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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended SEPTEMBER 30, 2002

or

For the transition period                              to                             .

Commission file number 000-31253

PHARSIGHT CORPORATION
(Exact name of Registrant as specified in its charter)

800 WEST EL CAMINO REAL, MOUNTAIN VIEW, CA 94040
(Address of principal executive offices, including zip code)

(650) 314-3800
(Registrant's telephone number, including area code)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES ý    NO o

        As of October 31, 2002, there were 18,836,804 outstanding shares of the Registrant's common stock, $0.001 par value.

PHARSIGHT CORPORATION

FORM 10-Q

INDEX

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PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

PHARSIGHT CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except par value amounts)

(1)

Derived from the Company's audited financial statements as of March 31, 2002.

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

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

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

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

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

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

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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, 2002.

        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 and six months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2003, 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.    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 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.

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

NOTE 3.    COMPREHENSIVE INCOME (LOSS)

        The Company's component of comprehensive income (loss) consists solely of unrealized gain and losses on available for sale investments. The unrealized gains and losses have been insignificant for the three and six months ended September 30, 2002 and 2001, and consequently, net loss approximates total comprehensive net loss.

NOTE 4.    RESTRUCTURING CHARGE

        During the three months ended December 31, 2001, the Company implemented a restructuring program to better align operating expenses with anticipated revenues ("December 2001 Restructuring Plan"). The December 2001 Restructuring Plan reduced resources in non-core areas, such as the Company's Information Products, resulting in a reduction of force across all company functions of approximately 14%, or 20 employees. 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. As of December 31, 2001, all 20 employees had been terminated as a result of the program. At September 30, 2002, the Company had $120,000 of accrued restructuring costs primarily related to monthly lease expenses for two facilities that were exited in fiscal year 2002.

        During the three months ended September 30, 2002, the Company announced that it was taking additional actions intended to help further reduce operating expenses across all non-core functional areas ("July 2002 Restructuring Plan"). The July 2002 Restructuring Plan included a total reduction of 18 staff. As of September 30, 2002, all restructured staff have been notified of termination and all but three of these staff have been terminated. The three remaining staff are scheduled for termination in December of 2002 and March of 2003. The Company has recorded $324,000 in restructuring charges during the quarter ended September 30, 2002 representing employee severance costs. At September 30, 2002, the Company had $157,000 of remaining accrued restructuring costs related to employee severance costs to be paid out in the third and fourth quarter of fiscal 2003.

        The restructuring actions taken in December 2001 and July 2002 did not impact the resources assigned to develop and support current and future Pharsight® Knowledgebase Server™, WinNonlin®, WinNonMix® and Trial Simulator™ product families.

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        The following tables depict the restructuring charges during the six months ended September 30, 2002 (in thousands):

NOTE 5.    NOTES PAYABLE

        In June 2002, the Company extended its secured revolving credit facility agreement with Silicon Valley Bank for an additional year. As of September 30, 2002, the Company had up to $7.5 million available under three different facilities. The credit facilities include $2.5 million of secured revolving credit against 80% of eligible domestic accounts receivable, $1.5 million of secured revolving credit against 90% of eligible foreign accounts receivable and $3.5 million in a secured term loan. The revolving credit facilities expire in June 2003. The secured term loan principal is payable over forty-eight months, beginning in July 2002. As of September 30, 2002, the Company had $1.0 million and $3.3 million borrowed from its revolving credit facilities and its secured term loan, respectively. All three facilities are secured by certain of the Company's assets, excluding intellectual property.

        The Company is required to meet certain financial covenants on a quarterly basis including: quick ratio greater than 1.0, remaining months liquidity of at least 6 months, liquidity of at least two times the secured term loan advance, and annual net losses within 20% of the Company's plan, measured at specific quarterly amounts. The Company is in compliance with each of these covenants as of September 30, 2002.

NOTE 6.    REDEEMABLE CONVERTIBLE PREFERRED STOCK

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. The sale and issuance of the Units under the Purchase Agreement 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").

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.

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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 or sale of substantially all of the assets of the Company in which the stockholders of the Company do not own a majority of the outstanding shares of the surviving corporation 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 will 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 use its commercially reasonable efforts to cause the Registration Statement to become effective within 105 days after the closing of the sale of the Initial Units.

        In the event that the Company shall fail to cause the Registration Statement to be timely filed, timely declared effective, or to be kept effective (other than pursuant to the permissible suspension

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periods), the Company shall pay 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 to be declared effective on November 1, 2002, and the holders of the Preferred Stock waived the right to receive liquidated damages resulting from the delayed date of effectiveness.

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 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 $239,000 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 stock) and September 6, 2002 (the date of the shareholder 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 $239,000 were accounted for as a discount on the redeemable preferred stock and are also accreted over the 5-year redemption period.

        The net discounted value for the Series A Preferred of $5.5 million is recorded as a long term liability as of September 30, 2002 with the corresponding aggregate value of the warrants and the beneficial conversion feature of $1.9 million ($1.3 million plus $585,000) recorded as additional-paid-in-capital within equity.

        Deemed dividends were recorded by the Company for the three and six months ended September 30, 2002 totaling approximately $55,000 and $58,000 respectively in aggregate 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 attributable to common stockholders.

        Dividends on the Preferred Stock, calculated at the rate of 8% per annum, were approximately $81,000 for the three months ended September 30, 2002 and $84,000 for the six months ended September 30, 2002. The dividends were charged against additional-paid-in-capital and included in the calculation of net loss attributable to common stockholders.

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NOTE 7.    CONTINGENCIES

        From time to time, the Company may become involved in claims, legal proceedings, or state or federal government agency proceedings that arise in the ordinary course of its business. The Company is currently subject to one such agency proceeding. The Company does not believe that the resolution of this agency proceeding will have a material adverse effect on its financial position and results of operations.

NOTE 8.    RECENT ACCOUNTING PRONOUNCEMENTS

Accounting for Business Combinations, Goodwill and Other Intangible Assets

        In June 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead an entity must perform an assessment of whether these assets are impaired as of the date of adoption and test for impairment at least annually in accordance with the provisions of Statement No. 142. The standards also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed annually for impairment. The Company adopted the provisions of Statement No. 141 on July 1, 2001 and Statement No. 142 on April 1, 2002. The adoption of Statement No. 141 or 142 did not have a significant impact on the Company's financial position and results of operations.

        The following tables present net loss and loss per share attributable to common stockholders as reported and adjusted to exclude the amortization of goodwill and assembled workforce as if these items had not been amortized (in thousands except per share data).