<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31,
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 business issuer as specified in its charter)
DELAWARE 33-0640125
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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 February 11, 2000: Common Stock: 16,767,925
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 December 31, 1999
(unaudited) and March 31, 1999..................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
December 31, 1999 and 1998, and for the nine months ended December 31,
1999 and 1998 (unaudited).......................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
December 31, 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......................................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 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 Registration Statement on Form S-8 dated July 6, 1999 and 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: the outcome of the Company's litigation with AHP, the
outcome of stockholder and other litigation, the Company's ability to both
reduce current amounts owed its significant vendors and to pay such amounts over
an extended period of time, the ability for the Company's common stock to
continued trading on the Nasdaq National Market, the Company's ability to obtain
new distribution channels 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 and ability to raise such
capital, 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>
December 31, 1999 March 31, 1999
------------------------ -------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 433,097 $ 2,299,959
Accounts receivable.................................................. --- 5,223,483
Inventories.......................................................... 6,181,368 13,478,116
Other current assets................................................. 566,308 998,088
------------------------ -------------------
Total current assets............................................. 7,180,773 21,999,646
FIXED ASSETS, net......................................................... 2,158,098 1,056,192
OTHER ASSETS, net of accumulated amortization of $190,932
$148,237, at December 31, 1999 and March 31, 1999, respectively...... 1,134,881 464,685
------------------------ -------------------
Total assets..................................................... $ 10,473,752 $ 23,520,523
======================== ===================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 12,672,760 $ 14,644,023
Accrued expenses..................................................... 611,148 415,394
Short-term debt and current portion of long-term debt................ --- 4,107,143
------------------------ -------------------
Total current liabilities........................................ 13,283,908 19,166,560
------------------------ -------------------
LONG-TERM DEBT............................................................ --- 392,857
------------------------ -------------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK, $.001 par value - 1,000,000 shares
authorized; 8,350 shares issued and outstanding as of December
31, 1999 and no shares as of March 31, 1999.......................... 8,573,608 ---
------------------------ -------------------
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $.001 par value - 24,000,000 shares authorized;
15,436,771 shares issued and outstanding as of December 31,
1999 and 13,883,668 as of March 31, 1999......................... 15,437 13,884
Additional paid-in capital........................................... 52,218,298 50,228,220
Deferred compensation................................................ (15,280) (321,691)
Accumulated deficit.................................................. (63,602,219) (45,959,307)
------------------------ -------------------
Total stockholders' (deficit) equity............................. (11,383,764) 3,961,106
------------------------ -------------------
Total liabilities and stockholders' (deficit) equity............. $ 10,473,752 $ 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 December 31, Nine Months Ended December 31,
----------------------------------------- ----------------------------------------
1999 1998 1999 1998
------------------ ------------------ ----------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Manufacturing.......................... $ 493,476 $ 4,378,624 $ 6,492,867 $ 8,640,795
Licensing and development fees......... --- 7,500,000 --- 7,500,000
------------------ ------------------ ----------------- ------------------
Total revenues......................... 493,476 11,878,624 6,492,867 16,140,795
------------------ ------------------ ----------------- ------------------
COST OF SALES............................... 4,119,238 3,545,191 10,603,575 6,998,349
------------------ ------------------ ----------------- ------------------
GROSS MARGIN................................ (3,625,762) 8,333,433 (4,110,708) 9,142,446
------------------ ------------------ ----------------- ------------------
OPERATING EXPENSES:
Research and development............... 1,237,630 4,051,204 6,581,289 14,493,887
General and administrative............. 2,577,294 1,474,125 6,313,926 4,081,640
Stock compensation..................... 7,435 146,820 297,737 375,753
------------------ ------------------ ----------------- ------------------
Total operating expenses........... 3,822,359 5,672,149 13,192,952 18,951,280
------------------ ------------------ ----------------- ------------------
NET EARNINGS (LOSS)......................... $ (7,448,121) $ 2,661,284 $ (17,303,660) $ (9,808,834)
================== ================== ================= ==================
NET EARNINGS (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net earnings (loss).................... $ (7,448,121) $ 2,661,284 $ (17,303,660) $ (9,808,834)
Less convertible preferred stock
dividend-in-kind................... (145,279) --- (339,252) ---
------------------ ------------------ ----------------- ------------------
Net earnings (loss) attributable to
common stockholders................ $ (7,593,400) $ 2,661,284 $ (17,642,912) $ (9,808,834)
================== ================== ================= ==================
EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share........ $ (0.53) $ 0.19 $ (1.26) $ (0.72)
================== ================== ================= ==================
Diluted earnings (loss)per share....... $ (0.53) $ 0.18 $ (1.26) $ (0.72)
================== ================== ================= ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic.................................. 14,242,620 13,651,589 14,008,058 13,649,243
================== ================== ================= ==================
Diluted................................ 14,242,620 15,010,220 14,008,058 13,649,243
================== ================== ================= ==================
</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>
Nine Months Ended December 31,
--------------------------------------------
1999 1998
-------------------- --------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (17,303,660) $ (9,808,834)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense............................. 198,258 103,130
Amortization expense............................. 101,632 92,607
Options issued for services...................... 297,737 375,753
Changes in assets and liabilities:
Decrease (increase) in accounts receivable....... 5,223,483 (1,954,455)
Decrease (increase) in inventories............... 7,296,748 (5,506,202)
Decrease (increase) in other current assets...... 431,780 (7,678)
Increase in other assets......................... (771,828) (38,716)
(Decrease) increase in accounts payable and
accrued expenses............................. (1,775,509) 2,464,531
Decrease in deferred revenue..................... --- (2,500,000)
------------------ --------------------
Net cash used in operating activities............ (6,301,359) (16,779,864)
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets......................... (1,300,164) (774,064)
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable....................... --- 500,000
Net proceeds from issuance of convertible
preferred stock.............................. 9,935,361 ---
Donated capital and net proceeds from
exercise of common stock options............. 299,300 9,989
Repayment of short-term and long-term debt....... (4,500,000) ---
------------------ --------------------
Net cash provided by financing activities........ 5,734,661 509,989
------------------ --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... (1,866,862) (17,043,939)
CASH AND CASH EQUIVALENTS, beginning of period..... 2,299,959 21,557,916
------------------ --------------------
CASH AND CASH EQUIVALENTS, end of period........... $ 433,097 $ 4,513,977
================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest......... $ 96,732 $ 8,614
================== ====================
</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 nine month
period ended December 31, 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 October 21, 1999, the Company received a one year termination notice
regarding the manufacture of certain products for AHP. From October 21, 1999
through November 15, 1999, the Company engaged in meaningful discussions with
AHP to resolve certain issues between the companies. On November 15, 1999, the
Company was informed that, on November 8, 1999, AHP initiated an action against
PharmaPrint in the Superior Court of New Jersey, Morris County Law Division,
alleging a number of claims including breach of contract. AHP is seeking
monetary damages, declatory judgement and injunctions. On November 16, 1999,
PharmaPrint initiated an action against AHP in the Orange County, California
Superior Court, alleging a number of claims including misappropriation of trade
secrets, breach of contract, violation of unfair competition laws and breach of
the implied covenant of good faith and fair dealing. PharmaPrint is seeking
monetary damages, preliminary and permanent injunctions, punitive damages,
restitution and disgorgement and other damages.
The Company has agreements with three of the four previously announced
Internet retailers to sell its combination vitamin-herbal products. One of the
original Internet retailers has elected not to sell nutraceutical products any
longer. To date, the Company has not recognized any meaningful sales to these
customers and no meaningful sales can be assured in the future. The Company has
no other agreements to distribute its products to any other customers.
The Company is currently negotiating a composition arrangement with its
significant vendors that
6
<PAGE>
includes both a reduction in the total amounts owed such vendors and an extended
payment plan should the vendors accept a reduced payment. The Company is also
considering issuing either common stock or warrants to purchase common stock to
the vendors as an incentive for the vendors to accept a reduced cash payment and
the extended payment plan. If the Company is unable to successfully negotiate a
composition arrangement with its vendors, the Company will evaluate other
options including, but not limited to, seeking protection from the bankruptcy
court.
The Company is presently funding its ongoing operations with cash on
hand and through the sale of shares of common stock held by the Company in a
privately held Internet company. At December 31, 1999, the Company held
1,900,000 shares of common stock in the Internet company. Through February 11,
2000, the Company had sold 1,000,000 shares of common stock in the Internet
company for an aggregate $1,2000,000. The Company and a third party have
executed a stock purchase agreement through February 29, 2000, for the sale of
the remaining 900,000 shares of common stock held by PharmaPrint in the Internet
company.
In October 1999, the Company was informed that it no longer complies
with Nasdaq's net tangible assets/market capitalization/total assets and
total revenue requirement as set forth in Nasdaq Marketplace Rule 4450 (b)
(01) (A). The Company has been granted a hearing, held on February 11, 2000,
to discuss the Company's continued listing on the Nasdaq National Market. The
Company submitted a plan, which was reviewed at the hearing, to demonstrate
its ability to sustain long-term compliance with the net tangible asset
requirement. The Company believes that maintenance of this requirement should
allow for continued listing on the Nasdaq National Market. The Company
further believes that it currently complies with all other requirements
necessary to maintain listing of its stock on the Nasdaq National Market.
The Company believes that Nasdaq will rule on the hearing in the near
future. Based on the outcome of the hearing, the Company's shares may continue
to trade on the Nasdaq National Market, the Company may be granted a further
temporary stay of delisting, the Company may qualify to trade on the Nasdaq
Small Cap Market, or the shares may be delisted from the Nasdaq National Market.
If the shares are delisted, they would likely be quoted in the NASD Electronic
Bulletin Board.
The Company's future ability to generate revenues in excess of expenses
is dependent upon many factors including the outcome of the Company's litigation
with AHP, the outcome of stockholder and other litigation, future sales of
product to other partners, other collaborative relationships, new distribution
channels, manufacturing, research and development expenses and general
administrative expenses.
The Company is currently seeking to raise additional equity and/or
debt capital to pay its current liabilities, to fund current operations and
to fund sales and marketing efforts for new revenue distribution channels.
The Company's ability to raise sufficient capital and future capital
requirements will depend on many factors, including but not limited to: the
outcome of the Company's litigation with AHP, the outcome of stockholder and
other litigation, the Company's ability to both reduce current amounts owed
its significant vendors and pay such amounts over an extended time period,
the ability for the Company's common stock to continue trading on the Nasdaq
National Market, the Company's ability to obtain new distribution channels to
sell its products, cost and availability of botanical extracts, cost and
availability of
7
<PAGE>
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. Provided that the
Company can successfully sell its remaining 900,000 shares in the Internet
company and successfully negotiate a composition arrangement, the Company
believes that its capital resources will enable it to maintain reduced
operations for the next three months. However, no assurance can be given that
additional capital, if needed, will be available when required or upon terms
acceptable to the Company.
The Company has been informed by its independent public accountants
that, depending on the success of PharmaPrint in mitigating the liquidity
risks referred to above prior to the completion of their audit of the
Company's financial statements for the year ending March 31, 2000, their
auditor's report on those financial statements may be qualified in that these
matters raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
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>
December 31, March 31,
1999 1999
------------------- --------------------
<S> <C> <C>
Raw materials $ 1,128,664 $ 5,095,645
Work-in-process 4,784,878 8,382,471
Finished product 267,826 ---
------------------- --------------------
Total inventories $ 6,181,368 $ 13,478,116
=================== ====================
</TABLE>
FIXED ASSETS
Fixed assets are stated at cost and consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
-------------------- -------------------
<S> <C> <C>
Equipment $ 2,375,360 $ 1,090,655
Furniture 207,500 202,781
Less accumulated depreciation (424,762) (237,244)
-------------------- -------------------
$ 2,158,098 $ 1,056,192
==================== ===================
</TABLE>
8
<PAGE>
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
At December 31, 1999, the Company owned 1,900,000 shares of common
stock in a privately held Internet company which is accounted for under the
cost method. The investment is carried at no cost. Subsequent to December 31,
1999, the Company sold 1,000,000 shares of the common stock to fund ongoing
operations and has a contract to sell the balance of the shares.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expenses as incurred. For
the nine months ended December 31, 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. For the three months ended December 31, 1999 and
for the nine months ended December 31, 1998 and 1999, the Company excluded all
outstanding stock options, warrants and Convertible Preferred Stock from the
diluted computation, as their effect is anti-dilutive. For the three months
ended December 31, 1998, 1,358,631 dilutive options and warrants were included
in the computation of dilute income per common share.
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) $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
nine months ended December 31, 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 nine months ended December 31, 1999.
In August 1999, the Company entered into several 30-month agreements
with a vendor to provide
9
<PAGE>
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 manufacturer's 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 equal to the lessor of (i) $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) and (ii) 100% of a measure of the market price of the common shares
at the time of conversion, 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).
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 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 the holder if at the time of conversion the
Company fails to issue common shares to the holders of the Preferred Stock or 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.
The Company has reached an agreement with the Investor to remove
certain redemption features of
10
<PAGE>
the Series A Preferred Stock. In addition, the Company has agreed that it
will seek stockholder approval to remove certain limitations on the aggregate
number of shares of common stock that may be issued upon conversion of the
Preferred Stock.
As of February 11, 2000, 2,890 shares of Preferred Stock were converted
into 2,776,236 shares of common stock.
6. JOINT VENTURE
In February 2000, Pharmaprint and ShenZhen ZeGu Venture Capital Co.,
Ltd., a wholly owned subsidiary of China New Industries Investment Co., Ltd.
signed a binding legal agreement for the creation of a joint venture. Under
the terms of the agreement, PharmaPrint will own 51% of the joint venture in
exchange for contributing certain rights to its proprietary technology. China
New Industries will contribute $6 million in cash and receive in return 49%
of the joint venture equity shares. China New Industries' initial
contribution is $1.5 million in cash; the remaining capital contributions
will be provided in installments over a two-year period in accordance with
relevant laws. The agreement provides that profits will be distributed based
on each party's percentage ownership of equity in the joint venture; however,
at the time of such distributions, if any, the Company will pay a nominal
administrative fee to its partner. PharmaPrint will transfer use rights to
its technology with respect to manufacturing, testing and quality control of
herbal-based health products; provide necessary technical assistance and
services; and grant the joint venture an exclusive license for the use of the
PharmaPrint patents, trade secrets and trademarks in China and the Asia
Pacific regions, while retaining title to these technologies. The agreement
is subject to approval by both parties' governing boards and certain
regulatory agencies.
7. STOCKHOLDERS LITIGATION
On February 3, 2000, the Company was served with a class action
complaint filed January 5, 2000, as amended January 27, 2000, in the U. S.
District Court, District of New Jersey. This action is on behalf of all those
who purchased or acquired the common stock of PharmaPrint between July 1, 1999
and November 15, 1999. The Company was also served with a class action
complaint filed January 20, 2000, also in the U. S. District Court, District
of New Jersey. This action is on behalf of all persons who purchased the
common stock of PharmaPrint from April 1, 1999 through November 17, 1999. The
plaintiffs are seeking compensatory damages, and other costs and expenses,
including legal fees. The Company and its officers intend to vigorously
defend the merits of the lawsuit.
11
<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 commercialized, or intends to commercialize 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 applied its PharmaPrint-TM- Process to produce a line of
high quality herbal dietary supplement products 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. 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. On October 21, 1999, the Company
received a one year termination notice regarding the manufacture of certain
products for AHP. From October 21, 1999 through November 15, 1999, the Company
engaged in meaningful discussions with AHP to resolve certain issues between the
companies. On November 15, 1999, the Company was informed that, on November 8,
1999, AHP initiated an action against PharmaPrint in the Superior Court of New
Jersey, Morris County Law Division, alleging a number of claims including breach
of contract. AHP is seeking monetary damages, declatory judgement and
injunctions. On November 16, 1999, PharmaPrint Inc. initiated an action against
AHP in the Orange County, California Superior Court, alleging a number of claims
including
12
<PAGE>
misappropriation of trade secrets, breach of contract, violation of unfair
competition laws and breach of the implied covenant of good faith and fair
dealing. PharmaPrint is seeking monetary damages, preliminary and permanent
injunctions, punitive damages, restitution and disgorgement and other damages.
During the nine months ended December 31, 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 three Internet retailers to sell PharmaPrint combination
products on each of the retailers websites and commenced deliveries of such
products in October 1999. To date, the Company has not recognized any meaningful
sales to these customers. 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 is currently devoting no resources to its
pharmaceutical program.
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 DECEMBER 31, 1999
Revenue for the three months ended December 31, 1999, was $493,476
compared to $11,878,624 for the three months ended December 31, 1998. Cost of
sales for the three months ended December 31, 1999, was $4,119,238 compared to
$3,545,191 for the three months ended December 31, 1998. Gross margin for the
three months ended December 31, 1999, was ($3,625,762) compared to $8,333,433
for the three months ended December 31, 1998. Revenue and cost of sales in both
periods were derived primarily from the manufacture of products for sale to
AHP. The decrease in revenue was primarily attributable to a reduction in the
number of capsules ordered by and sold to AHP. Additionally, during the three
months ended December 31, 1998, the Company recognized $7,500,000 in revenue
relating to $2,500,000 in deferred revenue realized as a result of the launch of
the AHP products and $5,000,000 received from AHP for certain development costs.
The decrease in cost of sales was primarily attributable to reduction in the
number of capsules ordered by and sold to AHP offset by certain inventory
write-downs realized during the three months ended December 31, 1999, for
13
<PAGE>
unsalable inventory relating to AHP. The decrease in gross profit was primarily
attributable to a lower transfer price per capsule sold after July 31, 1999, a
higher cost to produce certain products that comprised the majority of capsules
sold to AHP, certain inventory write-downs and the $7,500,000 payment received
from AHP during the three months ended December 31, 1998.
Research and development expenses for the three months ended December
31, 1999, decreased $2,813,574, or 69.5%, to $1,237,630, from $4,051,204 for the
three months ended December 31, 1998. The decrease was primarily attributable to
decreased development efforts related to the Company's dietary supplement
products, a reduction in stability testing requirements, and the timing of costs
associated with animal toxicology studies, clinical trials and other IND related
initiatives.
General and administrative expenses for the three months ended
December 31, 1999, increased $1,103,169, or 74.8%, to $2,577,294 from
$1,474,125 for the three months ended December 31, 1998. The increase was
primarily attributable to increased equipment rental costs, increased Company
marketing efforts, higher interest expense, increased depreciation and
amortization expenses, increased legal fees and an increase in bad debt
expense. During the three months ended December 31, 1999, the Company
implemented a reduction in force with respect to its personnel.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1999
Revenue for the nine months ended December 31, 1999, was $6,492,867
compared to $16,140,795 for the nine months ended December 31, 1998. Cost of
sales for the nine months ended December 31, 1999, were $10,603,575 compared
to $6,998,349 for the nine months ended December 31, 1998. Gross margin for
the nine months ended December 31, 1999, was ($4,110,708) compared to
$9,142,446 for the nine months ended December 31, 1998. Revenue and cost of
sales in both periods were derived primarily from the manufacture of products
for sale to AHP. The decrease in revenue was primarily attributable to a
reduction in the number of capsules ordered by and sold to AHP. Additionally,
during the nine months ended December 31, 1998, the Company recognized
$7,500,000 in revenue relating to $2,500,000 in deferred revenue realized as
a result of the launch of the AHP products and $5,000,000 received from AHP
for certain development costs. The increase in cost of sales related
primarily to the Company's minimum manufacturing requirement at a vendor,
higher cost to produce certain products that comprised the majority of
capsules sold to AHP and certain inventory write-downs realized for the nine
months ended December 31, 1999 compared to the nine months ended December 31,
1998. The decrease in gross margin for the nine months ended December 31,
1999 compared to December 31, 1998 was primarily attributable to the
$7,500,000 of licensing and development fees recognized during the nine
months ended December 31, 1998, 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 certain products that comprised the majority of
capsules sold to AHP during the nine months ended December 31, 1999.
Research and development expenses for the nine months ended December
31, 1999, decreased
14
<PAGE>
$7,912,598, or 54.6%, to $6,581,289, from $14,493,887 for the nine months ended
December 31, 1998. The decrease was primarily attributable to reduced costs
associated with animal toxicology studies, clinical trials and other IND related
initiatives and decreased development efforts related to the Company's dietary
supplement products.
General and administrative expenses for the nine months ended
December 31, 1999, increased $2,232,286, or 54.7%, to $6,313,926 from
$4,081,640 for the nine months ended December 31, 1998. The increase was
primarily attributable to increased equipment rental costs, higher interest
expense, additional staff prior to a reduction in force, Company marketing
efforts, higher interest expenses, increased depreciation and amortization
expenses, increased legal fees and an increase in bad debt expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities and through the sale of shares of common stock in an Internet
company. 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 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 equal to the lessor of (i) $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) and
(ii) 100% of a measure of the market price of the common stock at the time of
conversion, 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").
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
15
<PAGE>
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 the holder at the time of conversion the
Company fails to issue common shares to the holders of the Preferred Stock or 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 February 11, 2000, 2,890 shares of Preferred Stock were converted
into 2,776,236 shares of common stock.
The Company has reached an agreement with the Investor to remove
certain mandatory redemption features of the Series A Preferred Stock. In
addition, the Company has agreed that it will seek stockholder approval to
remove certain limitations on the aggregate number of shares of common stock
that may be issued upon conversion of the Preferred Stock.
As of December 31, 1999, the Company's staff of full-time employees and
consultants was 19.
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
nine months ended December 31, 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 nine months ended December 31, 1999.
The Company decreased its inventories to approximately $6,181,368 at
December 31, 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 nine months ended
December 31, 1999, inventory used in the Company's research and development
efforts and certain write-downs of inventory relating to the AHP Products.
In December 1999, the Company paid all outstanding principal and
interest due under a credit agreement with a bank. The Company currently has no
existing credit agreement with a bank.
16
<PAGE>
The Company is currently negotiating a composition arrangement with its
significant vendors that includes both a reduction in the total amounts owed
such vendors and an extended payment plan should the vendors accept a reduced
payment and extended payment terms. The Company is also considering issuing
either common stock or warrants to purchase common stock to the vendors as an
incentive for the vendors to accept a reduced cash payment and extended payment
terms. If the Company is unable to successfully negotiate a reduced payment
structure with its vendors, the Company will evaluate other options including,
but not limited to, seeking protection from the bankruptcy court.
The Company is presently funding its ongoing operations with cash on
hand and through the sale of shares of common stock held by the Company in a
privately held Internet company. At December 31, 1999, the Company held
1,900,000 shares of common stock in the Internet company. Through February 11,
2000, the Company had sold 1,00,000 shares of common stock in the Internet
company for an aggregate $1,200,000. The Company and a third party have extended
a stock purchase agreement through February 28, 2000, for the sale of the
remaining 900,000 shares of common stock held by PharmaPrint in the Internet
company.
In October 1999, the Company was informed that it no longer complies
with Nasdaq's net tangible assets/market capitalization/total assets and
total revenue requirement as set forth in Nasdaq Marketplace Rule 4450 (b)
(01) (A). The Company has been granted a hearing, held on February 11, 2000,
to discuss the Company's continued listing on the Nasdaq National Market. The
Company submitted a plan, which was reviewed at the hearing, to demonstrate
its ability to sustain long-term compliance with the net tangible asset
requirement. The Company believes that maintenance of this requirement should
allow for continued listing on the Nasdaq National Market. The Company
further believes that it currently complies with all other requirements
necessary to maintain listing of its stock on the Nasdaq National Market.
The Company believes that Nasdaq will rule on the hearing in the
near future. Based on the outcome of the hearing, the Company's shares may
continue to trade on the Nasdaq National Market, the Company may be granted a
further temporary stay of delisting, the Company may qualify to trade on the
Nasdaq Small Cap Market, or the shares may be delisted from the Nasdaq
National Market. If the shares are delisted, they would likely be quoted in
the NASD Electronic Bulletin Board.
The Company is currently seeking to raise additional equity and/or debt
capital. The Company's ability to raise sufficient capital and future capital
requirements will depend on many factors, including but not limited to: the
outcome of the Company's litigation with AHP, the outcome of stockholder and
other litigation, the Company's ability to both reduce current amounts owed its
significant vendors and pay such amounts over an extended time period, the
ability for the Company's common stock to continue trading on the Nasdaq
National Market, the Company's ability to obtain new distribution channels 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. Provided that
the Company can successfully sell its remaining 900,000 shares in the Internet
company at a minimum of $1.20 per share, the Company believes that its capital
resources will enable it to maintain reduced operations for the next three
17
<PAGE>
months. However, no assurance can be given that additional capital, if needed,
will be available when required or upon terms acceptable to the Company.
The Company has been informed by its independent public accountants
that, depending on the success of PharmaPrint in mitigating the liquidity
risks referred to above prior to the completion of their audit of the
Company's financial statements for the year ending March 31, 2000, their
auditor's report on those financial statements may be qualified in that these
matters raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
The conversion from a calendar year 1999 to calendar year 2000 occurred
without any significant disruption to the Company's business systems. The costs
associated with the Y2K project to date, which were not material, have been
expensed as incurred.
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.
On November 16, 1999, PharmaPrint initiated an action against American
Home Products Corporation ("AHP") in the Orange County, California Superior
Court alleging a number of claims including misappropriation of trade secrets,
breach of contract, violation of unfair dealing. PharmaPrint is seeking monetary
damages, preliminary and permanent injunctions, punitive damages, restitution
and disgorgement and other damages.
The Company was informed on November 15, 1999, that, on November 8,
1999, AHP initiated an action against PharmaPrint in the Superior Court of New
Jersey, Morris County Law Division alleging a number of claims including breach
of contract. PharmaPrint has not yet been served with a complaint in this
action. PharmaPrint believes that AHP is seeking monetary damages, delcaratory
judgement and injunctions. PharmaPrint believes that it has meritorious defenses
to AHP's action and intends to vigorously defend itself.
18
<PAGE>
In December 1999, the Company initiated an action against Applied
Analytical Industries, Inc. ("AAI") of Wilmington, North Carolina, filed in the
New Hanover North Carolina, Superior Court, for claims, including but not
limited to, breach of contract, fraudulent inducement and fraud and negligence
arising out of various manufacturing and analytical agreements between the
companies. PharmaPrint is seeking $4.8 million in damages. AAI has filed an
answer and counter claim for damages not exceeding that amount sought by
PharmaPrint.
On February 3, 2000, the Company was served with a class action
complaint filed January 5, 2000, as amended January 27, 2000, in the U.S.
District Court, District of New Jersey. The action is on behalf of all those
who purchased or acquired the common stock of PharmaPrint between July 1,
1999 and November 15, 1999. The Company was also served with a complaint filed
January 20, 2000, also in the U. S. District Court, District of New Jersey.
This action is on behalf of all persons who purchased the common stock of
PharmaPrint from April 1, 1999 through November 17, 1999. Each complaint has
named the Company and certain current and former officers as defendants. The
plaintiff's are seeking compensatory damages, and other costs and expenses,
including legal fees. The Company and its officers intend to vigorously
defend the merits of the lawsuit.
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 November 17, 1999,
regarding certain litigation with AHP.
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: February 14, 2000
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 433,097
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 6,181,368
<CURRENT-ASSETS> 7,180,773
<PP&E> 2,582,861
<DEPRECIATION> 424,762
<TOTAL-ASSETS> 10,473,752
<CURRENT-LIABILITIES> 13,283,908
<BONDS> 0
0
8,573,608
<COMMON> 15,437
<OTHER-SE> (11,399,201)
<TOTAL-LIABILITY-AND-EQUITY> 10,437,752
<SALES> 6,492,867
<TOTAL-REVENUES> 6,492,867
<CGS> 10,603,575
<TOTAL-COSTS> 10,603,575
<OTHER-EXPENSES> 13,152,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,237
<INCOME-PRETAX> (17,303,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,303,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,303,660)
<EPS-BASIC> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
