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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number 0-13304
CHANTAL PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2276346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12121 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 207-1950
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 twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ----
The number of shares of Common Stock, $.01 par value, outstanding as of January
31, 1997 was 18,190,516.
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1
CHANTAL PHARMACEUTICAL CORPORATION
INDEX TO FORM 10-Q
Part I: Financial Information (unaudited) Page Number
- ------------------------------------------ -----------
Item 1 - Financial Statements
-----------------------------
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996........................................ 3
Consolidated Statements of Operations for the three and six
months ended December 31, 1996 and December 31, 1995..... 4
Consolidated Statements of Cash Flows for the six months
ended December 31, 1996 and December 31, 1995............ 5
Notes to Consolidated Financial Statements.................... 6
Item 2 Management's Discussion and Analysis
------ of Financial Condition and Results of Operations...... 9
Part II: Other Information
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K..................... 11
Signatures.................................................... 12
2
Item 1. Financial Statements
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 1996 1996
- ------ ------------- ------------
(unaudited)
Current assets
Cash and cash equivalents $ 282,006 $ 305,668
Short-term investment 27,926 27,926
Accounts receivable, net 4,887,880 2,023,911
Inventory, net 6,760,575 6,888,416
Prepaid expenses and other current assets 766,761 46,411
------------ ------------
Total current assets 12,725,148 9,292,332
Property and equipment, at cost:
Equipment and machinery 1,838,320 1,841,964
Furniture, fixtures and leasehold improvements 824,423 823,992
Less accumulated depreciation and amortization (1,694,467) (1,520,032)
------------ ------------
Net property and equipment 968,276 1,145,924
License rights, net of accumulated
amortization of $1,558,833 and $1,141,856 6,780,712 7,197,689
Patents and trademarks, net of
accumulated amortization of $63,746 and $60,298 53,368 56,816
Prepaid royalties, net of accumulated 694,874 737,343
amortization of $154,501 and $112,032
Deposits and other assets 530,085 213,251
Organization cost, net of accumulated
amortization of $70,627 and $54,932 86,323 102,018
------------ ------------
TOTAL ASSETS $ 21,838,786 $ 18,745,373
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 4,488,778 $ 5,422,239
Accrued liabilities 2,184,798 1,447,291
Royalties payable 652,668 652,668
Current portion of capital lease obligation 59,697 59,697
Short-term borrowings 359,324 -
Current portion of note payable 250,000 -
------------ ------------
Total current liabilities 7,995,265 7,581,895
Long term liabilities
Notes payable, less current portion 5,250,000 -
Capital lease obligation, less current portion 351,127 384,882
------------ ------------
Total liabilities 13,596,392 7,966,777
Commitments and contingencies
Minority interest 1,293,120 1,406,897
Stockholders' equity
Preferred stock, $.10 par value;
1,000,000 shares authorized; 500,000
Preferred Series C shares issued and outstanding 50,000 50,000
Liquidation preference of $500,000
Common stock, $.01 par value;
20,000,000 shares authorized; 181,905 181,905
18,190,516 shares issued and
outstanding at December 31, 1996 and
June 30, 1996
Additional paid-in capital-preferred stock 2,204,000 2,204,000
Additional paid-in capital - common stock 52,204,860 51,159,860
Accumulated deficit (47,691,491) (44,224,066)
------------ ------------
Total stockholders' equity 6,949,274 9,371,699
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,838,786 $ 18,745,373
============ ============
See accompanying notes.
3
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended December 31, 1996 and December 31, 1995
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Revenues:
Product sales, net $ 3,805,447 $ 1,132,789 $ 5,634,453 $ 6,302,273
License fees and other income 30,650 35,301 111,280 66,393
----------- ----------- ----------- -----------
Total revenues 3,836,097 1,168,090 5,745,733 6,368,666
Costs of goods sold 760,654 159,889 1,088,817 992,341
----------- ----------- ----------- -----------
Gross profit 3,075,443 1,008,201 4,656,916 5,376,325
Marketing and other expenses related
to cosmetic line 1,760,392 4,169,319 3,634,901 6,364,231
General and administrative 1,258,249 935,472 2,883,263 1,954,029
Amortization of license rights 229,724 229,723 459,447 459,446
Research and development 88,186 248,537 90,530 403,828
----------- ----------- ----------- -----------
Loss from operations (261,108) (4,574,850) (2,411,225) (3,805,209)
Other income (expense):
Interest income 7,121 35,285 8,503 76,247
Interest expense (106,547) (24,050) (133,480) (49,208)
Non-cash interest expense on
convertible debentures (1,045,000) - (1,045,000) -
----------- ----------- ----------- -----------
Loss before income taxes and
minority interest (1,405,534) (4,563,615) (3,581,202) (3,778,170)
Income taxes - - - -
Minority interest (6,792) 290,831 113,777 286,803
----------- ----------- ----------- -----------
Net loss $(1,412,326) $(4,272,784) $(3,467,425) $(3,491,367)
=========== =========== =========== ===========
Net loss per share $(0.08) $(0.24) $(0.19) $(0.20)
=========== =========== =========== ===========
Weighted average shares outstanding 18,190,516 17,850,516 18,190,516 17,683,849
=========== =========== =========== ===========
See accompanying notes.
4
CHANTAL PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31, 1996 and December 31, 1995
(unaudited)
Six Months Ended
December 31,
1996 1995
------------- -------------
Cash flows from operating activities:
Net loss $(3,467,425) $(3,491,367)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 709,979 641,575
Provision for sales return (42,729) 145,879
Loss on disposition of assets 6,426 -
Minority interest (113,777) (286,803)
Common stock issued in
satisfaction of
consulting and legal fee - 120,420
Non-cash interest expense on
convertible debentures 1,045,000 -
Changes in operating assets and
liabilities:
Accounts receivable (2,821,240) 2,549,066
Inventory 127,841 (3,484,260)
Prepaid expenses and other
current assets (720,350) (195,835)
Other assets 185 (122,572)
Income taxes payable - (17,225)
Royalties payable - (369,334)
Accounts payable and accrued
liabilities (195,954) 1,195,171
----------- -----------
Net cash used in operating activities (5,472,044) (3,315,285)
----------- -----------
Cash flows from investing activities:
Additions of property and equipment (9,687) (516,165)
----------- -----------
Net cash used in investing activities (9,687) (516,165)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of short-term
borrowings and notes payable 5,874,226 -
Payments on short-term borrowings (382,402) (11,350)
Payments on capital lease obligation (33,755) (48,544)
Proceeds from issuance of common stock - 4,508,700
Proceeds from issuance of preferred
stock - 2,254,000
----------- -----------
Net cash provided by financing
activities 5,458,069 6,702,806
----------- -----------
Net increase (decrease) in cash and
cash equivalents (23,662) 2,871,356
Cash and cash equivalents:
At beginning of period 305,668 2,824,644
----------- -----------
At end of period $ 282,006 $ 5,696,000
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See accompanying notes.
5
CHANTAL PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
- ----------------
The accompanying consolidated financial statements of Chantal Pharmaceutical
Corporation (the "Company") have been prepared without audit pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of December 31, 1996 and
the results of their operations for the three and six months ended December 31,
1996 and 1995 and the cash flows for the six months ended December 31, 1996 and
1995 have been included. The results of operations for the interim periods are
not necessarily indicative of the results which may be realized for the full
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's latest Annual Report on Form 10-
K.
The Company, for the year ended June 30, 1996, underwent a complete review of
its method of recording revenue from sales to its U.S. distributor. In the
fiscal year ended June 30, 1995 and in the first quarter ended September 30,
1995, revenue from product sales to the Company's U.S. distributor, Stanson
Marketing, Inc. ("Stanson") was recognized upon shipment of product to Stanson.
In November 1995, in accordance with its agreement with Stanson, the Company
directed Stanson to commence shipment on an autoship basis to all possible
customers. The Company, in February 1996, sought the advice of its then
independent accountants as to whether its then existing revenue recognition
policy was in compliance with generally accepted accounting principles with
respect to recognizing second quarter autoship sales to Stanson. In connection
with the filing of its Quarterly reports on Form 10-Q for the quarters ended
December 31, 1995 and March 31, 1996, the Company adopted a cash basis revenue
recognition policy with respect to products subject to autoship distribution,
upon the advice of its then independent accountants, which advice was given
recognizing that their view may be different upon completion of their then in
progress procedures. The then independent accountants subsequently resigned as
the Company's independent accountants and advised the Company that they would
not be advising the Company as to whether the then existing revenue recognition
policy was in compliance with generally accepted accounting principles
Under the Company's revenue recognition policy adopted with respect to fiscal
1996 relating to sales by the Company to its U.S. distributor, Stanson
Marketing, Inc. ("Stanson"), revenue is recognized upon shipment to Stanson with
respect to products which were not distributed on an autoship basis, and revenue
is recognized with respect to products distributed on an autoship basis upon
sale by Stanson to its customers. The Company considers all products shipped to
Stanson after November 21, 1995 as being subject to distribution on an autoship
basis. This revenue recognition policy complies with FASB 48 "Revenue
Recognition when Rights of Return Exists".
Accordingly, for the three and six month period ended December 31, 1995 revenue
from Stanson consisted of products to be distributed on a non auto-ship basis
which were recognized upon shipment to Stanson and products distributed on the
autoship basis which were recognized on a cash basis. For the three and six
months ended December 31, 1996 revenue from Stanson consisted of products to be
distributed on an auto-ship basis and were recognized upon sale by Stanson to
its customers.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and its 90% owned subsidiary, Chantal Skin Care
Corporation ("Chantal Skin Care"). All significant intercompany accounts and
transactions have been eliminated.
6
Net loss per share
- ------------------
The computation of loss per share for the six month periods ended December 31,
1995 and 1996 are based on the weighted average number of common and common
equivalent shares outstanding. When dilutive, stock options, warrants and
convertible Preferred Stock are included as share equivalents using the treasury
stock method. Primary and fully diluted earnings per share are the same for each
of the periods presented.
NOTE 2 - INVENTORY
- ------------------
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventory consisted of the following:
December 31, June 30,
1996 1996
------------ ----------
Finished goods $3,782,952 $4,067,510
Compound 1,444,152 855,761
Work in progress 907,052 1,380,017
Raw materials and componentry 1,221,827 1,180,536
---------- ----------
7,355,983 7,483,824
Inventory reserve (595,408) (595,408)
---------- ----------
$6,760,575 $6,888,416
========== ==========
Included in inventory are products sold to the Company's U.S. distributor which
in accordance with the revenue recognition policy discussed above are not
recognized as revenue until the U.S distributor sells the product to its
customers.
NOTE 3 - LITIGATION
- -------------------
The Company and Chantal Burnison are defendants in an action titled Marksman
--------
Partners, L.P., on behalf of itself and all others similarly situated vs Chantal
- --------------------------------------------------------------------------------
Pharmaceutical Corporation and Chantal Burnison, filed on February 7, 1996 in
- -----------------------------------------------
the United States District Court, Central District of California, Western
Division, Case No. 96-0872. This action is a securities class action on behalf
of all persons who purchased or otherwise acquired the common stock of the
Company between July 10, 1995 and January 5, 1996, inclusive.
The Marksman Partners action is based on a contention that the Company's
-----------------
accounting for sales revenue, because of the nature of its distribution
agreement with Stanson Marketing, Inc. overstated its revenues for fiscal (June
30) 1995 and for the September 30, 1995 quarter ($3 million and $10 million,
respectively), which , the action claims, violated generally accepted accounting
principles and the Federal securities laws. The complaint notes that Chantal
Burnison sold 300,000 shares during the class period (the sales were actually
made by CBD Pharmaceutical Corporation from approximate total holdings of 1.3
million shares. Sales were made after consultation with Company's legal
counsel.) The complaint appears to rely on details of the contractual
relationship with the distributor to contend that the revenues should not have
been booked by the Company based on shipped orders from the distributor, since
among other reasons, plaintiffs allege that Stanson, during the relevant time
period, had the right to require the Company to purchase Stanson on a formula
dependent on its income from the Company's products' sales, and the Company did
not have a substantial history of selling through the distributor and the
distribution system. The action seeks monetary damages in an unspecified amount.
The amount sought on the basis stated in the complaint would be in excess of the
Company's current net worth.
The Company believes its financial reports were correctly presented under
generally accepted accounting principles. A motion to dismiss the Marksman
--------
Partners action was denied, and pre-trial discovery in the Marksman Partners
- --------
action has commenced. The Company plans to vigorously defend itself against the
claims asserted in the litigation.
7
In addition, a derivative action based on many of the same contentions as made
in Marksman has been filed against the Company and Chantal Burnison. The
action, entitled Baruch Singer and Dorothea E. Wakefield vs. Chantal Burnison,
-------------------------------------------------------------
defendant, and Chantal Pharmaceutical Corporation, nominal defendant, was filed
- -------------------------------------------------
in the Superior Court of the State of California, the County of Los Angeles,
case No. BC 147327.
The Company is also a defendant in a lawsuit entitled Amado Institute, Inc., an
-------------------------
Arizona Corporation, Plaintiff, vs. Chantal Pharmaceutical Corp., a Delaware
- ----------------------------------------------------------------------------
Corp., Defendants, filed in January 1996 in Arizona Superior Court, Santa Cruz
- -----------------
County, No. CV-96-018. The suit names the Company and Chantal Burnison as
defendants. The plaintiff disputes the rescission by the Company of the July
1995 transaction under which the Company acquired land and building for an
agreed value of $1,500,000, payable in cash or approximately 270,000 shares of
common stock, subject to certain conditions. The plaintiff seeks damages in the
sum of $2,981,312, alleged to be the value of 269,485 shares of Company common
stock on October 27, 1995, or in the alternative, the issuance of 269,485 shares
of registered common stock in the Company, together with interest, attorney's
fees and costs. The Company believes the rescission was timely pursuant to an
express right in the contract of purchase and is vigorously defending the
action.
With respect to each of the foregoing actions, the likelihood of an unfavorable
outcome and range of possible loss, if any, cannot be determined and accordingly
no amounts are accrued for them at December 31, 1996.
NOTE 4 - CONVERTIBLE DEBENTURE FINANCING
- ----------------------------------------
In October 1996, Chantal Pharmaceutical Corporation completed the sale of $5.25
million principal amount of 8% Convertible Debentures due September 30, 1998.
The Company received net proceeds of $4,882,500 after payment of placement fees
and expenses. The debentures were sold to investors qualifying as "non-U.S.
persons" in an offering completed under Regulation S.
The debentures are convertible into shares of common stock of the Company as to
one-third of the principal amount of each debenture after 45 days from the date
of issuance, an additional one-third after 75 days from the date of issuance and
the balance after 90 days from the date of issuance. The conversion price is the
lesser of $3.91 or 80% of the average closing bid price of the Company's common
stock for the five business days immediately preceding the conversion date. The
Company, in accordance with the terms of the debentures, notified those
debenture holders exercising their conversion option for the first one-third of
their debentures, that the Company intended to exercise its rights under the
debentures to pay cash in lieu of such conversion and notified all debenture
holders that it intended to also redeem the balance of the debentures for a
negotiated purchase price. The Company has not yet completed the financing to
permit it to complete such transactions. Were all the debentures converted as of
the earliest date in accordance with their terms, the Company would be required
to issue approximately 3.5 million shares of common stock which is in excess of
the number of authorized but unissued shares available.
In accordance with an SEC staff position taken in December 1996 with respect to
debt convertible at a discount to market, the premium attributable to the
discount is to be accounted for as additional interest expense. Accordingly, the
Company has recorded non-cash interest expense of $1,045,000 to reflect the
discount to market of the conversion option in the 8% convertible debentures due
September 30, 1998 and issued in October 1996.
8
CHANTAL PHARMACEUTICAL CORPORATION
----------------------------------
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As more fully discussed in results of operations, the Company recorded net loss
of $.08 per share for the three months ended December 31, 1996, which reflects a
non-cash interest expense on convertible debentures of $1,045,000 which had the
effect of increasing the net loss per share by $.06.
RESULTS OF OPERATIONS
- ---------------------
Revenues are primarily comprised of the Company's sales of Ethocyn-based Chantal
skin care products. Net revenues for the three months ended December 31, 1996
increased to $3,836,097 from $1,168,090 for the three months ended December 31,
1995. Net revenues for the six months ended December 31, 1996 decreased to
$5,745,733 from $6,368,666 for the six months ended December 31, 1995. The
Company recorded an additional provision of approximately $1.5 million against
the December 31, 1996 accounts receivable balance from Stanson which are beyond
the agreed upon payment terms. The Company recorded this provision as a
reduction of revenues for income statement purposes.
The Company, for the year ended June 30, 1996, underwent a complete review of
its method of recording revenue from sales to its U.S. distributor. In the
fiscal year ended June 30, 1995 and in the first quarter ended September 30,
1995, revenue from product sales to the Company's U.S. distributor, Stanson
Marketing, Inc. ("Stanson") was recognized upon shipment of product to Stanson.
In November 1995, in accordance with its agreement with Stanson, the Company
directed Stanson to commence shipment on an autoship basis to all possible
customers. The Company, in February 1996, sought the advice of its then
independent accountants as to whether its then existing revenue recognition
policy was in compliance with generally accepted accounting principles with
respect to recognizing second quarter autoship sales to Stanson. In connection
with the filing of its Quarterly reports on Form 10-Q for the quarters ended
December 31, 1995 and March 31, 1996, the Company adopted a cash basis revenue
recognition policy with respect to products subject to autoship distribution,
upon the advice of its then independent accountants, which advice was given
recognizing that their view may be different upon completion of their then in
progress procedures. The then independent accountants subsequently resigned as
the Company's independent accountants and advised the Company that they would
not be advising the Company as to whether the then existing revenue recognition
policy was in compliance with generally accepted accounting principles.
Under the Company's revenue recognition policy adopted with respect to fiscal
1996 relating to sales by the Company to its U.S. distributor, Stanson
Marketing, Inc. ("Stanson"), revenue is recognized upon shipment to Stanson with
respect to products which were not distributed on an autoship basis, and revenue
is recognized with respect to products distributed on an autoship basis upon
sale by Stanson to its customers. The Company considers all products shipped to
Stanson after November 21, 1995 as being subject to distribution on an autoship
basis. This revenue recognition policy complies with FASB 48 "Revenue
Recognition when Rights of Return Exists".
Accordingly, for the three and six month period ended December 31, 1995 revenue
from Stanson consisted of products to be distributed on a non auto-ship basis
which were recognized upon shipment to Stanson and products distributed on the
autoship basis which were recognized on a cash basis. For the three and six
months ended December 31, 1996 revenue from Stanson consisted of products to be
distributed on an auto-ship basis and were recognized upon sale by Stanson to
its customers.
Cost of goods sold as a percentage of revenues from product sales during the
three and six months periods ended December 31, 1996 was 20% and 19% of revenues
as compared with 14% and 16% of revenues for the three and six month periods
ended December 31, 1995. The increase in cost of goods sold as a percentage of
revenues is due to a change in the mix of sales.
Marketing and other expenses related to cosmetic sales decreased 57% and 43% to
$1,760,392 and $3,634,901 in the three and six months ended December 31, 1996
compared to $4,169,319 and $6,364,231 in the three and six months ended December
31, 1995. These expenses resulted from the marketing and promoting of the
Ethocyn-based skin care products and decreased from the prior period primarily
due to the additional expenditures incurred in the first and second quarters of
fiscal 1996 due to the launching of the Ethocyn-based skin care products.
General and administrative expenses increased 34% and 47% to $1,258,249 and
$2,883,263 for the three and six months ended December 31, 1996 compared to
$935,472 and $1,954,029 for the three and six months ended
9
December 31, 1995. The increase in the three and six month periods resulted
principally from an increase in professional services and insurance fees.
Research and development expenditures decreased to $88,186 and $90,530 in the
three and six months ended December 31, 1996 compared to $248,537 and $403,828
in the three and six months ended December 31, 1995. Research and development
activities continue to decrease, with the launch of the Chantal Ethocyn-based
skin care product line in August 1994. The research and development represents
ongoing stability and clinical testing of the Ethocyn-based Chantal Skin Care
cosmetic products, continued analysis of data and test results of Cyoctol
generated by The Upjohn Company, and Ethocyn scale-up synthesis and isomer
resolution research.
Interest expense increased for the three and six months ended December 31, 1996
as compared with the three and six months ended December 31, 1995 primarily due
to the addition of $5.25 million of convertible debentures in October 1996. In
accordance with an SEC position taken in December 1996 with respect to debt
convertible at a discount to market, the premium attributable to the discount is
to be accounted for as additional interest expense. Accordingly, the Company has
recorded non-cash interest expense of $1,045,000 to reflect the discount to
market of the conversion option in the 8% convertible debentures due September
30, 1998 and issued October 1996. The non-cash interest expense on convertible
debentures had the effect of increasing the net loss by $1,045,000 and the net
loss per share by $.06.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company used net cash flows in operations of $5,472,044 for the six months
ended December 31, 1996 principally due to the net loss of $3,467,425 and the
increase in the accounts receivable of $2,821,240 and prepaid expenses of
$720,350 offset by non-cash interest expense on convertible debentures of
$1,045,000. The increase in prepaid expenses is primarily due to additional
prepaid insurance and prepaid advertising for advertisements which began airing
in January 1997. Over half of the December 31, 1996 accounts receivable balance
has subsequently been received.
During the six months ended December 31, 1996, the Company received
approximately $992,000 in proceeds from the issuance of short-term debt and
approximately $4.9 million in proceeds from the issuance of convertible
debentures.
In October 1996, Chantal Pharmaceutical Corporation completed the sale of $5.25
million principal amount of 8% Convertible Debentures due September 30, 1998.
The Company received net proceeds of $4,882,500 after payment of placement fees
and expenses. The debentures were sold to investors qualifying as "non-U.S.
persons" in an offering completed under Regulation S.
The debentures are convertible into shares of common stock of the Company as to
one-third of the principal amount of each debenture after 45 days from the date
of issuance, an additional one-third after 75 days from the date of issuance and
the balance after 90 days from the date of issuance. The conversion price is the
lesser of $3.91 or 80% of the average closing bid price of the Company's common
stock for the five business days immediately preceding the conversion date. The
Company in accordance with the terms of the debentures, notified those debenture
holders exercising their conversion option for the first one-third of their
debentures, that the Company intended to exercise its rights under the
debentures to pay cash in lieu of such conversion and notified all debenture
holders that it intended to also redeem the balance of the debentures for a
negotiated purchase price. The Company has not yet completed the financing to
permit it to complete such transactions. Were all the debentures converted as of
the earliest date in accordance with their terms, the Company would be required
to issue approximately 3.5 million shares of common stock which is in excess of
the number of authorized but unissued shares available.
The Company believes that its existing cash balances, collection of current
accounts receivable and cash flow from operations will be sufficient to meet its
cash requirements through fiscal 1997. The Company launched the Ethocyn-based
Chantal Skin Care products into the Pacific Rim territory in November 1996 and
is currently working on the European launch. The international launches along
with the introduction of new products into the U.S. market will assist in the
growth of cash flow from operations in the current year. In addition, to the
extent the Company experiences growth in the future, or its cash flows from
operations is less than anticipated, the Company may be required to secure
additional sources of cash.
In the long term, the Company expects to incur additional costs as it evaluates
additional marketing and distribution channels for its Ethocyn-based cosmetic
products and continues to develop certain of its compounds to pharmaceutical
market approvals, both U.S. and foreign. In this regard, the Company may be
required to obtain additional funds to complete the research and development and
commercialization of such products. Such funds are expected to be obtained from
one or more of the following sources: (i) sales of Ethocyn-based cosmetics
products (ii) amounts to be received pursuant to the Company's license
agreements, including royalties from anticipated sales of Ethocyn-based and
Cyoctol-based products; (iii) strategic alliances with other companies,
including joint venture, joint development or license agreements; and (iv)
additional equity or debt offerings. However, there can be no assurance that
the Company will be successful in obtaining additional funds from any of the
foregoing sources.
The Company, at this time, does not have any material commitments for capital
expenditures.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on 8-K
None
11
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHANTAL PHARMACEUTICAL CORPORATION
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(Registrant)
February 14, 1997 BY: /s/ CHANTAL BURNISON
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CHANTAL BURNISON
Chairman of the Board
and Chief Executive Officer
/s/ YVETTE LAMPRECHT
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YVETTE LAMPRECHT
Chief Financial Officer
(Principal Financial Officer)
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