<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended December 31, 1996
Comission file number 1-9613
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Xytronyx, Inc.
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(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.)
6730 Mesa Ridge Rd., Suite 200, San Diego, CA 92121
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(Address of principal executive offices) (Zip Code)
(619) 550-3900
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(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
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As of February 13, 1997, there were 8,132,279 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
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995. . . . . . . . . . . . . . . . . . . . . . . . . 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and March 31, 1996. . . . . . . . . . . . . . 2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
December 31, 1996 and 1995 and from
September 23, 1983 (Inception) to
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Stockholders' Equity -
Nine Months Ended December 31, 1996 and 1995. . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1996 and 1995
and from September 23, 1983 (Inception) to
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . .12
PART II - OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . .15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .16
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q/A under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the "Notes to Consolidated Financial Statements", as well as
oral statements that may be made by the Company or by officers, directors or
employees of the Company acting on the Company's behalf, that are not historical
fact constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements involve
risks and uncertainties, including, but not limited to, the risk that the
Company may not be able to obtain additional financing, if necessary; the risk
that the Company may not be able to maintain its listing on the American Stock
Exchange; and the risk that the Company may not be able to continue the
necessary development of its operations on a profitable basis. In addition, the
Company's business, operations and financial condition are subject to reports
and statements filed from time to time with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K, for the fiscal
year ended March 31, 1996 and this Quarterly Report on Form 10-Q/A.
1
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XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
(AS RESTATED)
DECEMBER 31, 1996 March 31, 1996
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,932,616 $409,651
Short-term investments - 1,288,106
Accounts receivable, net of allowance 2,615 2,668
Inventory 72,195 40,907
Prepaid expenses 274,886 95,945
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Total current assets 3,282,312 1,837,277
Property and equipment, net of accumulated
depreciation 102,582 135,234
Patent costs, net of accumulated amortization 165,804 190,159
Other assets - 11,798
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TOTAL ASSETS $3,550,698 $2,174,468
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $835,987 $214,310
Accrued expenses 232,319 378,927
Note payable 74,904 -
Line of credit 509,700 -
Current portion of capitalized leases 4,598 12,512
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Total current liabilities 1,657,508 605,749
Other liabilities 14,267 20,670
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value,
300,000 shares authorized; 16,725 issued
and outstanding at December 31, 1996
(liquidation preference $4,348,500) 418,125 -
Common stock, $.02 par value, 30,000,000 shares
authorized; 8,132,279 and 8,051,029 shares
issued and outstanding at December 31 and
March 31, 1996, respectively 162,646 161,021
Capital in excess of par value 32,430,624 29,680,590
Deficit accumulated during the development stage (31,132,472) (28,293,562)
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Total stockholders' equity 1,878,923 1,548,049
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,550,698 $2,174,468
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See Notes to Consolidated Financial Statements.
2
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XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31, September 23, 1983
------------------------- ------------------------- (inception) to
1996 1995 1996 1995 December 31, 1996
- ------------------------------------------------------------- -------------------------------------------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 8,294 $ 700 $ 20,991 $ 11,730 $ 1,870,737
License fees and royalties 836 - 836 - 480,836
Contract research 17,500 - 39,172 45,000 268,063
Marketing rights - 175,000 - 205,000 1,306,500
Interest and other 3,562 26,055 25,123 80,933 1,535,920
- ------------------------------------------------------------- --------------------------- ---------------------
Total revenues 30,192 201,755 86,122 342,663 5,462,056
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COSTS AND EXPENSES
Cost of product sales 29,642 34,094 50,810 94,508 2,953,545
Product development 482,872 458,976 1,772,293 1,160,699 14,171,157
General and administrative 219,667 269,738 773,717 961,749 15,383,700
Business development
and marketing 9,677 80,893 139,560 342,198 3,407,243
Interest and other 33,622 13,628 50,393 24,763 540,624
- ------------------------------------------------------------- --------------------------- ---------------------
Total costs and expenses 775,480 857,329 2,786,773 2,583,917 36,456,269
- ------------------------------------------------------------- --------------------------- ---------------------
Net loss before convertible
preferred stock dividends (745,288) (655,574) (2,700,651) (2,241,254) (30,994,213)
- ------------------------------------------------------------- --------------------------- ---------------------
Convertible preferred stock
dividends 138,259 - 138,259 - 138,259
Net loss applicable to
common shareholders $ (883,547) $ (655,574) $(2,838,910) $(2,241,254) $ (31,132,472)
- ------------------------------------------------------------- --------------------------- ---------------------
- ------------------------------------------------------------- --------------------------- ---------------------
Net loss per share
of common stock ($0.11) ($0.10) ($0.35) ($0.40)
- ------------------------------------------------------------- ---------------------------
- ------------------------------------------------------------- ---------------------------
Weighted average common
stock outstanding 8,131,736 6,323,681 8,087,737 5,617,865
- ------------------------------------------------------------- ---------------------------
- ------------------------------------------------------------- ---------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Convertible Preferred Stock Common Stock Capital During the
----------------------------- ------------------------------- in Excess Development
Shares Par Value Shares Par Value of Par Value Stage Total
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1995 5,263,029 $105,261 $26,816,207 ($25,037,659) $1,883,809
Private placement of
common stock
November 1995 2,788,000 55,760 2,867,777 2,923,537
Net loss (2,241,254) (2,241,254)
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Balance at December
31, 1995 8,051,029 $161,021 $29,683,984 ($27,278,913) $2,566,092
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BALANCE AT MARCH 31,
1996 8,051,029 $161,021 $29,680,590 ($28,293,562) $1,548,049
EXERCISE OF WARRANTS 81,250 1,625 74,750 76,375
ISSUANCE OF WARRANTS 45,000 45,000
PRIVATE PLACEMENT OF
CONVERTIBLE -
PREFERRED STOCK IN
DECEMBER 1996 16,725 418,125 2,492,025 2,910,150
CONVERTIBLE PREFERRED
STOCK DIVIDENDS 138,259 (138,259) -
NET LOSS (2,700,651) (2,700,651)
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BALANCE AT DECEMBER
31, 1996 (AS RESTATED) 16,725 $418,125 8,132,279 $162,646 $32,430,624 ($31,132,472) $1,878,923
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- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
XYTRONYX, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, September 23, 1983
-------------------------------- (inception) to
1996 1995 December 31, 1996
- ------------------------------------------------------------------------------------------------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($2,700,651) ($2,241,254) ($30,994,213)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 82,794 88,863 1,556,807
Non-cash expense upon issuance of common stock
options, common stock and warrants 45,000 - 520,296
Net book value of disposal of property and equipment 2,648 5,507 150,900
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable 53 5,308 (2,616)
Inventory (31,288) 6,529 (72,198)
Prepaid expenses and other assets (167,143) (121,705) (274,063)
Accounts payable 621,677 (119,179) 835,986
Accrued expenses (146,608) 405,048 88,296
Customer advances - (30,888) 140,863
Other liabilities (2,976) (8,921) -
- ---------------------------------------------------------------------------------------------------------- ---------------
Net cash (used) by operating activities (2,296,494) (2,010,692) (28,449,942)
INVESTING ACTIVITIES
Purchases of short-term investments - (1,422,357) (5,480,432)
Maturities of short-term investments 1,288,106 992,326 5,480,432
Capital expenditures (4,927) (12,765) (826,590)
Patent costs (23,508) (45,822) (904,136)
Other - - (996)
- ---------------------------------------------------------------------------------------------------------- ---------------
Net cash provided (used) by investing activities 1,259,671 (488,618) (1,731,722)
FINANCING ACTIVITIES
Issuance of notes payable 218,966 325,426 1,878,367
Repayment of notes payable (144,062) (214,948) (1,584,719)
Issuance of line of credit 509,700 - 509,700
Repayment of capital lease obligations (11,341) (28,306) (186,323)
Long-term customer advances - - 100,000
Issuance of common and preferred stock 2,986,525 2,923,537 32,334,755
Issuance of stock warrants - - 62,500
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Net cash provided by financing activities 3,559,788 3,005,709 33,114,280
- ---------------------------------------------------------------------------------------------------------- ---------------
Net increase in cash
and cash equivalents 2,522,965 506,399 2,932,616
Cash and cash equivalents at beginning of period 409,651 827,752 -
- ---------------------------------------------------------------------------------------------------------- ---------------
Cash and cash equivalents at end of period $2,932,616 $1,334,151 $2,932,616
- ---------------------------------------------------------------------------------------------------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<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 have been restated to show the effect of a
non-cash Preferred Stock dividend which occurred as a result of the sale of
Convertible Preferred Sock which is convertible at a discount from the market
price of the underlying Common Stock. Further information regarding the
Preferred Stock dividend has been included in Note 6. The information in Notes 3
and 5 has also been expanded to include additional information regarding the
valuation methods used concerning common stock warrants issued in connection
with the acquisition of an exclusive world-wide license and a line of credit. In
addition, Note 8 has been added to disclose events subsequent to December 31,
1996. Management's Discussion and Analysis of Financial Condition and the
Results of Operation has also been revised to reflect information regarding the
Preferred Stock dividend and the subsequent events referred to above.
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 enterprise, and that certain consolidated financial statements
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 currently available resources will allow planned
operations to continue through December 1997. Unanticipated expenses, however,
could shorten that period. Accordingly, the Company will require additional
financing from time-to-time until it begins to generate positive cash flow from
operations (See Note 6). There can be no assurance that the Company will be
successful in obtaining financing, or that it will attain positive cash flow
from operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
6
<PAGE>
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial statements
contain all of the adjustments, consisting only of normal recurring adjustments
and accruals, necessary to present fairly the financial position of the Company
as of December 31, 1996 and March 31, 1996, results of operations for the three
months and nine months ended December 31, 1996 and 1995 and from September 23,
1983 (inception) to December 31, 1996 and cash flows for the nine months ended
December 31, 1996 and 1995 and from September 23, 1983 (inception) to December
31, 1996. The results of operations for the three months and nine months ended
December 31, 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 as set
forth in the Company's Annual Report on Form 10-K for the year ended March 31,
1996.
The Company has been informed that it is out of compliance with certain listing
requirements of the American Stock Exchange because of its record of losses,
cash outflows, reduced shareholders' equity and impaired financial condition.
The company is in discussions with the Exchange regarding the Company's
condition, however, there can be no assurance that the listing will be
continued.
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 subsidiary of the Company (See Note 8). The Board of Directors voted to
approve the merger, however the merger is also subject to shareholder approval
for the issuance of additional shares of Common Stock 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 Company 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.
The agreement calls for the Company to issue common stock to the BTI
stockholders with an aggregate acquisition value of $6,000,000. The number of
shares of the Company's common stock to be issued will be determined based upon
the market value of the Company's common stock prior to the date of exercise,
although the value of the common stock cannot be less than $2.00 or more than
$6.00 per share. The agreement has been approved by a majority of the
stockholders of BTI.
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
7
<PAGE>
to be comprised primarily of product development costs. Under the terms of the
agreement, the Company is also required to advance to BTI funds to repay
$285,000 in indebtedness in the event that the Company completes an equity
financing with net proceeds of $2,500,000 or more, and to advance to BTI funds
to repay an additional $243,000 in indebtedness in the event the Company
completes an equity financing with net proceeds of $5,000,000 or more. BTI and
the debtholders have agree to defer any of the scheduled payments until the
Company completes the final closing of its equity financing. Certain holders of
such indebtedness are shareholders of the Company. In exchange for such funding
BTI will issue convertible notes to the Company which may be converted into BTI
equity at the Company's option. The Company 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 December 31, 1996 and for the nine month period
then ended, the Company advanced $206,000 and $635,000 respectively, to BTI and
such advances are included in product development expense. In the event that
the Company terminates the agreement, the Company would remain obligated to
continue funding such product development expenses incurred during the period
ending 90 days from such termination, up to the $1,250,000 discussed above.
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 the Company 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 valued at $50,000
and must pay a minimum royalty of $50,000 per year. The value of the warrant was
based upon the negotiated terms of the agreement. The first year royalty is
payable in two stages, 1) $25,000 due upon execution of the agreement and 2)
$25,000 due upon submission of an IND application to the FDA. The value of the
warrants will be recognized as an expense in similar stages and amounts. During
the nine months ended December 31, 1996, the Company recorded $50,000 in product
development expense related to the agreement which included a $25,000 royalty
payment and $25,000 related to the issuance of warrants.
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, due in full on March 15, 1997.
5. LINE OF CREDIT
On September 30, 1996 the Company entered into a line of credit agreement with
two shareholders under which the Company may borrow up to $500,000. The
agreement calls for interest at the rate of 12% per annum. Principal and
accrued interest are due and payable not later than February 28, 1997. As of
December 31, 1996, the line of credit balance is $500,000 plus accrued interest
of $9,700.
In connection with the line of credit agreement discussed above, the Company
granted the two shareholders five-year warrants to purchase 150,000 shares of
the Company's common stock at an exercise price of $0.96, which was the initial
conversion price of the Series A Convertible
8
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Preferred Stock sold in the Private Placement discussed in Note 6. The warrants
are valued at $20,000, all of which was recorded as interest expense in the
quarter ended December 31, 1996. The fair market value of the warrants was
determined based upon rates for lines of credit with similar terms available to
the Company at the date of grant.
6. PRIVATE PLACEMENT
On December 19, 1996, the Company completed an initial closing on $3,345,000
(net proceeds to the Company of $2,910,150) of 33.45 Premium Preferred Units
("Units") at a price per Unit of $100,000, each Unit consisting of 500 shares of
Convertible Preferred Stock ("Preferred Stock"), par value $25.00 per share,
stated value $200.00 per share, and 50,000 Common Stock Purchase Warrants
("Warrants"), to accredited individuals and institutional investors pursuant to
Regulation D under the Securities Act of 1933, as amended. The placement agent
for the Private Placement received an aggregate dollar commission of $434,850
for the initial closing. The placement agent is affiliated with certain
significant shareholders of the Company. Each share of Preferred Stock may be
converted at the option of the holder into 208.33333 shares of common stock or
$0.96 per share of common stock which is a 23% discount from the closing market
price on December 19,1996. In addition, the conversion price is subject to
further adjustment on the date which is twelve months after the final closing
date if the average closing bid price of the Common Stock for the thirty
consecutive trading days immediately preceding that date is less than 130% of
the conversion price as adjusted, subject to a limit on the number of shares
that may be issued pursuant to such reset. Each Warrant entitles the holder to
purchase one share of Common Stock at a price of $1.00 per share and may be
exercised until November 26, 2005. The maximum offering amount of the Private
Placement is 100 Units which would represent aggregate proceeds of $10,000,000,
subject to an additional overallotment option of 25 units. The Company expects
the Private Placement to be completed no later than March 1997 (See Note 8);
however, there can no assurance that the Company will be able to successfully
sell further Units. The securities sold in the initial closing and the
securities which are to be offered under the Private Placement have not been
registered under the Securities Act and may not be offered or sold in the United
States without registration or an applicable exemption from registration
requirements. In accordance with the terms of the Private Placement, the
Company has agreed to file a registration statement with respect to resale of
certain of the securities to be offered. Holders of the Preferred Stock will be
entitled to receive dividends as, when and if declared by the Board of
Directors. The Company does not intend to pay cash dividends on the Preferred
Stock or the underlying Common Stock for the foreseeable future. Liquidating
rights for preferred shareholders are $260.00 per share plus accrued, but unpaid
dividends.
As mentioned above, the subscribers to the Private Placement purchased the Units
at a 23% discount from the closing price of the Company's common stock on
December 19, 1997. The resulting discount of $1,010,000 is considered a dividend
and will be recognized as a return to the Preferred Stockholders from the date
of issuance of the Preferred Stock to the date in which the Preferred Stock is
eligible for conversion into Common Stock. During the quarter ended December 31,
1996 the Company recognized a non-cash dividend to Preferred Stockholders of
$138,000. All of the subscribers to the Private Placement entered into a Lock-up
Agreement ("Lock-up") with the Company. In the Lock-up, each subscriber agreed
not to sell or exercise any of the securities contained in the Units until the
underlying common stock is registered with the Securities and Exchange
Commission. When the registration statement becomes effective,
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25% of the securities become unlocked and 25% become unlocked in each 90 day
interval following the effective date of the registration statement.
The Preferred Stock is convertible into Common Stock upon issuance, except that
most of the subscribers to the Private Placement signed a letter amending the
initial Subscription Agreement, in which they agreed not to convert any of the
Preferred Stock until the underlying common stock is registered. The amendment
provides that they may convert the Preferred Stock into common stock in
accordance with the Lock-up mentioned in the prior paragraph. The assumed
effective date of the registration statement for the Common Stock underlying the
Preferred Stock conversion is July 1, 1997.
7. EQUITY INCENTIVE PLANS
In December, 1996, the Board of Directors approved a new form of Equity
Incentive Plan to provide long-term performance incentives to key employees and
consultants to the Company in the form of stock options, stock appreciation
rights, restricted stock and other awards, including cash-based awards. In
addition, the Board of Directors approved a Stock Option Plan for Non-Employee
Directors which provides for grants of stock options to non-employee members of
the Company's Board of Directors. Each plan provides up to 3,000,000 shares of
the Company's common stock to be granted for this purpose. The Board intends
that the plans be submitted to stockholders for approval; however, the Company
may issue awards under the plans prior to stockholder approval. The Board of
Directors awarded 675,000 stock options at market value on the date of the grant
to H. Laurence Shaw, its President and Chief Executive Officer which are
intended to the extent possible to qualify as incentive stock options. Of the
initial grant, 525,000 stock options shall vest quarterly over a period of two
years and 150,000 stock options shall vest quarterly over a two year period
commencing on the first anniversary of the effective date of his employment
agreement.
8. SUBSEQUENT EVENTS
In February 1997, the Company and BTI (See Note 2) agreed to extend the period
during which the Company may exercise its option to acquire BTI from April 30,
1997 until such time as BTI has completed human clinical trials of Boronated
Porphyrin Compound ("BOPP") at an agreed upon dose level (the "Option Period").
The Option Period was extended at the Company's request to enable BTI to
complete preclinical studies, to commence clinical trials in humans and to
demonstrate that a given dose level of BOPP in humans would not cause certain
adverse events. Accordingly, the Company has deferred its election to exercise
the option.
On March 7, 1997, the Company completed the final closing of its Private
Placement (See Note 6) on $6,655,000 (net proceeds to the Company of $5,632,000)
of 66.55 Units at a price per Unit of $100,000, each Unit consisting of 500
shares of Preferred Stock par value $25.00 per share, stated value $200.00 per
share, and 50,000 Warrants, to accredited individuals and institutional
investors pursuant to Regulation D under the Securities Act of 1933, as amended.
The terms and conditions were the essentially the same as the initial closing
described in Note 6. The overallotment option was not exercised.
In April 1997, the Board of Directors approved an interest free bridge loan of
$300,000 to Dr. Shaw for the purpose of acquiring a new residence in California
prior to the sale of his New Jersey residence. The loan, which was made on May
13, 1997, will be paid back upon the
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earlier of (i) the sale of Dr. Shaw's residence or (ii) December 17, 2001.
On June 23, 1997, the Company received approval from the FDA to begin
commercial sales and distribution in the United States for its PTM product.
The Company also signed a letter of intent with Steri-Oss, a leading dental
implant company, for the exclusive five-year distribution of PTM in North
America and other countries, excluding Europe and Japan.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE (EPS). This
statement requires the presentation of earnings per share to reflect both "Basic
EPS" as well as "Dilutive EPS" on the face of the statement of operations. In
general, Basic EPS excludes dilution created by stock equivalents and is a
function of weighted average number of common shares outstanding for the
periods. Diluted EPS does reflect the potential dilution created by stock
equivalents as if such equivalents are converted into common stock and is
calculated in substantially the same manner as fully Diluted EPS illustrated in
Accounting Principals Board Opinion No. 15 "EARNINGS PER SHARE" .
The Company will be required to adopt the new method of reporting EPS during
fiscal year 1998. Based on the Company's capital structure, the anticipated
results of implementing SFAS No. 128 would reflect net loss per share in
materially the same manner as currently reported.
11
<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 $30,000 for the quarter ended December 31, 1996, a 85%
decrease from revenues of $202,000 recorded during the same period of the prior
year. Current quarter revenues relate to product sales and contract research for
the use of the Company's Kephra-TM- reversible color change technology in
various applications. Prior year revenues for the quarter included $175,000 of
marketing rights income. No such revenues were earned in the current quarter.
Cost of product sales decreased $4,000, or 13%, from the prior year. This
decrease is consistent with the decrease in product sales.
Total revenues for the nine month period ending December 31, 1996 totaled
$86,000, a decrease of $257,000, or 75%, from the same period of the prior year.
Prior year revenues for this nine month period included approximately $205,000
in marketing rights income. No such revenues were earned in the current year.
Cost of product sales for the nine month period ending December 31, 1996
decreased $44,000, or 46%, from the prior year, consistent with the decrease in
product sales.
Product development costs totaled $483,000 for the quarter, an increase of
$24,000 or 5% over the prior year costs of $459,000. The majority of the
increase resulted from the initiation of work on two projects in the cancer
therapy area, including: (i) $206,000 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) $104,000 in
expenses related to the acquisition of the Photodynamic Immunotherapy-TM-
("PDIT-TM-") technology for the treatment of cancer, expenses incurred in
association with a related research agreement and expenses incurred related to
in-house product development of the PDIT-TM- technology. No such costs were
incurred in the prior year.
For the nine months ended December 31, 1996, product development costs increased
$612,000, or 53%, over the same period of the prior year to $1,772,000. The
initiation of work on the two projects discussed above generated expenses of
$1,123,000 for the nine month period. No such costs were incurred in the same
period of the prior year. This increase was offset by a reduction in
expenditures for the nine month period related to the completion of the U.S. FDA
clinical trials for the Periodontal Tissue Monitor ("PTM").
Business development costs for the current quarter totaled $10,000, a decrease
of $71,000, or 88%, from the same quarter of the prior year. The decrease is
the result of management concentrating its efforts on the initial closing of a
private placement financing which occurred on December 19, 1996 (See Part II,
Item 2 of this 10-Q). General and administrative expenses for the three month
period ended December 31, 1996 decreased 19% to $220,000 from the same period
of the prior year. The decrease is largely the result of personnel attrition.
12
<PAGE>
Business development costs for the nine month period ended December 31, 1996
decreased $203,000, or 59%, from the same period of the prior year to $140,000.
General and administrative expenses for the nine month period ended December 31,
1996 decreased $188,000, or 20%, from the same period of the prior year to
$774,000. Both decreases are the result of management concentrating its efforts
in the product development area related to PDT and PDIT discussed above and the
initial closing of the private placement.
Net loss before convertible preferred stock dividends for the quarter ended
December 31, 1996 totaled $745,000, a 14% increase over the prior year's second
quarter loss of $656,000. This increase is a result of the increase in product
development efforts discussed above and increased interest expense offset by
lower business development and general and administrative expenses. Net loss per
share of common stock for the quarter ended December 31, 1996 was $.11, a 10%
increase from the prior year's third quarter loss of $.10 per share primarily
due to events discussed above, offset by a 1,808,000 increase in the weighted
average number of shares outstanding.
Net loss before convertible preferred stock dividends for the nine months ended
December 31, 1996 totaled $2,701,000, an increase of $460,000, or 21%, over the
same period of the prior year. This increase is a result of the increase in
product development efforts offset by a reduction in other expenditures. Net
loss per share of common stock for the nine months ended December 31, 1996 was
$.35, a 14% decrease from the loss of $.40 per share for the same period of the
prior year. The decrease is primarily a result of a 2,469,000 increase in the
weighted average number of shares outstanding for the nine month period.
As discussed in Note 6, the Company recorded a non-cash convertible preferred
stock dividend during the quarter ended December 31, 1996 in connection with the
sale of Convertible Preferred Stock. The effect of this non-cash dividend is to
increase the net loss applicable to common stockholders by $138,000 for the
quarter and nine months ended December 31, 1996.
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments at December 31, 1996 totaled
$2,933,000, an increase of $1,235,000 from the March 31, 1996 balances.
Working capital at December 31, 1996 increased by 32% from March 31, 1996 to
$1,625,000. These increases were primarily due to the initial closing of the
private placement financing in which the Company raised a net amount of
$2,910,000 through the sale of Premium Preferred Units (See Part II, Item 2 of
this 10-Q). Prepaid expenses increased by $179,000 as a result of the prepayment
of annual insurance premiums and costs associated with the private placement.
Notes payable and line of credit increased by $585,000 as a result of obtaining
a $500,000 line of credit proceeds used as bridge financing prior to the initial
closing of the private placement and financing insurance premiums. Accounts
payable and accrued expenses increased a net $475,000 for the nine-month period.
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. As described in Note 6 of the Notes to
Consolidated Financial Statements the Company expects the proceeds from the sale
of the Premium Preferred Units will be sufficient to meet its cash needs until
December 31, 1997. Unanticipated expenses or working capital requirements could,
however, shorten that period.
13
<PAGE>
In March 1996 the Company completed a 12-month U.S. clinical trial of PTM at
three universities. The Company has compiled and analyzed the data generated
from the clinical studies. In September 1996 the Company submitted a Premarket
Approval application ("PMA") to the Food and Drug Administration ("FDA") and is
currently awaiting a response from the FDA (See Note 8). The completion of the
clinical studies have resulted 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 September 1996, the Company received the
initial purchase order for $75,000 associated with the European launch of the
PTM from Hawe Neos. The order is expected to be delivered in the fourth quarter
of Fiscal 1997. 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 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 (amended in February 1997)
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 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 has been informed that it is out of compliance with certain listing
requirements of the American Stock Exchange because of its record of losses,
cash outflows, reduced shareholders' equity and impaired financial condition.
The company is in discussions with the Exchange regarding the Company's
condition, however, there can be no assurance that the listing will be
continued.
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.
14
<PAGE>
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On December 19, 1996, the Company completed an initial closing on $3,345,000
(net proceeds to the Company of $2,910,150) of 33.45 Premium Preferred Units
("Units") at a price per Unit of $100,000, each Unit consisting of 500 shares of
Convertible Preferred Stock ("Preferred Stock"), par value $25.00 per share,
stated value $200.00 per share, and 50,000 Common Stock Purchase Warrants
("Warrants"), to accredited individuals and institutional investors pursuant to
Regulation D under the Securities Act of 1933, as amended. The placement agent
for the Private Placement received an aggregate dollar commission of $434,850
for the initial closing. The placement agent is affiliated with certain
significant shareholders of the Company. Each share of Preferred Stock may be
converted at the option of the holder into 208.33333 shares of common stock or
$0.96 per share of common stock which is a 23% discount from the closing market
price on December 19,1996. In addition, the conversion price is subject to
further adjustment on the date which is twelve months after the final closing
date if the average closing bid price of the Common Stock for the thirty
consecutive trading days immediately preceding that date is less than 130% of
the conversion price as adjusted, subject to a limit on the number of shares
that may be issued pursuant to such reset. Each Warrant entitles the holder to
purchase one share of Common Stock at a price of $1.00 per share and may be
exercised until November 26, 2005. The maximum offering amount of the Private
Placement is 100 Units which would represent aggregate proceeds of $10,000,000,
subject to an additional overallotment option of 25 units. The securities sold
in the initial closing and the securities which are to be offered under the
Private Placement have not been registered under the Securities Act and may not
be offered or sold in the United States without registration or an applicable
exemption from registration requirements. In accordance with the terms of the
Private Placement, the Company has agreed to file a registration statement with
respect to resale of certain of the securities to be offered.
On March 7, 1997, the Company completed the final closing of its Private
Placement on $6,655,000 (net proceeds to the Company of $5,632,000) of 66.55
Units at a price per Unit of $100,000, each Unit consisting of 500 shares of
Preferred Stock par value $25.00 per share, stated value $200.00 per share, and
50,000 Warrants, to accredited individuals and institutional investors pursuant
to Regulation D under the Securities Act of 1933, as amended. The terms and
conditions were the essentially the same as the initial closing described above.
The overallotment option was not exercised.
ITEM 5. OTHER INFORMATION
On December 11, 1996, the Board of Directors of the Company approved, among
other matters, the following changes to the Company and its management,
conditioned upon a closing or closings of at least $3,000,000 of gross proceeds
in the Private Placement by December 31, 1996:
A. The hiring of Dr. H. Laurence Shaw as Chief Executive Officer and
President of the Company;
B. The appointment of Dr. Jerry A. Weisbach as a Director of the Company,
a scientific advisor and consultant to the Company; and
15
<PAGE>
C. The appointment of Dr. David Golde as Chairman of the Company's newly
formed Scientific Advisory Board.
On December 19, 1996, following the initial closing of the Company's Private
Placement, the Company accepted resignations from the Board of Directors of each
of H. Laurence Garrett, III, William L. Jorgenson, John M. Kolbas, Morris S.
Weeden and Larry Bymaster. The current Board of Directors consists of Jack H.
Halperin, H. Laurence Shaw, M.D., Elliott H. Vernon, Jerry A. Weisbach, Ph.D.
and Michael S. Weiss. Larry Bymaster remains as an employee of the Company.
In December, 1996, the Board of Directors approved a new form of Equity
Incentive Plan to provide long-term performance incentives to key employees and
consultants to the Company in the form of stock options, stock appreciation
rights, restricted stock and other awards, including cash-based awards. In
addition, the Board of Directors approved a Stock Option Plan for Non-Employee
Directors which provides for grants of stock options to members of the Company's
Board of Directors. The Board intends that the plans be submitted to
stockholders for approval; however, the Company may issue awards under the plans
prior to stockholder approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
4.6 Certificate of Designations of Series A Convertible
Preferred Stock of Xytronyx, Inc.
10.45 Xytronyx, Inc. Equity Incentive Plan.
10.46 Xytronyx, Inc. Stock Option Plan for Non-Employee
Directors.
10.47 Employment Agreement between Xytronyx, Inc. and H.
Laurence Shaw dated December 16, 1996.
b) REPORTS ON FORM 8-K
Financial
Date of Report Item Reported Statements Filed
- --------------- ------------- ----------------
December 19,1996 Item 5 - Other Events None
News Release dated December 19, 1996
announcing that the Company had an initial
closing of a private placement of equity
securities to accredited individuals and
institutional investors pursuant to
Regulation D under the Securities Act of
1933, as amended, that the Company had hired
Dr. H. Laurence Shaw to serve as the Company's
new Chief Executive and President, that
Jerry A. Weisbach has agreed to join the
Company's Board of Officer Directors and
Scientific Advisory Board, and that
David W. Golde, M.D. has agreed to join
the Company as Chairman of the Scientific
Advisory Board filed as Exhibit 99.1 hereto,
is hereby incorporated into this Report by
reference.
16
<PAGE>
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: June 27, 1997 /s/ James Hertzog
---------------------------
James Hertzog
Controller
(Principal Accounting Officer and Officer
duly authorized to sign this report on
behalf of the registrant)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMENDED
DECEMBER 31, 1996 INTERIM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,932,616
<SECURITIES> 0
<RECEIVABLES> 2,615
<ALLOWANCES> 0
<INVENTORY> 72,195
<CURRENT-ASSETS> 3,282,312
<PP&E> 803,223
<DEPRECIATION> (700,641)
<TOTAL-ASSETS> 3,550,698
<CURRENT-LIABILITIES> 1,657,508
<BONDS> 14,267
0
418,125
<COMMON> 162,646
<OTHER-SE> 1,298,152
<TOTAL-LIABILITY-AND-EQUITY> 3,550,698
<SALES> 20,991
<TOTAL-REVENUES> 86,122
<CGS> 50,810
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,772,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,393
<INCOME-PRETAX> (2,700,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,700,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 138,259<F1>
<NET-INCOME> (2,838,910)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<FN>
<F1>Includes Convertible Preferred Stock Dividends
</FN>
</TABLE>