<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 JUNE 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 August 16, 1999: Common Stock: 13,889,918
Total number of pages: 15
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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 June 30, 1999
(unaudited) and March 31, 1999................................ 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and 1998 (unaudited)......... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 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..................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 14
SIGNATURES ............................................................... 15
</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"), 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
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PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 7,147,942 $ 2,299,959
Accounts receivable ................................................... 5,108,313 5,223,483
Inventories ........................................................... 10,806,500 13,478,116
Other current assets .................................................. 978,576 998,088
-------------- --------------
Total current assets .............................................. 24,041,331 21,999,646
FIXED ASSETS, net .......................................................... 1,198,415 1,056,192
OTHER ASSETS, net of accumulated amortization of $137,509 and $148,237,
at June 30, 1999 and March 31, 1999, respectively ..................... 639,110 464,685
-------------- --------------
Total assets ...................................................... $ 25,878,856 $ 23,520,523
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 10,449,272 $ 14,644,023
Accrued expenses ...................................................... 450,207 415,394
Short-term debt and current portion of long-term debt ................. 3,595,902 4,107,143
-------------- --------------
Total current liabilities ......................................... 14,495,381 19,166,560
-------------- --------------
LONG-TERM DEBT ............................................................. 345,238 392,857
-------------- --------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, $.001 par value - 1,000,000 shares
authorized, 10,000 shares issued and outstanding as of June 30,
1999 and no shares as of March 31, 1999 ............................... 10,004,972 --
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value - 24,000,000 shares authorized,
13,889,918 shares issued and outstanding as of June 30, 1999
and 13,883,668 as of March 31, 1999 ............................... 13,890 13,884
Additional paid-in capital common ..................................... 50,382,775 50,228,220
Deferred compensation ................................................. (84,837) (321,691)
Accumulated deficit ................................................... (49,278,563) (45,959,307)
-------------- --------------
Total stockholders' equity ........................................ 1,033,265 3,961,106
-------------- --------------
Total liabilities and stockholders' equity ........................ $ 25,878,856 $ 23,520,523
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------
1999 1998
---------------- -----------------
(Unaudited)
<S> <C> <C>
REVENUES .................................... $ 5,409,618 $ 225,956
COST OF SALES ............................... 4,769,717 174,267
---------------- ----------------
GROSS PROFIT ................................ 639,901 51,689
---------------- ----------------
OPERATING EXPENSES:
Research and development ............... 2,144,722 3,302,679
General and administrative ............. 1,577,256 1,147,589
Stock compensation ..................... 194,439 30,000
---------------- ----------------
Total operating expenses ........... 3,916,417 4,480,268
---------------- ----------------
NET LOSS .................................... $ (3,276,516) $ (4,428,579)
---------------- ----------------
---------------- ----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss ............................... $ (3,276,516) $ (4,428,579)
Less convertible preferred stock
dividend-in-kind ....................... (42,740) --
---------------- ----------------
Loss attributable to common stockholders $ (3,319,256) $ (4,428,579)
---------------- ----------------
---------------- ----------------
BASIC/DILUTED LOSS PER COMMON SHARE ......... $ (0.24) $ (0.32)
---------------- ----------------
---------------- ----------------
BASIC/DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ............................ 13,889,204 13,644,271
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $ (3,276,516) $ (4,428,579)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense ........................... 57,802 31,219
Amortization expense ........................... 48,209 13,745
Options issued for services .................... 194,439 30,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ..... 115,170 (225,956)
Decrease (increase) in inventories ............. 2,671,616 (1,923,745)
Decrease (increase) in other current assets .... 19,512 (151,015)
Increase in other assets ....................... (222,634) (10,455)
Increase in accounts payable and accrued
expenses ....................................... (4,159,938) (1,896,964)
------------ ------------
Net cash used in operating activities .......... (4,552,340) (8,561,750)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ....................... (200,025) (29,979)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable
preferred stock ................................ 9,962,232 --
Donated capital and net proceeds from
exercise of common stock options ............... 196,976 9,989
Repayment of notes short-term and long-term
debt ........................................... (558,860) --
------------ ------------
Net cash provided by financing activities ...... 9,600,348 9,989
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ...................................... 4,847,983 (8,581,740)
CASH AND CASH EQUIVALENTS, beginning of period ... 2,299,959 21,557,916
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ......... $ 7,147,942 $ 12,976,176
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ......... $ 88,008 $ 5,014
------------ ------------
------------ ------------
</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 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 three month period ended June
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 AHP ("the AHP Products") and commenced
significant 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. The Company's future ability to generate revenues in excess of its
expenses is dependent upon many factors including its ability to obtain patent
coverage sufficient enough to obtain royalties from AHP, future sales of the AHP
Products and other products and manufacturing and research and development
expenses.
The Company's future capital requirements will depend on many factors,
including but not limited to: changes in the Company's relationship with AHP,
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. The Company believes
that its current capital resources along with a recently completed preferred
stock financing will enable it to maintain its current and planned operations
for at least the next 9 months. However, no assurance can be given that
additional capital, if needed, will be available when required or upon terms
acceptable to the Company.
6
<PAGE>
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>
June 30, 1999 March 31, 1999
--------------------- --------------------
<S> <C> <C>
Raw materials $ 1,560,853 $ 5,095,645
Work-in-process 9,245,647 8,382,471
--------------------- --------------------
Total inventories $10,806,500 $13,478,116
--------------------- --------------------
--------------------- --------------------
</TABLE>
FIXED ASSETS
Fixed assets are stated at cost and consisted of the following:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
--------------------- --------------------
<S> <C> <C>
Equipment $ 1,290,680 $ 1,090,655
Furniture 202,781 202,781
Less accumulated depreciation (295,046) (237,244)
--------------------- --------------------
$ 1,198,415 $ 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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. For the
three months ended June 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
During fiscal 1998, the Company adopted SFAS No. 128 "Earnings Per Share."
As required 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 antidulutive.
7
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
The Company has a $10,000,000 purchase commitment, expiring in December
2000, with a vendor to purchase raw materials to be used for one herbal product
and to provide processing services for an additional herbal product. These
agreements are terminable by the Company in certain circumstances, including
termination of certain AHP agreements. The product and service commitments are
used by the Company to meet its obligations under an AHP supply agreement. As of
June 30, 1999, the Company had spent $3,338,000 pursuant to these agreements.
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
will provide certain manufacturing services for the Company at agreed upon
prices based upon production volume. The Company is committed to reimburse the
vendor a minimum of $300,000 per quarter. The Company is also subject to the
following termination fees: (i) $700,000 if the agreement is terminated within 6
to 12 months of its effective date; (ii) $200,000 if the agreement is terminated
within 12 to 24 months of its effective date and (iii) $100,000 if the agreement
is terminated after 24 months of its effective date.
5. REDEEMABLE 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. 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, 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: 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.
8
<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.
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 $500,000 upon the issuance of a
patent containing claims covering the PharmaPrint-TM- Process. Additionally,
AHP has agreed to spend annually at least the lesser 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 the 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. AHP and PharmaPrint are currently negotiating a
permanent increase to the per unit increase. If an agreement is not reached,
effective August 1, 1999, the prices at which AHP purchases products from
PharmaPrint, with certain limited exceptions, will revert to the prices
agreed upon in the AHP agreements based upon the manufacturing specifications
agreed upon in the AHP agreements. Such prices will remain fixed until
October 2000. Accordingly, increases in material or production costs, without
a corresponding increase in the price AHP pays PharmaPrint, will reduce the
profitability to PharmaPrint of the AHP supply agreements.
9
<PAGE>
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 has also commenced the development of, utilizing the
PharmaPrint-TM- Process, a line of herbal products combined with vitamins
and/or minerals. The Company anticipates that it will initially utilize the
same herbal products developed for AHP in this combination product line. The
Company anticipates marketing these products directly to mass market and
Internet retailers.
The Company also has commenced research efforts on soy, a product
classified as a functional food.
During the three months ended September 30, 1998, the Company substantially
completed the development of the AHP Products and commenced significant
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 JUNE 30, 1999
Revenue for the three months ended June 30, 1999, was $5,410,000 compared
to $226,000 for the three months ended June 30, 1998. Cost of sales for the
three months ended June 30, 1999, were $4,770,000 compared to $174,000 for the
three months ended June 30, 1998. Revenue and cost of sales in both periods were
derived from the manufacturing of products for sale to AHP. The increases in
revenue and cost of sales are a result of greater deliveries of product to AHP
pursuant to a supply agreement.
Research and development expenses for the three months ended June 30,
1999, decreased $1,158,000, or 35.1%, to $2,145,000 from $3,303,000 for the
three months ended June 30, 1998. The decrease was primarily attributable to
the timing of clinical trials, the completion of an animal toxicology
program, and decreased development efforts related to the Company's dietary
supplement products as a result of the Company's completion of the
development of the AHP Products.
General and administrative expensed for the three months ended June 30,
1999, increased $430,000, or 37.5%, to $1,577,000 from $1,148,000 for the three
months ended June 30, 1998. The increase was primarily attributable to
additional staff, Company marketing efforts, increased equipment lease costs,
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
10
<PAGE>
proceeds of approximately $12,700,000. In February 1998, the Company
completed a public offering of 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. 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, 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: 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 June 30, 1999, the Company's staff of full-time employees and
consultants was 28.
The Company has a $10,000,000 purchase commitment, expiring in December
2000, with a vendor to purchase raw materials to be used for one herbal product
and to provide processing services for an additional herbal product. These
agreements are terminable by the Company in certain circumstances, including
termination of certain AHP agreements. The product and service commitments are
used by the Company to meet its obligations under an AHP supply agreement. As of
June 30, 1999, the Company had spent $3,338,000 pursuant to these agreements.
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
will provide certain manufacturing services for the Company at agreed upon
prices based upon production volume. The Company is committed to reimburse the
vendor a minimum of $300,000 per quarter. The Company is also subject to the
following termination fees: (i) $700,000 if the agreement is terminated within 6
to 12 months of its effective date; (ii) $200,000 if the agreement is terminated
within 12 to 24 months of its effective date and (iii) $100,000 if the agreement
is terminated after 24 months of its effective date.
The Company decreased its inventories to approximately $10,807,000 at June
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 three months ended June 30, 1999.
11
<PAGE>
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 June 30, 1999, the balance of this loan
was $488,095. The remaining $4,000,000 under this credit facility, which
expires in December 1999, is 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%. At March 31, 1999, the prime rate was
7.75%. At June 30, 1999, $3,453,045 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.
The Company's future capital requirements will depend on many factors,
including but not limited to: changes in the Company's relationship with AHP,
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. The Company believes
that its current capital resources along with a recently completed preferred
stock financing will enable it to maintain its current and planned operations
for at least the next 9 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
12
<PAGE>
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 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. However, the
Company 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 hypotherical changes in interest rates as of June 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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
27.1 Financial Data Schedule
(b) A Report on Form 8-K was filed on June 11, 1999 related to the
issuance of Series A Convertible Preferred Stock
14
<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: August 16, 1999
15
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