) the number of shares
subject to such options increased by 1,004,224 shares and (2) the exercise price
on the existing variable stock options was reduced from $2.11 per share to $1.56
per share. In addition, the Board of Directors accelerated the vesting of the
variable stock options. Effective with the Merger, the number and the associated
exercise price of the variable stock options became fixed and accounted for
accordingly. Therefore, a compensation charge $14,729,024 was recorded in the
quarter ended March 31, 2000, resulting from the revaluation under variable plan
accounting and the acceleration of the vesting of the variable stock options.
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma results of operations for the six months
ended June 30, 2000 and 1999 give effect to the Company's acquisition of HDC
and Pacific as if the transactions had occurred at the beginning of each
fiscal year. The following pro forma results of operations do not reflect the
$19,182,524 non-cash stock based compensation charge, or the $9,405,671
charge for purchased in-process research and development recorded in the six
months ended June 30, 2000 and 1999, respectively. The pro forma results of
operations do not purport to reflect what the Company's results of operations
would have been if the acquisition had occurred at the beginning of the
periods. The financial data are based upon financial assumptions that the
Company believes are reasonable and should be read in conjunction with the
consolidated financial statements and accompanying notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
Pro Forma Results for the
---------------------------
Six Months Ended June 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues $ 132,401 $ 193,258
=========== ===========
Net loss $(4,595,613) $(5,106,826)
=========== ===========
Basic and diluted net loss
per common share $ (.16) $ (.20)
=========== ===========
</TABLE>
11
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. CONTINGENCIES
On February 22, 1999, Christopher R. Richied ("Richied") filed a complaint with
the United States District Court for the Southern District of New York naming
Pacific, and Binary Therapeutics Inc. ("Binary"), both subsidiaries of the
Company, as defendants (the "Complaint"). The Complaint alleged that Pacific and
Binary breached obligations to Richied under certain consulting agreements. On
August 7, 2000, Pacific and Binary settled the Complaint. In connection with the
settlement, the Company received a release from all claims and was not required
to pay any remuneration.
7. RELATED PARTY TRANSACTIONS
As part of the acquisition of HDC, the Company assumed notes payable in the
amount of $330,000, including notes payable to Richard J. Kurtz, a director
of the Company and a former shareholder of HDC. On May 31, 2000, the Company
paid $243,068 to Mr. Kurtz, consisting of $235,019 of principal plus $8,049
of accrued interest.
On June 14, 2000, the Company entered into an agreement with Interneuron
Pharmaceuticals, Inc. ("Interneuron") for the out-licensing of PRO 2000 Gel.
Glenn L. Cooper, M.D., a director of the Company, is the President and Chief
Executive Officer of Interneuron. In addition, the principal shareholder of
the Company is a shareholder of Interneuron. Pursuant to this agreement, the
Company received a payment of $500,000 in June 2000, which is included in
other income for the three and six months ended June 30, 2000. The Company
retains ownership and certain future rights to PRO 2000 Gel under the
licensing agreement, including i) provisions for additional payments based
upon the achievement of certain milestones and ii) royalties from future
commercial sales of PRO 2000 Gel, if any. Interneuron has a limited option to
purchase the ownership of PRO 2000 Gel. The Company, however, has no further
obligation to fund research and development for PRO 2000 Gel.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation -
an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact
on the Company's financial position or results of operations.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
From its inception in 1985 through 1999, HeavenlyDoor.com, Inc. (formerly
"Procept, Inc." or the "Company") operated as a biopharmaceutical company
engaged in the development and commercialization of novel drugs with a
product portfolio focused on infectious diseases and oncology. In March 1999,
Procept acquired Pacific Pharmaceuticals, Inc. ("Pacific"), which became a
subsidiary of the Company. In January 2000, the Company consummated a major
strategic change in its business by acquiring Heaven's Door Corporation
("HDC"), a company that provides business-to-business and
business-to-consumer products and services for the funeral service industry
over the Internet. Effective with the acquisition of HDC, the Company's name
was changed from Procept, Inc. to HeavenlyDoor.com, Inc. The Company expects
to grow its Internet business through internal development as well as through
strategic alignments and/or potential acquisitions. The Company will also
endeavor to maximize the value of its biotechnology assets through
out-license or disposition.
RESULTS OF OPERATIONS
From inception through June 30, 2000, the Company has generated no revenues
from product sales, has not been profitable since inception, and has an
accumulated deficit of $127.6 million. During that period, the Company was
dependent upon corporate collaborations, equity financing and interest on
invested funds to provide the working capital necessary for the research and
development activities. Losses have resulted principally from costs incurred
in research and development activities related to the Company's efforts to
develop drug candidates and from the associated administrative costs required
to support these efforts. In addition, since the acquisition of HDC, the
Company has incurred losses in connection with the development of the
Company's website and related marketing activities. The Company expects to
continue to incur significant operating losses in connection with its ongoing
efforts to develop its new Internet business.
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The Company's total revenues, comprised primarily of interest income, increased
by $10,000 for the three months ended June 30, 2000 as compared to the similar
period in 1999. For the comparative six month periods ended June 30, 2000 and
1999 interest income decreased by $23,000. The three and six month changes in
interest income resulted from increases or decreases, respectively, in average
cash balances available for investment during the periods.
The Company's total operating expenses increased by $2.3 million to $3.2 million
for the second quarter of 2000 from $900,000 for the comparable period of 1999.
Total operating expenses increased to $24.0
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million from $10.9 million for the six month periods ended June 30, 2000 and
1999, respectively, an increase of $13.1 million. During the first quarter ended
March 31, 2000, the Company recorded non-cash charges of approximately $19.2
million. These non-cash items included a charge of approximately $14.7 million
relating to compensation expense associated with variable stock options, and a
$4.5 million charge for the fair value of common stock issued to consultants. In
the first quarter of 1999, the Company recorded a non-cash charge of
approximately $9.4 million relating to the acquisition of Pacific
Pharmaceuticals, Inc. These non-cash charges excluded, total operating expenses
increased to $4.8 million for the six months ended June 30, 2000 from $1.5
million during the same period in 1999, an increase of $3.3 million. Components
of the changes in total operating expenses are as follows:
Research and development expenses increased by $100,000 and $200,000 for the
three and six month periods ended June 30, 2000 and 1999, respectively. These
increases in development costs were primarily due to expenditures associated
with developing the Company's Internet web site.
Sales and marketing expenses increased by $200,000 and $400,000 for the
comparable three and six month periods in 2000 and 1999, respectively. The
increase in sales and marketing expenditures reflects the Company's entry into
an Internet business strategy and the escalation of sales and marketing
activities associated with promoting the Internet web site.
General and administrative expenses increased by $700,000 and $1.0 million for
the three and six months ended June 30, 2000, respectively, over the similar
periods in 1999. During the second quarter of 2000, the Company relocated its
principal offices to New York City and shut down its biopharmaceutical
operations in Cambridge, Massachusetts. All employees of the Company that were
engaged in the biopharmaceutical operations were released from employment on
June 30, 2000. The second quarter and six month increases principally reflect
additional compensation costs, comprised of salaries and benefits relating to
increased staffing of its Internet activities as well as severance benefits
recorded as of June 30, 2000 for former employees of the Company's
biopharmaceutical operations.
Amortization of goodwill and intangibles that resulted from the acquisition of
Heaven's Door Corporation was $1.5 million and $2.0 million for the three and
six month periods ended June 30, 2000, respectively.
The Company recorded gains of $200,000 and $400,000, respectively, in other
operating (income) expense for the second quarter and six months ended June 30,
2000, primarily from gains of $100,000 and $300,000 on sales of biotechnology
research and development equipment and fixed assets in connection with the shut
down of its biopharmaceutical operations. During the second quarter, the Company
also received proceeds of $500,000 under its out-licensing agreement with
Interneuron
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Pharmaceuticals, Inc. (see "Related Party Transactions," below), which was
recorded as other income.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter and six months ended June 30, 2000 the Company incurred net
losses of $2.6 million and $23.3 million, respectively. The net loss for the six
month period ended June 30, 2000 includes non-cash charges of approximately
$14.7 million associated with variable stock options, and a $4.5 million for the
fair value of common stock issued to consultants. Since the beginning of this
year, the Company has used $2.9 million to fund operating activities, as
compared to $2.1 million for the same period of 1999. The $800,000 increase is
primarily the result of the Company's increased operating activities associated
with developing the new Internet business.
At June 30, 2000, the Company's aggregate cash and cash equivalents were $4.8
million, a net increase of $700,000 from December 31, 1999. The increase in cash
is primarily attributable to receipt of proceeds of $3.1 million during the
first quarter of 2000 from the exercise of approximately 1.3 million Class C
common stock warrants at a negotiated discount to the contractual exercise
price. In addition, the Company received proceeds of $400,000 during the first
quarter from the sale of its investment in Aquila Biopharmaceuticals, Inc.
During the second quarter 2000, the Company received proceeds of $500,000 in
connection with its out-licensing of PRO 2000 Gel. During the six month period
ended June 30, 2000, the Company also received $100,000 from the sale of
equipment.
In connection with the acquisition of HDC in January 2000, each share of HDC
stock was converted into approximately 0.81 shares of the Company's common stock
or a total of 10,920,000 HeavenlyDoor.com shares. In accordance with the merger
agreement, the Company also issued 3,876,887 shares of common stock with a fair
value of $23,020,955 to investors in the Company's 1998 private placement,
former preferred stockholders of Pacific Pharmaceuticals, Inc., and certain
other common stockholders in exchange for the elimination of the certain
contractual obligations incurred in connection with the 1998 private placement,
the Pacific acquisition and other transactions. In addition, the Company issued
546,000 common shares as consideration for the fee due the placement agent
involved in the HDC transaction. The Company also issued a total of 750,000
shares with a fair value of $4,453,500 to consultants in exchange for consulting
services.
The Company expects that its current funds and interest income will be
sufficient to fund the Company's operations over the next twelve months.
Although management continues to pursue additional funding
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arrangements, no assurance can be given that such financing will be available
to the Company. If the Company is unable to generate significant revenue from
future operations, or obtain additional revenue in connection with the
licensing or sale of the Company's biotechnology assets, or secure additional
financing, the Company's financial condition will be adversely affected.
Further, any potential strategic alignment and/or potential acquisition could
affect the Company's liquidity and financing requirements. If additional
funds are raised by issuing equity securities, further dilution to existing
shareholders will result and future investors may be granted rights superior
to those of existing shareholders.
The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the timing of revenues from the disposition of the biotechnology assets.
Other important factors that may affect achieving the Company's strategic goals
and other forward-looking statements are set forth in Exhibit 99.1 of the
Company's 1999 Annual Report on Form 10-K.
The Company's working capital and other cash needs will depend heavily on the
amount and timing of the Company's investment in the development and promotion
of its web site. The Company's actual cash requirements may vary materially from
those now planned because of the Company's expenditures associated with
developing the Internet business and the timing of and structure of payments
related to the biotechnology assets.
RELATED PARTY TRANSACTIONS
As part of the acquisition of Heaven's Door Corporation, the Company assumed
notes payable in the amount of $330,000, payable to Richard J. Kurtz, a
director of the Company and a former shareholder of HDC. On May 31, 2000, the
Company paid $243,068 to Mr. Kurtz, consisting of $235,019 of principal plus
$8,049 of accrued interest.
On June 14, 2000, the Company entered into an agreement with Interneuron
Pharmaceuticals, Inc. ("Interneuron") for the out-licensing of PRO 2000 Gel.
Glenn L. Cooper, M.D., a director of the Company, is the President and Chief
Executive Officer of Interneuron. In addition, the principal shareholder of
the Company is a shareholder of Interneuron. Pursuant to this agreement, the
Company received a payment of $500,000 in June 2000, which is included in
other income for the three and six months ended June 30, 2000. The Company
retains ownership and certain future rights to PRO 2000 Gel under the
licensing agreement, including i) provisions for additional payments based
upon the achievement of certain milestones and ii) royalties from future
commercial sales of PRO 2000 Gel, if any. Interneuron has a limited option to
purchase the ownership of PRO 2000 Gel. The Company, however, has no further
obligation to fund research and development for PRO 2000 Gel.
RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
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In March 2000, the Financial Accounting Standard Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation -
an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact
on the Company's financial position or results of operations.
YEAR 2000
During 1998, the Company completed its assessment of the potential impact of the
year 2000 on its information technology and non-information technology systems.
The year 2000 problem as defined is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs or systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in a miscalculation or system failures. Based on the Company's
assessment, there is no year 2000 impact on the Company's information technology
systems. Operating systems and applications used by the Company are year 2000
compliant. At this time, the Company is not aware of any year 2000 issues
relating to its third party vendors. The Company replaced several
non-information technology systems. The cost of year 2000 compliant
non-technology information systems was approximately $8,000. The Company's most
critical uncertainty relates to its third parties' information technology
systems not being year 2000 compliant. This may result in inaccurate information
from banks, government agencies, contracted research organization, vendors, etc.
As of June 30, 2000, the Company had not experienced any adverse effects as a
result of the year 2000 problem.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48 ("FRR 48"), "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments." FRR 48 required disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those already required under generally accepted accounting principles.
The Company is not a party to any of the instruments discussed in FRR 48 and
considers its market risk to be minimal.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its Annual Meeting of Stockholders on Monday, June 19, 2000.
The shareholders voted on the following proposals:
1. A proposal to elect ten Directors of the Company to serve for terms
expiring at the Annual Meeting in 2001. A majority of the securities
present, or represented, and entitled to vote at the meeting voted in favor
of each of the ten nominees.
2. A proposal to amend the Company's 1998 Equity Incentive Plan to increase
the number of shares of Common Stock of the Company covered by the plan to
10,800,000 shares. A majority of the securities present, or represented,
and entitled to vote at the meeting voted in favor of the proposal.
3. A proposal to approve the assignment of the Company's biotechnology assets
to its wholly owned subsidiary, Procept, Inc. (formerly Pacific
Pharmaceuticals, Inc.) An affirmative vote of a majority of the securities
outstanding was required for adoption. An insufficient number of shares
were voted in favor of the proposal.
4. A proposal to amend the Company's restated Certificate of Incorporation to
increase the number of shares of Common Stock of the Company authorized for
issuance from 50,000,000 to 75,000,000. A majority of the securities
outstanding as of the record date voted in favor of the proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.21 Licensing Agreement by and between
HeavenlyDoor.com, Inc. and Interneuron
Pharmaceuticals, Inc. dated June 14, 2000. (The
Company has submitted a confidentiality request
for certain parts of this exhibit.)
27.1 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
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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.
HEAVENLYDOOR.COM, INC.
<TABLE>
<CAPTION>
(Registrant)
<S> <C>
Date: August 14, 2000 by: /s/ Salvatore A. Bucci
--------------------------------
Salvatore A. Bucci
Senior Vice President and
Chief Financial Officer
</TABLE>
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EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
10.21 Licensing Agreement by and between HeavenlyDoor.com, Inc.
and Interneuron Pharmaceuticals, Inc. dated June 14,
2000. (The Company has submitted a confidentiality
request for certain parts of this exhibit).
27.1 Financial Data Schedule. Filed herewith.
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