UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended JUNE 30, 2003

or

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the transition period              to              .

 

Commission file number 000-31253

 

PHARSIGHT CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

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       ý                       NO       o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES       o                       NO       ý

 

As of July 31, 2003, there were 19,053,057 outstanding shares of the Registrant’s common stock, $0.001 par value.

 

 

PHARSIGHT CORPORATION

 

FORM 10-Q

 

INDEX

 

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
	Condensed Balance Sheets as of June 30, 2003 and March 31, 2003
	Condensed Statements of Operations for the Three Months Ended June 30, 2003 and 2002
	Condensed Statements of Cash Flows for the Three Months Ended June 30, 2003 and 2002
	Notes to Condensed Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures about Market Risk
Item 4.		Controls and Procedures
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Changes in Securities and Use of Proceeds
Item 3.		Default Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits and Report on Form 8-K
Signature
Exhibit Index

 

2

 

PART I.    FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

PHARSIGHT CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)

 

		June 30, 2003			March 31, 2003
		(unaudited)			(1)
Assets
Current assets:
Cash and cash equivalents		$	8,931		$	10,875
Accounts receivable, net		2,779			2,111
Recognized income not yet billed		412			192
Prepaids and other current assets		1,026			975
Total current assets		13,148			14,153
Property and equipment, net		1,011			1,177
Other assets		244			244
Total assets		$	14,403		$	15,574
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable		$	697		$	635
Accrued expenses		760			1,086
Accrued compensation		1,363			1,198
Deferred revenue		5,720			4,980
Current portion of notes payable		1,875			1,875
Current obligations under capital leases		183			295
Total current liabilities		10,598			10,069
Obligations under capital leases, less current portion		37			55
Notes payable, less current portion		1,750			1,969
Redeemable convertible preferred stock, $0.001 par value:
Authorized shares—3,200,000 (2,000,000 designated as Series A and 1,200,000 designated as Series B) at June 30 and March 31, 2003
Issued and outstanding shares—1,814,662 (all designated as Series A) at June 30 and March 31, 2003		5,704			5,608
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value:
Authorized shares—1,800,000 at June 30 and March 31, 2003; Issued and outstanding shares—none at June 30 and March 31, 2003		—			—
Common stock, $0.001 par value:
Authorized shares—120,000,000 at June 30 and March 31, 2003; Issued and outstanding shares—19,053,057 at June 30 and March 31, 2003		19			19
Additional paid-in capital		75,533			75,927
Deferred stock compensation		(134		)	(352		)
Accumulated deficit		(79,104		)	(77,721		)
Total stockholders’ deficit		(3,686		)	(2,127		)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit		$	14,403		$	15,574

 

(1) Derived from the Company’s audited financial statements as of March 31, 2003.

 

The accompanying notes are an integral part of these condensed financial statements.

 

3

 

PHARSIGHT CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended June 30,
		2003			2002
Revenues:
License and renewal		$	1,589		$	1,500
Services		2,138			1,955
Total revenues		3,727			3,455
Costs and expenses:
License and renewal (1)		110			179
Services (2)		1,728			1,533
Research and development (3)		770			1,465
Sales and marketing (4)		1,111			1,636
General and administrative (5)		1,263			1,571
Amortization of deferred stock compensation		67			457
Total costs and expenses		5,049			6,841
Loss from operations		(1,322		)	(3,386		)
Other income (expense):
Interest expense		(62		)	(94		)
Interest income and other, net		1			15
Net loss		(1,383		)	(3,465		)
Preferred stock dividend		(145		)	(3		)
Deemed dividend to preferred stockholders		(96		)	(3		)
Net loss attributable to common stockholders		$	(1,624	)	$	(3,471	)
Basic and diluted net loss per share attributable to common stockholders		$	(0.09	)	$	(0.19	)
Shares used to compute basic and diluted net loss per share attributable to common stockholders		19,046			18,699

 

The accompanying notes are an integral part of these condensed financial statements.

 

4

 

The following table shows amortization of deferred stock compensation excluded from certain costs and expenses on the Condensed Statements of Operations:

 

		Three Months Ended June 30,
		2003			2002
		(unaudited)
(1)License and renewal		$	10		$	29
(2)Services		1			7
(3)Research and development		6			32
(4)Sales and marketing		31			99
(5)General and administrative		19			290
Total		$	67		$	457

 

The accompanying notes are an integral part of these condensed financial statements.

 

5

 

PHARSIGHT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

		Three Months Ended June 30,
		2003			2002
Operating activities
Net loss		$	(1,383	)	$		(3,465	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred stock compensation		67			457
Depreciation		275			391
Issuance of options in exchange for services		—			8
Changes in operating assets and liabilities:
Accounts receivable		(668		)	(398			)
Recognized income not yet billed		(220		)	(31			)
Prepaids and other assets		(51		)	(12			)
Accounts payable		62			93
Accrued expenses		(326		)	(31			)
Accrued compensation		165			(655			)
Deferred revenue		740			230
Accrued interest and other		—			(1			)
Net cash used in operating activities		(1,339		)	(3,414			)
Investing activities
Purchases of property and equipment		(109		)	(47			)
Maturities of short-term investments		—			1,498
Net cash provided (used) by investing activities		(109		)	1,451
Financing activities
Proceeds from notes payable		—			750
Principal payments on notes payable		(219		)	(750			)
Principal payments on capital lease obligations		(130		)	(159			)
Proceeds from the issuance of common stock		—			3
Net proceeds from the issuance of redeemable convertible preferred stock		—			3,021
Dividend paid to preferred stockholders		(147		)	—
Net cash provided (used) by financing activities		(496		)	2,865
Net increase (decrease) in cash and cash equivalents		(1,944		)	902
Cash and cash equivalents at the beginning of the period		10,875			10,498
Cash and cash equivalents at the end of the period		$	8,931		$		11,400
Supplemental disclosures of non cash activities
Deemed dividend to preferred stockholders		$	96		$	3
Accrued preferred stock dividend		$	145		$	3
Reversal of deferred stock compensation upon cancellation of unvested options		$	151		$	55
Discount on redeemable convertible preferred stock		$	—		$	(1,023		)

 

The accompanying notes are an integral part of these condensed financial statements.

 

6

 

PHARSIGHT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1.  BASIS OF PRESENTATION

 

Pharsight Corporation (the “Company”) develops and markets products and services that help pharmaceutical and biotechnology companies improve their decision-making in drug development and commercialization. By integrating scientific, clinical and business decision criteria into a dynamic, model-based methodology, the Company helps its customers optimize the value of their drug development programs and portfolios from discovery to post-launch marketing and any point in between.  The Company uses computer-based drug-disease models, dynamic predictive market models, clinical trial simulation and advanced valuation models to create a continuously evolving view of its customers’ development efforts and product portfolios.  The Company was incorporated in California in April 1995 and was reincorporated in Delaware in June 2000.

 

The accompanying condensed financial statements of the Company have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with these rules and regulations. The information included in this report should be read in conjunction with the Company’s financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2003.

 

In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004, or for any other future period.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

NOTE 2.  RECENT ACCOUNTING PRONOUNCEMENTS

 

Revenue Arrangements with Multiple Deliverables

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Elements,” which addresses certain aspects of accounting for arrangements that include multiple products or services. Specifically, this issue addresses: (1) how to determine whether an arrangement that contains multiple products or services contains more than one unit of accounting, and (2) how the arrangement consideration should be measured and allocated. Accordingly, the adoption of EITF No. 00-21 may impact the timing of revenue recognition as well as the allocation between products and services. EITF No. 00-21 will be applicable for transactions entered into beginning July 1, 2003.  The Company does not believe that the adoption of EITF No. 00-21 will have a material impact on its results of operations or financial position.

 

Consolidation of Variable Interest Entities

 

In January 2003 the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”  (“FIN 46”). Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires that a VIE be consolidated by a company if that company is subject to a majority of the VIE’s risk of loss or entitled to receive a majority of the VIE’s residual returns or both. A company that consolidates a VIE is referred to as the primary beneficiary of that entity.  The Company has adopted the disclosure provisions and will adopt the consolidation requirements as of July 1, 2003.  The Company does not expect the adoption of the consolidation requirements of FIN 46 to have a material impact on its results of operations or financial position.

 

7

 

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

 

In June 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of July 1, 2003. The Company does not believe the adoption of this statement will have a material impact on its results of operations or financial position.

 

Accounting for Stock-Based Compensation-Transition and Disclosure

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“FAS 148”). FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to the FAS 123 fair value method of accounting for stock-based employee compensation. In addition, FAS 148 requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Accordingly, the Company adopted the disclosure provisions of this statement in fiscal year 2003 and in its interim financial statements thereafter.  See Note 4 for further information.

 

NOTE 3.  NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

Basic net loss per share is computed using the weighted-average number of vested (i.e. not subject to a right of repurchase) outstanding shares of common stock. Diluted net loss per share is computed using the weighted-average number of shares of vested common stock outstanding and, when dilutive, weighted average number of unvested common stock outstanding, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible preferred stock using the as-if-converted basis. All potential common shares including preferred stock (on an as-if-converted basis), have been excluded from the computation of diluted net loss per share for all periods presented because the effect would be antidilutive due to the net loss in each period presented.

 

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

 

		Three Months Ended June 30,
		2003			2002
Net loss attributable to common stockholders		$	(1,624	)	$	(3,471	)
Weighted average common shares outstanding		19,053			18,766
Less weighted average common shares subject to repurchase		(7		)	(67		)
Shares used to compute basic and diluted net loss per share		19,046			18,699
Basic and diluted net loss per common share		$	(0.09	)	$	(0.19	)

 

NOTE 4.  STOCK-BASED COMPENSATION

 

The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair market value of the stock on the date of grant. As permitted under the Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (“FAS 123”) and Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“FAS 148”), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Company’s financial statements in connection with employee stock awards where the exercise price of the award is equal to the fair market value of the stock at the date of the award. When stock options are granted with an exercise price that is lower than the fair market value of the stock on the date of grant, the difference is recorded as deferred compensation and amortized to expense on a graded basis over the vesting term of the stock options.

 

Pro forma information regarding net loss and net loss per share is required by FAS 148. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called “stock-based awards”), under the fair value method of that statement.

 

8

 

The fair value of the Company’s stock based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

 

 

 

In conjunction with the transfer of the Company's securities from the Nasdaq National Market to the Over-The-Counter Bulletin Board and in accordance with the terms of the purchase plan, the Company suspended any new offerings under the purchase plan until such time as the Company could either qualify for an exemption or otherwise register its shares in compliance with applicable securities laws.  Therefore, there were no participants in the Employee Stock Purchase Plan for the quarter ended June 30, 2003.

 

For purposes of pro forma disclosures, the estimated fair value of the stock-based awards is amortized to expense over the awards’ vesting period. The Company’s pro forma information is as follows (in thousands, except per share amount):

 

 

NOTE 5.  COMPREHENSIVE INCOME (LOSS)

 

The Company’s component of comprehensive income (loss) consists solely of unrealized gain and losses on available for sale securities. The unrealized gains and losses have not been material for the three months ended June 30, 2003 and 2002, and consequently, net loss approximates total comprehensive net loss.

 

NOTE 6.   RESTRUCTURING CHARGE

 

During the year ended March 31, 2002, the Company implemented a restructuring program to better align operating expenses with anticipated revenues. The Company recorded a $676,000 restructuring charge, which consists of $402,000 in facility exit costs, $253,000 in personnel severance costs and $21,000 in other exit costs. The restructuring program resulted in the reduction in force across all company functions of approximately 14% of the Company’s workforce, or 20 employees. As of March 31, 2002, all 20 employees had been terminated as a result of the program. At June 30, 2003, the Company had $8,000 of accrued restructuring costs related to monthly lease expenses for one of the two facilities that were exited during the year ended March 31, 2002, and other exit costs. The restructuring accrual is included within Accrued Expenses in the balance sheets.

 

9

 

 

 

During the year ended March 31, 2003, the Company announced that it was taking two additional actions intended to help further reduce operating expenses across all non-core functional areas. These actions were initiated in July 2002 (the “July 2002 Restructuring Plan”) and November 2002 (the “November 2002 Restructuring Plan”). The July 2002 Restructuring Plan included a total reduction of approximately 15% of the Company’s workforce, or 18 employees.  All 18 employees had been terminated as of March 31, 2003. The November 2002 Restructuring Plan included a total reduction in force of 19 employees and the closure of two remote office locations. As of March 31, 2003, all of the employees had been terminated. In July 2002 and November 2002, the Company recorded $324,000 and $364,000 in restructuring charges, respectively, representing employee severance costs and facility exit costs.

 

The following table depicts the restructuring activity during the quarter ended June 30, 2003 (in thousands):

 

 

NOTE 7. NOTES PAYABLE

 

In May 2003, the Company extended its secured revolving credit facility agreement with Silicon Valley Bank for an additional year. The Company has $2.0 million available for borrowing under two accounts receivable facilities. These include $1.4 million of secured revolving credit against 80% of eligible domestic accounts receivable and $600,000 of secured revolving credit against 90% of eligible foreign accounts receivable. As of June 30, 2003, $1.0 million of the accounts receivable facility has been utilized and is outstanding, and a remaining secured term loan balance of $2.6 million is outstanding. The following financial covenants apply to the extended Silicon Valley Bank loan facilities: remaining months liquidity of at least six months (defined as cash used in operating activities for the most recent quarter multiplied by two); liquidity of at least two times the term loan advance; and cumulative fiscal year-to-date net loss within 20% of the Company’s plan, measured monthly.  The Company was in compliance with each of these covenants as of June 30, 2003.

 

NOTE 8.  REDEEMABLE CONVERTIBLE PREFERRED STOCK

 

Series A Redeemable Convertible Preferred Stock and Common Stock Warrants

On June 26, 2002 and September 11, 2002, the Company completed a private placement of 1,814,662 units (each a “Unit,” and, collectively, the “Units”) for an aggregate purchase price of $7.5 million to certain investors. The sale and issuance of the Units were made pursuant to a Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”) and closed in two phases. The first phase was completed on June 26, 2002, pursuant to which the Company sold an aggregate of 761,920 Units for an aggregate purchase price of $3.15 million. The second phase was completed on September 11, 2002, pursuant to which the Company sold an aggregate of 1,052,742 Units for an aggregate purchase price of $4.35 million. Each Unit consists of one share of the Company’s Series A redeemable convertible preferred stock (the “Series A Preferred”) and a warrant to purchase one share of common stock (each a “Warrant,” and, collectively, the “Warrants”).

 

10

 

Dividends

The holders of the Series A Preferred shall be entitled to receive cumulative dividends in preference to any dividend on the common stock, payable quarterly at the rate of 8% per annum, at the election of the holder either in cash or in shares of Series B redeemable convertible preferred stock (the “Series B Preferred” and, together with the Series A Preferred, the “Preferred Stock”). The Series B Preferred has identical rights, preferences and privileges as the Series A Preferred, except that the Series B Preferred is not entitled to the dividend payment right.

 

Conversion

The holders of the Preferred Stock shall have the right to convert the Preferred Stock, at any time, into shares of common stock. The initial conversion rate shall be four to one, subject to proportional adjustments for stock splits, stock dividends, recapitalizations and the like.

 

The Preferred Stock shall be automatically converted into common stock, at the then applicable conversion price, (i) in the event that the holders of at least 75% of the outstanding Preferred Stock consent to such conversion or (ii) upon the closing of a firmly underwritten public offering of shares of common stock of the Company for a public offering price of at least $3.006 per share and with gross proceeds to the Company of not less than $40,000,000 (before deduction of underwriters commissions and expenses).

 

Liquidation Preference

In the event of any liquidation or winding up of the Company, the holders of the Preferred Stock shall be entitled to receive in preference to the holders of the common stock a per share amount equal to the greater of (a) the original issue price, plus any accrued but unpaid dividends and (b) the amount that such shares would receive if converted to common stock immediately prior thereto (the “Liquidation Preference”). After the payment of the Liquidation Preference to the holders of the Preferred Stock, the remaining assets shall be distributed ratably to the holders of the common stock. A merger, acquisition, sale of voting control of the Company in which the stockholders of the Company do not own a majority of the outstanding shares of the surviving corporation, or a sale of all or substantially all of the assets of the Company, shall be deemed to be a liquidation.

 

Voting Rights

The holders of Preferred Stock are entitled to vote together with the common stock. Each share of Preferred Stock shall have a number of votes equal to the number of shares of common stock then issuable upon conversion of such share of Preferred Stock. In addition, consent of the holders of at least 75% of the then outstanding Preferred Stock shall be required for certain actions, including any action that amends the Company’s charter documents so as to adversely affect the Preferred Stock.

 

Redemption

At the election of the holders of at least 75% of the Preferred Stock, to the extent that the Company may legally do so, the Company shall redeem the outstanding Preferred Stock after the fifth anniversary of the initial issuance of Preferred Stock. Such redemption shall be at a price of $4.008 per share plus accrued and unpaid dividends. If the holders of Preferred Stock shall not have elected to have the Company redeem the Preferred Stock at or after the fifth anniversary of the date of issuance, the Company shall have the option to redeem the Preferred Stock on the same terms as the optional redemption by the holders of Preferred Stock.

 

Registration Rights

Pursuant to the Purchase Agreement, within 55 days following the initial closing, the Company agreed to use its best efforts to prepare and file a registration statement on Form S-3 (the “Registration Statement”) for the resale of the shares of common stock issuable to the purchasers upon conversion of the Preferred Stock and exercise of the Warrants (the “Shares”), and to use its commercially reasonable efforts to cause the Registration Statement to become effective within 105 days after the initial closing.    In addition, in the event that the Company fails to cause the Registration Statement to be timely filed, timely declared effective, or to be kept effective (other than pursuant to the permissible suspension periods), the Company is obligated to pay to the holders of Preferred Stock as liquidated damages the amount of 1% per month of the aggregate purchase price for the shares remaining to be sold pursuant to the Registration Statement.

 

The Company caused the Registration Statement covering the shares of common stock issuable upon conversion of the Series A Preferred, the shares of common stock issuable upon exercise of the Warrants sold pursuant to the Purchase Agreement and other shares of common stock held by such stockholders to be declared effective on October 31, 2002. The holders of the Preferred Stock waived the right to receive liquidated damages resulting from the delayed date of effectiveness through November 30, 2002.

 

11

 

The Company has not filed a Registration Statement covering the shares of Series B preferred stock to be issued as a dividend with respect to the Series A Preferred Stock, and therefore, the holders of Preferred Stock accrued additional liquidated damages following November 30, 2002.  In February 2003, the holders of the Preferred Stock waived the right to receive the foregoing liquidated damages.

 

In May 2003, the holders of the Preferred Stock waived the requirement that the Company file a post-effective amendment on Form S-1 in the event that the Company is no longer eligible to use Form S-3.   The holders of Preferred Stock also waived the right to receive liquidated damages as a result of the failure to file a post-effective amendment on Form S-1.  Notwithstanding the foregoing, the holders of Preferred Stock are entitled to terminate the May 2003 waivers and, as a result, require the Company to file a post-effective amendment on Form S-1 within thirty (30) days from the Company’s receipt of such waiver termination and to cause such post-effective amendment to become effective within ninety (90) days from receipt of such waiver termination, or otherwise incur liquidated damages under the terms of the Purchase Agreement.   On June 10, 2003, the Registration Statement ceased to be effective.

 

Warrants

The Warrants are exercisable for a period of five years from the date of issuance at a per share price equal to $1.15, subject to proportional adjustments for stock splits, stock dividends, recapitalizations and the like. If not exercised after five years, the right to purchase the common stock will terminate. The Warrants contain a cashless exercise feature. The common stock issuable upon exercise of the Warrants are entitled to the benefits and subject to the terms of the Registration Rights described above.

 

Summary of Certain Preferred Stock and Warrant Accounting

Due to the nature of the redemption features of the Series A Preferred, the Company excluded the Series A Preferred from stockholders’ equity in its financial statements.

 

The amount representing the Series A Preferred with total gross proceeds of $7.5 million was discounted by a total of $2.1 million, including $1.3 million representing the value assigned to the Warrants, $585,000 representing the related beneficial conversion feature of the Series A Preferred, and $268,000 representing issuance costs. The $1.3 million value of the Warrants is subject to accretion over the 5-year redemption period. After reducing the proceeds by the value of the Warrants, the remaining proceeds are used to compute a discounted conversion price in accordance with EITF 00-27, “Application of EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments”. The discounted conversion price for each of the two closings is compared to the fair market value of the Company’s common stock on June 26, 2002 (the date of issuance of the Series A Preferred) and September 6, 2002 (the date of the stockholder vote approving the second closing) resulting in a total beneficial conversion feature of $585,000, which represents the difference between the fair market value of the Company’s common stock and the discounted conversion price. The beneficial conversion feature of $585,000 is subject to accretion over the 5-year redemption period. Issuance costs of $268,000 were accounted for as a discount on the redeemable Preferred Stock and are also subject to accretion over the 5-year redemption period.

 

Deemed dividends were recorded by the Company for approximately $96,000 and $3,000 for the three months ended June 30, 2003 and 2002, respectively, representing accretion of the discount resulting from the value of Warrants, the value of the beneficial conversion feature and the issuance costs. The aggregate deemed dividends recorded were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders.

 

Dividends on the Preferred Stock were approximately $145,000 and $3,000 for the three months ended June 30, 2003 and 2002, respectively, calculated at the rate of 8% per annum. The dividends were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders.

 

NOTE 9. CONTINGENCIES

 

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. In the opinion of management, final judgments from such pending claims, charges, and litigation, if any, against the Company, would not have a material adverse effect on its financial position, result of operations, or cash flows.

 

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NOTE 10. WARRANTIES

 

The Company generally provides a warranty for its software products and services to its customers for a period of 90 days and accounts for its warranties under the FASB’s Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“FAS 5”).  The Company’s software products’ media are generally warranted to be free of defects in materials and workmanship under normal use and the products are also generally warranted to substantially perform as described in certain Company documentation. The Company also provides for a limited performance warranty for its software products for a period of 90 days from the date of installation at the customer premises, if used as permitted under the signed agreement and in accordance with the Company documentation. The sole remedy that the Company provides is that it will, at its own expense, use commercially reasonable efforts to correct any reproducible error in the software during the warranty period, and if it determines that it is unable to correct the error, the Company will refund the license fee paid for the nonconforming component of the licensed software. The Company’s services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in a customer’s signed contract. In the event there is a failure of such warranties, the Company generally will correct or provide a reasonable work around or replacement product. The Company has not provided for a warranty accrual in all periods presented. To date, the Company’s product warranty expense has not been material.

 

The Company generally agrees to indemnify its customers against legal claims that the Company’s PKS software product infringes certain third-party intellectual property rights and accounts for its indemnification obligation under FAS 5. In the event of such a claim, the Company is obligated to pay those costs and damages finally awarded against customer in any such action that are specifically attributable to such claim, or those costs and damages agreed to in a monetary settlement of such action. In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, in general, to refund the cost of the software paid to date upon the customer’s return of the software product. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers. As such, the Company has not recorded a liability for infringement costs in all periods presented.

 

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ITEM 2.                                               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and the results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly report on Form 10-Q.  This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These forward-looking statements are usually accompanied by words like “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions. Our actual results could differ materially from those discussed by these forward-looking statements as a result of factors, which include, but are not limited to, those discussed under “Risk Factors” below.  We caution readers not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof.

 

Overview

 

Pharsight Corporation develops and markets products and services that help pharmaceutical and biotechnology companies improve their decision-making in drug development and commercialization. By integrating scientific, clinical and business decision criteria into a dynamic, model-based methodology, we help our customers optimize the value of their drug development programs and portfolios from discovery to post-launch marketing and any point in between.  We use computer-based drug-disease models, dynamic predictive market models, clinical trial simulation and advanced valuation models to create a continuously evolving view of our customers’ development efforts and product portfolios.

 

Critical Accounting Policies and Estimates

 

Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate estimates, including those related to revenue and restructuring. Estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

 

Revenue Recognition

 

Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. We follow detailed revenue recognition guidelines, which are discussed below. We recognize revenue in accordance with GAAP rules that have been prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by interpretations of the rules and an understanding of industry practices, both of which are subject to change. Consequently, the revenue recognition accounting rules require management to make significant judgments.

 

We do not record revenue on sales to customers whose ability to pay is in doubt at the time of sale. Rather, we recognize revenue from these customers as cash is collected. The determination of a customer’s ability to pay requires significant judgment. In this regard, management considers the international region of the customer and the financial viability of the customer in assessing a customer’s ability to pay.

 

We generally do not consider revenue arrangements with extended payment terms to be fixed or determinable and, accordingly, we do not generally recognize revenue on the majority of these arrangements until the customer payment becomes due. The determination of whether extended payment terms are fixed or determinable requires management to exercise significant judgment, including assessing such factors as the past payment history with the individual customer and evaluating the risk of concessions over an extended payment period. The determinations that we make can materially impact the timing of recognition of revenues. Our normal payment terms currently range from “net 30 days” to “net 60 days,” which are not considered extended payment terms.

 

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Some of our PKS software arrangements include consulting implementation services. We defer revenue for consulting implementation services, along with the associated license revenue, until the services are completed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, we defer revenue until the uncertainty is sufficiently resolved.

 

Restructuring

 

During fiscal years 2003 and 2002, we recorded significant accruals in connection with our restructuring programs. These accruals include estimates pertaining to the ability to sub-lease a facility in Mountain View, California. The actual costs may differ from these estimates. These estimates will be reviewed and potentially revised on a quarterly basis and, to the extent that future vacancy rates and sublease rates vary adversely from those estimates, we may incur additional losses that are not included in the accrued facilities consolidation charge at June 30, 2003. Conversely, unanticipated improvements in vacancy rates or sublease rates, or termination settlements for less than our accrued amounts, may result in a reversal of a portion of the accrued balance and a benefit on our statement of operations in a future period. Such reversals would be reflected as a credit to restructuring charges.

 

Source of Revenue and Revenue Recognition

 

Our revenues are derived from two primary sources: initial and renewal fees for product licenses and scientific and training consulting services. Additionally, we had an insignificant amount of revenue from subscriptions to our information products in fiscal 2003.

 

Our revenue recognition policy is in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” or SOP 97-2, as amended by Statement of Position No. 98-4, “Deferral of the Effective Date of SOP 97-2, `Software Revenue Recognition,’ “ or SOP 98-4, and Statement of Position No. 98-9, “Modification of SOP No. 97-2 with Respect to Certain Transactions,” or SOP 98-9. For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. If any of these criteria are not met, we defer revenue recognition until such time as all of the criteria are met. We do not currently offer, have not offered in the past, and do not expect to offer in the future, extended payment term arrangements. If we do not consider collectibility to be probable, we recognize revenue when the fee is collected. No customer has the right of return.

 

We have contracts from which we receive solely license and renewal fees consist of one-year software licenses (initial and renewal fees) bundled with post contract support services, or PCS. We do not have vendor specific objective evidence to allocate the fee to the separate elements, as we do not sell PCS separately. We recognize each of the initial and renewal license fees ratably over the one-year period of the license during which the PCS is expected to be provided as required by paragraph 12 of SOP 97-2.

 

We do not present PCS revenue separately as we do not have vendor specific objective evidence of PCS, and we do not believe other allocation methodologies, namely allocation based on relative costs, provide a meaningful and supportable allocation between license and PCS revenues.

 

For arrangements consisting solely of services, we recognize revenue as services are performed. Arrangements for services may be charged at daily rates for different levels of consultants and out-of-pocket expenses or may be for a fixed fee. For fixed fee contracts with payments based on milestones or acceptance criteria, we recognize revenue as such milestones are achieved or upon acceptance, which approximates the level of services provided. For fixed fee arrangements at the end of each accounting period (i) we analyze the appropriateness of the daily rates charged based upon total fees to be charged and total hours to be incurred, and (ii) we determine if losses should be recognized.

 

We also enter into arrangements consisting of licenses, renewal fees and scientific consulting services. The scientific consulting services meet the criteria of paragraph 65 of SOP 97-2 for separate accounting. As the only undelivered elements are services and PCS, and the PCS term (expressed or implied) and the period over which we expect the services to be performed are the same period, we recognize revenue based on the lesser of actual services performed and licenses delivered or straight line over the period of the agreement. If the PCS term and the period over which we expect the services to be performed are not the same period, we recognize revenue based on the lesser of actual services performed and licenses delivered or straight line over the longer of the PCS term and the period over which we expect the services to be performed. Vendor specific objective evidence of fair value of scientific services for purposes of revenue recognition in these multiple element arrangements is based on daily rates for different levels of consultants and out-of-pocket expenses.

 

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We also have arrangements that consist of licenses, PCS, and implementation/installation services. For arrangements involving a significant amount of services related to installation and implementation of our software products, we recognize revenue for the entire arrangement fee ratably over the remaining period of the PCS term once the services are completed and accepted by the customer. We currently do not have vendor specific objective evidence for our PCS.

 

We recognize revenue from the subscription to information products over the contract period, provided we have evidence of an arrangement, the price of the subscription is fixed or determinable and payment is reasonably assured. The subscription fees have been included in license revenues.

 

We have one international distributor. There is no right of return or price protection for sales to the international distributor. Sales are made to the distributor using a sell-in model. Revenue from this distributor in fiscal 2003 was less than 2%. Revenues from this distributor for fiscal 2002 and 2001 were less than 1% of total revenues.

 

Results of Operations

 

All percentage calculations set forth in this section have been made using figures presented in the financial statements, and not from the rounded figures referred to in the text of this management discussion and analysis.

 

Three Months Ended June 30, 2003 and 2002

 

Revenues

 

Total revenues increased 8% to $3.7 million in the three months ended June 30, 2003, from $3.5 million in the three months ended June 30, 2002.  License and renewal revenues increased 6% to $1.6 million in the three months ended June 30, 2003, from $1.5 million in the three months ended June 30, 2002.  The increase was primarily due to revenue recognized on sales of both our Pharsightâ Knowledgebase Server^TM (PKS) and desktop software products.  The first quarter of fiscal 2004 reflects no revenue from information products, which were discontinued in fiscal 2003.  The increase in PKS product revenue relates to one sale that was previously deferred until deployment services were completed.  The increase in desktop software revenue was a result of increases in both the quantity of licenses and the average selling prices (ASP) for sales booked in the current and prior periods that were recognized during the first quarter of fiscal 2004.  The increased quantity of our desktop software products is primarily attributed to customer renewals of our WinNonlinâ Pro and higher-priced WinNonlinâ Enterprise products.  The increase in average selling prices of our desktop software products is primarily a result of price increases that took effect in July 2002 and February 2003.  License and renewal revenue as a percentage of total revenue was 43% for the first quarters of both fiscal 2004 and fiscal 2003.

 

Services revenues increased 9% to $2.1 million in the three months ended June 30, 2003, from $2.0 million in the three months ended June 30, 2002.  The increase was primarily driven by additional customers in the first quarter of fiscal 2004 compared to the same period of fiscal 2003, reflecting successful efforts to diversify our revenue base and expand acceptance of our methodologies.    Services revenues as a percentage of total revenues was 57% for the first quarter of fiscal 2004, unchanged from the same period of fiscal 2003.

 

Cost and Expenses

 

Cost of License and Renewal Revenues. Cost of license and renewal revenues consists of royalty expense and cost of materials for both initial licenses and product updates provided for in our annual license agreements, and support and product update costs.  Cost of license and renewal revenues decreased 39% to $110,000 in the three months ended June 30, 2003, from $179,000 in the three months ended June 30, 2002.  The decrease was due primarily to lower support costs resulting from our July 2002 and November 2002 restructuring actions, and decreased royalty costs as ownership of some technology previously licensed by us from a third party was transferred to us.  Cost of license and renewal revenues as a percentage of license and renewal revenues was 7% for the three months ended June 30, 2003, compared to 12% in the three months ended June 30, 2002.  The overall margin improvement in the first quarter of fiscal 2004 as compared to the same period in fiscal 2003 is due to:  the July 2002 and February 2003 price increases in our desktop software products; revenue growth in PKS, which carry lower royalties; and decreased royalty and support expenses in our desktop business, described above.

 

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Cost of Services Revenues.  Cost of services revenues consists of salary and related expenses associated with the delivery of consulting, training, and PKS software deployment projects.  Cost of services revenues increased 13% to $1.7 million in the three months ended June 30, 2003, from $1.5 million in the three months ended June 30, 2002.  The increase was due primarily to the creation of a PKS software deployment business in September 2002 in response to demand from several new PKS customers for software deployment services provided by Pharsight.   Cost of services as a percentage of services revenues was 81% for the three months ended June 30, 2003, compared to 78% in the same period in 2002.  The services margin decline in the first quarter of fiscal 2004 resulted from the addition of costs related to the ramp-up of the PKS deployment services area.  In the three months ended June 30, 2003, we recognized previously deferred deployment services expenses to match revenues on one PKS deployment completed during the first quarter of fiscal 2004.  Excluding revenue and expenses associated with the deployment business, cost of services as a percentage of services revenues decreased for the three months ended June 30, 2003 compared to the same period in 2002 due to higher services revenues, combined with consistent cost of services.

 

Research and Development.  Research and development expenses decreased 47% to $770,000 in the three months ended June 30, 2003, from $1.5 million in the three months ended June 30, 2002. The decrease resulted primarily from reduced headcount in the research and development organization as a result of our July 2002 and November 2002 restructuring actions.  Our restructuring actions primarily reduced resources in areas such as the management and the development of non-core product areas, such as our information products program.  Research and development expenses as a percentage of revenues were 21% for the three months ended June 30, 2003, compared to 42% in the comparable period in 2002.

 

Sales and Marketing.  Sales and marketing expenses decreased 32% to $1.1 million in the three months ended June 30, 2003, from $1.6 million in the three months ended June 30, 2002.  The decrease in sales and marketing expenses is related primarily to a decrease in the average number of personnel in direct sales, corporate marketing, and product marketing during the quarter, as well as a reduction in corporate marketing spending. Sales and marketing expenses as a percentage of total revenues declined to 30% for the three months ended June 30, 2003 from 47% in the same period in fiscal 2003.

 

General and Administrative.  General and administrative expenses decreased 20% to $1.3 million in the three months ended June 30, 2003, from $1.6 million in the three months ended June 30, 2002.   The decrease for the first quarter of fiscal 2003 resulted from reduced staff associated with the restructuring actions taken in July 2002 and November 2002, partially offset by higher outside professional fees.  General and administrative expenses as a percentage of total revenues were 34% for the three months ended June 30, 2003, compared to 45% in the quarter ended June 30, 2002

 

Deferred Stock Compensation. During the three months ended June 30, 2003 and 2002, we recorded amortization of deferred compensation of $67,000, and $457,000, respectively.  The deferred compensation expenses recorded in each period represent the difference between the exercise price of stock options granted and the then deemed fair value of our common stock.

 

Restructuring Charges. In fiscal 2003 and 2002, we implemented restructuring programs to better align operating expenses with anticipated revenues. During the third quarter of fiscal 2002, we recorded a $676,000 restructuring charge, which consisted of $402,000 in facility exit costs, $253,000 in employee severance costs and $21,000 in other exit costs. This restructuring program resulted in a reduction in force across all company functions of approximately 14% of our work force, or 20 employees, and was intended to reduce expenses by approximately $4.5 million on an annualized basis.

 

During the second quarter of fiscal 2003, we recorded a $324,000 restructuring charge, which consisted entirely of employee severance costs. This restructuring program resulted in a reduction in force across all company functions of 18 employees or approximately 15% and is intended to result in a reduction in annualized operating expenses of $2.5 to $3.0 million.

 

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During the third quarter of fiscal 2003, we recorded a $364,000 restructuring charge, which consisted of $293,000 in employee severance costs and $71,000 in facility exit costs. This restructuring plan reduced resources not integral to the development, marketing and deployment of our software products and consulting services. This includes a reduction in staff of 19 employees or approximately 20% of our work force, and is intended to result in a reduction in annualized operating expenses of $2.0 to $2.5 million, helping us move closer to our goal of long-term, sustainable profitability.

 

At June 30, 2003, we had $8,000 of remaining accrued restructuring costs related to monthly lease expenses for one facility that was exited in fiscal year 2002.  The monthly lease expenses for this facility will be paid out in the second quarter of fiscal 2004.  There are no other cash payments to be made related to these restructuring charges.  The three restructuring programs we implemented have reduced expenses by approximately $10 million per year.

 

Other Income (Expense).  Interest income and other, net, decreased to $1,000 in the three months ended June 30, 2003, from $15,000 in the three months ended June 30, 2002.  The combination of a lower average balance of cash and short-term investments, and significantly lower interest rates paid by financial institutions, resulted in lower interest income.  Interest expense decreased to $62,000 in the three months ended June 30, 2003, from $94,000 in the three months ended June 30, 2002.  The decrease was a result of interest paid on notes payable to Silicon Valley Bank, due to lower average borrowings and lower interest rates during the first three months of fiscal 2004, compared to the first three months of fiscal 2003.

 

Liquidity and Capital Resources

 

As of June 30, 2003, we had $8.9 million in cash and cash equivalents, a decrease of 18% from cash and cash equivalents of $10.9 million held as of March 31, 2003.  As of June 30, 2003, there was an aggregate of $3.6 million in borrowings outstanding under our borrowing arrangements and credit facilities, compared to $3.8 million in borrowings outstanding at March 31, 2003.  The net decrease in borrowings during the three-month period ended June 30, 2003, resulted from scheduled repayments of principal under our term loan with Silicon Valley Bank.

 

In June 2002 and September 2002, we sold an aggregate of 1,814,662 shares of Series A preferred stock and warrants to purchase 1,814,662 shares of our common stock to investors affiliated with The Sprout Group and Alloy Ventures.  Dr. Chambon, one of our directors, is affiliated with the Sprout Group, and two of our directors, Mr. Sanders and Dr. Kelly, are affiliated with Alloy Ventures.  Net proceeds from these transactions were approximately $7.2 million. The purchase price was arrived at through negotiations with the investors and was determined as the sum of $4.008 (four times the average closing price of our common stock over the five trading days prior to the initial closing (i.e., $1.002) for each share of Series A preferred stock), and $0.125 for each warrant to purchase one share of our common stock.  The Series A preferred stock is redeemable at any time after five years from issuance upon the affirmative vote of at least 75% of the holders of Preferred Stock.  The Series A preferred stock is redeemable at a price of $4.008 per share plus any unpaid dividends with respect to such share. Each share of Series A preferred stock is convertible into four shares of common stock at the election of such holder or upon the occurrence of certain other events. The Series A preferred stock is entitled to receive an annual dividend of 8% payable quarterly in cash or shares of Series B preferred stock, at the election of the holder of the Series A preferred stock.  The Series B preferred stock has identical rights, preferences and privileges to the Series A preferred stock except that the Series B preferred stock is not entitled to 8% dividends.  These quarterly dividends commenced in September 2002.  During the three months ended June 30, 2003, we paid $147,000 in cash dividends to the Series A preferred stockholders and we recorded an additional $84,000 in accrued dividends payable as of June 30, 2003.  The warrants are exercisable for a period of five years from issuance with an exercise price of $1.15.

 

Net cash used in operating activities for the three months ended June 30, 2003 was $1.3 million and primarily reflects our net loss for the period, with the remainder attributable to net changes in operating assets and liabilities.  These uses of cash were partially offset by $67,000 of non-cash charges related to deferred stock compensation and $275,000 of non-cash charges related to depreciation and amortization.

 

Net cash used in investing activities was $109,000 for the three months ended June 30, 2003, and was attributable to the purchase of fixed assets and the capitalization of certain expenses related to internal software systems.

 

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Net cash used in financing activities was $496,000 for the three months ended June 30, 2003. Cash used in financing activities were related to scheduled principal payments on capital leases and the term loan with Silicon Valley Bank, and dividends paid to preferred stockholders.

 

In May 2003, we extended our secured revolving credit facility agreement with Silicon Valley Bank for an additional year.  As of June 30, 2003, we had two revolving credit facilities in place, providing for up to $2.0 million in borrowings. The revolving credit facilities are comprised of $1.4 million of secured revolving credit against 80% of eligible domestic accounts receivable, and $600,000 of secured revolving credit against 90% of eligible foreign accounts receivable. The revolving credit facilities expire in May 2004.  As of June 30, 2003, we had $1.0 million borrowed from our revolving credit facilities.   In addition, we continue to have a secured term loan payable of $2.6 million outstanding to Silicon Valley Bank.  The secured term loan principal is payable over forty-eight months, with monthly repayments having commenced in July 2002.  Certain of our assets, excluding intellectual property, secure all three facilities.

 

The following financial covenants apply to the extended Silicon Valley Bank loan facilities: remaining months liquidity of at least six months (defined as cash used in operating activities for the most recent quarter multiplied by two); liquidity of at least two times the term loan advance; and cumulative fiscal year-to-date net loss within 20% of our plan, measured monthly.  We are in compliance with each of these covenants as of June 30, 2003.

 

The following table depicts our contractual obligations as of June 30, 2003:

 

 

 

Operating leases reported above include $8,000 in restructuring vacated facilities expenditures and do not reflect sublease income totaling $37,000 to be realized in less than one year.

 

We believe we have adequate cash to sustain operations through the next 12 months, and we are managing the business to achieve positive cash flow utilizing existing assets.  During fiscal 2003, our commitments and liabilities were significantly reduced via restructuring events.  In addition, we reduced ongoing operating expenses by reducing purchases of other services and making workforce reductions.  We are committed to the successful execution of our operating plan and will take further restructuring actions as necessary to ensure our cash resources are sufficient to fund our presently anticipated operating losses and working capital requirements at least through the next 12 months.

 

Our future liquidity and capital requirements will depend on numerous factors including our future revenues and expenses, growth or contraction of operations and general economic pressures.  We may need to raise additional funds through public or private financings or other sources to fund our operations.  We may not be able to obtain additional funds on commercially reasonable terms, or at all.  Failure to raise capital when needed could harm our business.  If we raise additional funds through the issuance of equity securities, these equity securities might have rights, preferences or privileges senior to our common stock and preferred stock.  In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict out ability to make capital expenditures and incur additional indebtedness.

 

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Recent Accounting Pronouncements

 

Revenue Arrangements with Multiple Deliverables

 

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Elements” (“EITF No. 00-21”) which addresses certain aspects of accounting for arrangements that include multiple products or services. Specifically, this issue addresses: (1) how to determine whether an arrangement that contains multiple products or services contains more than one unit of accounting, and (2) how the arrangement consideration should be measured and allocated. Accordingly, the adoption of EITF No. 00-21 may impact the timing of revenue recognition as well as the allocation between products and services. EITF No. 00-21 will be applicable for transactions entered into beginning July 1, 2003.  We do not believe that the adoption of EITF No. 00-21 will have a material impact on our results of operations or financial position.

 

Consolidation of Variable Interest Entities

 

In January 2003 the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”  (“FIN 46”). Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires that a VIE be consolidated by a company if that company is subject to a majority of the VIE’s risk of loss or entitled to receive a majority of the VIE’s residual returns or both. A company that consolidates a VIE is referred to as the primary beneficiary of that entity.  We have adopted the disclosure provisions and will adopt the consolidation requirements as of July 1, 2003.  We do not expect the adoption of the consolidation requirements of FIN 46 to have a material impact on its results of operations or financial position.

 

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

 

In June 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective as of July 1, 2003. We do not believe the adoption of this statement will have a material impact on our results of operations or financial position.

 

Accounting for Stock-Based Compensation-Transition and Disclosure

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“FAS 148”). FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to the FAS 123 fair value method of accounting for stock-based employee compensation. In addition, FAS 148 requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Accordingly we adopted the disclosure provisions of this statement in fiscal year 2003 and in our interim financial statements thereafter.  See Note 4 in the Notes to our Condensed Financial Statements for further information.

 

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RISK FACTORS

 

This offering involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition or operating results could be materially adversely affected. This could cause the trading price of our common stock to decline, and you may lose part or all of your investment.

 

Business Risks

 

Items That Affect Our Future Operations

 

We have a history of losses that we expect will continue, and we may not be able to generate sufficient revenues to achieve profitability.

 

We commenced our operations in April 1995 and have incurred net losses since that time. As of June 30, 2003, we had an accumulated deficit of $79.1 million. We expect to incur further losses as we continue to develop our business. Since the amounts we may determine to invest to grow our business are uncertain, we are unable to be certain when, if ever, we may become profitable. We have announced that we intend to achieve cash breakeven; however, this expectation is based on a number of assumptions, including some outside of our control, including the state of the overall economy and the demand for our products, and if these assumptions do not prove to be accurate then we may never generate sufficient revenues to achieve profitability. Furthermore, even if we do achieve breakeven profitability and positive operating cash flow, we may not be able to sustain or increase profitability or positive operating cash flow on a quarterly or annual basis. If our losses exceed the expectations of investors, the price of our common stock may decline.

 

We have a limited amount of capital resources and we may not be able to sustain or grow our business if we cannot achieve profitability or raise additional funds on a timely basis.

 

We are committed to the successful execution of our operating plan and will take further restructuring actions as necessary to ensure our cash resources are sufficient to fund our presently anticipated operating losses and working capital requirements at least through the next 12 months. However, even if we reach profitability, we may not be able to generate sufficient profits to grow our business.  As a result, we may need to raise additional funds through public or private financings or other sources to fund our operations.  We may not be able to obtain additional funds on commercially reasonable terms, or at all. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, these equity securities might have rights, preferences or privileges senior to our common stock and preferred stock. In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict our ability to make capital expenditures and incur additional indebtedness.

 

We have engaged in restructuring actions in order to reduce our operating expenses. These actions may not be sufficient to reduce our operating expenses to the level that we need to achieve, and so we may need to engage in additional restructuring actions.

 

In November 2001, July 2002 and November 2002, we announced that we were taking additional actions intended to reduce our expenses.  Our restructuring actions were designed to lower our cash used for operating expenses by reducing expenses for facilities, sales and marketing, hosting, professional services and marketing arrangements and significantly reducing our current employee and contractor staffing levels. While restructuring actions have reduced cash operating expenses, our ability to adequately reduce cash used in operations, and ultimately generate profitable results from operations, is dependent upon successful execution of our business plan, including obtaining new customers. During the year ended March 31, 2003, we used cash for operating activities of $8.3 million. We cannot assure you that we will be successful in implementing our new business plan or sufficiently reducing our operating expenses in the future. Our inability to generate adequate revenue growth and continue to develop successful product and services offerings could prevent us from successfully achieving breakeven operations and result in additional restructuring actions.

 

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Our quarterly operating results may fluctuate significantly and may not be predictive of future financial results.

 

We expect our quarterly operating results may fluctuate in the future, and may vary from investors’ expectations, depending on a number of factors described in this section entitled “Factors Affecting Operating Results under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report on Form 10-Q, including:

 

•                                          Variances in demand for our products and services;

 

•                                          Timing of the introduction of new products or services and enhancements of existing products or services;

 

•                                          Changes in research and development expenses;

 

•                                          Our ability to complete fixed-price service contracts without committing additional resources;

 

•                                          Changes in industry conditions affecting our customers; and

 

•                                          Our ability to realize operating efficiencies through restructuring or other actions .

 

As a result, quarterly comparisons may not indicate reliable trends of future performance.

 

We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue, we may not be able to reduce our spending in the short term in response. Any shortfall in revenue would have a direct impact on our results of operations.

 

In the past we have taken actions intended to reduce our expenses on an annualized basis.  Our cost-cutting actions leave us with less available capacity to deliver our products and services. If there is a significant increase in demand from our estimates, it will take us longer to react to satisfy this demand, which would limit our ability to grow our business and potentially become profitable.

 

Because our sales and implementation cycles are long and unpredictable, our revenues are difficult to predict and may not meet our expectations or those of our investors.

 

The lengths of our sales and implementation cycles are difficult to predict and depend on a number of factors, including the type of product or services being provided, the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales cycle is unpredictable and may take six months or more. Our implementation cycle is also difficult to predict and can be longer than one year. Each of these can result in delayed revenues, increased selling expenses and difficulty in matching revenues with expenses, which may contribute to fluctuations in our results of operations. A key element of our strategy is to market our product and service offerings to large organizations. These organizations can have elaborate decision-making processes and may require evaluation periods, which could extend the sales and implementation cycle. Moreover, we often must provide a significant level of education to our prospective customers regarding the use and benefit of our product and service offerings, which may cause additional delays during the evaluation and acceptance process. We therefore have difficulty forecasting the timing and recognition of revenues from sales of our product and service offerings.

 

Our revenue is concentrated in a few customers, and if we lose any of these customers our revenue may decrease substantially.

 

We receive a substantial majority of our revenue from a limited number of customers. In fiscal 2003, sales to our top two customers accounted for 28% of our revenue, and sales to our top five customers accounted for 50% of our revenue. In fiscal 2002, sales to our top two customers collectively accounted for 29% of our revenue and sales to our top five customers accounted for 49% of our revenue. We expect that a significant portion of our revenue will continue to depend on sales to a small number of customers. If we do not generate as much revenue from these major customers as we expect to, or if we lose any of them as customers, our total revenue may be significantly reduced.

 

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If we are unable to generate additional sales from existing customers and generate sales to new customers, we may not be able to generate sufficient revenues to become profitable.

 

Our success depends on our ability to develop our existing customer relationships and establish relationships with additional pharmaceutical and biotechnology companies. If we lose any significant relationships with existing customers or fail to establish additional relationships, we may not be able to execute our business plan and our business will suffer. Developing customer relationships with pharmaceutical companies can be difficult for a number of reasons. These companies are often very large organizations with complex decision-making processes that are difficult to change. In addition, because our products and services relate to the core technologies of these companies, these organizations are generally cautious about working with outside companies. Some potential customers may also resist working with us until our products and services have achieved more widespread market acceptance. Our existing customers could also reassess their commitment to us, not renew existing agreements or choose not to expand the scope of their relationship with us.

 

Our revenues and results of operations would be adversely affected if a customer cancels a contract for services with us.

 

Our services agreements can be canceled upon prior notice by our customers. Additionally, due to the nature of our services engagements, customers sometimes delay projects because of timing of the clinical trials and the need for data and information that prevent us from proceeding with our projects. These delays and contract cancellations cannot be predicted with accuracy and we cannot assure you that we will be able to replace any delayed or canceled contracts with the customer or other customers. If we are unable to replace those contracts, our revenues and results of operations would be adversely affected.

 

We may lose existing customers or be unable to attract new customers if we do not develop new products and services or if our offerings do not keep pace with technological changes.

 

The successful growth of our business depends on our ability to develop new products and services and incorporate new capabilities, including the expansion of our product to address a broader set of customer needs related to clinical development of drugs and thereby expand the number of its prospective users, on a timely basis. If we cannot adapt to changing technologies, emerging industry standards, new scientific developments and increasingly sophisticated customer needs, we may not achieve revenue growth and our products and services may become obsolete, and our business could suffer. We have suffered product delays in the past, resulting in lost product revenues. In addition, early releases of software often contain errors or defects. We cannot assure you that, despite our extensive testing, errors will not be found in our products before or after commercial release, which could result in product redevelopment costs and loss of, or delay in, market acceptance. Furthermore, a failure by us to introduce new products or services on schedule could harm our business prospects. Any delay or problems in the installation or implementation of new products or services may cause customers to forego purchases from us.

 

If the security of our customers’ data is compromised, we could be liable for damages and our reputation could be harmed.

 

As part of implementing our products and services, we inherently gain access to certain highly confidential proprietary customer information. It is critical that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite our implementation of a number of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. We do not have insurance to cover us for losses incurred in many of these events. If we fail to meet our customers’ security expectations, we could be liable for damages and our reputation could suffer.

 

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If we are unable to complete a project due to scientific limitations or otherwise meet our customers’ expectations, our reputation may be adversely affected and we may not be able to generate new business.

 

Because our projects may contain scientific risks, which are difficult to foresee, we cannot guarantee that we will always be able to complete them. Any failure to meet our customers’ expectations could harm our reputation and ability to generate new business. On a few occasions, we have encountered scientific limitations and been unable to complete a project. In each of these cases, we have been able to successfully renegotiate the terms of the project with the particular customer. We cannot assure you that we will be able to renegotiate our customer agreements if such circumstances occur in the future. Moreover, even if we complete a project, we may not meet our customers’ expectations regarding the quality of our products and services or the timeliness of our services.

 

If we are unable to hire additional specialized personnel, we will not be able to grow our business.

 

Growth in the demand for our products and services will require additional personnel, particularly qualified scientific and technical personnel. We currently have limited personnel and other resources to staff and complete projects. In addition, as we grow our business, we expect an increase in the number of complex projects and large deployments of our products and services, which require a significant amount of personnel for extended periods of time. However, there is currently a shortage of these personnel worldwide, and competition for these personnel from numerous companies and academic institutions may limit our ability to hire these persons on commercially reasonable terms. Staffing projects and deploying our products and services will also become more difficult as our operations and customers become more geographically diverse. If we are not able to adequately staff and complete our projects, we may lose customers and our reputation may be harmed. Any difficulties we may have in completing customer projects may impair our ability to grow our business.

 

If we lose key members of our management, scientific or development staff, or our scientific advisors, our reputation may be harmed and we may lose business.

 

We are highly dependent on the principal members of our management, scientific and development staff. Our reputation is also in part based on our association with key scientific advisors. The loss of any of these personnel might adversely impact our reputation in the market and harm our business. Failure to attract and retain key management, scientific and technical personnel could prevent us from achieving our strategy and developing our products and services.

 

Our business depends on our intellectual property rights, and if we are unable to adequately protect them, our competitive position will suffer.

 

Our intellectual property is important to our competitive position. We protect our proprietary information and technology through a combination of patent, trademark, trade secret and copyright law, confidentiality agreements and technical measures. We have filed thirteen patent applications, but do not currently have any patents issued. We cannot assure you that the steps we have taken will prevent misappropriation of our proprietary information and technology, nor can we guarantee that we will be successful in obtaining any patents or that the rights granted under such patents will provide a competitive advantage. Misappropriation of our intellectual property could harm our competitive position. We may also need to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. In addition, the laws of some foreign countries provide less protection of intellectual property rights than the laws of the United States and Europe. As a result, we may have an increasingly difficult time adequately protecting our intellectual property rights as our sales in foreign countries grow.

 

If we become subject to infringement claims by third parties, we could incur unanticipated expense and be prevented from providing our products and services.

 

We cannot assure you that infringement claims by third parties will not be asserted against us or, if asserted, will be unsuccessful. These claims, whether or not meritorious, could be expensive and divert management resources from operating our company. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could block our ability to provide products or services, unless we obtain a license to such technology. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all.

 

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International sales of our product account for a significant portion of our revenue; which exposes us to risks inherent in international operations.

 

We market and sell our products and services in the United States and internationally. International sales of our products and services accounted for approximately 23% of our total revenues for the year ending March 31, 2003. We have a total of 8 employees based outside the United States that market and sell our products and services in Europe.  Our existing marketing efforts into international markets may require significant management attention and financial resources. We cannot be certain that our existing international operations will produce desired levels of revenue. We currently have limited experience in developing localized versions of our products and services and marketing and distributing our products internationally. Our operations in the United States and Europe also expose us to the following general risks associated with international operations:

 

•                                          Disruptions to commercial activities or damage to our facilities as a result of political unrest, war, terrorism, labor strikes and work stoppages;

 

•                                          Difficulties and costs of staffing and managing foreign operations;

 

•                                          The impact of recessions in economies outside the United States;

 

•                                          Greater difficulty in accounts receivable collection and longer collection periods;

 

•                                          Potential adverse tax consequences, including higher tax rates generally in Europe;

 

•                                          Tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries;

 

•                                          Unexpected changes in regulatory requirements of foreign countries, especially those with respect to software, pharmaceutical and biotechnology companies; and

 

•                                          Fluctuations in the value of currencies.

 

To the extent that such disruptions and costs interfere with our commercial activities, our results of operations could be harmed.

 

Risks Related To Our Industry

 

Our market may not develop as quickly as expected, and companies may enter our market, thereby increasing the amount of competition and impairing our business prospects.

 

Because our products and services are new and still evolving, there is significant uncertainty and risk as to the demand for, and market acceptance of, these products and services. As a result, we are not able to predict the size and growth rate of our market with any certainty. In addition, other companies, including potential strategic partners, may enter our market. Our existing customers may also elect to terminate our services and internally develop products and services similar to ours. If our market fails to develop, grow more slowly than expected or become saturated with competitors, our business prospects will be impaired.

 

Government regulation of the pharmaceutical industry may restrict our operations or the operations of our customers and, therefore, adversely affect our business.

 

The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of some of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. The regulatory agencies could enact new regulations or amend existing regulations with regard to these or other products that could restrict the use of our products or the business of our customers, which could harm our business.

 

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Consolidation in the pharmaceutical industry could cause disruptions of our customer relationships and interfere with our ability to enter into new customer relationships.

 

In recent years, the worldwide pharmaceutical industry has undergone substantial consolidation. If any of our customers consolidate with another business, they may delay or cancel projects, lay off personnel or reduce spending, any of which could cause our revenues to decrease. In addition, our ability to complete sales or implementation cycles may be impaired as these organizations undergo internal restructuring.

 

Reduction in the research and development budgets of our customers may impact our sales.

 

Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to changes in available resources, spending priorities, internal budgetary policies and the availability of grants from government agencies. Our business could be harmed by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.

 

Risks Related to Our Stock

 

Our common stock only trades on the Over the Counter bulletin board system, and has experienced depressed trading volumes and stock price since it began to be traded there.

 

On November 8, 2002 our stock was removed from trading on the Nasdaq National Market as a result of failure to meet the continuing listing requirements.  As a result, our common stock is quoted only on the over-the-counter bulletin board.  Consequently, our common stock does not experience large trading volumes, and has traded under $1.00 per share since it was delisted in November 2002.

 

In addition, our delisting from the Nasdaq National Market has caused the loss of our exemption from the provisions of Section 2115 of the California Corporations Code which imposes particular aspects of California corporate law on certain non-California corporations operating within California. As a result, (i) our Board of Directors will no longer be classified and our stockholders will elect all of our directors at each annual meeting, (ii) our stockholders will be entitled to cumulative voting, and (iii) we will be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters’ rights in connection with certain strategic transactions.

 

The public market for our common stock may be volatile.

 

The market price of our common stock has been, and we expect it to continue to be, highly volatile and to fluctuate significantly in response to various factors, including:

 

•                                          Actual or anticipated variations in our quarterly operating results;

 

•                                          Announcements of technological innovations or new services or products by us or our competitors;

 

•                                          Timeliness of our introductions of new products;

 

•                                          Changes in financial estimates by securities analysts;

 

•                                          Changes in the conditions and trends in the pharmaceutical market; and

 

•                                          We have experienced very low trading volume in our stock, and so small purchases and sales can have a significant effect on our stock price.

 

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In addition, the stock markets have experienced extreme price and volume fluctuations, particularly in the past year, that have affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions, such as recessions and interest rate fluctuations, may also have an adverse effect on the market price of our common stock.

 

Because our executive officers and directors have substantial control of our voting stock, takeovers not supported by them will be more difficult, possibly preventing you from obtaining optimal share price.

 

The control of a significant amount of our stock by insiders could adversely affect the market price of our common stock. Entities affiliated with three of our directors beneficially own or control a majority of the outstanding common stock, calculated on an as-if-converted basis, as of June 30, 2003. If these directors choose to act or vote together, they will have the power to control all matters requiring the approval of our stockholders, including the election of directors and the approval of significant corporate transactions. Without the consent of these stockholders, we could be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock.

 

ITEM 3.                                                     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have considered the provisions of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments".  We have no holdings of derivative financial or commodity-based instruments at March 31, 2003.

 

A review of our other financial instruments and risk exposures at that date revealed that we have exposure to interest rate and foreign currency exchange rate risks.  At March 31, 2003, we performed sensitivity analyses to assess the potential effect of these risks and concluded that near-term changes in interest rates and foreign currency exchange rates would not materially affect our financial position, results of operations or cash flows.

 

We have operated primarily in the United States and all funding activities and sales have been denominated in U.S. dollars.  Accordingly, we have no material exposure to foreign currency rate fluctuations.

 

Our interest income is sensitive to changes in the general level of United States interest rates.  Due to the nature of our short-term investments, consistent with our belief as of March 31, 2002, we believe that there is no material market risk exposure.  As of March 31, 2003, our cash, cash equivalents and short-term investments consisted primarily of demand deposits and money market funds.

 

Our market and currency risk disclosures for the three month period ended June 30, 2003 have not changed significantly from those stated above.

 

ITEM 4.                                                     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.  Subject to the limitations described below, our management, with the participation of our Chief Executive Officer, Shawn O’Connor, and our Chief Financial Officer, Charles Faas, has concluded that our disclosure controls and procedures were effective as of June 30, 2003.

 

Changes in Internal Control Over Financial Reporting.  There was no change in our internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Disclosure Controls and Procedures.    Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and procedures will necessarily prevent all error and all fraud. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Any control system will reflect inevitable limitations, such as resource constraints, a cost-benefit analysis based on the level of benefit of additional controls relative to their costs, assumptions about the likelihood of future events and human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of June 30, 2003, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure controls and procedures were met.

 

PART II.                                                OTHER INFORMATION

 

ITEM 1.                                                     LEGAL PROCEEDINGS

 

Not Applicable.

 

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ITEM 2.                                                     CHANGES IN SECURITIES AND USE OF PROCEEDS

 

Reference is made to that certain Preferred Stock and Warrant Purchase Agreement dated June 25, 2002, by and among the Company and certain entities affiliated with Alloy Ventures, Inc. and the Sprout Group (the “Purchase Agreement”), pursuant to which the Company issued and sold shares of Series A Preferred Stock and warrants to purchase shares of common stock.   Pursuant to the terms of the Purchase Agreement, the Company is obligated to maintain an effective registration statement covering the resale of the shares of common stock issuable to the purchasers upon conversion of the Preferred Stock and the exercise of the warrants.  In the event that the Company fails to keep the registration statement effective (other than pursuant to the permissible suspension periods), the Company is obligated to pay to the holders of Preferred Stock as liquidated damages, the amount of 1% per month of the aggregate purchase price for the shares remaining to be sold pursuant to the Registration Statement.

 

In May 2003, the holders of the Preferred Stock waived the requirement that the Company file a post-effective amendment on Form S-1 in the event that the Company is no longer eligible to use a registration statement on Form S-3.  The holders of Preferred Stock also waived the right to receive liquidated damages as a result of the failure to file a post-effective amendment on Form S-1.  Notwithstanding the foregoing, the holders of Preferred Stock are entitled to terminate the May 2003 waivers and, as a result, require the Company to file a post-effective amendment on Form S-1 within thirty (30) days from the Company’s receipt of such waiver termination, and to cause such post-effective amendment to become effective within ninety (90) days from receipt of such waiver termination, or otherwise incur liquidated damages under the terms of the Purchase Agreement.   On June 10, 2003, the Registration Statement ceased to be effective.

 

ITEM 3.                                                     DEFAULT UPON SENIOR SECURITIES

 

Not Applicable.

 

ITEM 4.                                                     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not Applicable.

 

ITEM 5.                                                     OTHER INFORMATION

 

In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the “Act”), Pharsight Corporation is required to disclose the non-audit services approved by its Audit Committee to be performed by Ernst & Young LLP, its external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company.  The only non-audit services approved by Pharsight’s Audit Committee to be performed by Ernst & Young LLP are services rendered in connection with tax compliance.  Fees for such services are expected to be less than $40,000.

 

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ITEM 6.                                                     EXHIBITS AND REPORTS ON FORM 8-K

 

(a)  EXHIBITS.

 

The following exhibits are filed with this report:

 

Exhibit Number		Description of Document
3.2(1)		Amended and Restated Certificate of Incorporation of Pharsight.
3.3(2)		Bylaws of Pharsight.
3.4(1)		Certificate of Designation of Series A and Series B Convertible Preferred Stock of Pharsight Corporation.
4.1		Reference is made to Exhibits 3.2, 3.3, and 3.4.
4.2(2)		Amended and Restated Investors’ Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto.
10.50		Employment Letter, dated June 16, 2003 between Company and Mark Robillard.
10.51		Employment Letter, dated June 16, 2003 between Company and Mona Cross Sowiski.
10.52		Additional Stock Grant Letter, dated June 16, 2003 between Company and Charles Faas.
10.53		Additional Stock Grant Letter, dated June 16, 2003 between Company and Shawn O’Connor.
10.54		Pharsight Corporation Amended and Restated 2000 Equity Incentive Plan, as amended.
10.55		Pharsight Corporation Amended and Restated 2000 Employee Stock Purchase Plan, as amended.
31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1*		Certification required by Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

 

(1)          Filed as the like-numbered exhibit to the Registrant’s Annual Report on Form 10-K (Commission No. 000-31253) for the fiscal year ended March 31, 2002, and incorporated herein by reference.

 

(2)          Filed as the like-numbered exhibit to our Registration Statement on Form S-1 (Registration No. 333-34896), originally filed on April 17, 2000, as amended, and incorporated herein by reference.

 

*                                         The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

(b)  REPORTS ON FORM 8-K.

 

On April 29, 2003, the Company filed a Current Report on Form 8-K under “Item 5. Other Events and Required FD Disclosure” announcing that the Company issued a press release on April 29, 2003 regarding its financial results for the fiscal year ended March 31, 2003.

 

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SIGNATURE

 

 

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.

 

 

	PHARSIGHT CORPORATION
Date:  August 12, 2003	By:	/s/ Charles K. Faas
		Charles K. Faas
		Chief Financial Officer
		(Duly Authorized Officer)

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Document
3.2(1)		Amended and Restated Certificate of Incorporation of Pharsight.
3.3(2)		Bylaws of Pharsight.
3.4(1)		Certificate of Designation of Series A and Series B Convertible Preferred Stock of Pharsight Corporation.
4.1		Reference is made to Exhibits 3.2, 3.3, and 3.4.
4.2(2)		Amended and Restated Investors’ Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto.
10.50		Employment Letter, dated June 16, 2003 between Company and Mark Robillard.
10.51		Employment Letter, dated June 16, 2003 between Company and Mona Cross Sowiski.
10.52		Additional Stock Grant Letter, dated June 16, 2003 between Company and Charles Faas.
10.53		Additional Stock Grant Letter, dated June 16, 2003 between Company and Shawn O’Connor.
10.54		Pharsight Corporation Amended and Restated 2000 Equity Incentive Plan, as amended.
10.55		Pharsight Corporation Amended and Restated 2000 Employee Stock Purchase Plan, as amended.
31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1*		Certification required by Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

 

(1)                                  Filed as the like-numbered exhibit to the Registrant’s Annual Report on Form 10-K (Commission No. 000-31253) for the fiscal year ended March 31, 2002, and incorporated herein by reference.

 

(2)                                  Filed as the like-numbered exhibit to our Registration Statement on Form S-1 (Registration No. 333-34896), originally filed on April 17, 2000, as amended, and incorporated herein by reference.

 

*                                         The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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