<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 March 31, 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)
DELAWARE 04-2893483
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
840 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS 02139
- -------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (617) 491-1100
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.
CLASS OUTSTANDING AS OF MAY 10, 2000
----- ------------------------------
Common Stock, $.01 par value 32,491,293
Exhibit Index Appears on Page 21
<PAGE>
HEAVENLYDOOR.COM, INC.
(FORMERLY PROCEPT, INC.)
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) 3
March 31, 2000 and December 31, 1999
Consolidated Statements of Operations (Unaudited) 4
Three months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) 5-6
Three Months ended March 31, 2000 and 1999
Notes to Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial 13-16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18-19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEAVENLYDOOR.COM, INC.
(Formerly Procept, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
2000
(UNAUDITED) DECEMBER 31, 1999
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,669,374 $ 4,074,525
Investment in Aquila -- 269,976
Prepaid expenses and other current assets 302,262 223,065
------------- -------------
Total current assets 6,971,636 4,567,566
------------- -------------
Property and equipment, net of accumulated depreciation of
$1,935,017 and $1,901,797 at March 31, 2000 and
December 31, 1999, respectively 131,438 50,553
Goodwill and other intangibles, net of accumulated amortization
of $583,516 at March 31, 2000 23,984,143 --
Deferred charges -- 321,544
Deposits 20,455 7,150
------------- -------------
Total assets $ 31,107,672 $ 4,946,813
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 315,380 $ 119,826
Notes payable 330,000 --
Accrued compensation 169,977 84,961
Accrued professional services 99,500 243,962
Other current liabilities 216,042 200,870
Deferred rent 33,084 67,317
Current portion of capital lease obligations 6,117 4,832
------------- -------------
Total current liabilities 1,170,100 721,768
------------- -------------
Capital lease obligations 13,099 14,384
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share; 1,000,000 shares authorized:
Series A, 0 shares designated at March 31, 2000 and December 31, 1999;
0 shares issued and outstanding at March 31, 2000 and
December 31, 1999 -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
32,491,172 and 14,970,818 shares issued at March 31, 2000 and
December 31, 1999, respectively 324,912 149,709
Additional paid-in capital 154,634,972 87,194,700
Deferred compensation (56,259) (2,187,710)
Accumulated deficit (124,979,152) (81,044,361)
Accumulated other comprehensive income -- 98,323
------------- -------------
Total shareholders' equity 29,924,473 4,210,661
------------- -------------
Total liabilities and shareholders' equity $ 31,107,672 $ 4,946,813
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
HEAVENLYDOOR.COM, INC.
(Formerly Procept, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
Interest income $ 49,170 $ 81,853
------------ ------------
Total revenues $ 49,170 $ 81,853
------------ ------------
Costs and operating expenses:
Research and development (excludes $3,746,836 of
non-cash stock based compensation charges in 2000) 346,227 219,493
Sales and marketing 155,250 --
General and administrative (excludes $15,435,688 of
non-cash stock based compensation charges in 2000) 777,889 490,081
Non-cash stock based compensation charge 19,182,524 --
Amortization of goodwill 583,516 --
Charge for purchased in-process research and development -- 9,405,671
Other (income) expense, net (237,400) (43,392)
------------ ------------
Total costs and expenses 20,808,006 10,071,853
------------ ------------
Net loss $(20,758,836) $ (9,990,000)
============ ============
Basic and diluted net loss per common share $ (0.79) $ (2.69)
============ ============
Weighted-average number of common
shares outstanding -- basic and diluted 26,160,393 3,719,797
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
HEAVENLYDOOR.COM, INC.
(Formerly Procept, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDING MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(20,758,836) $ (9,990,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 609,989 37,589
Gain on sale of assets (234,100) (24,550)
Charge for purchased in-process research -- 9,405,671
Compensation charge associated with stock options 14,729,024 --
Non-cash settlement of litigation -- 38,127
Compensatory stock and stock option expense 4,459,992 6,491
Changes in operating assets and liabilities, net of acquisition:
Prepaid expenses and other current assets (24,849) 82,218
Deposits (5,039) --
Accounts payable 176,952 (145,606)
Accrued compensation 85,016 (31,766)
Deferred rent (34,233) (23,780)
Other current liabilities (267,786) 19,954
------------ ------------
Net cash used in operating activities (1,263,870) (625,652)
------------ ------------
Cash flows from investing activities:
Capital expenditures (11,543) --
Proceeds from sale of equipment -- 29,119
Proceeds from sale of investments 405,753 --
Proceeds from maturity of marketable securities -- 991,326
Cash acquired in acquisitions 17,831 2,750,097
Merger costs -- (358,370)
------------ ------------
Net cash provided by investing activities 412,041 3,412,172
------------ ------------
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 --
Payment of note payable -- (85,000)
------------ ------------
Net cash (used in) provided by financing activities 3,446,678 (85,000)
------------ ------------
Net change in cash and cash equivalents 2,594,849 2,701,520
Cash and cash equivalents at beginning of period 4,074,525 2,885,165
------------ ------------
Cash and cash equivalents at end of period $ 6,669,374 $ 5,586,685
============ ============
</TABLE>
(Continued on Page 6)
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
HEAVENLYDOOR.COM, INC.
(Formerly Procept, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from Page 5)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDING MARCH 31,
2000 1999
-------------- ----------
<S> <C> <C>
Supplement disclosure of cash flow information:
Cash paid for interest $ -- $ 549
============== ==========
Supplemental disclosure of non-cash transactions:
Fair value of common stock issued to acquire
Heaven's Door Corporation $ 23,935,275 $ --
============== ==========
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
============== ==========
Debt assumed from the acquisition of Heaven's Door Corporation $ 330,000 $ --
============== ==========
Debt assumed from the acquisition of Pacific Pharmaceuticals $ -- $ 285,000
============== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Unaudited Financial Statements
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 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 will focus on growing the Internet business,
while maximizing the value of the 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 third parties, the market acceptance of the
Company's products, the success of the Company in financing efforts, 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 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's subsidiary HDC, 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 web site offers funeral
homes and other service providers the ability to have an Internet presence
through a customized, linked web site designed by Heaven's Door Corporation for
the funeral home or other provider.
From inception through March 31 2000, the Company generated no revenue from
product sales, has not been profitable, and has incurred an accumulated deficit
of $125.0 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 incur additional operation losses over the next several years as it
focuses on growing the new Internet business, while maximizing the value of the
biotechnology assets.
7
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Unaudited Financial Statements
In January 2000, the Company received proceeds of approximately $0.4 million
from the sale of 113,674 common shares of Aquila Biopharmaceuticals, Inc.
("Aquila"). During the three months ended March 31, 2000, the Company recorded a
gain of approximately $0.2 million, representing the difference between the
proceeds of the sale of $0.4 million minus the carrying cost of the investment
of $0.2 million. As of March 31, 2000, the Company had liquidated all securities
it held in Aquila.
On March 28, 2000, the Company received proceeds of approximately $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 approximately $0.2 million was recorded directly to equity
which represents the fair market value of the discount given to the 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 through April 2001.
The accompanying financial statements for the three months ended March 31, 2000
are unaudited and have been prepared by the Company in accordance with generally
accepted accounting principles. These interim financial statements, in 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 March 31, 2000. The results of operations for the interim
periods are not necessarily indicative of the results of operations to be
expected for the fiscal year. These interim financial statements 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.
2. SHAREHOLDERS' EQUITY
On December 31, 1999, the Company had a total of 14,970,818 shares of common
stock outstanding. 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 Heaven's Door Corporation, termination of certain contractual
obligations, the issuance of common stock to consultants, and the exercise of
warrants and options for common stock.
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
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.
8
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Unaudited Financial Statements
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 2000 and March 2000 the Company issued a total of 59,241 shares 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 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 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
In the quarter ended December 31, 1997, the Company adopted SFAS 128, "Earnings
Per Share," which modifies the way in which earnings per share ("EPS") is
calculated and disclosed. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS 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-month period ended
March 31, 2000 and 1999, there were no dilutive securities.
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income." This statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. The Company has adopted SFAS 130 in the
accompanying financial statements and will provide such information annually in
its Statement of Shareholders' Equity and in a footnote disclosure for interim
periods. Accumulated other comprehensive income is calculated as follows:
9
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Unaudited Financial Statements
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
Net loss $(20,758,836) $ (9,990,000)
Change in unrealized gain
on investments -- (207,977)
------------- -------------
Comprehensive loss $(20,758,836) $(10,197,977)
============ ============
Unrealized gain on investments:
Balance at December 31, 1999 $ 98,323
Change during the three months
ended March 31, 2000 (98,323)
-------------
Balance at March 31, 2000 $ --
=============
</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 accounting
method. The aggregate purchase price of approximately $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 $0.1
million, were allocated to the acquired tangible and intangible assets. As a
result of this acquisition, the Company has recorded goodwill and other
intangibles of approximately $24.5 million, which represents the excess cost
of net liabilities acquired and which will be amortized over a period ranging
from three to ten years. Pursuant to the Merger Agreement with HDC, each
share of Heaven's Door Corporation 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 carry a 10% annual interest rate. As of
March 31, 2000, notes payable of 330,000 were outstanding.
In accordance with the Merger Agreement, the Company also issued 3,876,887
shares to investors in the 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
10
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Unaudited Financial Statements
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 OPERATION
The following unaudited pro forma results of operations for the three months
ended March 31, 2000 and 1999 give effect to the Company's acquisition of
Heaven's Door Corporation as if the transaction had occurred at the beginning
of each period. 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
periods ended March 31, 2000 and 1999, respectively. The pro forma results of
operation do not purport to reflect what the Company's results of operations
actually would have been if the acquisition has occurred as of the beginning
of the periods, or what such results will be for any future period. 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
QUARTER ENDED MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 49,170 $ 118,931
Net loss $ (1,607,532) $ (1,396,133)
============ ============
Basic and diluted net loss per common share $ (0.05) $ (0.06)
============ ============
</TABLE>
6. NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement was originally effective for
all fiscal year ends beginning after June 15, 1999. In June 1999, the FASB
issued SFAS 137, which delayed the effective date of SFAS 133 by one year. SFAS
133 is currently effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company does not
believe that the adoption of SFAS 133 will have a significant effect on the
Company's results of operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101")
which is effective no later than the quarter ending March 31, 2000. SAB 101
clarifies the Securities and Exchange Commission's views regarding recognition
of revenue. In March 2000, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101A, "Amendment: Revenue Recognition in Financial
Statements" ("SAB 101A"). SAB 101A delays the implementation date of SAB
11
<PAGE>
HeavenlyDoor.com, Inc.
(Formerly Procept, Inc.)
Notes to Unaudited Financial Statements
101 by one quarter to the quarter ending June 30, 2000 for registrants with the
fiscal years that begin between December 16, 1999 and March 15, 2000. The
Company does not believe that the adoption of SAB 101 will have a significant
effect on the Company's results of operation or its financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
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
noncompensatory 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 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 will focus on growing the Internet business, while maximizing
the value of the biotechnology assets through out-license or disposition.
RESULTS OF OPERATIONS
From inception through March 31, 2000, the Company has generated no revenues
from product sales, has not been profitable since inception, and has an
accumulated deficit of $125.0 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 HDC's website and related
marketing activities. The Company expects to incur significant additional
operating losses over the next several years due to its ongoing efforts to
develop the new Internet business.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
The Company's total revenues, comprised primarily of interest income, decreased
by $33,000 in the first quarter of 2000 from the same period in 1999. The
decline in revenue resulted from lower interest income earned on invested funds.
The lower interest earnings was the result of lower average cash balances
available for investment.
The Company's total operating expenses increased $10.7 million to $20.8
million for the first quarter of 2000 from $10.1 million for the comparable
period of 1999. The Company recorded non-cash charges of approximately $19.2
million during the period ended March 31, 2000. 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. Without these
non-cash charges, total operating expenses increased to $1.6 million in the
first quarter of 2000 from $0.7 million during the same period in 1999.
Research and development expenses increased 58% to $0.3 million in the first
quarter of 2000
13
<PAGE>
from $0.2 million in the first quarter of 1999. This increase in development
costs was primarily due to expenditures associated with developing the
Company's Internet web site. Sales and marketing expenses increased 100% to
$0.2 million for the first quarter of 2000. The increase in sales and
marketing expenditures reflects the Company's entry into an Internet business
strategy and the ramping up of sales and marketing activities associated with
the Internet web site. General and administrative expenses increased 59% to
approximately $0.8 million in the first quarter of 2000 from approximately
$0.5 million in the first quarter of 1999, reflecting the increase in
administrative personnel associated with the activities of new Internet
business. During the first quarter of 2000 the Company amortized
approximately $0.6 million of the goodwill and other intangibles which
resulted from the acquisition of Heavens Door Corporation. The Company
recorded a gain of $0.2 million in other (income) expenses in the first
quarter of 2000. This gain was generated from the disposition of the
Company's investment in Aquila Biopharmaceuticals, Inc., and the sale of
research and development supplies. Due to the focus on the Internet business
strategy, the Company has sold and plans to continue to sell most of its
biotechnology research and development equipment.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 31, 2000 the Company incurred a net loss of
approximately $20.8 million. The net loss included non-cash charges of
approximately $14.7 million associated with variable stock options, and $4.5
million for the fair value of common stock issued to consultants. During the
first quarter of 2000 the Company used approximately $1.3 million to fund
operating activities, as compared to $0.6 million cash used in operations for
the same period of 1999. The $0.7 (102%) increase is primarily a result of
the Company's increased operating activities associated with the new Internet
business.
During the first quarter of 2000, the Company received proceeds of approximately
$0.4 million from the sale of its' investment in Aquila Biopharmaceuticals, Inc.
("Aquila"). The Company recognized a gain of approximately $0.2 million on the
sale of the investment in Aquila.
At March 31, 2000, the Company's aggregate cash and cash equivalents were $6.7
million, a net increase of $2.6 million from December 31, 1999. The increase in
cash is primarily attributable to the proceeds of approximately $3.1 million
from the exercise of approximately 1.3 million Class C common stock warrants at
a negotiated discount to the contractual exercise price.
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
14
<PAGE>
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 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 Procept's operations through April 2001. Although management
continues to pursue additional funding 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 the www.HeavenlyDoor.com website, or obtain
revenue in connection with the licensing or sale of the Company's biotech
assets, or secure additional financing, the Company's financial condition will
be adversely affected. 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 biotech 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 the web
site, the timing of and structure of payments related to the biotech assets.
RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement was originally effective for all fiscal year ends beginning after June
15, 1999. In June 1999, the FASB issued Statement 137, which delayed the
effective date of Statement 133 by one year. Statement 133 is currently
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value derivatives are
recorded each period in current earnings or other comprehensive
15
<PAGE>
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company does not
believe that the adoption of SFAS 133 will have a significant effect on the
Company's results of operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101")
which is effective no later than the quarter ending March 31, 2000. SAB 101
clarifies the Securities and Exchange Commission's views regarding recognition
of revenue. In March 2000, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101A, "Amendment: Revenue Recognition in Financial
Statements" ("SAB 101A"). SAB 101A delays the implementation date of SAB 101 by
one quarter to the quarter ending June 30, 2000 for registrants with the fiscal
years that begin between December 16, 1999 and March 15, 2000. The Company does
not believe that the adoption of SAB 101 will have a significant effect on the
Company's results of operation or its financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
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
noncompensatory 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 March 2000, the Company had not experienced any adverse effects as a
result of the year 2000 problem.
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<PAGE>
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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES.
The following equity securities were sold during the first quarter of 2000
without registration under the Securities Act of 1933, in reliance on certain
exemptions therefrom:
1. On January 28, 2000, the Company issued 3,876,887 shares to investors in
the Company's 1998 private placement, former preferred stockholders of
Pacific Pharmaceuticals and other common stockholders, in exchange for the
elimination of the certain contractual obligations incurred in connection
with the 1998 placement, the Pacific acquisition and other transactions.
2. The Company issued 546,000 common shares as consideration for the fee due
the placement agent involved in the HDC transaction.
3. The Company issued a total of 750,000 shares to consultants in exchange for
consulting services.
4. In February and March 2000, the Company issued a total of 59,241 shares in
connection with the exercise of warrants for common stock.
5. On March 28, 2000 the Company issued 1,291,666 shares of common stock in
connection with the exercise of Class C Warrants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held a special meeting of stockholders on Tuesday, January 25, 2000.
The shareholders voted on the following proposals:
1. A proposal to amend the Company's restated certificate of incorporation to
increase the number of authorized shares of common stock from 30,000,000
shares to 50,000,000 shares. A majority of the securities issued and
outstanding as of the record date voted in favor of the proposal, as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN PERCENT FOR
--- ------- ------- -----------
<S> <C> <C> <C>
10,115,567 31,878 41,254 68.8%
</TABLE>
18
<PAGE>
2. A proposal to issue up to 10,920,000 shares of the Company's Common Stock
to the stockholders of Heaven's Door Corporation ("HDC") in connection with
and as a result of the acquisition of HDC pursuant to the Agreement and
Plan of Merger dated as of November 8, 1999 among the Company, HDC, Procept
Acquisition Corp. and the stockholders of HDC named therein, and the
issuance of up to 5,000,000 shares of the Company's Common Stock to certain
existing stockholders of the Company in connection with the cancellation of
certain contractual anti-dilution and divided rights. A majority of the
securities present, or represented, and entitled to vote at the meeting
voted in favor of the proposal, as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN PERCENT FOR
--- ------- ------- -----------
<S> <C> <C> <C>
10,138,645 29,240 20,813 69.0%
</TABLE>
3. A proposal to amend the Procept restated certificate of incorporation to
change the name of the Company from Procept, Inc. to HeavenlyDoor.com, Inc.
A majority of the securities issued and outstanding as of the record date
voted in favor of the proposal, as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN PERCENT FOR
--- ------- ------- -----------
<S> <C> <C> <C>
10,136,741 25,420 26,536 69.0%
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27.1 Financial Data Schedule. Filed herewith.
(b) REPORTS ON FORM 8-K.
Current report on Form 8-K dated January 28, 2000 filed with the
Securities and Exchange Commission on February 28, 2000 relating to
the completion of the Company's merger with Heaven's Door Corporation.
19
<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.
HEAVENLYDOOR.COM, INC.
(Registrant)
Date: May 15, 2000 by: /S/ MICHAEL E. FITZGERALD
-------------------------------------
Michael E. Fitzgerald
Vice President, Finance
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule. Filed herewith.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet at March 31, 2000 and the statement of operations for the three months
ended March 31, 2000 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,669,374
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,971,636
<PP&E> 2,066,455
<DEPRECIATION> 1,935,017
<TOTAL-ASSETS> 31,107,672
<CURRENT-LIABILITIES> 1,170,100
<BONDS> 0
0
0
<COMMON> 324,912
<OTHER-SE> 29,599,561
<TOTAL-LIABILITY-AND-EQUITY> 31,107,672
<SALES> 0
<TOTAL-REVENUES> 49,170
<CGS> 0
<TOTAL-COSTS> 20,808,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,758,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,758,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,758,836)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
