PHARSIGHT CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2004

¨	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)

Delaware

77-0401273

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

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 x NO ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The number of shares of Registrant’s common stock outstanding as of August 6, 2004: 19,096,957

PHARSIGHT CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)

	Condensed Balance Sheets — June 30, 2004 and March 31, 2004	3

	Condensed Statements of Operations—Three Months Ended June 30, 2004 and 2003	4

	Condensed Statements of Cash Flows — Three Months Ended June 30, 2004 and 2003	5

	Notes to Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	31

Item 3.	Defaults upon Senior Securities	31

Item 4.	Submission of Matters to a Vote of Security Holders	31

Item 5.	Other Information	31

Item 6.	Exhibits and Reports on Form 8-K	31

	Signature	32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PHARSIGHT CORPORATION

CONDENSED BALANCE SHEETS

(In thousands, except share and per share amounts)


	June 30, 2004			March 31, 2004*
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	8,463		$	10,027
Accounts receivable, net of allowance for doubtful accounts of $14 at June 30, 2004 and March 31, 2004		4,376			3,770
Unbilled accounts receivable		55			50
Prepaids and other current assets		543			670

Total current assets		13,437			14,517

Property and equipment, net		380			495
Other assets		282			282

Total assets	$	14,099		$	15,294

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	493		$	407
Accrued expenses		304			522
Accrued compensation		1,160			1,589
Deferred revenue		7,905			7,987
Current portion of notes payable		1,875			1,875
Capital lease obligations		37			55

Total current liabilities		11,774			12,435

Deferred revenue, long-term portion		180			516
Notes payable, less current portion		875			1,094

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, 2004 and March 31, 2004
Issued and outstanding shares - 1,869,085 and 1,850,943 at June 30, 2004 and March 31, 2004, respectively (1,814,662 designated as Series A and 54,423 and 36,281 designated as Series B at June 30, 2004 and March 31, 2004, respectively) Aggregate redemption and liquidation value - $7,491		6,266			6,164

Commitments and contingencies

Stockholders’ deficit:
Preferred stock, $0.001 par value:
Authorized shares - 1,800,000 at June 30, 2004 and March 31, 2004
Issued and outstanding shares - none at June 30, 2004 and March 31, 2004
Common stock, $0.001 par value:
Authorized shares - 120,000,000 at June 30, 2004 and March 31, 2004
Issued and outstanding shares - 19,058,453 at June 30, 2004 and
March 31, 2004, respectively		19			19
Additional paid-in capital		74,609			74,784
Accumulated deficit		(79,624	)		(79,718	)

Total stockholders’ deficit		(4,996	)		(4,915	)

Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	14,099		$	15,294

*	Derived from the Company’s audited financial statements as of March 31, 2004.

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

PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,
	2004			2003
Revenues:
License and renewal	$	2,119		$	1,589
Services		2,915			2,138

Total revenues		5,034			3,727

Cost of revenues:		93			110
License and renewal		1,751			1,728

Services		1,844			1,838
Total cost of revenues

Gross margin		3,190			1,889

Operating expenses:
Research and development		710			770
Sales and marketing		1,092			1,111
General and administrative		1,254			1,263
Amortization of deferred stock compensation (1)		—			67

Total operating expenses		3,056			3,211

Income (loss) from operations		134			(1,322	)

Other income (expense):
Interest expense		(42	)		(62	)
Interest income		10			18
Other expense		(4	)		(12	)

Total other income (expense)		(36	)		(56	)

Income (loss) before income taxes		98			(1,378	)

Provision for income taxes		(4	)		(5	)

Net income (loss)		94			(1,383	)

Preferred stock dividends		(175	)		(145	)

Deemed dividend to preferred stockholders		—			(96	)

Net loss attributable to common stockholders	$	(81	)	$	(1,624	)

Basic and diluted net loss per share attributable to common stockholders	$	(0.00	)	$	(0.09	)

Shares used to compute net loss per share attributable to common stockholders		19,058			19,046

(1)	The following table shows the amount of amortization of deferred stock compensation excluded from cost of revenues and certain operating expenses in the Statements of Operations:


	Three Months Ended June 30,
	2004		2003
License and renewal	$	—	$	10
Services		—		1
Research and development		—		6
Sales and marketing		—		31
General and administrative		—		19

	$	—	$	67

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

PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended June 30,
	2004			2003
Cash Flows From Operating Activities:
Net income (loss)	$	94		$	(1,383	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of deferred stock compensation		—			67
Depreciation and amortization		125			275
Changes in assets and liabilities:
Accounts receivable, net		(606	)		(668	)
Unbilled accounts receivable		(5	)		(220	)
Prepaids and other assets		127			(51	)
Accounts payable		86			62
Accrued expenses		(218	)		(326	)
Accrued compensation		(429	)		165
Deferred revenue		(418	)		740

Net cash used in operating activities		(1,244	)		(1,339	)

Cash Flows From Investing Activities:
Purchases of property and equipment		(10	)		(109	)

Net cash used in investing activities		(10	)		(109	)

Cash Flows From Financing Activities:
Principal payments on notes payable		(219	)		(219	)
Principal payments on capital lease obligations		(18	)		(130	)
Dividends paid to preferred stockholders		(73	)		(147	)

Net cash used in financing activities		(310	)		(496	)

Net decrease in cash and cash equivalents		(1,564	)		(1,944	)
Cash and cash equivalents at the beginning of period		10,027			10,875

Cash and cash equivalents at the end of period	$	8,463		$	8,931

Supplemental disclosures of non-cash investing and financing activities:
Amortization of deemed dividend to preferred stockholders	$	—		$	96

Issuance of dividend to preferred stockholders in form of stock	$	102		$	—

Accrued preferred stock dividend	$	48		$	145

Reversal of deferred stock compensation upon cancellation of unvested options	$	—		$	151

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

PHARSIGHT CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying financial statements of Pharsight Corporation (“Pharsight,” “we,” “our,” “us”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

The interim financial statements are unaudited but reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. The results of operations for the three months ended June 30, 2004 are not necessarily indicative of results to be expected for the fiscal year ending March 31, 2005, or any other period. Certain prior period amounts have been reclassified in greater detail to conform to the current period classification. The reclassification had no impact on our historical results of operations or financial position.

We operate in two reportable business segments: Software Products and Strategic Consulting. See Note 9.

2. REVENUE RECOGNITION

Our revenues are derived from two primary sources: (1) initial and renewal fees for term-based product licenses, and (2) services related to scientific and training consulting and software deployment.

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, collection of the receivable is reasonably assured, and no significant post-delivery obligations remain unfulfilled. 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

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