<PAGE> 1
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 JUNE 30, 2000
[ ] 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)
4701 VON KARMAN AVE SUITE 201,
NEWPORT BEACH, CALIFORNIA 92660
(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 [ ] No [X]
Number of shares outstanding as of August 16, 2000: Common Stock: 17,152,507
<PAGE> 2
PHARMAPRINT INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Facing Sheet .................................................................... 1
Index ......................................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
March 31, 2000................................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999 (unaudited)............................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
June 30, 2000 and 1999 (unaudited) .............................................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 16
Item 6. Exhibits and Reports on Form 8-K........................................ 18
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 Annual Report on Form 10-K for the fiscal year ended March 31,
2000 filed on August 17, 2000, 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:
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
<PAGE> 3
PART I -- FINANCIAL INFORMATION
PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,947 $ 302,633
Accounts receivable, net of allowance for doubtful
accounts of $742,888 at June 30, 2000 and March 31, 2000 -- --
Other receivables 221,000
Inventories 1,764,348 1,741,773
Other current assets 304,580 335,536
------------ ------------
Total current assets 2,301,875 2,379,942
Property and equipment, net 146,308 200,000
------------ ------------
$ 2,448,183 $ 2,579,942
============ ============
Liabilities and stockholders' (deficit) equity
Current liabilities:
Accounts payable $ 14,158,772 $ 13,992,548
Accrued expenses 312,621 383,633
Short-term debt and current portion of long-term debt 323,382 77,611
------------ ------------
Total current liabilities 14,794,775 14,453,792
Long-term debt, net of current portion 117,081 137,352
------------ ------------
Total liabilities 14,911,856 14,591,144
------------ ------------
Stockholders' (deficit) equity:
Convertible Series A preferred stock, $0.001 par value - 1,000,000 shares
authorized, 7,110 shares issued and outstanding at June 30, 2000 and
March 31, 2000 (liquidation preference of $7,531,035 at June 30, 2000) 7 7
Common stock, $0.001 par value - 24,000,000 shares authorized,
16,830,425 shares issued and outstanding at June 30, 2000 and March 31, 2000 16,831 16,831
Additional paid-in-capital 62,259,995 62,081,499
Deferred compensation (97,157) (101,903)
Accumulated deficit (74,643,349) (74,007,636)
------------ ------------
Total stockholders' (deficit) equity (12,463,673) (12,011,202)
------------ ------------
$ 2,448,183 $ 2,579,942
============ ============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
3
<PAGE> 4
PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Three Months Ended June 30,
---------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Manufacturing revenues $ 420 $ 5,409,618
Cost of sales -- 4,769,717
------------ ------------
Gross profit (loss) 420 639,901
------------ ------------
Operating expenses:
Research and development 32,455 2,144,722
General and administrative 986,479 1,577,256
Stock compensation 4,746 194,439
------------ ------------
Total operating expenses 1,023,680 3,916,417
Other income and expense:
Interest expense (7,453) --
Gain on sale of non-marketable equity securities 504,000 --
Interest income 1,996 --
------------ ------------
Total other income and expense 498,543 --
------------ ------------
Net loss (524,717) (3,276,516)
============ ============
Net loss available to common stockholders per share $ (0.03) $ (0.24)
============ ============
Basic/diluted weighted average common shares outstanding 16,830,425 13,889,204
============ ============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
4
<PAGE> 5
PHARMAPRINT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Three Months Ended June 30,
-------------------------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (524,717) $(3,276,516)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense -- 57,802
Amortization expense -- 48,209
Stock compensation expense 4,746 194,439
Gain on sale of non-marketable equity securities (504,000)
Changes in operating assets and liabilities:
Accounts receivable -- 115,170
Inventories (22,575) 2,671,616
Other assets 30,956 (203,122)
Accounts payable and accrued expenses 95,212 (4,159,938)
----------- -----------
Net cash used in operating activities (920,378) (4,552,340)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment -- (200,025)
Proceeds from the sale of fixed assets 53,692 --
Proceeds from sale of non-marketable equity securities 283,000 --
----------- -----------
Net cash provided by (used in) investing activities 336,692 (200,025)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock and exercise of stock options -- 196,976
Net proceeds from issuance of convertible preferred stock -- 9,962,232
Proceeds from credit line 293,000 --
Repayment of short-term and long-term debt -- (558,860)
----------- -----------
Net cash provided by financing activities 293,000 9,600,348
----------- -----------
Net change in cash and cash equivalents (290,686) 4,847,983
Cash and cash equivalents, beginning of period 302,633 2,299,959
=========== ===========
Cash and cash equivalents, end of period $ 11,947 $ 7,147,942
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ 88,008
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements
5
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PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial statements of PharmaPrint, Inc. ("PharmaPrint") for the three
months ended June 30, 2000 and 1999 are unaudited. Certain information and note
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in PharmaPrint's Form 10-K as of and for the year
ended March 31, 2000. In the opinion of management, the financial statements
contain all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the financial position of PharmaPrint for the periods
presented. The interim operating results may not be indicative of operating
results for the full year or for any other interim periods.
NOTE 2 - GOING CONCERN/RISK FACTORS
Risk Factors
Since inception (September 15, 1994) the Company has incurred significant losses
(totaling $74,643,349 through June 30, 2000) and has a working capital deficit
of $12,346,502 at June 30, 2000.
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 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 a legal action against
PharmaPrint, alleging a number of claims including breach of contract. AHP is
seeking monetary damages, declaratory judgment and injunctions. On November 16,
1999, PharmaPrint initiated an action against AHP, 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.
On July 20, 2000, AHP and the Company entered into a confidential settlement
agreement fully and finally resolving the actions of both parties. The Company
is in the process of evaluating the financial statement impact of this
settlement and is currently seeking new sources of revenue.
The Company is currently negotiating settlement and payment arrangements with
its significant vendors that include both a reduction in the total amounts owed
such vendors and an extended payment plan should the vendors accept a reduced
payment. Certain vendors have also independently commenced legal actions against
the Company to collect amounts owed them and for various other damages (see Note
7). The Company also intends to issue either common stock or warrants to
purchase common stock to the vendors as an incentive for the vendors to accept a
6
<PAGE> 7
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reduced cash payment and the extended payment plan. If the Company is unable to
successfully negotiate arrangements with its vendors and/or is unsuccessful in
its defense of pending legal matters (see Note 7), the Company will evaluate
other options including, but not limited to, seeking protection from the
bankruptcy court. The Company has completed negotiations with several
significant vendors (see Note 6).
On May 4, 2000, the Company was de-listed from the NASDAQ National Market for
failure to maintain the net tangible asset requirement of NASDAQ, among other
requirements. The shares are currently quoted on the NASD over-the-counter
bulletin board. The de-listing may make it more difficult for the Company to
raise capital in the public markets in the future.
The Company is presently funding its ongoing operations from cash on hand,
through the sale of shares of Vicus.com, Inc. (see Note 4) and from a $1 million
secured line of credit (see Note 9).
The Company is currently seeking to raise additional equity and/or debt capital,
sell its technology or locate an appropriate merger candidate in order 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 meet future capital requirements will depend on
many factors, including but not limited to: 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
Company's ability to get its common stock re-listed on the NASDAQ National
Market, the Company's ability to obtain new distribution channels to sell its
products, cost and availability of key botanical extracts, cost and availability
of manufacturing service contractors, ability to obtain and enforce patents,
dependence on third parties for collaboration/new distribution channels, and
competition. Provided that the Company can successfully raise capital and
successfully negotiate settlement and payment arrangements with significant
vendors, the Company believes that its capital resources will enable it to
maintain reduced operations for the next six months. However, no assurance can
be given that additional capital, if needed, will be available when required or
upon terms acceptable to the Company or that the Company will be successful in
its efforts to negotiate with significant vendors.
The accompanying financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts (including the realizability of long-lived assets under
SFAS No. 121 and of inventories) or the amount and classification of liabilities
that might result from the outcome of this uncertainty.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues are recognized when products are shipped to customers.
7
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PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Loss Per Share
The Company has 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 and warrants. The Company excluded
all outstanding stock options and warrants from the diluted computation, as
their effect is antidilutive.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
established standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income generally
represents all changes in stockholders' equity except those resulting from
investments by and distributions to owners. There is no effect of SFAS No. 130
in these financial statements as the Company has no items of comprehensive
income.
Segment Information
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company believes that it currently
operates under one segment.
Recent Accounting Pronouncements
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of this standard to have
a material impact on its results of operations, financial position or cash flows
as it currently does not engage in any derivative or hedging activities.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue No.
00-2, "Accounting for Web Site Development Costs" ("EITF 00-2") to be applicable
to all web site development costs incurred for the quarter beginning after June
30, 2000. The consensus states that for specific web site development costs, the
accounting for such costs should be accounted for under AICPA Statement of
Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
8
<PAGE> 9
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Software Developed or Obtained for Internal Use." The Company does not expect
the adoption of EITF 00-2 to have a material effect on its financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of APB 25.
FIN 44 clarifies the application of APB 25 for (a) the definition of employee
for purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain provisions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain other provisions of FIN 44 prior to March 31, 2000 did
not have a material effect on the financial statements. The Company does not
expect that the adoption of the remaining provisions will have a material effect
on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the fourth quarter of
the fiscal year beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position and
results of operations.
NOTE 4 - NON-MARKETABLE EQUITY SECURITIES
Non-marketable equity securities consist of shares of Vicus.com, Inc. ("Vicus").
Vicus was formed by the Company and several related parties to the Company, and
was for some time operating out of the Company's offices. During the current
quarter, the Company sold its remaining 420,000 shares at $1.20 to unrelated
parties, of which $221,000 has not yet been collected and is recorded as other
receivables in the accompanying condensed consolidated balance sheets. The
proceeds of $504,000 from the sales of this stock are recorded as a gain on the
sale of non-marketable equity securities as the stock's net book value was $0.
NOTE 5 - AGREEMENTS
As part of a Settlement Agreement with AHP dated July 20, 2000, all agreements
with AHP have been terminated (see Note 1).
USC License Agreement
In March 1995, the Company entered into a license agreement with USC (the "USC
License Agreement") that granted the Company an exclusive, worldwide license to:
(i) the PharmaPrint(TM) Process; (ii) use certain therapeutic compounds; and
(iii) other related products developed at USC. USC has also agreed to grant the
Company the right to sublicense certain products and a right of first refusal to
obtain a license for any improvements to certain products
9
<PAGE> 10
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
developed by USC. The term of the USC License Agreement began March 1, 1995, and
ends on the later of February 28, 2010, or the expiration of the last issued
patent under the USC License Agreement.
In exchange for the license, the Company agreed to pay USC: (i) royalty payments
of 1% of the Company's net sales of pharmaceutical products developed using the
PharmaPrint(TM) Process; (ii) after the first patent issues, an annual minimum
royalty of $15,000, which shall increase by $5,000 annually for the following
two years and be $25,000 annually thereafter; (iii) an annual license fee of
$10,000 payable until a patent issues; and (iv) 328,563 shares of the Company's
common stock valued at $316,000 at the time of the exchange.
During each of the three months ended June 30, 2000, and 1999, total royalty
expense under the USC License Agreement was $25,000. As of June 30, 2000, the
Company had not remitted the royalty payment according to the terms of the USC
License Agreement. As a result, the Company is default on this agreement. It is
management's intent to cure such default by remitting payment, however no
assurances can be given that such payment will occur.
NOTE 6 - VENDOR NEGOTIATIONS
Accounts Payable Settlements
The Company is currently negotiating settlement and payment arrangements with
its significant vendors that include both a reduction in the total amounts owed
such vendors and an extended payment plan should the vendors accept a reduced
payment. Certain vendors have also independently commenced legal actions against
the Company to collect amounts owed them and for various other damages. The
Company also intends to issue 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 arrangements with its vendors and/or is unsuccessful in its defense of
pending legal matters, the Company will evaluate other options including, but
not limited to, seeking protection from the bankruptcy court
The Company has obtained settlement agreements with certain of its vendors. The
settlement agreements require the Company to issue non-interest bearing notes
with payments totaling one-half of the amount owed to each of the vendors.
Additionally, the Company will transfer 1,000,000 shares of its common stock to
these settling creditors on a pro-rata basis. The agreements are contingent on
each of the settling creditors signing the agreements; otherwise, all of the
agreements will be null and void. As of July 14, 2000, 10 of the 20 settling
creditors have signed representing approximately $1,755,000 of the accounts
payable at March 31, 2000. If all of these agreements are signed, the Company
will reduce its obligations (before considering the present value of these
payments at an estimated 12% discount rate) by a total of $3,345,000 in exchange
for stock valued at $359,000 (based on the August 15, 2000 closing price),
representing a potential extraordinary gain on extinguishment of debt of
approximately $2,986,000.
10
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PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - PENDING LITIGATION
In July 1999 Applied Analytical Industries, Inc. ("AAI"), a vendor, filed a
Demand for Arbitration with the American Arbitration Society, seeking to recover
damages for alleged breach of contract related to a Manufacturing Contract. In
December 1999 the Company initiated a counterclaim against AAI. The Company
filed the suit for claims arising from breach of contract, fraudulent inducement
and fraud and negligence arising from various manufacturing and analytical
agreements between the companies. The Company is seeking in excess of $6,000,000
in damages, and AAI is seeking in excess of $6,000,000 for payment of unpaid
charges, interest and other damages. The Company has reached a tentative
settlement with AAI, agreeing to transfer 2.2 million shares of the Company's
common stock (valued at approximately $790,000 based on the August 15, 2000
closing price) in exchange for the relief of approximately $5.5 million in
accounts payable and a mutual dismissal of all actions, which would result in a
potential extraordinary gain on extinguishment of debt of approximately
$4,710,000.
On February 3, 2000, the Company was served with a class action complaint filed
January 5, 2000, as amended January 27, 2000. This action is on behalf of all
those who 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. 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 lawsuits.
On March 31, 2000 the Company settled a suit with International Processing
Corporation ("IPC"), a vendor. In the settlement, the Company agreed to issue a
promissory note which called for quarterly payments of $25,000 beginning on June
30, 2000, with a balloon payment of $75,000 due on March 30, 2002 and a pro-rata
percentage of 1,000,000 shares (as determined by a percentage of the total
amount of debt released by IPC over the total amount released by all other
vendors - see Note 6) in exchange for a release from all amounts due to IPC
prior to the agreement. The Company has discounted the note using a 12% interest
rate, and transferred the present value of the payment obligations from accounts
payable to notes payable. No gain on extinguishment of debt will be recognized
until the number of shares is determined. Based on the Company's closing price
on August 15, 2000 and preliminary allocation of shares, this settlement would
result in a potential extraordinary gain of approximately $436,000.
During the current fiscal year Pennie and Edmonds, LLP ("PEL"), filed a suit
against the Company for unpaid legal fees in the amount of $225,000. The Company
contends that PEL's estimation of the fees owed to them is based upon excessive
and inappropriate charges for services that are unjustified. The Company
believes that it has meritorious defenses to these claims and intends to
vigorously defend itself. As the outcome or final amount to be paid by the
client is undeterminable no accrual for loss relating to this suit is reflected
in the accompanying financial statements.
11
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PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On March 29, 2000 the Company was informed that an action was filed by a former
employee Kenneth Gorelick against the Company alleging damages arising out of
employment with the Company in excess of $150,000 plus interest and costs. The
Company contends that this is not a legitimate claim. The Company believes that
it has meritorious defenses to these claims and intends to vigorously defend
itself. As the outcome and final amount are not determinable, no accrual for
loss relating to this suit is reflected in the accompanying financial
statements.
In April 2000, the Company initiated an action against Bio Dar, Inc. ("Bio
Dar"), a vendor. The Company filed the suit for claims arising from
establishment of rights and to verify ownership of intellectual properties. The
Company is seeking $2.5 million in damages. Bio Dar has filed an answer to the
suit, and has initiated a counter suit for damages not exceeding the amount
sought by the Company. As the outcome and final amount are not determinable, no
accrual for loss relating to this suit is reflected in the accompanying
financial statements.
NOTE 8 - STOCKHOLDERS' EQUITY
Convertible Series A Preferred Stock
The Series A Preferred Stock has a dividend yield of 6%, payable at the time of
conversion in shares of the Company's common stock. For the three months ended
June 30, 2000, the Company has recorded dividends of $110,996 related to
preferred stock dividends that will be due upon conversion. As this amount will
not be paid in cash, it is shown as a decrease in the accumulated deficit
account and a corresponding increase in the additional paid in capital account
in the accompanying consolidated balance sheet. This amount has also been
disclosed as an increase to the preferred stock's liquidation preference at June
30, 2000.
On July 5, 2000, 105 additional shares of preferred stock were converted into
322,082 shares of common stock.
Options Granted to Mr. Steven Bowman
On April 14, 1995, the Company adopted the 1995 Stock Option Plan, as amended,
(the "Plan") pursuant to which directors, officers, key employees, consultants,
scientific advisors and other personnel working directly with the Company are
eligible to receive stock options as defined in the 1995 Plan. The Company and
its stockholders have approved 5,900,000 shares of common stock available for
issuance under the 1995 Plan. The 1995 Plan, unless terminated sooner by the
Board of Directors, will terminate on April 14, 2005.
On May 15, 2000 the Company granted to Steven Bowman, Chief Executive Officer,
non-qualified stock options to purchase 500,000 shares of common stock at the
then fair market value of $0.375 per share. Mr. Bowman's right to purchase
125,000 shares of common stock will vest on each of August 15, 2000, November
15, 2000, February 15, 2001 and May 15, 2001. Additionally, Mr. Bowman's right
to purchase shares of common stock will vest upon a change in control of
ownership of the Company or upon his achieving certain specified goals as
defined in the agreement between Mr. Bowman and the Company.
12
<PAGE> 13
PHARMAPRINT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - LINE OF CREDIT
On May 8, 2000, the Company entered into a line of credit agreement with
Montecito Leasing Group, LLC ("Montecito"). Pursuant to the terms of the
agreement, the Company obtained a $1,000,000 credit line with a maturity date of
November 22, 2000. Outstanding borrowings under this line bear interest at 10%
per annum payable monthly and are secured by substantially all of the Company's
assets including all of its inventories, fixed assets, patents and pending
patents. At June 30, 2000, the Company's balance on this line was $293,000.
Concurrent with the line of credit, the Company granted Montecito a warrant to
purchase 500,000 shares of the Company's common stock at $0.40 per share (lower
than the Company's closing price of $0.65 on the date of grant). 250,000 of
these shares are exercisable immediately, with the other 250,000 shares
exercisable when and if the Company has borrowed an aggregate of $1,000,000
under the line of credit. The warrant agreement also contains a cashless
exercise option, registration rights and anti-dilution provisions as more fully
described in the warrant agreement. The warrant expires in May 2005. The fair
value of the exercisable portion of this warrant of $67,500 has been recorded as
a debt discount and will be amortized beginning July 2000 over the remaining
debt term.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We intend to use our PharmaPrint Process technology to develop high quality
dietary supplement, functional food and pharmaceutical products from botanical
sources. We believe that our PharmaPrint 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, our 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 Process technology enables us to
identify, quantify and standardize the bioactives within plant sources that are
believed to provide therapeutic benefits and produce products having consistent
batch-to-bath quantities of these bioactives.
We intend to commercialize development efforts for four distinct product lines
derived from botanical sources: 1) single herbal dietary supplement products; 2)
herbal dietary supplements in combination with vitamins and minerals; 3) FDA
approved pharmaceuticals from plant sources and 4) functional food products
based on soy or soy dietary supplements.
In September 1999, we launched six combination products that were initially
marketed on three websites.
In the summer of 1999, we completed analysis of the Phase II study for our
initial pharmaceutical product candidate, PPRT-321, a saw palmetto-derived drug
that is being
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developed for the treatment of symptoms associated with BPH. The clinical study
data demonstrated that the product was safe and appeared to improve symptoms
associated with an enlarged prostate gland. We are currently devoting limited
resources to our pharmaceutical program to maintain an active Saw-Palmetto
Investigational New Drug Application.
In the spring of 1999, we began using the PharmaPrint Process technology on soy,
a product classified as both a functional food and dietary supplement. Initial
results of this work were submitted in a provisional patent application.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000
American Home Products Corporation ("AHP") accounted for substantially all of
the Company's sales for the three months ended June 30, 1999. The relationship
with this customer was terminated during fiscal year 2000 due to significant
litigation between the two parties as described below. As a result, the Company
has no current distribution channels to market its products and the Company has
essentially ceased all revenue-generating activities. Manufacturing revenues of
only $420 were realized for the three months ended June 30, 2000 compared to
$5,409,618 for the three months ended June 30, 1999. Because of no activity in
revenue generation, no costs of sales expense was realized for the three months
ended June 30, 2000 compared to $4,769,717 for the three months ended June 30,
1999.
Prior to the AHP agreement, the Company engaged primarily in research and
development activities and reported as a development stage company. During the
term of the AHP agreement, the Company continued research and development
activities, but due to lack of revenue and the resulting shortage of funds, the
Company has suspended such activities. Research and development expense for the
three months ended June 30, 2000 was $32,455 compared to $2,144,722 for the
three months ended June 30, 1999.
The Company in the course of business incurred general and administrative
expense necessary for the operation of the Company. In the Company's current
financial condition, senior management made such attempts as reasonable to
reduce these expenses. Such expenses were $986,479 for the three months ended
June 30, 2000, a $590,777 or 37% decrease compared to $1,577,256 for the three
months ended June 30, 1999.
Stock compensation decreased to $4,746 for the quarter ended June 30, 2000 from
$194,439 for the quarter ended June 30, 1999. This decrease is due to less
options and a lower valuation of options and warrants granted to consultants in
fiscal year 2000.
The Company recorded a gain on sale of non-marketable equity securities of
$504,000 during the three months ended June 30, 2000. There were no such sales
in the comparable period of 1999.
As a result of the above factors, net loss for the three months ended June 30,
2000 was $524,717, a decrease of $2,751,799 or 84% compared to $3,276,516 for
the three months ended June 30, 1999. Net loss per share available to common
stockholders was three cents for the three months ended June 30, 2000 compared
to a net loss per common share of twenty-four cents for the three months ended
June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
During the three months ended June 30, 2000 the Company sold fixed assets for
proceeds of $53,692, borrowed $293,000 on a line of credit and sold
non-marketable equity securities for proceeds of $283,000. These transactions
partially offset cash used in operating activities of $920,378. Cash and cash
equivalents decreased $290,685 for the three months ended June 30, 2000 and were
$11,948 at June 30, 2000. For the three months ended June 30, 1999, the Company
realized net proceeds of $9,962,232 from issuance of redeemable preferred stock.
The proceeds from issued preferred stock were partially offset by net cash used
in operating activities of $4,552,340. For the three months ended June 30, 1999,
cash and cash equivalents increased $4,847,983 and was $7,147,942 at June 30,
1999.
We currently have a negative working capital position and intend to rely on
proceeds from a secured line of credit facility to pay day-to-day expenses. This
loan allows us to borrow up to $500,000. It may increase to $1,000,000 under
certain conditions. As of June 30, 2000, we have borrowed $293,000 of the
$500,000 currently available to us. The lender has a security interest on
substantially all of our assets securing the repayment of all amounts advanced
to us under this line of credit. The lender has rights that effectively allow it
to direct how we spend any loan proceeds that we receive and to withhold the
advance of funds pursuant to this line of credit for any reason or for no reason
at all.
The Company's Independent Auditors' qualified their opinion and expressed doubt
about the Company's ability to continue as a going concern for the consolidated
balance sheets as of March 31, 2000 and the Company's results of operations and
cash flows for the year ended March 31, 2000, They stated that "the ability of
the Company to continue in existence is dependent primarily upon negotiating
acceptable settlement and payment terms with its significant vendors, obtaining
additional debt and equity financing to fund its short-term operating expenses
and to fund sales and marketing efforts for new revenue channels of
distribution, successful resolution of its customer, vendor and stockholder
litigation, as well as the generating of income form collaborative
relationships, new partners and other new revenue distribution channels."
On May 4, 2000, the Company was de-listed from the NASDAQ National Market for
failure to maintain the net tangible asset requirement of NASDAQ, among other
requirements. The shares are currently quoted on the NASD over-the-counter
bulletin board. The de-listing may make it more difficult for the Company to
raise capital in the public markets in the future.
As of June 30, 2000 7,110 shares of our Series A were issued and outstanding.
The Series A Preferred Stock has a dividend rate of six percent, payable at the
time of conversion in shares of our common stock. Upon the occurrence of certain
liquidation events, the holders of our Series A Preferred Stock are entitled to
receive, in preference over the holders of common stock and any preferred stock
ranking junior to our 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. Our
Series A Preferred Stock is also redeemable at the option of the holder if at
the time of conversion we fail to issue shares of our common stock to the
holders of 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 specified periods.
As discussed in Note 6 to our Condensed Consolidated Financial Statements on
page 10 of this report we are currently negotiating settlement and payment
arrangements with our significant creditors. If we are unsuccessful in creating
these arrangements then we will evaluate other options including but not limited
to seeking protection from the bankruptcy court.
The Company is currently seeking to raise additional equity and/or debt capital,
sell its technology or locate an appropriate merger candidate in order 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 meet future capital requirements will depend on
many factors, including but not limited to: 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
Company's ability to get its common stock re-listed on the NASDAQ National
Market, the Company's ability to obtain new distribution channels to sell its
products, cost and availability of key botanical extracts, cost and availability
of manufacturing service contractors, ability to obtain and enforce patents,
dependence on third
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parties for collaboration/new distribution channels, and competition. Provided
that the Company can successfully raise capital and successfully negotiate
settlement and payment arrangements with significant vendors, the Company
believes that its capital resources will enable it to maintain reduced
operations for the next six months. However, no assurance can be given that
sufficient capital exists for reduced operations and that additional capital, if
needed, will be available when required or upon terms acceptable to the Company
or that the Company will be successful in its efforts to negotiate with
significant vendors.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not currently directly exposed to market risks related to
fluctuations in interest rates in long-term or short-term debt. Currently, and
as of June 30, 2000, we have no variable interest rate loans.
However, if interest rates do increase from their current levels, we may
have more difficulty in obtaining debt financing than we might otherwise, and if
we are successful, then the terms under which we would be able to obtain
financing would be less favorable to us.
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On November 16, 1999, we 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, and violation of fair dealing. On November 8, 1999, American Home
Products Corporation initiated an action against us in the Superior Court of New
Jersey, Morris County Law Division alleging a number
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of claims including breach of contract. On July 20, 2000, we settled with
American Home Products Corporation and all actions were dismissed.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a special meeting of the stockholders on April 13, 2000. Three
matters were voted upon at this meeting.
1. An amendment to the Company's Certificate of Incorporation increasing
the number of authorized shares of common stock from 24,000,000 to
50,000,000 shares of common stock was approved.
2. An amendment to the Company's 1995 Stock Option Plan, as amended to
increase the number of shares reserved for issuance thereunder from
2,900,000 shares to 5,900,000 shares was approved and;
3. A proposal to allow the Company to issue shares of common stock upon
conversion of the Series A Preferred Stock in excess of the Maximum
Share Amount as set forth in the Certificate of Designations,
Preferences and Rights and certain rules of the NASDQAQ National Market
was approved.
The shareholders voted on these issues as follows:
Shares Cast
<TABLE>
<CAPTION>
Abstentions and
Broker
Proposed For Against Non-Votes
------------------------ ------------------- ------------------- ---------------------
<S> <C> <C> <C>
1 15,029,852 580,446 37,601
2 4,191,772 859,643 10,596,484
3 4,329,552 710,063 10,608,284
</TABLE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
27.1 Financial Data Schedule
(b) We filed the following reports on Form 8-K during the fiscal quarter ended
June 30, 2000:
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On April 13, 2000 we reported the resignation of C. Richard Piazza as our Chief
Executive Officer and the Chairman of our Board of Directors.
On May 19, 2000, we reported the Dismissal of Arthur Andersen LLP and the
appointment of Corbin & Wertz as our independent accountants.
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SIGNATURES
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.
By: /s/ Steven A. Bowman
----------------------------------
Steven A. Bowman
Chief Executive Officer, Principal
Accounting Officer
Date: August 21, 2000
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EXHIBIT INDEX
Exhibit Number Description
27.1 Financial data schedule
