FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended December 31, 1997
Commission file number 1-9613
------
PACIFIC PHARMACEUTICALS, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3258753
-----------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
6730 MESA RIDGE RD., SUITE A, SAN DIEGO, CA 92121
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 550-3900
----------------------------------------------------
(Registrant's Telephone number, including area code)
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
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of February 12, 1998, there were 10,323,427 shares of the registrant's
Common Stock, $.02 par value outstanding.
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Incorporated September 23, 1983
INDEX
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . .1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -
December 31, 1997 and March 31, 1997. . . . . . . . . . . .2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
December 31, 1997 and 1996 and from
September 23, 1983 (Inception) to
December 31, 1997 . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Stockholders' Equity-
Nine Months Ended December 31, 1997 and 1996 . . . . . . .4
Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1997 and 1996
and from September 23, 1983 (Inception) to
December 31, 1997 . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . .6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . .10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . .13
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the "Notes to Consolidated Financial Statements", as well
as oral statements that may be made by the Company or by officers, directors
or employees of the Company acting on the Company's behalf, that are not
historical fact constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to,
the risk that the Company may not be able to obtain additional financing, if
necessary; the risk that the Company may not be able to maintain its listing
on the American Stock Exchange; and the risk that the Company may not be able
to continue the necessary development of its operations on a profitable
basis. In addition, the Company's business, operations and financial
condition are subject to reports and statements filed from time to time with
the Securities and Exchange Commission, including the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997, the Registration
Statement on Form S-3 declared effective on September 4, 1997, and this
Quarterly Report on Form 10-Q.
1
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
December 31, 1997 March 31, 1997
- --------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $416,942 $1,784,599
Short-term investments 3,496,647 4,981,435
Accounts receivable, net 75,070 99,066
Inventory 38,637 41,677
Prepaid expenses 107,622 87,311
- --------------------------------------------------------------------------------------------------------------
Total current assets 4,134,918 6,994,088
Property and equipment, net 78,993 82,563
Patent costs, net 126,753 157,597
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,340,664 $7,234,248
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $236,772 $723,523
Accrued expenses 249,221 161,574
Current portion of capitalized leases 3,967 4,670
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 489,960 889,767
- --------------------------------------------------------------------------------------------------------------
Capital leases, net of current portion 23,593 13,072
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 2,000,000 shares authorized;
41,606 and 50,002 shares issued and outstanding at December 31
and March 31, 1997, respectively (liquidation preference $10,818,000) 1,040,188 1,250,038
Common stock, $.02 par value, 100,000,000 shares authorized;
10,321,237 and 8,151,029 shares issued and outstanding at
December 31 and March 31, 1997, respectively 206,422 163,021
Capital in excess of par value 42,199,926 38,274,539
Deficit accumulated during the development stage (39,619,425) (33,356,189)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,827,111 6,331,409
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,340,664 $7,234,248
- --------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
2
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine Months Ended
December 31 December 31 September 23, 1983
------------------------ ---------------------- (inception) to
1997 1996 1997 1996 December 31, 1997
- ----------------------------------------------------------------- ---------------------------------------------
REVENUES
Product sales $ 68,810 $ 8,294 $ 69,510 $ 20,991 $2,019,741
License fees and royalties 145 836 332 836 481,539
Contract research - 17,500 - 39,172 268,063
Marketing rights - - - - 1,311,500
Interest and other 59,175 3,562 224,834 25,123 1,864,947
- --------------------------------------------------------------------------------------------------------------------
Total revenues 128,130 30,192 294,676 86,122 5,945,790
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product sales 87,471 29,642 122,792 50,810 3,120,727
Product development 411,042 482,872 1,433,306 1,772,293 16,397,834
General and administrative 474,538 219,667 1,672,782 773,717 17,438,280
Business development
and marketing 36,888 9,677 159,128 139,560 3,717,414
Interest and other 1,598 33,622 55,725 50,393 611,520
- --------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,011,537 775,480 3,443,733 2,786,773 41,285,775
- --------------------------------------------------------------------------------------------------------------------
Net loss before convertible
preferred stock dividends (883,407) (745,288) (3,149,057) (2,700,651) (35,339,985)
- --------------------------------------------------------------------------------------------------------------------
Convertible preferred stock
dividends 665,786 138,259 3,114,179 138,259 4,279,440
Net loss applicable to
common shareholders $(1,549,193) $(883,547) $(6,263,236) $(2,838,910) $(39,619,425)
- --------------------------------------------------------------------------------------------------------------------
Net loss per share
of common stock ($0.16) ($0.11) ($0.70) ($0.35)
- ------------------------------------------------------------------ ---------------------------
Weighted average common
stock outstanding 9,986,058 8,131,736 8,906,236 8,087,737
- ------------------------------------------------------------------ ---------------------------
See Notes to Consolidated Financial Statements.
3
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Deficit
Accumulated
Convertible Preferred Stock Common Stock Capital During the
----------------------------- --------------------------- in Excess Development
Shares Par Value Shares Par Value of Par Value Stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 8,051,029 $161,021 $29,680,590 ($28,293,562) $1,548,049
Exercise of warrants 81,250 1,625 74,750 76,375
Issuance of warrants 45,000 45,000
Private placement of
convertible preferred stock 16,725 418,125 2,492,025 2,910,150
Convertible preferred stock
dividends 138,259 (138,259) -
Net loss (2,700,651) (2,700,651)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,1996 16,725 $ 418,125 8,132,279 $162,646 $32,430,624 ($31,132,472) $1,878,923
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 50,000 $1,250,038 8,151,029 $163,021 $38,274,539 ($33,356,189) $6,331,409
EXERCISE OF WARRANTS 420,312 8,406 386,687 395,093
ISSUANCE OF COMMON STOCK FOR
SERVICES 1,143 20 980 1,000
CONVERSION OF PREFERRED STOCK
INTO COMMON STOCK (8,394) (209,850) 1,748,753 34,975 174,875 -
PREFERRED STOCK UNIT PURCHASE
OPTION AS COMPENSATION FOR
FINANCIAL ADVISORY SERVICES 248,666 248,666
CONVERTIBLE PREFERRED STOCK
DIVIDENDS 3,114,179 (3,114,179) -
NET LOSS (3,149,057) (3,149,057)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 41,606 $1,040,188 10,321,237 $206,422 $42,199,926 ($39,619,425) $3,827,111
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
4
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
December 31, September 23, 1983
--------------------------- (inception) to
1997 1996 December 31, 1997
- --------------------------------------------------------------------------------- -----------------
OPERATING ACTIVITIES
Net loss ($3,149,057) ($2,700,651) ($35,339,985)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 62,742 82,794 1,646,486
Non-cash expense upon issuance of common stock
options, common stock and warrants 248,666 45,000 768,962
Net book value of disposal of long-term assets 58,534 2,648 223,850
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable 23,996 53 (75,071)
Inventory 3,040 (31,288) (38,640)
Prepaid expenses and other assets (20,311) (167,143) (118,597)
Accounts payable (486,751) 621,677 236,772
Accrued expenses 87,647 (146,608) 105,198
Customer advances - - 140,863
Other liabilities 1,506 (2,976) (3,360)
- ---------------------------------------------------------------------------------------------------
Net cash used by operating activities (3,169,988) (2,296,494) (32,853,522)
INVESTING ACTIVITIES
Purchases of short-term investments - - (10,461,867)
Maturities of short-term investments 1,484,788 1,288,106 6,965,220
Capital expenditures (16,637) (4,927) (848,064)
Patent costs (58,321) (23,508) (970,748)
Other - - 7,829
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,409,830 1,259,671 (5,307,630)
FINANCING ACTIVITIES
Issuance of notes payable - 218,966 2,183,868
Repayment of notes payable - (144,062) (2,474,824)
Repayment of capitalized lease obligations (3,592) (11,341) (183,199)
Issuance of line of credit 509,700 509,700
Long-term customer advances - - 100,000
Issuance of common and preferred stock 396,093 2,986,525 38,380,049
Issuance of warrants - - 62,500
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 392,501 3,559,788 38,578,094
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (1,367,657) 2,522,965 416,942
Cash and cash equivalents at beginning of period 1,784,599 409,651 -
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $416,942 $2,932,616 $416,942
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
5
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Pacific
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc. and
XYX Acquisition Corp. (collectively the "Company"). All significant
intercompany balances and transactions have been eliminated. On August 7,
1997, the Company's stockholders approved a name change to Pacific
Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Statement of
Financial Accounting Standards ("SFAS") No. 7. Among the disclosures required
by SFAS No. 7 are that the Company's financial statements be identified as
those of a development stage enterprise, and that certain consolidated
financial statements disclose activity since the date of the Company's
inception.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual
results may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial
statements contain all of the adjustments, consisting only of normal
recurring adjustments and accruals, necessary to present fairly the financial
position of the Company as of December 31, 1997 and March 31, 1997, and the
results of operations for the three months and nine months ended December 31,
1997 and 1996 and from September 23, 1983 (inception) to December 31, 1997.
The results of operations for the three months and nine months ended
December 31, 1997 are not necessarily indicative of the results to be
expected in subsequent periods or for the year as a whole. For further
information, refer to the consolidated financial statements and footnotes
thereto as set forth in the Company's annual report on Form 10-K for the year
ended March 31, 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, EARNINGS PER SHARE (EPS). This statement requires the presentation
of earnings per share to reflect both "Basic EPS" as well as "Dilutive EPS"
on the face of the statement of operations. In general, Basic EPS excludes
dilution created by stock equivalents and is a function of the weighted
average number of common shares outstanding for the periods. Diluted EPS does
reflect the potential dilution created by stock equivalents as if such
equivalents are converted into common stock and is calculated in
substantially the same manner as fully Diluted EPS illustrated in Accounting
Principals Board Opinion No. 15 "EARNINGS PER SHARE".
The Company adopted the new method of reporting EPS starting with this
quarter ended December 31, 1997. Because the Company's common stock
equivalents are anti-dilutive, the result of implementing SFAS No. 128
reflects net loss per share in materially the same manner as previously
reported.
6
2. PRODUCT APPROVAL AND DISTRIBUTION AGREEMENT
On June 23, 1997, the Company received approval from the United States Food
and Drug Administration ("FDA") to begin commercial sales and distribution in
the United States for its Periodontal Tissue Monitor ("PTM") product. During
the current year, the Company also signed two agreement with Steri-Oss, Inc.,
for the exclusive five-year distribution of PTM worldwide, except in Japan.
The Company's agreement with Hawe Neos for distribution of PTM in Europe
terminated in November 1997.
3. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary
Therapeutics, Inc. ("BTI") under which the Company was granted an option to
acquire BTI, a development stage company with certain technologies in the
area of Photodynamic Therapy ("PDT") treatment for cancer. The agreement, as
amended, gives the Company the right to acquire BTI by a merger of BTI into
a wholly-owned subsidiary of the Company. In February 1997, the Company and
BTI agreed to extend the period during which the Company may exercise its
option to acquire BTI from April 30, 1997 until such time as BTI has
completed human clinical trials of Boronated Porphyrin Compound ("BOPP") at
an agreed upon dose level (the "Option Period"). The Option Period was
extended at the Company's request to enable BTI to complete pre-clinical
studies, to commence clinical trials in humans and to demonstrate that a
given dose level of BOPP in humans would not cause certain adverse events.
Accordingly, the Company has deferred its election to exercise the option.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued will be determined based
upon the market value of the Company's common stock prior to the date of
exercise, although the value of the common stock cannot be less than $2.00 or
more than $6.00 per share. The agreement has been approved by a majority of
the stockholders of BTI. The Board of Directors voted to approve the merger,
however the merger is also subject to shareholder approval for the issuance
of additional shares of common stock. One of the Company directors is also a
director of BTI.
Under the agreement, the Company will assist BTI during the option period in
preparing the PDT products for advancement into human clinical trials. In
order to exercise its rights to consummate the merger, the Company will have
to satisfy certain conditions, including funding expenses incurred by BTI
during the option period. These expenses represent the majority of BTI's
expenditures for the option period and are comprised primarily of product
development costs. The Company is also required to advance to BTI funds to
repay $653,000 in indebtedness, including accrued interest as part of the
acquisition price of BTI. Certain holders of such indebtedness are
shareholders of the Company. In exchange for such funding, BTI will issue
convertible notes to the Company which may be converted into BTI equity at
the Company's option. The Company is recording all advances to BTI as
product development expense in the period incurred due to uncertainties
regarding the ultimate value to be realized from the convertible notes.
During the nine months ended December 31, 1997 and 1996, the Company advanced
$901,000 and $635,000, respectively to BTI and such advances are included in
product development expense. During the Option Period, the Company has
advanced $2,182,000 to BTI.
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDEND
In fiscal year 1997, the Company completed a private placement of Premium
Preferred Units ("Units"), each Unit consisting of 500 shares of Convertible
Preferred Stock ("Preferred Stock"), par value $25.00 per share, and
50,000 Common Stock Purchase Warrants ("Warrants"). Subscribers to the private
7
placement purchased the Units at a discount from the closing prices of the
Company's common stock on December 19, 1996 and March 7, 1997. The resulting
discount of $4,754,000 is considered a non-cash dividend ("Dividend") and is
recognized as a return to the Preferred Stockholders from the date of
issuance of the Preferred Stock to the date in which the Preferred Stock is
eligible for conversion into Common Stock. During the year ended March 31,
1997 and the nine months ended December 31, 1997, the Company recognized a
non-cash Dividend to Preferred Stockholders of $1,165,000 and $3,114,000,
respectively. All of the subscribers to the Private Placement entered into a
Lock-up Agreement ("Lock-up") with the Company. In the Lock-up, each
subscriber agreed not to sell or exercise any of the securities contained in
the Units until the underlying common stock was registered with the
Securities and Exchange Commission. A Registration Statement on Form S-3
became effective on September 4, 1997 and 50% of the underlying common stock
is eligible for trading. 75% of the underlying common stock will be eligible
for trading on March 4, 1998 and 100% on June 4, 1998.
The Preferred Stock is convertible into Common Stock upon issuance, except
that most of the subscribers to the Private Placement signed a letter
amending the initial Subscription Agreement, in which they agreed not to
convert any of the Preferred Stock until the underlying Common Stock was
registered. The amendment provides that they may convert the Preferred Stock
into Common Stock in accordance with the Lock-up mentioned in the prior
paragraph. For the nine months ended December 31, 1997, the estimated
effective date of the registration statement was revised from July 1, 1997 to
September 1, 1997. This change in estimate resulted in the reduction of
$235,000 of convertible preferred stock dividends, or $.03 per common share
for the nine months ended December 31, 1997. The registration statement was
declared effective on September 4, 1997.
5. FINANCIAL ADVISORY SERVICES
Under the terms of the Placement Agency Agreement the Company signed with
Paramount Capital Inc.("Paramount"), Paramount will provide financial
advisory services to the Company for an 18 month period beginning March 8,
1997. The Company pays Paramount $2,500 per month and has agreed to sell
to Paramount 2.5 Units at a price equal to 110% of the unit price paid by
investors in the 1997 Private Placement. The convertible Preferred Stock
contained in the Units converts into 260,417 shares of the Company's common
stock ("Advisory Stock"). There are also warrants ("Advisory Warrants") to
purchase 125,000 shares of the Company's common stock at $1.00 per share
attached to the Units, which are exercisable until March 7, 2007. The market
price of the Company's common stock on March 7, 1997 was $1.50 per share. The
Company valued the Advisory Stock at $335,000 and the Advisory Warrants at
$162,000 using a generally accepted valuation method. The Company recorded
$249,000 in general and administrative expenses as amortization of such value
for the nine months ended December 31, 1997 related to this agreement.
8
6. RELATED PARTY TRANSACTION
Under the terms of the employment agreement with the Company's Chairman and
President, Dr. H. Laurence Shaw, the Company paid all of Dr. Shaw's
relocation expenses, which totaled $182,000 during the nine months ended
December 31, 1997. The Board of Directors also approved an interest free
bridge loan of $300,000 to Dr. Shaw for the purpose of acquiring a new
residence in California prior to the sale of his New Jersey residence. The
loan, which was made in May 1997 was paid back in September 1997.
7. CHANGE IN AUTHORIZED CAPITAL
On August 7, 1997, the Company's stockholders approved an increase in the
authorized number of common stock from 30,000,000 to 100,000,000 shares and
preferred stock from 300,000 to 2,000,000 shares.
9
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total revenues were $128,000 for the quarter ended December 31, 1997, a
$98,000 increase from revenues of $30,000 recorded during the same period of
the prior year. Current quarter revenues relate primarily to sales of $69,000
of the Company's Periodontal Tissue Monitor ("PTM") kits and interest income
of $59,000 generated on the Company's cash balances. In the same period of
the prior year, the Company had product sales and contract research revenue
related to its Kephra products.
Cost of product sales was $87,000, relating to manufacturing and quality
assurance costs on the Company's PTM sales. Costs of product sales during the
same period in the prior year related to manufacturing costs for the
Company's Kephra products sold.
As the Company moves toward its first human clinical trials, spending on
product development was concentrated on its photodynamic therapy cancer
treatment, BOPP and Cancer Immunotherapy. Total product development costs
were $411,000 for the current quarter, a decrease of $72,000 or 15% over the
prior year third quarter costs of $483,000. The decrease relates to the
following areas: (i) an increase of $64,000 in funding of product
development expenses in accordance with the Agreement and Plan of Merger with
Binary Therapeutics, Inc. ("BTI"), the holder of certain technologies in the
area of Photodynamic Therapy ("PDT") for the treatment of cancer; (ii) a
decrease of $32,000 in expenses related to Cancer Immunotherapy technology;
(iii) a decrease of $37,000 in expenses related to PTM product development,
as the PTM product was approved by the FDA during the current year and has
moved out of the product development phase; and (iv) a decrease of $67,000 in
product development expenses related to the Company's Kephra product line and
general product development costs. The Company is not actively seeking
licensing opportunities or making product development expenditures for the
Kephra product line.
General and administrative expenses for the current quarter were $475,000, an
increase of $255,000 from the same period of the prior year. The Company
recognized an expense of $83,000 under the terms of a financial advisory
agreement with the Company's placement agent, in which it granted a preferred
stock purchase option in exchange for such services. The Company incurred
higher general and administrative labor costs during the current quarter
compared to the same period of the prior year.
Business development costs for the current quarter totaled $37,000, an
increase of $27,000 from the same quarter of the prior year.
10
Net loss before convertible preferred stock dividends for the quarter ended
December 31, 1997 totaled $883,000 or a 19% increase over the prior year's
third quarter loss of $745,000. This increase, as explained above, is a
result of greater general and administrative expenses, somewhat offset by
greater revenue. Net loss per share of common stock for the quarter ended
December 31, 1997 was $.16 compared to $.11 in the same quarter in the
previous year. During the quarter ended December 31, 1997, the Company
recognized a non-cash convertible preferred stock dividend of $666,000
compared to $138,000 during the same period of the prior year.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total revenues aggregated $295,000 for the nine months ended December 31,
1997, a $208,000 increase from revenues of $86,000 recorded during the same
period of the prior year. Current year revenues relate primarily to interest
income of $225,000 generated on the Company's cash balances and sales of the
Company's PTM product. In the prior year, the Company had product sales of
$21,000 and contract research revenue of $39,000 related to its Kephra
products.
Cost of product sales was $123,000, relating to manufacturing and quality
assurance costs on the Company's PTM product. The Company completed product
validation studies required by the FDA during the current year and began
producing PTM for distribution in the United States. Costs of product sold
during the same period in the prior year relate to manufacturing costs for
the Company's Kephra products sold.
Product development costs for the current year were $1,433,000, a decrease of
$339,000 or 19% over the prior year costs. The decrease relates primarily to
the following areas: (i) an increase of $244,000 in funding of BTI's product
development expenses related to PDT; (ii) a decrease of $105,000 in expenses
related to Cancer Immunotherapy technology for the treatment of cancer;
(iii) a decrease of $241,000 in expenses related to PTM product development; and
(iv) a decrease of $237,000 in product development expenses related to the
Company's Kephra product line and general product development expenses.
General and administrative expenses for the current year were $1,673,000, an
increase of $899,000 from the same period of the prior year. The Company
incurred significant legal and accounting fees related to the registration of
the securities sold in the recent private placement and began the recognition
of an 18 month financial advisory agreement in which the Company has granted
a preferred stock purchase option in exchange for such services. The Company
also incurred $182,000 in relocation expenses during the nine months ended
December 31, 1997 in connection with the relocation of its Chairman,
President and Chief Executive Officer from New Jersey to California. There
were no such costs incurred during the same period of the prior year.
Business development costs for the current year totaled $159,000, a decrease
of $20,000, or 14%, from the same period of the prior year.
Net loss before convertible preferred stock dividends for the nine months
ended December 31, 1997 totaled $3,149,000 or a 17% increase over the prior
year loss of $2,701,000. This increase is a result of greater general and
administrative expenses somewhat offset by lower product development costs
and increased revenue. Net loss per share of common stock for the nine months
ended December 31, 1997 was $.70 compared to $.35 in the same period in the
previous year. During the nine months ended December 31, 1997, the Company
recognized a non-cash convertible preferred stock dividend of $3,114,000
compared to $138,000 during the same period of the prior year.
11
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at December 31, 1997
totaled $3,914,000, a $2,853,000 decrease from the March 31, 1997 balance.
Working capital at December 31, 1997 decreased by $2,459,000 from March 31,
1997 to $3,645,000. These decreases were primarily due to the net loss before
convertible preferred stock dividends for the nine months ended December 31,
1997 and payment of certain current liabilities.
Since inception, the Company has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate that negative
cash flow from operations will continue for the foreseeable future, and that
outside sources of funding will continue to be required. Without significant
future revenues, the Company's financial resources are anticipated to be
adequate through September 1998, based on a continuation of the pattern of
expenses which have prevailed during fiscal years 1997 and 1998.
Unanticipated expenses or working capital requirements could, however,
shorten that period.
In August and December 1997 the Company signed exclusive five year renewable
distribution agreements with Steri-Oss, Inc. to distribute the Company's PTM
product worldwide, except in Japan. In the event the Company begins selling
material quantities of the PTM, the Company may need additional working
capital which may cause an increase in the net utilization of cash. However,
there can be no assurance that any of its existing or future marketing
partners will order the PTM products in significant quantities.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which it acquired an
exclusive license to certain proprietary technology in the treatment of
cancer. The Company has incurred $535,000 in product development expenses
since the acquisition of the license and expects to continue funding such
efforts associated with the commercialization of the licensed technology,
including the commencement of human clinical trials, which will increase the
Company's net utilization of cash. However, there can be no assurance that
FDA and other regulatory approval required to commence such trials will be
forthcoming.
In June 1996 the Company entered into an agreement which granted the Company
the option to acquire Binary Therapeutics, Inc. ("BTI"). Under the agreement
as amended, the Company has spent $2,550,000 and is currently funding
substantially all expenses of BTI, which consist primarily of product
development expenses, and expects to continue funding such expenses until the
Company determines if it will elect to exercise its option to acquire BTI.
There can be no assurance that the Company will exercise its option to
acquire BTI.
12
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
10.56 Exclusive Distribution Agreement for European
Territory dated December 1, 1997 between
Pacific Pharmaceuticals, Inc. and Steri-Oss,
Inc. Portions of this exhibit have been omitted
pursuant to request for confidential treatment.
10.57 Consulting Agreement dated November 14, 1997 between
Pacific Pharmaceuticals, Inc. and Frank Barnes.
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.
Pacific Pharmaceuticals, Inc.
Date: February 12, 1998 /S/ JAMES HERTZOG
-------------------------------
James Hertzog
Chief Accounting Officer
(Principal Accounting Officer and Officer
duly authorized to sign this report on
behalf of the registrant)
13