<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/x/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________ .
Commission File Number 000-21141
PHARMAPRINT INC.
(Name of small business issuer as specified in its charter)
DELAWARE 33-0640125
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2600 MICHELSON, SUITE 1600, IRVINE,
CALIFORNIA 92612
(Address of principal executive offices) (Zip code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 794-7778
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 Issuer
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 as of November 15, 1999: Common Stock: 13,903,251
Total number of pages: 20
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
FACING SHEET ................................................................ 1
INDEX....................................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and March 31, 1999................................ 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1999 and 1998, and for the
six months ended September 30, 1999 and 1998 (unaudited)...... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1999 and 1998 (unaudited) ..... 5
Notes to Condensed Consolidated Financial Statements (unaudited). 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
Item 6. Exhibits and Reports on Form 8-K................................ 19
SIGNATURES ................................................................ 20
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking" statements. The Company is
including this statement for the express purpose of availing itself of
protections of the safe harbor provided by the Private Securities Litigation
Reform Act of 1995 with respect to all such forward-looking statements.
Examples of forward-looking statements include, but are not limited to: (a)
projections of revenues, capital expenditures, growth, prospects, dividends,
capital structure and other financial matters; (b) statements of plans and
objectives of the Company or its management or Board of Directors; (c)
statements of future economic performance; (d) statements of assumptions
underlying other statements and statements about the Company and its business
relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar
expressions.
The Company's ability to predict projected results or the effect of
certain events on the Company's operating results is inherently uncertain.
Therefore, the Company wishes to caution each reader of this report to
carefully consider the following factors and certain other factors discussed
herein and in the Company's March 31, 1999 Annual Report on Form 10-K, any or
all of which have in the past and could in the future affect the ability of
the Company to achieve its anticipated results and could cause actual results
to differ materially than those discussed herein: changes in the Company's
relationship with American Home Products Corporation (""AHP''), resolution of
pricing and other disputes with AHP, the Company's ability to obtain future
collaborative relationships to sell its products, cost and availability of
botanical extracts, cost and availability of manufacturing service
contractors, ability to obtain and enforce patents, limited manufacturing
experience, dependence on third parties, uncertainties related to the
PharmaPrint-TM-Process, government regulation and uncertainty of product
approvals, ability to commercialize and market products, cost and results of
research and development and clinical and toxicology studies, technological
advances by third parties and competition, future capital needs of the
Company, control by existing shareholders and general economic and business
conditions.
PHARMAPRINT-TM- IS A TRADEMARK OF THE COMPANY AND CENTRUM-Registered
Trademark- IS A REGISTERED TRADEMARK OF AHP.
2
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ --------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 2,209,320 $ 2,299,959
Accounts receivable ........................................ 3,066,366 5,223,483
Inventories................................................. 10,022,289 13,478,116
Other current assets........................................ 825,915 998,088
------------ ------------
Total current assets................................... 16,123,890 21,999,646
FIXED ASSETS, net............................................... 1,390,409 1,056,192
OTHER ASSETS, net of accumulated amortization of
$160,788 and $148,237, at September 30, 1999 and
March 31, 1999, respectively................................ 1,034,694 464,685
------------ ------------
Total assets........................................... $ 18,548,993 $ 23,520,523
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 10,487,533 $ 14,644,023
Accrued expenses ........................................... 419,997 415,394
Short-term debt and current portion of long-term debt....... 3,095,933 4,107,143
------------ ------------
Total current liabilities.............................. 14,003,463 19,166,560
------------ ------------
LONG-TERM DEBT.................................................. -- 392,857
------------ ------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK, $.001 par value -
1,000,000 shares authorized; 10,000 shares
issued and outstanding as of September 30, 1999
and no shares as of March 31, 1999.......................... 10,129,334 --
------------ ------------
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $.001 par value - 24,000,000 shares
authorized; 13,903,251 shares issued and outstanding
as of September 30, 1999 and 13,883,668 as of
March 31, 1999......................................... 13,903 13,884
Additional paid-in capital.................................. 50,451,135 50,228,220
Deferred compensation....................................... (40,023) (321,691)
Accumulated deficit......................................... (56,008,819) (45,959,307)
------------ ------------
Total stockholders' (deficit) equity................... (5,583,804) 3,961,106
------------ ------------
Total liabilities and stockholders' (deficit) equity... $ 18,548,993 $ 23,520,523
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Manufacturing.............................. $ 589,774 $ 4,036,215 $ 5,999,392 $ 4,262,171
----------- ----------- ------------ ------------
COST OF SALES.................................. 1,714,621 3,278,892 6,484,338 3,453,158
----------- ----------- ------------ ------------
GROSS MARGIN................................... (1,124,847) 757,323 (484,946) 809,013
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Research and development................... 3,198,937 7,140,004 5,343,659 10,442,683
General and administrative................. 2,159,376 1,459,925 3,736,632 2,607,515
Stock compensation......................... 95,863 198,933 290,302 228,933
----------- ----------- ------------ ------------
Total operating expenses.............. 5,454,176 8,798,862 9,370,593 13,279,131
----------- ----------- ------------ ------------
NET LOSS....................................... $(6,579,023) $(8,041,539) $ (9,855,539) $(12,470,118)
=========== =========== ============ ============
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss................................... $(6,579,023) $(8,041,539) $(9,855,539) $(12,470,118)
Less convertible preferred stock
dividend-in-kind...................... (151,233) -- (193,973) --
----------- ----------- ------------ ------------
Loss attributable to common
stockholders.......................... $(6,730,256) $(8,041,539) $(10,049,512) $(12,470,118)
=========== =========== ============ ============
BASIC/DILUTED LOSS PER
COMMON SHARE............................... $(0.48) $(0.59) $(0.72) $(0.91)
=========== =========== ============ ============
BASIC/DILUTED WEIGHTED
AVERAGE COMMON
SHARES OUTSTANDING......................... 13,890,353 13,651,589 13,889,781 13,648,064
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................................. $(9,855,539) $(12,470,118)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense................................. 130,466 64,488
Amortization expense................................. 71,488 28,044
Options issued for services.......................... 290,302 228,933
Changes in assets and liabilities:
Decrease (increase) in accounts receivable........... 2,157,117 (4,128,316)
Decrease (increase) in inventories................... 3,455,827 (3,190,749)
Decrease in other current assets..................... 172,173 57,500
Increase in other assets............................. (641,497) (38,717)
(Decrease) increase in accounts payable
and accrued expenses............................ (4,151,887) 4,265,437
----------- ------------
Net cash used in operating activities................ (8,371,550) (15,183,498)
----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of fixed assets............................. (464,683) (599,150)
----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of convertible
preferred stock................................. 9,935,361 --
Donated capital and net proceeds from
exercise of common stock options................ 214,300 9,989
Repayment of short-term and long-term
debt............................................ (1,404,067) --
----------- ------------
Net cash provided by financing activities............ 8,745,594 9,989
----------- ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS.............................................. (90,639) (15,772,659)
CASH AND CASH EQUIVALENTS,
beginning of period.................................. 2,299,959 21,557,916
----------- ------------
CASH AND CASH EQUIVALENTS,
end of period........................................ $ 2,209,320 $ 5,785,257
=========== ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest................. $ 156,958 $ 6,129
=========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have not been presented. The accompanying unaudited
financial statements and related notes should be read in conjunction with the
financial statements and related notes included in the PharmaPrint Inc. Annual
Report on Form 10-K for the year ended March 31, 1999.
In the opinion of management of the Company, all material adjustments
(consisting of normal recurring items) considered necessary to present fairly
the Company's financial condition, results of operations, and changes in
financial position have been made. The results of operations for the six month
period ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2000.
2. RISK FACTORS
During the year ended March 31, 1999, the Company substantially completed
the development of certain products for American Home Products Corporation
("AHP") and commenced manufacture and delivery of such products pursuant to a
supply agreement with AHP. Prior to that time, the Company engaged primarily
in research and development activities and reported as a development stage
company. Since inception (September 15, 1994) the Company has incurred
significant losses. On July 31, 1999, an agreement to increase the per unit
cost paid by AHP to PharmaPrint for products delivered to AHP expired.
Currently, no agreement has been reached for a permanent price increase and,
therefore, the Company recorded sales to AHP subsequent to July 31, 1999,
based upon prices agreed to in the AHP agreements, resulting in a loss on
sales of product to AHP. AHP and PharmaPrint are currently negotiating an
increase to the per unit amount and resolution of certain other disputes
between the companies. The Company's future ability to generate revenues in
excess of its expenses is dependent upon many factors including attaining an
increase to the per unit amount charged to AHP, resolution of other disputes
between AHP and the Company's, ability to obtain patent coverage sufficient
enough to obtain royalties from AHP, future sales of product to AHP, future
sales of product to other partners, other collaborative relationships,
manufacturing and research and development expenses and general administrative
expenses.
In September 1999, the Company received a notice from the bank that it
was in default of its credit agreement. In November 1999, the Company and the
bank entered into a Forebearance Agreement that provided, among other things,
that the Company pay principal and interest in an amount equal to $1,587,000 and
maintain a cash balance in excess of the loan amount due to the bank. The
Forebearance Agreement expires November 30, 1999. No further advances are
available to the Company under the credit agreement.
The Company is exploring several alternatives for repaying the bank prior
to November 30, 1999 and is currently in discussions with several lenders to
replace the Company's bank debt. Additionally, on November 12, 1999, the
Company and a third party executed a stock purchase agreement for the sale by
the Company of 1,900,000 shares of common stock held by PharmaPrint in an
Internet company. The net proceeds from this transaction are
6
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
expected to be approximately $2,300,000. The Company expects this transaction
to close in one or more transactions on or before December 31, 1999.
Additionally, on November 12, 1999, the Company received a commitment letter
from a lessor to purchase certain equipment from the Company and
simultaneously lease the equipment back to the Company. The net proceeds from
this transaction are expected to be $400,000. The Company expects this
transaction to close within 45 days.
In October 1999, the Company received a notice from The Nasdaq-Amex
Group that the Company no longer met the market capitalization requirement of
$50,000,000 for continued listing on the Nasdaq National Market pursuant to
one of Nasdaq's maintenance standards. The Company has responded by
submitting to Nasdaq correspondence indicating that it believes it meets the
listing requirements using an alternative maintenance standard that requires
$4,000,000 in net tangible assets. If Nasdaq determines that the Company
fails, among other things, to meet the net tangible asset and other criteria
for this maintenance standard, the Company will pursue other remedies
including, but not limited to, raising additional equity capital to meet the
net tangible asset criteria or seeking to apply for listing on the Nasdaq
SmallCap Market.
The Company's future capital requirements will depend on many factors,
including but not limited to: changes in the Company's relationship with AHP,
resolution of pricing and other disputes between AHP and the Company, the
Company's ability to obtain future collaborative relationships to sell its
products, cost and availability of botanical extracts, cost and availability
of manufacturing service contractors, ability to obtain and enforce patents,
limited manufacturing experience, dependence of third parties, uncertainties
related to the PharmaPrint-TM- Process, government regulation and uncertainty
of product approvals, ability to commercialize and market products, cost and
results of research and development and clinical and toxicology studies,
technological advances by third parties and competition. Provided that the
Company can find a replacement for its bank debt or complete the sale of
common stock in an Internet company and execute a sales leaseback agreement
for certain equipment, the Company believes that its current capital resources
will enable it to maintain its current and planned operations for at least the
next six months. However, no assurance can be given that additional capital,
if needed, will be available when required or upon terms acceptable to the
Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost (determined on a specific
identification method) or market and consisted of the following:
<TABLE>
<CAPTION>
September March
30, 1999 31, 1999
------------ -----------
<S> <C> <C>
Raw materials............... $ 1,462,001 $ 5,095,645
Work-in-process............. 8,282,368 8,382,471
Finished product............ 277,920 --
------------ -----------
Total inventories $10,022,289 $13,478,116
=========== ===========
</TABLE>
7
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FIXED ASSETS
Fixed assets are stated at cost and consisted of the following:
<TABLE>
<CAPTION>
September March
30, 1999 31, 1999
---------- ----------
<S> <C> <C>
Equipment....................... $1,539,879 $1,090,655
Furniture....................... 207,500 202,781
Less accumulated depreciation... (356,970) (237,244)
---------- ----------
$1,390,409 $1,056,192
========== ==========
</TABLE>
Depreciation is provided using the straight-line method over the
estimated useful life for equipment of three to ten years and furniture for
five years.
INVESTMENTS
The Company owns 1,900,000 shares of common stock in an Internet
company which is accounted for under the cost method. The investment is carried
at no cost.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expenses as incurred. For
the six months ended September 30, 1999, the Company included in research and
development approximately $907,000 of production costs incurred in the
manufacturing of salable products.
LOSS PER SHARE
Pursuant to SFAS No. 128, basic loss per share is computed based on the
weighted average number of common shares outstanding for the period. Diluted
loss per share is computed assuming dilution from stock options, warrants and
Convertible Preferred Stock. The Company excluded all outstanding stock options,
warrants and Convertible Preferred Stock from the diluted computation, as their
effect is anti-dilutive.
4. COMMITMENTS AND CONTINGENCIES
In June 1998, the Company entered into a three-year service agreement
with a vendor. Under the terms of the agreement, effective July 1, 1998, the
vendor provided certain manufacturing services for the Company at agreed upon
prices based upon production volume. The Company was committed to reimburse the
vendor a minimum of $300,000 per quarter. The Company was also subject to the
following termination fees: (i) $700,000 if the agreement was terminated within
6 to 12 months of its effective date; (ii)
8
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$200,000 if the agreement was terminated within 12 to 24 months of its
effective date and (iii) $100,000 if the agreement was terminated after 24
months of its effective date. During the six months ended September 30, 1999,
the Company did not meet its minimum manufacturing quantity pursuant to the
agreement and recorded a $223,000 expense to cost of goods sold. In July
1999, the Company cancelled the agreement with the vendor and recorded a
$200,000 termination fee, classified as a cost of sales expense for the six
months ended September 30, 1999.
In August 1999, the Company entered into several 30-month agreements with
a vendor to provide various manufacturing and management consulting services.
Pursuant to the management agreement, the Company has agreed to reimburse the
vendor $33,000 per month in exchange for, among other things, general
management services, access to the manufacturers standard operating procedures
and computer systems and general assistance in the establishment of the
Company's own manufacturing site.
5. CONVERTIBLE PREFERRED STOCK
On June 4, 1999, the Company completed a $10 million private placement
(the "Private Placement") of Series A Convertible Preferred Stock
("Series A Preferred Stock") with RGC International Investors, LDC (the
"Investor"). The Series A Preferred Stock is convertible into shares of the
Company's common stock at a conversion price of $8.55 (120% of the average
closing bid price of the Company's common stock for the three trading days
prior to the execution of definitive documentation on June 4, 1999), upon the
terms and subject to the conditions set forth in the Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock,
the "Agreement". Subject to a limit on the total number of shares of common
stock issuable upon conversion of the Series A Preferred Stock, after October
4, 1999, the conversion price may be reduced to a price equal to 100% of a
measure of the market price of the common stock at the time of conversion.
The Company has the option to redeem the Series A Preferred Stock on or
after July 29, 2000. In order to effect such a redemption, the average closing
bid price of the common stock for the ten consecutive trading days prior to the
notice of redemption must be less than $4.8125. The redemption price of each
share of Series A Preferred Stock in such case will be 115% of the stated value
($1,000) plus 6.0% of the stated value per year the Series A Preferred Stock is
outstanding.
The Series A Preferred Stock has a yield of 6%, payable at the time of
conversion in shares of the Company's common stock. The Series A Preferred Stock
does not otherwise bear dividends.
In connection with the Private Placement, the Company granted the
Investor registration rights which obligate the Company to register the resale
of the shares of common stock issuable upon conversion of the Series A Preferred
Stock. Other than as provided under the Delaware General Corporation Law, the
holders of Series A Preferred Stock have no rights to vote on matters presented
to the Corporation's stockholders.
Upon the occurrence of certain liquidation events as defined in the
Agreement, the holders of Series
9
<PAGE>
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A Preferred Stock are entitled to receive, in preference over the holders of
common stock and any preferred stock ranking junior to the Series A Preferred
Stock, an amount equal to the stated value plus 6% per year (pro rated for
any partial year) of such stated value beginning on June 4, 1999 and ending
on the date of final distribution. The Preferred Stock is also redeemable at
the option of holder if the following items of default occur: at the time of
conversion the Company fails to issue common shares to the holders of the
Preferred Stock; the Company makes an assignment for the benefit of
creditors; bankruptcy, insolvency, reorganization or liquidation proceedings
are commenced; the Company fails to maintain the listing of its common stock
on Nasdaq National Market, Nasdaq SmallCap Market, American Stock Exchange or
the New York Stock Exchange; if the registration statement registering the
resale of the common stock issuable upon conversion of the Series A Preferred
Stock is not effective for certain specified periods.
As of November 12, 1999, no Preferred Stock was converted into common
stock.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
PharmaPrint uses its PharmaPrint-TM- Process technology to develop high
quality dietary supplement, functional food and pharmaceutical products from
botanical sources. The Company believes that its PharmaPrint-TM- Process
technology represents a new paradigm in the development of therapeutic products
from botanical sources. Unlike the traditional drug development process of
identifying, isolating and synthesizing single bioactive molecules from plant
and other sources, the Company's core technologies were developed based on
empirical data suggesting that the health benefits and safe usage of certain
plant-derived therapeutics might be the result of the natural combination of
multiple molecules found in the plant extract and that single molecules, in
isolation, may not replicate the natural plant's effectiveness. The
PharmaPrint-TM- Process technology enables the Company to identify, quantify and
standardize the bioactives within plant sources that are believed to provide
therapeutic benefits and produce products having consistent batch-to-batch
quantities of these bioactives.
The Company has, or intends to, commercialize its development efforts
for four distinct product lines derived from botanical sources.
In October 1997, the Company entered into several agreements with AHP
whereby the Company is applying its PharmaPrint-TM- Process to produce a line
of high quality herbal dietary supplement products currently marketed by AHP
under the Centrum-Registered Trademark- brand name. Pursuant to the terms of
the agreements, AHP paid the Company $2,500,000 as an up-front licensing fee
and is required to pay an additional fee of $5,000,000 upon the issuance of a
patent containing claims covering the PharmaPrint-TM- Process. Additionally,
AHP has agreed to spend annually at least the lessor of $20 million or an
amount equal to 50% of net sales of the AHP Products in advertising and other
marketing expenditures in each of the first two years following initial
product launch. AHP has also agreed to purchase the AHP Products from the
Company under a supply agreement at specified prices. In addition, if the
Company succeeds in securing a patent containing a claim or claims comprising
the PharmaPrint-TM- Process applied generally or on a product-by-product
basis, AHP will pay royalties to the Company on net sales of such patented
AHP products of 4% in the first year and 6% thereafter. AHP commenced
marketing PharmaPrint's six herbal dietary supplement products (echinacea,
garlic, ginseng, ginkgo biloba, saw palmetto and St. John's wort) in October
1998. In November 1998, AHP and PharmaPrint entered into an agreement whereby
AHP paid PharmaPrint $5,000,000 as reimbursement for certain development and
production costs and increased the per unit amount to be paid by AHP to
PharmaPrint for AHP Products delivered or to be delivered prior to February
28, 1999. In April 1999, AHP and PharmaPrint entered into an additional
agreement that extended the per unit cost increase paid by AHP to PharmaPrint
for AHP Products delivered or to be delivered from March 1, 1999 through July
31, 1999. Currently, no agreement has been reached for a permanent price
increase and, therefore, the Company recorded sales to AHP subsequent to July
31, 1999 based upon prices agreed to in the AHP agreements. AHP and
PharmaPrint are currently negotiating a permanent increase to the per unit
amount and resolution of certain other disputes between the companies.
11
<PAGE>
During the three months ended September 30, 1999, the Company, utilizing
the PharmaPrint-TM- Process, completed the development of an initial line of
herbal products (echinacea, garlic, ginseng, ginkgo biloba, saw palmetto and St.
John's wort) combined with vitamins and/or minerals. The Company has reached
agreements with four Internet retailers to sell PharmaPrint combination products
on each of the retailers websites and commenced deliveries of such products in
October 1999. The Company is also marketing the combination products to food,
drug and mass market merchandisers, direct marketers and additional Internet
retailers.
Another application of the PharmaPrint-TM- Process is the development of
FDA-approvable pharmaceuticals from natural plant sources. The Company has
completed a Phase II study for its initial pharmaceutical product candidate,
PPRT-321, a saw palmetto-derived drug that is being developed for the treatment
of symptoms associated with BPH. The clinical study demonstrated that the
product was safe and appeared to improve symptoms associated with an enlarged
prostate gland. The Company currently is evaluating further studies for
PPRT-321.
The Company also has commenced development efforts on soy, a product
classified as both a functional food and dietary supplement.
During the three months ended September 30, 1998, the Company
substantially completed the development of the AHP Products and commenced
manufacture and delivery of such products pursuant to the supply agreement.
Prior to that time, the Company engaged primarily in research and development
activities and reported as a development stage company.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenue for the three months ended September 30, 1999, was $590,000
compared to $4,036,000 for the three months ended September 30, 1998. Cost of
sales for the three months ended September 30, 1999, were $1,715,000 compared to
$3,279,000 for the three months ended September 30, 1998. Gross Margin for the
three months ended September 30, 1999, was ($1,125,000) compared to $757,000 for
the three months ended September 30, 1998. Revenue and cost of sales in both
periods were derived from the manufacturing of products for sale to AHP. The
decrease in revenue and cost of sales was primarily attributable to a reduction
in the number of capsules ordered by and sold to AHP. The decrease in gross
profit was primarily attributable to a lower transfer price per capsule sold
after July 31, 1999, the Company's minimum manufacturing requirement at a vendor
and a higher cost to produce two products that comprised the majority of
capsules sold to AHP.
Research and development expenses for the three months ended September
30, 1999, decreased $3,941,000, or 55.2%, to $3,199,000, from $7,140,000 for the
three months ended September 30, 1998. The decrease was primarily attributable
to decreased development efforts related to the Company's dietary supplement
products as a result of the Company's completion of the development of AHP
products, a reduction in stability testing requirements, and the timing of costs
associated with animal toxicology studies, clinical trials and other IND related
initiatives.
12
<PAGE>
General and administrative expenses for the three months ended September
30, 1999, increased $699,000, or 47.9%, to $2,159,000 from $1,460,000 for the
three months ended September 30, 1998. The increase was primarily attributable
to increased equipment rental costs, additional staff, Company marketing
efforts, higher interest expense and increased depreciation and amortization
expenses.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1999
Revenue for the six months ended September 30, 1999, was $5,999,000
compared to $4,262,000 for the six months ended September 30, 1998. Cost of
sales for the six months ended September 30, 1999, were $6,484,000 compared to
$3,453,000 for the six months ended September 30, 1998. Gross margin for the six
months ended September 30, 1999, was ($485,000) compared to $809,000 for the six
months ended September 30, 1998. Revenue and cost of sales in both periods were
derived from the manufacturing of products for sale to AHP. The increase in
revenue and cost of sales was primarily attributable to a significantly greater
number of capsules ordered by and sold to AHP during the three months ended June
30, 1999 compared to the three months ended June 30, 1998, offset by a reduction
in the number of capsules ordered by and sold to AHP during the three months
ended September 30, 1999 compared to the three months ended September 30, 1998.
The decrease in gross profit was primarily attributable to a lower transfer
price per capsule sold after July 31, 1999, the Company's minimum manufacturing
requirement at a vendor and a higher cost to produce two products that comprised
the majority of capsules sold to AHP during the three months ended September 30,
1999.
Research and development expenses for the six months ended September
30, 1999, decreased $5,099,000, or 48.8%, to $5,344,000, from $10,443,000 for
the six months ended September 30, 1998. The decrease was primarily attributable
to reduced costs associated with animal toxicology studies, clinical trials and
other IND related initiatives, decreased development efforts related to the
Company's dietary supplement products as a result of the Company's completion of
the development of AHP products and a reduction in stability testing
requirements.
General and administrative expenses for the six months ended September
30, 1999, increased $1,129,000, or 43.3%, to $3,737,000 from $2,608,000 for the
six months ended September 30, 1998. The increase was primarily attributable to
increased equipment rental costs, higher interest expense, additional staff,
Company marketing efforts and increased depreciation and amortization expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities. From inception (September 15, 1994) through May 1996, the
Company had raised an aggregate net amount of approximately $2,100,000 through
private sales of equity securities. In August 1996, the Company completed an
initial public offering of 3,000,000 shares of its common stock at $5.00 per
share, raising net proceeds of approximately $12,700,000. In February 1998, the
Company completed a public offering of
13
<PAGE>
2,587,500 shares of its common stock at $10.50 per share. The net proceeds
from this public offering were approximately $24,400,000.
On June 4, 1999, the Company completed a $10 million private placement
(the "Private Placement") of Series A Convertible Preferred Stock ("Series
A Preferred Stock") with RGC International Investors, LDC (the
"Investor"). The Series A Preferred Stock is convertible into shares of the
Company's common stock at a conversion price of $8.55 (120% of the average
closing bid price of the Company's common stock for the three trading days
prior to the execution of definitive documentation on June 4, 1999), upon the
terms and subject to the conditions set forth in the Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock,
the "Agreement". Subject to a limit on the total number of shares of common
stock issuable upon conversion of the Series A Preferred Stock, after October
4, 1999, the conversion price may be reduced to a price equal to 100% of a
measure of the market price of the common stock at the time of conversion.
The Company has the option to redeem the Series A Preferred Stock on or
after July 29, 2000. In order to effect such a redemption, the average closing
bid price of the common stock for the ten consecutive trading days prior to the
notice of redemption must be less than $4.8125. The redemption price of each
share of Series A Preferred Stock in such case will be 115% of the stated value
($1,000) plus 6.0% of the stated value per year the Series A Preferred Stock is
outstanding.
The Series A Preferred Stock has a yield of six percent, payable at the
time of conversion in shares of the Company's common stock. The Series A
Preferred Stock does not otherwise bear dividends.
In connection with the Private Placement, the Company granted the
Investor registration rights which obligate the Company to register the resale
of the shares of common stock issuable upon conversion of the Series A Preferred
Stock. Other than as provided under the Delaware General Corporation Law, the
holders of Series A Preferred Stock have no rights to vote on matters presented
to the Corporation's stockholders.
Upon the occurrence of certain liquidation events as defined in the
Agreement, the holders of Series A Preferred Stock are entitled to receive, in
preference over the holders of common stock and any preferred stock ranking
junior to the Series A Preferred Stock, an amount equal to the stated value plus
6% per year (pro rated for any partial year) of such stated value beginning on
June 4, 1999 and ending on the date of final distribution. The Preferred Stock
is also redeemable at the option of holder if the following items of default
occur: at the time of conversion the Company fails to issue common shares to the
holders of the Preferred Stock; the Company makes an assignment for the benefit
of creditors; bankruptcy, insolvency, reorganization or liquidation proceedings
are commenced; the Company fails to maintain the listing of its common stock on
Nasdaq National Market, Nasdaq SmallCap Market, American Stock Exchange or the
New York Stock Exchange; if the registration statement registering the resale of
the common stock issuable upon conversion of the Series A Preferred Stock is not
effective for certain specified periods.
As of November 12, 1999, no Preferred Stock was converted into common
stock.
As of September 30, 1999, the Company's staff of full-time employees
and consultants was 29.
14
<PAGE>
In June 1998, the Company entered into a three-year service agreement
with a vendor. Under the terms of the agreement, effective July 1, 1998, the
vendor provided certain manufacturing services for the Company at agreed upon
prices based upon production volume. The Company was committed to reimburse the
vendor a minimum of $300,000 per quarter. The Company was also subject to the
following termination fees: (i) $700,000 if the agreement was terminated within
6 to 12 months of its effective date; (ii) $200,000 if the agreement was
terminated within 12 to 24 months of its effective date and (iii) $100,000 if
the agreement was terminated after 24 months of its effective date. During the
six months ended September 30, 1999, the Company did not meet its minimum
manufacturing quantity pursuant to the agreement and recorded a $223,000 expense
to cost of goods sold. In July 1999, the Company cancelled the agreement with
the vendor and recorded a $200,000 termination fee, classified as a cost of
sales expense for the six months ended September 30, 1999.
The Company decreased its inventories to approximately $10,022,000 at
September 30, 1999, from approximately $13,478,000 at March 31, 1999. This
decrease was primarily attributable to the Company having sufficient inventory
on hand to supply AHP with product deliveries during the six months ended
September 30, 1999.
In December 1998, the Company entered into a $4,500,000 credit
agreement with a bank. Pursuant to such agreement, at March 31, 1999, the
Company had borrowed $500,000 to finance certain equipment. The interest rate on
this borrowing is prime plus 1.25% and principal and interest are due over 48
months from the date of the loan. At September 30, 1999, the balance of this
loan was $452,391. The remaining $4,000,000 under this credit facility was
available to the Company based upon accounts receivable and purchase orders. The
interest rate on this portion of the credit facility is prime plus 1.0%. The
prime rate was 8.25% and 7.75% on September 30, and March 31, 1999,
respectively. At September 30, 1999, $2,643,552 was advanced under this portion
of the agreement. The credit agreement requires the Company to maintain certain
financial ratios and covenants including a minimum cash balance of $4,000,000
and a debt to net worth ratio of 1.90 to 1.0. The Lender has a security interest
in all of the Company's assets, excluding intellectual property
In September 1999, the company received a notice from the bank that it
was in default of its credit agreement. In November 1999, the Company and the
bank entered into a Forebearance Agreement that provided among other things,
that the Company pay principal and interest in an amount equal to $1,587,000 and
maintain a cash balance in excess of the loan amount due to the bank. The
Forebearance Agreement expires November 30, 1999. No further advances are
available to the Company under the credit agreement.
The Company is exploring several alternatives for repaying the bank prior
to November 30, 1999 and is currently in discussions with several lenders to
replace the Company's bank debt. Additionally, on November 12, 1999, the
Company and a third party executed a stock purchase agreement for the sale by
the Company of 1,900,000
15
<PAGE>
shares of common stock held by PharmaPrint in an Internet company. The net
proceeds from this transaction are expected to be approximately $2,300,000.
The Company expects this transaction to close in one or more transactions on
or before December 31, 1999. Additionally, on November 12, 1999, the Company
received a commitment letter from a lessor to purchase certain equipment from
the Company and simultaneously lease the equipment back to the Company. The
net proceeds from this transaction are expected to be $400,000. The Company
expects this transaction to close within 45 days.
The Company's future capital requirements will depend on many factors,
including but not limited to: changes in the Company's relationship with AHP,
resolution of pricing and other disputes between AHP and the Company, the
Company's ability to obtain future collaborative relationships to sell its
products, cost and availability of botanical extracts, cost and availability of
manufacturing service contractors, ability to obtain and enforce patents,
limited manufacturing experience, dependence of third parties, uncertainties
related to the PharmaPrint-TM- Process, government regulation and uncertainty of
product approvals, ability to commercialize and market products, cost and
results of research and development and clinical and toxicology studies,
technological advances by third parties and competition. Provided that the
Company can find a replacement for its bank debt or complete the sale of common
stock in an Internet company and execute a sales leaseback agreement for certain
equipment, the Company believes that its current capital resources will enable
it to maintain its current and planned operations for at least the next six
months. However, no assurance can be given that additional capital, if needed,
will be available when required or upon terms acceptable to the Company. To the
extent that the Company's capital resources are insufficient to meet its
operating requirements, the Company will seek additional funds through equity or
debt financings, collaborative or other arrangements with corporate partners,
licensees and others. Other than previously described, the Company has no
additional arrangements with respect to, or sources of, such additional
financing, and the Company does not anticipate that existing stockholders will
provide any portion of the Company's future financing requirements. Any
additional financings may have the effect of substantially diluting the
Company's book value per share and the ownership percentage of the Company's
then existing stockholders. Additionally, no assurance can be given that
additional financing will be available when needed or upon terms acceptable to
the Company. If adequate funds are not available, the Company may be required to
delay or terminate expenditures for certain or all of its programs or to license
to third parties the rights to commercialize products or technologies that the
Company would otherwise seek to develop itself, any of which could have a
materially adverse effect on the business, financial condition or results of
operations of the Company.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. As the century date change occurs, these programs may recognize
the year 2000 as 1900, or not at all. If not corrected, many computer systems
and applications could fail or create erroneous results by or at the year 2000
(the "Y2K Issue"). The Y2K Issue has been eliminated in many new programs and
systems, which are said to be "Y2K compliant." The Company has completed its
initial assessment of the Y2K Issue and believes, based on manufacturers'
specifications, that all its information technology ("IT") systems and
applications and related hardware are Y2K compliant. The Company has not
completed assessing Y2K compliance of its
16
<PAGE>
non-IT systems, principally manufacturing systems, but it believes that any
non-compliance will not affect the ability to use the related manufacturing
equipment. The Company is continuing to assess whether third parties with
whom it deals, such as customers, vendors and governments have any Y2K issues
that could affect the Company; such problems could result in interruptions in
delivery of services and materials and payments, among other things. The
Company has not developed formal Y2K non-compliance contingency plans, but
will consider the need for such plans upon completion of the Y2K compliance
assessments. Based on currently available information, the Company believes
that its cost to assure Y2K compliance are not expected to be material.
The Company has completed testing of its own systems and is not
currently aware of any significant Y2K compliance issues in its own systems. The
Company, however, cannot assure that the information it receives from third
parties about their Y2K compliance will be meaningful or accurate. Failure of
significant third parties with whom the Company deals to achieve Y2K compliance
could have a material adverse effect on the Company's operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in
interest rates on long-term and short-term debt. Currently, the Company does not
utilize interest rate swaps, forward or option contracts on foreign currencies
or commodities, or other types of derivative financial instruments. The purpose
of the following discussion is to provide a framework to understand the
Company's sensitivity to hypothetical changes in interest rates as of September
30, 1999. You should be aware that many of the statements contained in this
section are forward looking and should be read in conjunction with related
information included in the PharmaPrint Inc. Annual Report on Form 10-K for the
year ended March 31, 1999, and in conjunction with the Company's disclosures
under the heading "Cautionary Statement Regarding Forward-Looking Statements."
The Company utilizes debt financing primarily for the purpose of
financing equipment and working capital. Historically, the Company has borrowed
under its credit facility to fund such activities. Borrowings under these
facilities are at variable rates.
For variable rate debt, changes in interest rates generally do not
influence the fair market value of the debt, but do affect future earnings and
cash flows. Holding the variable rate debt balance constant, each one percentage
point increase in interest rates occurring on the first day of the year would
result in an increase in interest expense for the current year of approximately
$30,000 for the Company's short-term debt, and $5,000 for the Company's
long-term debt. Based on the Company's current level of exposure to market risks
related to fluctuations in interest rates on debt financing, the Company
believes that any such risks are not expected to be material.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PharmaPrint initiated an action against IPC of Winchester, Kentucky
entitled PHARMAPRINT INC., a Delaware corporation v. INTERNATIONAL PROCESSING
CORPORATION, a New Jersey corporation; GLATT AIR TECHNIQUES, INC., a foreign
corporation, filed in the Orange County, CA Superior Court, Central Justice
Center, alleging a number of claims including, but not limited to, breach of
contract and negligence related to certain damage to PharmaPrint's encapsulation
equipment that resulted in losses to PharmaPrint in the approximate sum of
$6,000,000.
Pennie & Edmonds initiated an action against PharmaPrint entitled
PHARMAPRINT INC., a corporation v. PENNIE & EDMONDS, LLP, filed in the Orange
County, CA Superior Court, Central Justice Center, alleging unpaid legal fees in
the approximate sum of $225,000. PharmaPrint has contended that Pennie & Edmonds
claim is based upon excessive and inappropriate charges for services that were
unjustified. PharmaPrint believes that it has valid defenses to these claims and
intends to vigorously defend itself.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1999 Annual Meeting of Stockholders on September
24, 1999 for the following purposes:
1. To elect five directors; and
2. To ratify Arthur Andersen LLP, independent certified accountants, as
auditors for the Company for the fiscal year ended March 31, 2000.
All proposals were approved as follows:
<TABLE>
<CAPTION>
For Against or Abstain
Withheld
---------- ---------- ----------
<S> <C> <C> <C>
1. Election of Directors
John H. Abeles 8,929,891 89,654 --
Elliot P. Friedman 8,925,091 94,454 --
Erinch R. Ozada 8,925,991 93,554 --
Phillip G. Trad 8,925,691 89,854 --
Nathan Troum 8,929,591 89,954 --
2. Ratification of Arthur 8,974,960 18,825 25,760
</TABLE>
18
<PAGE>
Andersen LLP, as
independent certified public
accountants, and auditors for
the Company for the fiscal
year ended March 31, 2000
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
19
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PHARMAPRINT INC.
/s/ JAMES R. WODACH
-------------------------
James R. Wodach
Senior Vice President and
Chief Financial Officer
Date: November 15, 1999
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,209,320
<SECURITIES> 0
<RECEIVABLES> 3,066,366
<ALLOWANCES> 0
<INVENTORY> 10,022,289
<CURRENT-ASSETS> 16,123,890
<PP&E> 1,747,379
<DEPRECIATION> 356,970
<TOTAL-ASSETS> 18,548,993
<CURRENT-LIABILITIES> 14,003,463
<BONDS> 0
0
10,129,334
<COMMON> 13,903
<OTHER-SE> (5,175,104)
<TOTAL-LIABILITY-AND-EQUITY> 18,548,993
<SALES> 5,999,392
<TOTAL-REVENUES> 5,999,392
<CGS> 6,484,338
<TOTAL-COSTS> 6,484,338
<OTHER-EXPENSES> 9,183,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187,124
<INCOME-PRETAX> (9,855,539)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,855,539)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,855,539)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
