<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended June 30, 1996
Comission file number 1-9613
-------
Xytronyx, Inc.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3258753
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(State of incorporation) (I.R.S. Employer Identification No.)
6555 Nancy Ridge Drive, Suite 200, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
(619) 550-3900
----------------------------------------------------
(Registrant's Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
As of August 13, 1996, there were 8,119,779 shares of the registrant's Common
Stock, $.02 par value outstanding.
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months Ended June 30, 1996 and 1995
and from September 23, 1983 (Inception)
to June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets -
June 30, 1996 and March 31, 1996 . . . . . . . . . . . . . . . . 2
Consolidated Statements of Stockholders' Equity
Three Months Ended June 30, 1996 and 1995. . . . . . . . . . . . 3
Consolidated Statements of Cash Flows -
Three Months Ended June 30, 1996 and 1995
and from September 23, 1983 (Inception)
to June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 9
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 September 23, 1983
-------------------------- (inception) to
1996 1995 June 30, 1996
- ------------------------------------------------------------------------ ------------------
<S> <C> <C> <C>
REVENUES
Product sales $ 5,025 $ -- $ 1,854,771
License fees and royalties -- -- 480,000
Contract research 3,972 40,000 232,863
Marketing rights -- -- 1,306,500
Interest and other 15,835 54,901 1,526,632
- ------------------------------------------------------------------------ ------------------
Total revenues 24,832 94,901 5,400,766
- ------------------------------------------------------------------------ ------------------
COSTS AND EXPENSES
Cost of product sales 9,770 31,017 2,912,505
Product development 721,487 257,670 13,120,351
General and administrative 292,489 415,855 14,902,472
Business development
and marketing 58,092 94,416 3,325,775
Interest and other 2,389 3,895 492,620
- ------------------------------------------------------------------------ ------------------
Total costs and expenses 1,084,227 802,853 34,753,723
- ------------------------------------------------------------------------ ------------------
Net loss ($1,059,395) ($707,952) ($29,352,957)
- ------------------------------------------------------------------------ ------------------
Net loss per share
of common stock ($0.13) ($0.13)
- ------------------------------------------------------------------------
Weighted average
shares outstanding 8,083,378 5,263,029
- ------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 255,808 $ 409,651
Short-term investments 551,397 1,288,106
Accounts receivable 9,094 2,668
Inventory 36,481 40,907
Prepaid expenses 277,143 95,945
- -----------------------------------------------------------------------------------------------------
Total current assets 1,129,923 1,837,277
Property and equipment, net of accumulated depreciation 126,383 135,234
Patent costs, net of accumulated amortization 176,569 190,159
Other assets 11,798 11,798
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,444,673 $ 2,174,468
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 377,533 $ 214,310
Accrued expenses 303,256 378,927
Note payable (Note 4) 218,966 --
Current portion of capitalized leases 4,458 12,512
- -----------------------------------------------------------------------------------------------------
Total current liabilities 904,213 605,749
Other liabilities 16,556 20,670
STOCKHOLDERS' EQUITY:
Preferred stock, $25 par value, 300,000 shares authorized -- --
Common stock, $.02 par value, 30,000,000 shares authorized;
8,088,529 and 8,051,029 shares issued and outstanding at
June 30 and March 31, 1996, respectively 161,771 161,021
Capital in excess of par value 29,715,090 29,680,590
Deficit accumulated during the development stage (29,352,957) (28,293,562)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 523,904 1,548,049
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,444,673 $ 2,174,468
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Capital During the
------------------------ in Excess Development
Shares Par Value of Par Value Stage Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 5,263,029 $105,261 $26,816,207 ($25,037,659) $ 1,883,809
Net loss (707,952) (707,952)
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 5,263,029 $105,261 $26,816,207 ($25,745,611) $ 1,175,857
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 8,051,029 $161,021 $29,680,590 ($28,293,562) $ 1,548,049
EXERCISE OF WARRANTS 37,500 750 34,500 35,250
NET LOSS (1,059,395) (1,059,395)
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 8,088,529 $161,771 $29,715,090 ($29,352,957) $ 523,904
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, September 23, 1983
--------------------------- (inception) to
1996 1995 June 30, 1996
- ---------------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($1,059,395) ($707,952) ($29,352,957)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 30,547 30,437 1,504,560
Non-cash compensation expense upon issuance
of common stock options and common stock -- -- 475,296
Net book value of disposals -- 2,249 148,252
Option income from retirement of stock
or amounts previously advanced by customer -- -- (400,000)
Changes in assets and liabilities:
Accounts receivable (6,426) (37,513) (9,095)
Inventory 4,426 (12,176) (36,484)
Prepaid expenses and other assets (181,198) (336,274) (288,118)
Accounts payable 163,223 (143,093) 377,532
Accrued expenses (75,670) 107,670 159,234
Customer advances -- (30,888) 140,863
Deferred rent (2,976) (2,974) --
- ------------------------------------------------------------------------------------------------ ----------------
Net cash used by operating activities (1,127,469) (1,130,514) (27,280,917)
INVESTING ACTIVITIES
Purchases of short-term investments (256,116) -- (5,736,548)
Maturities of short-term investments 992,825 992,326 5,185,151
Capital expenditures (3,353) (1,744) (825,016)
Patent application costs (4,754) (12,800) (885,382)
Other -- -- (996)
- ------------------------------------------------------------------------------------------------ ----------------
Net cash provided by (used by) investing activities 728,602 977,782 (2,262,791)
FINANCING ACTIVITIES
Issuance of notes payable 218,966 325,426 1,878,367
Repayment of notes payable -- -- (1,440,657)
Repayment of capitalized lease obligations (9,192) (7,799) (184,174)
Long-term customer advances -- -- 100,000
Issuance of common and preferred stock 35,250 -- 29,383,480
Issuance of stock warrants -- -- 62,500
- ------------------------------------------------------------------------------------------------ ----------------
Net cash provided by financing activities 245,024 317,627 29,799,516
- ------------------------------------------------------------------------------------------------ ----------------
Net increase (decrease) in cash
and cash equivalents (153,843) 164,895 255,808
Cash and cash equivalents at beginning of period 409,651 827,752 --
- ------------------------------------------------------------------------------------------------ ----------------
Cash and cash equivalents at end of period $ 255,808 $ 992,647 $ 255,808
- ------------------------------------------------------------------------------------------------ ----------------
- ------------------------------------------------------------------------------------------------ ----------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Xytronyx, Inc.
and its wholly owned subsidiaries, Perio Test, Inc. and XYX Acquisition Corp.
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial
Accounting Standards Board Statement No. 7 ("FAS 7"). Among the disclosures
required by FAS 7 are that the Company's financial statements be identified
as those of a development stage company, and that the consolidated statements
of operations, stockholders' equity and cash flows disclose activity since
the date of the Company's inception.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amount and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms and covenants of its financing agreements and
business contracts, to obtain additional financing or refinancing as may be
required, and ultimately to attain successful operations. Management
anticipates that without significant revenues its current resources will
allow planned operations to continue through October 1996, and possibly
beyond that date. Unanticipated expenses, however, could shorten that
period. Accordingly, the Company will most probably require additional
financing from time-to-time until it begins to generate positive cash flow
from operations. There can be no assurance that the Company will be
successful in obtaining financing, or that it will attain positive cash flow
from operations.
In the opinion of the Company, the unaudited consolidated financial
statements contain all of the adjustments, consisting only of normal
recurring adjustments and accruals, necessary to present fairly the financial
position of the Company as of June 30, 1996 and March 31, 1996, and the
results of operations for the three months ended June 30, 1996 and 1995 and
from September 23, 1983 (inception) to June 30, 1996. The results of
operations for the three months ended June 30, 1996 are not necessarily
indicative of the results to be expected in subsequent periods or for the
year as a whole. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended March 31, 1996.
2. OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
On June 4, 1996 the Company entered into an agreement with Binary
Therapeutics, Inc. ("BTI") under which the Company was granted an option to
acquire BTI, a development stage company with certain technologies in the
area of Photodynamic Therapy ("PDT") for cancer. The agreement gives the
Company the right to acquire BTI at anytime prior to April 30, 1997 by a
merger of BTI into a wholly owned
5
<PAGE>
subsidiary of the Company. If the Company elects to exercise its option, the
agreement calls for the Company to issue common stock to the BTI stockholders
with an aggregate acquisition value of $6,000,000. The number of shares of
the Company's common stock to be issued will be determined based upon the
market value of the Company's common stock prior to the date of exercise,
although the value of the common stock cannot be less than $2.00 or more than
$6.00 per share.
Under the agreement, the Company will assist BTI during the option period in
preparing one or more PDT products for advancement into human clinical trials.
In order to exercise its rights to consummate the merger, the Company will
have to satisfy certain conditions, including funding up to $1,250,000 in
expenses budgeted to be incurred by BTI during the option period. These
expenses represent the majority of BTI's budgeted expenditures for the period
and are expected to be comprised primarily of product development costs. In
exchange for such funding BTI will issue convertible notes to the Company
which may be converted into BTI equity at the Company's option. The Company
has elected to record all advances to BTI as product development expense in
the period incurred due to uncertainties regarding the ultimate value to be
realized from the convertible notes. During the quarter ended June 30, 1996,
the Company advanced $201,298 to BTI and such advances are included in product
development expense for the quarter. In the event that the Company terminates
the agreement, the Company would remain obligated to continue funding of such
product development expenses incurred during the period ending 90 days from
such termination.
The agreement has been approved by a majority of the stockholders of BTI.
The Corporation's Common Stock is listed for quotation on AMEX, which
requires shareholder approval of the issuance of additional shares of Common
Stock or securities convertible into Common Stock if the issuance of such
securities (i) is in connection with the acquisition of a company and the
shares of Common Stock or securities convertible into Common Stock could
result in an increase in the number of outstanding shares of Common Stock of
20% or more, (ii) is in connection with the acquisition of a company where a
director, officer or substantial shareholder of the Corporation has a 5% or
greater interest in such company and the issuance of the securities could
result in an increase in outstanding Common Stock of 5% or more. Even if the
Company is not required to obtain such approval, the Company may elect to
obtain the approval of its stockholders prior to effecting the merger with
BTI.
3. LICENSE AGREEMENT WITH WOUND HEALING OF OKLAHOMA
On May 8, 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which it acquired an
exclusive world-wide license to a certain technology, Photodynamic
Immunotherapy-TM- ("PDIT-TM-") treatment for cancer. Under the agreement,
the Company granted WHO a ten-year warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.25 per share and must pay
a minimum royalty of $50,000 per year. During the quarter ended June 30, 1996
the Company recorded $25,000 in product development expense related to the
agreement.
4. NOTE PAYABLE
The note payable is an insurance premium finance agreement with principal,
and interest at an annual rate of 10.50%, payable in monthly installments
of $25,406 with the final payment due March 15, 1997.
6
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues aggregated $25,000 for the quarter ended June 30, 1996, a
$70,000 decrease from revenues of $95,000 recorded during the same period of
the prior year. Prior year revenues included approximately $31,000 in income
related to the termination of a marketing agreement. No such revenues were
earned in the current quarter.
Product development costs totaled $721,000 for the quarter, an increase of
$464,000 or 180% over the prior year costs of $258,000. The majority of the
increase resulted from the initiation of work on two projects in the cancer
therapy area, including: (i) $201,000 in funding of product development
expenses in accordance with the Agreement and Plan of Merger with Binary
Therapeutics, Inc. ("BTI"), the holder of certain technologies in the area of
Photodynamic Therapy ("PDT") for the treatment of cancer, and (ii) $98,000 in
payments related to the acquisition of the Photodynamic Immunotherapy-TM-
("PDIT-TM-") technology for the treatment of cancer and the initiation of a
related research agreement.
Business development costs for the current quarter totaled $58,000, a
decrease of $36,000, or 38%, from the same quarter of the prior year.
General and administrative expenses for the three month period ended June 30,
1996 decreased 30% to $292,000 from the same period of the prior year. Prior
year expenses included costs associated with the termination of certain
employment relationships.
Net loss for the quarter ended June 30, 1996 totaled $1,059,000, a 50%
increase over the prior year's first quarter loss of $708,000. This increase
is a result of the increase in product development efforts discussed above
offset by reductions in business development and general and administrative
expenses. Net loss per share of common stock for the quarter ended June 30,
1996 was $.13, and was equal to the first quarter of the prior year, despite
the increase in net loss, due to a 2,820,000 increase in the weighted average
number of shares outstanding.
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at June 30, 1996 totaled
$807,000, a $891,000, or 52%, decrease from the March 31, 1996 balance.
Working capital at June 30, 1996 decreased by 82% from March 31, 1996 to
$226,000. These decreases were primarily due to the net loss for the three
month period ending June 30, 1996 and other less significant changes in
certain balance sheet accounts since March 31, 1996. Prepaid expenses
increased by $181,000 as a result of the prepayment of annual insurance
premiums. Notes payable increased by approximately $219,000 as a result of
financing these insurance premiums. Accounts payable and accrued expenses
increased a net $87,000 for the three-month period. Stockholders equity
decreased by $1,024,000 as a result of the net loss for the period.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Since inception, the Company has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate that negative
cash flow from operations will continue for the foreseeable future, and that
outside sources of funding will continue to be required. Without significant
future revenues, the Company's financial resources are anticipated to be
adequate through October 1996, based on a continuation of the pattern of
expenses which have prevailed during Fiscal 1997. Unanticipated expenses or
working capital requirements could, however, shorten that period.
In March 1996 the Company completed a 12-month U.S. clinical trial of the
Periodontal Tissue Monitor ("PTM") at three universities. The Company has
compiled and analyzed the data generated from the clinical studies and is
preparing a Premarket Approval application ("PMA") for submission to the Food
and Drug Administration ("FDA"). The completion of the clinical studies will
result in the reduction or elimination of certain product development
expenses.
In May 1996 the Company entered into an agreement with Hawe-Neos Dental to
distribute the PTM in Europe. In January 1995 the Company entered into an
agreement with Shofu Dental Company for distribution of the PTM in Japan.
Shofu is currently conducting Japanese clinical trials of the PTM. The
Company is in the process of identifying marketing partners for the PTM for
the U.S. and other markets. In the event the Company begins selling material
quantities of the PTM, the Company may need additional working capital, and
additional personnel and space, both of which may cause an increase in the
net utilization of cash. However, there can be no assurance that FDA PMA
approval or any other required regulatory approvals will be forthcoming, that
the Company will complete any new marketing agreements, or that any of its
existing or future marketing partners will order the PTM products in
increased quantities.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which it acquired an
exclusive license to certain proprietary technology in the Photodynamic
Immunotherapy ("PDIT") treatment of cancer. The Company expects to fund
certain product development efforts associated with the commercialization of
the licensed technology, including the commencement of human clinical trials,
which will increase the Company's net utilization of cash. However, there
can be no assurance that FDA and other regulatory approval required to
commence such trials will be forthcoming.
In June 1996 the Company entered into an agreement which granted the Company
the option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately
held, development stage enterprise holding certain technologies for the
Photodynamic Therapy ("PDT") treatment of cancer. Under the agreement the
Company expects to fund certain product development expenses incurred by BTI,
which will increase the Company's net utilization of cash.
The Company continues to be engaged in efforts to obtain additional financing
and to seek strategic partners to aid in the development and marketing of its
products. The continued existence of the Company is dependent upon receiving
additional financing from time-to-time until it begins to generate positive
cash flow from operations. If and as orders for the Company's products are
placed in increasing quantities, the Company expects to seek equity and/or
debt financing as a function of availability and cost. No assurance can be
given that the Company will be successful in obtaining additional equity
and/or debt financing or locating new strategic partners, or that it will be
able to generate positive cash flow from operations.
8
<PAGE>
PART II-OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Date of Report Item Reported Financial Statements Filed
- --------------- ---------------- --------------------------
July 9, 1996 Item 5 - Other Events No
(news release announcing
approval of Agreement and
Plan of Merger by majority
of shareholders of Binary
Therapeutics, Inc.)
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.
Xytronyx, Inc.
Date: August 13, 1996 /s/ Dale A. Sander
-------------------------------
Dale A. Sander
Chief Financial Officer
(Principal Accounting Officer and Officer
duly authorized to sign this report on
behalf of the registrant)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE JUNE 30, 1996 INTERIM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 255,808
<SECURITIES> 551,397
<RECEIVABLES> 9,094
<ALLOWANCES> 0
<INVENTORY> 36,481
<CURRENT-ASSETS> 1,129,923
<PP&E> 804,779
<DEPRECIATION> 678,396
<TOTAL-ASSETS> 1,444,673
<CURRENT-LIABILITIES> 904,213
<BONDS> 16,556
0
0
<COMMON> 161,771
<OTHER-SE> 362,133
<TOTAL-LIABILITY-AND-EQUITY> 1,444,673
<SALES> 5,025
<TOTAL-REVENUES> 24,832
<CGS> 9,770
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 721,487
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 630
<INCOME-PRETAX> (1,059,395)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,059,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,059,395)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
