<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
- --------------------------------------------------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended MARCH 31, 1997 Commission File No. 0-18734
LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0314804
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11077 N. TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (619) 558-0364
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 periods 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 the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at May 9, 1997
<S> <C>
Class A common stock, no par value 36,560,759
Class B common stock, no par value 283,000
</TABLE>
<PAGE> 2
LIDAK Pharmaceuticals
FORM 10-Q
For the quarter ended March 31, 1997
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
<S> <C> <C>
Balance Sheets at March 31, 1997 and September 30, 1996............... 3
Statements of Operations for the three and six month periods
ended March 31, 1997 and 1996 and for the period
from August 31, 1988 (inception) to March 31, 1997.................... 4
Statements of Stockholders' Equity (Deficit) from August
31, 1988 (inception) to March 31, 1997................................ 5
Statements of Cash Flows for the six month periods
ended March 31, 1997 and 1996 and for the period
from August 31, 1988 (inception) to March 31, 1997.................... 10
Notes to Financial Statements......................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................... 19
SIGNATURES ...................................................................... 20
</TABLE>
2
<PAGE> 3
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,781,404 $ 13,347,508
Short-term investments 2,470,708 7,026,502
Interest receivable 186,202 338,403
Prepaid and other 183,801 825,924
-------------- ----------------
Total current assets 18,622,115 21,538,337
PROPERTY - at cost (less accumulated depreciation of $321,665 and $266,668) 249,266 275,972
PATENT COSTS (less accumulated amortization of $53,186 and $39,654) 589,646 581,770
DEBT ISSUE COSTS 282,755 185,015
OTHER ASSETS 265,785 265,785
-------------- ----------------
TOTAL $ 20,009,567 $ 22,846,879
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 5,341,176 $ 5,721,087
Accounts payable 1,705,412 1,329,418
Accrued compensation and payroll taxes 216,940 206,445
Due to MBI 9,485 21,810
Deferred revenue 500,000
-------------- ----------------
Total current liabilities 7,273,013 7,778,760
-------------- ----------------
COMMITMENTS - (Note 4)
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
36,560,759 and 34,054,022 shares issued and outstanding 53,970,158 49,216,569
Class B - 510,000 shares authorized; 283,000 shares
issued and outstanding (convertible to Class A Common Stock) 147,748 147,748
Deficit accumulated during the development stage (41,381,352) (34,296,198)
-------------- ----------------
Total stockholders' equity 12,736,554 15,068,119
-------------- ----------------
TOTAL $ 20,009,567 $ 22,846,879
============== ================
</TABLE>
See notes to financial statements
3
<PAGE> 4
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31, MARCH 31,
------------- ------------- ------------- ------------- ---------------
1997 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees/Contract research $ 3,000,000 $ 500,000 $ 3,000,000 $ 4,482,625
Federal research grants $ 55,000 11,332 112,500 17,832 911,277
Interest and other 207,984 279,336 425,056 469,371 3,644,670
------------- ------------- ------------- ------------- ---------------
Total revenues 262,984 3,290,668 1,037,556 3,487,203 9,038,572
------------- ------------- ------------- ------------- ---------------
EXPENSES:
Research and development 2,847,147 1,115,346 5,026,542 2,556,769 29,415,351
General and administrative 734,285 901,709 1,871,244 1,551,852 16,147,586
Cost of contract research 533,270
Interest 545,948 1,214,630 1,224,924 1,390,004 4,323,717
------------- ------------- ------------- ------------- ---------------
Total expenses 4,127,380 3,231,685 8,122,710 5,498,625 50,419,924
------------- ------------- ------------- ------------- ---------------
NET INCOME (LOSS) $ (3,864,396) $ 58,983 $ (7,085,154) $ (2,011,422) $ (41,381,352)
============= ============= ============= ============= ===============
NET INCOME (LOSS) PER SHARE $ (0.11) $ 0.00 $ (0.20) $ (0.07)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 36,719,420 32,655,301 36,002,531 30,797,315
============= ============= ============= =============
</TABLE>
See notes to financial statements
4
<PAGE> 5
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK COMMON STOCK(1)
--------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes receivable
and cash in September 1988 at $.0125 per share
Issuance of preferred stock in October 1988 for
license and other rights 2,000,000 1
Issuance of common stock for cash in October
1988 at $.05 per share
Issuance of common stock for cash in January 1989
at $.05 per share
Issuance of stock options effective in August
1989 to purchase 600,000 shares of Class B
common stock at $.0125 per share (with an
estimated fair market value of $.05 per share)
Issuance of common stock for cash in September
1989 at $.0125 per share (with an estimated
fair market value of $.05 per share)
Collection on notes receivable
Net loss
---------- ------ ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1988 2,000,000 1
Conversion of advances to common stock in October
1989 at $.50 per share
Issuance of common stock for cash in May 1990 at
$1.00 per share (net of stock issue costs totaling
$1,033,280) 5,000,000 $3,966,820
Issuance of common stock for cash in June 1990 at
$1.00 per share (net of stock issue costs totaling
$97,500) 750,000 652,500
Exercise of stock options in July and August 1990
at $.50 per share
Forgiveness of compensation obligation
Collection on notes receivable
Net loss
---------- ------ ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1990 2,000,000 1 5,750,000 4,619,320
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK(1) DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes receivable
and cash in September 1988 at $.0125 per share 4,235,000 $ 52,937 $(14,525) $ 38,412
Issuance of preferred stock in October 1988 for
license and other rights 1
Issuance of common stock for cash in October
1988 at $.05 per share 60,000 4,000 4,000
Issuance of common stock for cash in January 1989
at $.05 per share 60,000 4,000 4,000
Issuance of stock options effective in August
1989 to purchase 600,000 shares of Class B
common stock at $.0125 per share (with an
estimated fair market value of $.05 per share) 22,500 22,500
Issuance of common stock for cash in September
1989 at $.0125 per share (with an estimated
fair market value of $.05 per share) 400,000 20,000 20,000
Collection on notes receivable 1,635 1,635
Net loss $ (409,718) (409,718)
--------- ------- ----------- -------- ---------
BALANCE, SEPTEMBER 30, 1988 4,795,000 103,437 (409,718) (12,890) (319,170)
Conversion of advances to common stock in October
1989 at $.50 per share 250,000 125,000 125,000
Issuance of common stock for cash in May 1990 at
$1.00 per share (net of stock issue costs totaling
$1,033,280) 3,966,820
Issuance of common stock for cash in June 1990 at
$1.00 per share (net of stock issue costs totaling
$97,500) 652,500
Exercise of stock options in July and August 1990
at $.50 per share 21,500 10,750 10,750
Forgiveness of compensation obligation 66,923 66,923
Collection on notes receivable 12,890 12,890
Net loss (2,319,231) (2,319,231)
--------- ------- ----------- ------- -----------
BALANCE, SEPTEMBER 30, 1990 5,056,500 306,110 (2,728,949) -- 2,196,482
(Continued) - 1.
</TABLE>
5
<PAGE> 6
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK COMMON STOCK(1)
--------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1990 2,000,000 $1 5,750,000 $4,619,320
Exercise of stock options in November
1990 at $.50 per share
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totaling $130,339) 960,003 $769,670
Conversion of common stock 115,000 5,750
Net loss
---------- ------ ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1991 2,000,000 1 960,003 769,670 5,865,000 4,625,070
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totaling $428,605) 4,266,680 3,571,395
Exercise of stock options in March 1992 at
$.50 per share
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totaling $317,930) 5,650,200 8,157,370
Conversion of common stock 395,000 6,250
Net loss
---------- ------ ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1992 2,000,000 1 5,226,683 4,341,065 11,910,200 12,788,690
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash 793,645 600,010
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash 793,645 749,995
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totaling $8,720) 96,897 209,298
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totaling $4,122) 103,050 98,928
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totaling $42,125) 836,335 1,212,376
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash 315,000 63,000
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash 320,000 300,000
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK(1) DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1990 5,066,500 $306,110 $ (2,728,949) -- $2,196,482
Exercise of stock options in November
1990 at $.50 per share 2,000 1,000 1,000
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totaling $130,339) 760,670
Conversion of common stock (115,000) (5,750)
Net loss (1,949,588) (1,949,586)
--------- ------- ------------ ------ ----------
BALANCE, SEPTEMBER 30, 1991 4,953,500 301,360 (4,678,537) 1,017,564
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totaling $428,605) 3,571,395
Exercise of stock options in March 1992 at
$.50 per share 119,000 59,500 59,500
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totaling $317,930) 8,157,370
Conversion of common stock (395,000) (6,250)
Net loss (2,361,655) (2,361,655)
--------- ------- ------------ ------ ----------
BALANCE, SEPTEMBER 30, 1992 4,677,500 354,610 (7,040,392) -- 10,443,974
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash 600,010
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash 749,995
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totaling $8,720) 209,298
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totaling $4,122) 98,928
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totaling $42,125) 1,212,376
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash 63,000
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash 300,000
(Continued) - 2.
</TABLE>
6
<PAGE> 7
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK COMMON STOCK(1)
--------------------------------------------- ------------------------
SERIES A SERIES B CLASS A
------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash 96,000 $ 90,000
Exercise of stock options in August 1993 and September
1993 at exercise prices ranging from $0.81 to $1.53
per share 27,480 $ 37,480
Compensation expense related to stock options granted
at an exercise price below fair market value 163,333
Cancellation of Series A Preferred and Class B Common
Stock in July 1993 (1,500,000) 28,003
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement 1,500,000 2,670,000
Conversion of preferred and common stock (100,000) (5,642,653) (4,731,065) 6,040,653 4,790,121
Cancellation of partial shares (30)
Net loss
---------- ------ ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1993 400,000 $ 1 -- -- 22,416,905 23,411,234
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 17,202 24,384
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totaling $541,340) 4,312,860 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totaling $4,414) 106,340 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totaling $2,875) 78,335 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash 106,666 100,000
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share 113,267 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215) 522,449 1,807,785
Conversion of preferred and common stock (400,000) (1) (106,666) (100,000) 653,416 113,911
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 (70,000) 20,794
Cancellation of partial shares (3)
Net loss
---------- ------ ---------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1994 -- -- -- -- 28,149,971 35,156,504
---------- ------ ---------- ----------- ---------- -----------
(Continued) - 3.
</TABLE>
<TABLE>
<CAPTION>
[continuation of] COMMON STOCK(1) DEFICIT
---------------------- ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
---------------------- DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
---------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash $ 90,000
Exercise of stock options in August 1993 and September
1993 at exercise prices ranging from $0.81 to $1.53
per share 37,480
Compensation expense related to stock options granted
at an exercise price below fair market value 163,333
Cancellation of Series A Preferred and Class B Common
Stock in July 1993 (2,240,250) $(28,003)
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement 2,670,000
Conversion of preferred and common stock (298,000) (59,056)
Cancellation of partial shares
Net loss $ (6,139,223) (6,139,223)
---------- -------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1993 2,139,250 267,551 (13,179,615) -- 10,499,171
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 24,384
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totaling $541,340) 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totaling $4,414) 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totaling $2,875) 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash 100,000
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215) 1,807,785
Conversion of preferred and common stock (146,750) (13,910)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 (1,546,500) (20,794)
Cancellation of partial shares
Net loss (4,813,341) (4,813,341)
---------- -------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1994 446,000 232,847 (17,992,956) -- (17,396,395)
---------- -------- ------------ ------------ -----------
(Continued) - 3.
</TABLE>
7
<PAGE> 8
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE PREFERRED STOCK COMMON STOCK(1) DEFICIT RECEIV-
---------------------------- -------------------------------------- ACCUMULATED ABLE
SERIES A SERIES B CLASS A CLASS B DURING THE FROM
------------- ------------- --------------------- --------------- DEVELOPMENT STOCK-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE HOLDERS TOTAL
------ ------ ------ ------ ---------- --------- ------ ------ ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1994 TO
SEPTEMBER 30, 1995
Exercise of non-
redeemable Class B
Warrants in January
and Febraury, 1995
at $1.4175 per share
for cash 97,202 137,783 137,783
Exercise of Class C
Warrants between
October, 1994 and
June, 1995 at $1.00
per share for cash
(net of commissions
totaling $28,743) 415,600 388,857 388,857
Exercise of Class D
Warrants between
April, 1995 and
September, 1995 at
$1.50 per share for
cash 153,335 230,003 230,003
Exercise of Class E
Warrants in April
and August, 1995 at
$0.20 per share for
cash 85,000 17,000 17,000
Exercise of stock
options between
October, 1994 and
September, 1995 at
exercise prices
ranging from $0.50
per share to $3.58
per share 842,956 1,121,771 1,121,771
Compensation expense
related to stock
options granted at
an exercise price
below fair market
value 129,792 129,792
Conversion of common
stock 103,000 53,774 (103,000) (53,774)
Net loss (10,173,001) (10,173,001)
------ ----- ------ ------ ---------- ---------- ------- -------- ------------ ------ -----------
BALANCE, SEPTEMBER 30,
1995 -- -- -- -- 29,847,064 37,235,484 343,000 179,073 (28,165,057) -- 9,248,600
====== ===== ====== ====== ========== ========== ======= ======== ============ ====== ===========
OCTOBER 1, 1995 TO
SEPTEMBER 30, 1996
Exercise of Class D
Warrants between
October, 1995 and
September, 1996 at
$1.50 per share for
cash 78,334 117,500 117,500
Exercise of Class E
Warrants in March,
1996 at $0.20 per
share for cash 25,000 5,000 5,000
Issuance of Class A
Common Stock in
connection with
Stock Purchase
Agreement in
November 1995 (net
of issue costs of
$83,495) 481,651 1,416,505 1,416,505
Conversion of Convertible
Notes to Class A Common
Stock between February
and September, 1996
(including interest and
discount applied of
$2,263,276 and net
issue costs of $402,268) 3,419,166 10,147,676 10,147,676
Exercise of stock options
between October, 1995
and September, 1996 at
exercise prices ranging
from $0.50 per share to
$3.56 per share 142,807 263,079 263,079
Conversion of common stock 60,000 31,325 (60,000) (31,325)
Net loss (6,130,241) (6,130,241)
------ ----- ------ ------ ---------- ---------- ------- -------- ------------ ------ -----------
BALANCE, SEPTEMBER 30,
1996 -- -- -- -- 34,054,022 $49,216,569 283,000 $147,748 $(34,296,198) -- $15,086,119
====== ===== ====== ====== ========== ========== ======= ======== ============ ====== ===========
</TABLE>
(Continued) - 4.
8
<PAGE> 9
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1997
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE PREFERRED STOCK COMMON STOCK(1) DEFICIT RECEIV-
---------------------------- -------------------------------------- ACCUMULATED ABLE
SERIES A SERIES B CLASS A CLASS B DURING THE FROM
------------- ------------- --------------------- --------------- DEVELOPMENT STOCK-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE HOLDERS TOTAL
------ ------ ------ ------ ---------- --------- ------ ------ ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1996 TO
MARCH 31, 1997
(Unaudited)
Exercise of Class D
Warrants between
January and March,
1997 at $1.50 per
share for cash $321,085 $481,628 $ 481,628
Exercise of Class E
Warrants in October,
1996 at $0.20 per
share for cash 75,000 15,000 15,000
Conversion of
Convertible Notes
to Class A Common
Stock between
October, 1996 and
January, 1997
(including interest
and discount applied
of $635,029 and net
of issue costs of
$79,922) 2,093,852 3,095,221 3,095,221
Exercise of stock
options between
October, 1996 and
March, 1997 at
exercise prices
ranging from $0.9375
per share to $1.0625
per share 16,800 16,750 16,750
Compensation expense
related to valuation
of stock options
granted to non-
employees between
October 1996 and
March 1997 86,167 86,167
Discount on
Convertible Notes
issued in
February, 1997 1,058,823 1,058,823
Net loss (7,085,154) (7,085,154)
------ ----- ------ ------ ---------- ----------- ------- -------- ------------ ------ -----------
BALANCE, MARCH 31,
1997 -- -- -- -- 36,560,759 $53,970,158 283,000 $147,748 $(41,381,352) -- $12,736,554
====== ===== ====== ====== ========== =========== ======= ======== ============ ====== ===========
</TABLE>
See notes to financial statements.
(Concluded) - 5
9
<PAGE> 10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31, 1988
MARCH 31, (INCEPTION) TO
-------------------------------- MARCH 31,
1997 1996 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,085,154) $ (2,011,422) $ (41,381,352)
Adjustments to reconcile net loss to
net cash used for operating activiites:
Technology license fee 3,545,713
Depreciation and amortization 181,548 151,770 778,431
Non-cash interest expense 1,066,679 1,390,004 3,837,709
Compensation paid with common stock and stock options 86,167 661,792
Compensation forgiven by stockholder 66,923
Imputed interest under technology license fees 82,613
Changes in assets and liabilities:
Interest receivable 152,201 (109,520) (186,202)
Prepaid and other 642,123 66,894 (449,586)
Patent costs (21,408) (36,611) (642,832)
Organizational costs (20,242)
Accounts payable 502,729 (732,639) 1,832,147
Accrued compensation and payroll taxes 10,495 1,439 216,940
Due to MBI (12,325) 6,441 9,485
Deferred revenue (500,000) 500,000
---------------- ---------------- ----------------
Net cash used for operating activities (4,976,945) (773,644) (31,648,461)
---------------- ---------------- ----------------
INVESTING ACTIVITIES:
Short-term investments 4,555,794 3,865,597 (2,470,708)
Capital expenditures (28,291) (41,406) (570,931)
---------------- ---------------- ----------------
Net cash provided by (used for) investing activities 4,527,503 3,824,191 (3,041,639)
---------------- ---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 513,378 1,842,203 39,191,649
Proceeds from the issuance of convertible notes payable 6,000,000 13,500,000 19,500,000
Debt issue costs (288,519) (771,351) (1,059,870)
Repayment of convertible notes payable (3,341,521) (3,341,521)
Stock issue costs (83,495) (2,913,703)
Advances for purchase of common stock 125,000
Collection of notes receivable for common stock 14,525
Proceeds from stockholder loans 322,788
Repayment of stockholder loans (322,788)
Proceeds from issuance of subordinated notes payable-net
of issue costs 538,750
Repayment of subordinated notes payable (625,000)
Payment on technology license fee (958,326)
---------------- ---------------- ----------------
Net cash provided by financing activities 2,883,338 14,487,357 50,471,504
---------------- ---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,433,896 17,537,904 15,781,404
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,347,508 4,244,575
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,781,404 $ 21,782,479 $ 15,781,404
================ ================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 784,224 $ 993,763
================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING AND FINANCING ACTIVITIES:
In October 1989, advances of $125,000 were converted into 250,000 shares of
Class B Common Stock.
In May 1990 and September 1992, the Company recorded an expense and a liability
in the amount of $817,387 and $58,326, respectively, related to the technology
license agreement and the grant-in-aid agreement with MBI.
During 1993, the Company recorded expense and equity in the amount of $2,670,000
related to the amendment of the technology license agreement with MBI.
During 1993, 1994 and 1995, the Company recorded expense and equity in the
amount of $163,333, $245,000 and $81,666, respectively, related to the issuance
of stock options (below fair market value) as compensation for services provided
under a consulting agreement, and $48,126 in 1995 related to compensation to an
employee.
See notes to financial statements.
10
<PAGE> 11
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q. These statements should be
read in conjunction with the Company's audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1996 and the Company's unaudited Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996. In the opinion of
management, the financial statements include all adjustments, consisting
only of normal recurring accruals, necessary to summarize fairly the
Company's financial position as of March 31, 1997 and results of operations
for the three and six months ended March 31, 1997 and from August 31, 1988
(Inception) to March 31, 1997. The results of operations for the three and
six months ended March 31, 1997 may not be indicative of the results that
may be expected for the year ending September 30, 1997.
2. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. PRIOR YEAR QUARTERLY INFORMATION
Interest expense, net loss and net loss per share for the three and six
months ended March 31, 1996 have been restated from amounts previously
disclosed by the Company in its Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996. This restatement reflects the impact on those
amounts of an adjustment made in the fourth fiscal quarter of the year
ended September 30, 1996, (as reported in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996), to record an
adjustment to recognize non-cash interest expense associated with the
Convertible Notes (See Note 4). The effect of the adjustment on amounts
previously disclosed was to increase interest expense and net loss for the
three and six months ended by $1,214,630 ($0.04 per share) and $1,390,004
($0.04 per share), respectively.
4. CONVERTIBLE NOTES PAYABLE
Note Issued in February, 1997 - On February 26, 1997, the Company issued a
Convertible Note in the amount of $6.0 million (the "1997 Note") as part of
a private placement to an institutional investor. The 1997 Note accrues
interest at an annual rate of 7%, beginning
11
<PAGE> 12
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES PAYABLE (CONTINUED)
August 26, 1997 and is due and payable on February 26, 2000 if and to the
extent the 1997 Note is not previously converted pursuant to its terms. The
Company is recognizing the stated 7% annual interest ratably over the term
of the 1997 Note. The 1997 Note is convertible (subject to certain maximum
share limitations discussed below) at the option of the holder into shares
of Class A Common Stock at a price equal to (i) the Market Price per share,
(as defined in the 1997 Note) of the Class A Common Stock on the date of
conversion if conversion takes place prior to the 90th day following the
date of issue or (ii) 85% of the Market Price per share on the date of
conversion, if the conversion takes place after May 26, 1997. Pursuant to
the terms of the 1997 Note, the holder is entitled to receive (i) a Class G
Stock Purchase Warrant for each two shares of Class A Common Stock issued
to the holder upon conversion of the 1997 Note, and (ii) a certain number
of Class G Stock Purchase Warrants in the event that the Company prepays
the 1997 Note. Each Class G Stock Purchase Warrant is exercisable beginning
August 26, 1997, or the first date after February 26, 1997 when the trading
price of the Class A Common Stock is $6.00 or more, for a period of five
years from the date of issue into one share of Class A Common Stock at an
exercise price of $2.97 per share.
The option to convert the 1997 Note at 85% of the average closing bid price
of the Class A Common Stock effectively results in the issue of the 1997
Note at an 18% discount. This discount, totaling $1,058,823, was recorded
by the Company as equity in connection with the issuance of the 1997 Note
(See Note 6). The discount is being amortized as non-cash interest expense
during the 90 days prior to the period in which the discount on conversion
applies, with a corresponding increase to the principal amount of the 1997
Note. Through March 31, 1997, $400,000 of the discount was amortized as
non-cash interest expense on the 1997 Note.
The $6.0 million principal amount of the 1997 Note is convertible into an
aggregate maximum of 7,257,465 shares of Class A Common Stock. In the event
that the shares of Class A Common Stock underlying the 1997 Note cannot be
issued upon request for conversion due to the above referenced maximum
share limitations, the Company is immediately obligated to repay the
original principal of that portion of the 1997 Note which is presented for
conversion and cannot be converted, together with (i) a premium equal to
17.64% of such principal plus any accrued and unpaid interest, and (ii)
that number of Class G Stock Purchase Warrants equal to 50% of the
principal plus interest divided by the conversion price on the date of
payment.
Notes Issued in Fiscal Year 1996 - Between November 1995 and January 1996,
the Company issued $13.5 million of Convertible Notes Payable (the "95/96
Notes") as part of a private placement to institutional investors. The
$13.5 million original principal amount of the 95/96 Notes was convertible
into an aggregate maximum of 5,513,018 shares of Class A Common Stock at
the option of the holders, with each individual note limited to a pro-rata
amount of such number of shares.
12
<PAGE> 13
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES PAYABLE (CONTINUED)
From October 1, 1996 through January 10, 1997, the Company issued a total
of 2,093,852 shares of Class A Common Stock in connection with the
conversion of $2,540,116 of the original principal amount of the 95/96
Notes resulting in an aggregate issuance of 5,513,018 shares of stock to
date pursuant to the 95/96 Notes. The Company repaid certain holders of the
95/96 Notes, $1,728,393 on December 19, 1996 and $1,635,810 on January 10,
1997, representing a total of $2,673,217 of original principal and $690,986
of premium and accrued interest in accordance with the provisions of the
95/96 Notes, thus retiring the entire balance of the principal and interest
on the 95/96 Notes. The Company has no further obligation under the 95/96
Notes.
The conversion of the 95/96 Notes at 80% of the average closing bid price
of the Company's Class A Common Stock resulted in the 95/96 Notes being
issued at a 25% discount (the "Conversion Discount"). The Company
recognized the Conversion Discount as non-cash interest expense over the
term of the 95/96 Notes with a corresponding increase to the original
principal amount of the 95/96 Notes. Any portion of the Conversion Discount
not recognized upon conversion of the Notes was recorded as interest
expense on that date. In addition, the stated 7% annual interest was
recognized over the term of the 95/96 Notes until the 95/96 Notes were
repaid. Through January 10, 1997, a total of $847,781 was recorded as
interest expense relating to the 95/96 Notes, including $349,139 relating
to the Conversion Discount.
5. DEBT ISSUE COSTS
Debt issue costs represent costs related to the issuance of the 1997 Notes
and the 95/96 Notes (the "Convertible Notes"). The debt issue costs are
amortized over the life of the Convertible Notes, to the extent that the
notes are not converted or repaid (See Note 4). To date, the Company has
recorded debt issue costs in the amount of $288,519 in connection with the
1997 Note, of which $5,763 was amortized through March 31, 1997. Through
January 10, 1997, $289,160 of debt issue costs were amortized and $482,191
were reclassified to stock issue costs in connection with the conversion of
the 95/96 Notes into Common Stock. (See Notes 4 & 6)
6. STOCKHOLDERS' EQUITY
Between October and January 1997, the Company issued an aggregate of
2,093,582 shares of Class A Common Stock from the conversion of $2,540,116
in the principal amount of the 95/96 Notes. The amount recorded as
Stockholders' Equity in connection with these conversions included $635,029
of interest and discount associated with the converted principal and was
reduced by $79,923 due to the reclassification of previously recorded debt
issue costs (See Note 4).
13
<PAGE> 14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
On January 28, 1997, the Company extended the expiration of its Class D
Warrants from February 26, 1997 to December 31, 1997. Between January and
March, 1997, the Company received proceeds totaling $481,628 from the
exercise of 321,085 Class D Warrants.
In February 1997, the Company recorded equity in the amount of $1,058,823
representing the discount related to the conversion feature on the 1997
Note. (See Note 4).
During the six months ended March 31, 1997, the Company issued 56,500 stock
options for the purchase of shares of Class A Common Stock to non-employees
for services rendered. In connection with such issuances, the Company has
recorded compensation expense and equity in the amount of $86,167
representing the fair market valuation of the stock options on the date of
grant pursuant to Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-based Compensation".
7. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" ("EPS"). This Statement requires the presentation
of earnings per share to reflect both "Basic EPS" as well as "Diluted EPS"
on the face of the statement of operations. In general, Basic EPS excludes
dilution created by stock equivalents and is a function of the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from common stock equivalents if such
equivalents are converted into common stock and is calculated in the same
manner as fully diluted EPS illustrated in Accounting Principles Board
Opinion No. 15, "Earnings Per Share" ("APB No. 15").
The Company will be required to adopt the new method of reporting EPS for
the year ending September 30, 1997. In this quarterly report on Form 10-Q,
the Company has presented its net income (loss) per share under APB No. 15.
This presentation is consistent with the Basic EPS method as the inclusion
of common stock equivalents in the Diluted EPS calculation would be
anti-dilutive. Based on the Company's continuing net losses, the
anticipated results of implementing SFAS No. 128 is not expected to have a
material impact on the Company's EPS.
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements relating to
future events or the future performance of the Company. Prospective and current
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective and current investors should specifically consider various factors
identified in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, including the matters set forth under the caption "Risk
Factors" contained therein as well as factors in this Form 10-Q, which could
cause actual results to differ materially from those indicated by such
forward-looking statements.
OVERVIEW
The Company is a development stage company engaged in the research,
development and commercialization of innovative pharmaceutical products. The
Company is currently focusing its efforts primarily on the commercialization of
n-docosanol 10% cream (LIDAKOL(R)) and its Large Multivalent Immunogen (LMI)
technology. The Company has not generated any significant product revenues and
has been unprofitable since inception in August 1988. For the period from
inception to March 31, 1997, the Company incurred a cumulative net loss of $41.4
million. The Company's research and development, clinical trial and general and
administrative expenses will continue to be substantial and the Company expects
to continue to incur operating losses during the next several years.
In 1996, the Company reported results from three Phase 3 clinical
trials comparing LIDAKOL cream to placebo cream as a treatment of recurrent oral
herpes episodes. In these trials, LIDAKOL demonstrated clinical effectiveness
compared to historical episode features reported by the patients in the study,
including reduced healing times, episode abortion and shortening of pain
symptoms. However, similar results were obtained with the cream used as the
intended placebo in the trials. If these trials had shown statistically
significant advantage of LIDAKOL versus placebo, the Company could have filed a
New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA")
for marketing approval of LIDAKOL as a treatment of recurrent oral herpes. As a
result of the inconclusive outcome, the Company obtained FDA approval to use an
alternative placebo to conduct additional Phase 3 clinical trials to prove the
efficacy of LIDAKOL versus an alternative placebo in order to complete final
requirements to file an NDA for marketing approval.
In July and September 1996, the Company initiated two additional Phase
3 clinical trials of LIDAKOL in the United States. The Company estimates that
during fiscal 1997, it will incur direct costs for these two studies of
approximately $3.0 to $3.5 million. The Company anticipates completion of these
studies including data availability, in the summer of 1997.
The Company's business is subject to significant risks including, but
not limited to, the success of its research and development efforts,
uncertainties associated with obtaining and enforcing patents important to the
Company's business and lengthy and expensive regulatory approval processes and
from pharmaceutical and biotechnology companies, increasing pressure on
pharmaceutical pricing from payors, patients, and government agencies and
limitations on the availability of capital. Even if the Company's products
appear promising at an early stage of development, they may not reach the market
for a number of reasons. Such reasons include, but are not limited to, the
possibilities that the potential products will be found ineffective or toxic
during clinical trials, fail to receive the necessary regulatory approvals, be
15
<PAGE> 16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
difficult to manufacture on a large scale, be uneconomical to market, or be
precluded from commercialization by proprietary rights of third parties, or that
the Company may not have sufficient financial resources to complete final
development and/or marketing. Additional expenses, delays and losses of
opportunities that may arise out of these and other risks could have a material
adverse effect on the Company's financial condition and results of operations.
RESULTS OF OPERATIONS
NET LOSSES
During the three and six months ended March 31, 1997, (the "1997 three
and six months"), the Company incurred net losses of $3.9 million and $7.1
million, respectively, compared to net income of $59,000, and net loss of $2.0
million, respectively, during the three and six months ended March 31, 1996 (the
"1996 three and six months").
REVENUES
Total revenues for the 1997 three and six months were $263,000 and $1.0
million, respectively. For the three months ended March 31, 1997, (the "1997
three months"), total revenues consisted of interest and other income of
$208,000 and federal research grant income of $55,000. For the six months ended
March 31, 1997, (the "1997 six months"), total revenues consisted of license
fee/contract research revenue of $500,000, interest and other income of $425,000
and federal research grant income of $112,500. For the three months ended March
31, 1996, (the "1996 three months"), total revenue consisted of license
fee/contract research income of $3,000,000, interest and other income of
$279,000 and federal research grant income of $11,000. For the six months ended
March 31, 1996, (the "1996 six months"), total revenue consisted of license
fee/contract research revenue of $3,000,000, interest and other income of
$469,000 and federal research grant income of $18,000.
The decrease in revenues in the 1997 three and six months was due
primarily to license fees earned in the 1996 period in connection with certain
licensing agreements. Partially offsetting the decreased revenues in the 1997
periods, are increased revenues during the 1997 periods from federal research
grants issued by the National Institutes of Health.
EXPENSES
Research and development expenses for the 1997 three and six months
increased to $2.8 million and $5.0 million, respectively, from $1.1 million and
$2.6 million in the 1996 three and six months. The increase in expenses during
the 1997 three and six months was attributable primarily to increased activities
related to the on-going U.S. Phase 3 clinical trials of LIDAKOL. During the 1997
six months, the Company's clinical trial expense increased to $3.0 million, from
$1.0 million in the 1996 period.
General and administrative expenses for the 1997 three months decreased
to $734,000 from $902,000 in the 1996 three month period. The decrease in
expenses in the 1997 three month period, compared to the 1996 three month
period, is due primarily to lower legal fees, decreased costs of the mailing of
proxy material to the Company's shareholders, decreased investor relations
expenses, and decreases from non-recurring taxes paid in the 1996 period
associated with license fees earned in the 1996 period. Also contributing to the
16
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
decreased expenses in the 1997 period are decreased non-cash expenses in the
amount of $55,000 from the amortization of deferred debt issue costs related to
the convertible notes payable . See Note 4 to the Financial Statements.
Partially offsetting the decreased expenses in the 1997 period are increased
expenses in connection with the recording of non-cash compensation expense
related to the issuance of stock options to non-employees. See Note 6 to the
Financial Statements.
During the 1997 six months, general and administrative expenses
increased to $1.9 million from $1.6 million in the 1996 six month period. The
increase in expenses during the 1997 six months, compared to the 1996 six
months, is attributable primarily to non-recurring expenses incurred in the 1997
period related to reacquiring from Bristol-Myers Squibb Company the rights to
market LIDAKOL in all territories except the U.S., Canada and Mexico. Also
contributing to the increased expenses in the 1997 six months are increased
non-cash expenses in the amount of $11,000 from the amortization of deferred
debt issue costs and increased compensation expense as referenced above.
Partially offsetting the increased expenses in the 1997 six months are decreased
expenses as noted above.
Interest expense for the 1997 three and six months decreased to
$546,000 and $1.2 million, respectively, from $1.2 million and $1.4 million,
respectively, in the 1996 three and six months. Interest expense recorded in
these periods consists primarily of the non-cash amortization of the discount on
the convertible notes as discussed in Note 4 to the Financial Statements. The
decrease in interest expense during the 1997 three and six months is due
primarily to lower non-cash expenses associated with amortization of the
discount on the convertible notes and lower interest expense due to a lower
convertible notes payable balance in the 1997 periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through the sale of equity and debt securities and stockholder loans. Net cash
provided from financing activities through March 31, 1997 was $50.5 million.
At March 31, 1997, the Company had cash, cash equivalents and
short-term investments totaling $18.3 million and working capital of $11.3
million, as compared to $20.4 million and $13.8 million, respectively, at
September 30, 1996. The decreases in cash, cash equivalents and short-term
investments during the 1997 six months is attributable primarily to net cash
used to fund operating activities, as discussed below. Also contributing to the
decrease in cash, cash equivalents and short-term investments is the repayment
of $3.4 million of principal and interest of convertible notes payable, offset
by the receipt of $6.0 in principal amount from the issuance of a convertible
note in February 1997. See Note 4 to Financial Statements.
Net cash used by the Company to fund operating activities during the
1997 six months increased to $5.0 million from $774,000 during the 1996 six
months. This increase is attributable primarily to increased expenses and
decreased revenues during the 1997 period as discussed in "Results of
Operations". During the 1997 period, net cash used to fund operating activities
included $500,000 attributable to the recognition of revenue which was received
and recorded as deferred revenue in the 1996 period. See "Results of Operations,
Revenues". In addition, $28,000 of cash was used for capital expenditures during
the period.
17
<PAGE> 18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (concluded)
As discussed above, the results of the clinical studies reported in
1996 of the Company's most developed drug candidate, LIDAKOL, do not support the
filing of an NDA at this time. The Company is conducting two additional clinical
studies to prove the efficacy of LIDAKOL versus an alternative placebo which, if
successful, would enable it to file an NDA. Through March 31, 1997, the Company
has recorded expenses of approximately $3.0 million in connection with these
trials. The Company estimates it will incur additional direct costs for these
two additional clinical studies of approximately $250,000 to $500,000 during
fiscal 1997.
Future clinical trial expenses notwithstanding, the Company anticipates
that, on average, cash requirements to fund the operating activities for the
remainder of the fiscal year ending September 30, 1997 will be consistent with,
and similar to, the expenditures of the six months ended March 31, 1997, due to
the fact that certain of the clinical trial expenses incurred in the 1997 six
months will be paid in the subsequent period. The Company estimates its current
cash, cash equivalents and short-term investments will be sufficient to fund
operating activities for at least the next 12 months.
On February 26, 1997, the Company issued a Convertible Note Payable in
the amount of $6.0 million as part of a private placement to an institutional
investor, (the "1997 Note"). The 1997 Note is convertible at the option of the
holder into shares of Class A Common Stock at a price equal to (i) the Market
Price per share, (as defined in the 1997 Note), of the Class A Common Stock on
the date of conversion, if conversion takes place prior to the 90th day
following the date of issue or (ii) 85% of the Market Price per share on the
date of conversion, if the conversion takes place after May 26, 1997, provided,
however, that in no event can the total shares issued from the conversion of the
1997 Note be more than 7,257,465. In the event that the shares of Class A Common
Stock underlying the 1997 Note cannot be issued upon request for conversion due
to the above referenced maximum share limitations, the Company is immediately
obligated to repay the original principal of that portion of the 1997 Note which
is presented for conversion and cannot be converted, together with (i) a premium
equal to 17.64% of such principal plus any accrued and unpaid interest, and (ii)
that number of Class G Stock Purchase Warrants equal to 50% of the principal
plus interest divided by the conversion price on the date of payment. See Note 4
to the Financial Statements.
Between November 1995 and January 1996, the Company issued a total of
$13.5 million of convertible notes as part of a private placement to
institutional investors. The Company has no further obligations under these
notes. See Note 4 to the Financial Statements.
The Company expects to continue to incur substantial operating losses
for the foreseeable future. The Company's available funds may not be sufficient
to permit the Company to successfully complete development or commercialize any
of its proposed pharmaceutical products. Accordingly, the Company may be
required to raise substantial additional capital or to collaborate with one or
more large pharmaceutical or biotechnology companies which could provide the
necessary financing and expertise to complete clinical development, manufacture
and package finished product and obtain regulatory approvals to market its
products. There can be no assurance that the Company can successfully obtain
such additional capital, or enter into the collaborative arrangements necessary
to fully develop or commercialize any of its proposed products on acceptable
terms.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held March 15, 1997, the
Company's shareholders re-elected four directors of the Company to hold office
until the 1999 Annual Meeting of Shareholders, and approved the following
proposals:
1) To amend the Company's 1994 Stock Option Plan to provide for an increase
in the number of shares of Common Stock authorized for issuance under such
plan from 1,350,000 to 2,000,000.
There were cast 29,494,985 votes in favor of this proposal, 2,812,722 votes
against this proposal, 322,311 votes abstained and 5,071,790 unvoted votes.
2) To ratify the selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending September 30, 1997.
There were cast 35,632,215 votes in favor of this proposal, 163,234 votes
against this proposal, 187,998 votes abstained, and 1,718,361 unvoted
votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Statement Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
March 31, 1997:
Report on Form 8-K filed on January 15, 1997 - reporting the issuance
of 1,338 shares of the Company's Class A Common Stock in connection
with the conversion of $2,322 in principal amount of Convertible Note,
and the repayment of $1,635,810 representing $1,297,678 of original
principal, and $338,132 of premium and accrued interest to the
noteholders pursuant to the terms of the convertible note.
Report on Form 8-K filed on February 11, 1997 - reporting the extension
of the expiration date of the Company's Class D Warrants from February
26, 1997 to December 31, 1997.
Report on Form 8-K filed on March 10, 1997 - reporting the completion
of a $6.0 million private financing of a three-year Convertible Note to
an institutional investor.
Report on Form 8-K filed on March 24, 1997 - reporting preliminary
results of a clinical trial using LIDAKOL(R)as a topical treatment for
Kaposi's Sarcoma.
Report on Form 8-K filed on March 24, 1997 - reporting the appointment
of James E. Berg to the position of Vice President of Clinical Affairs
and Product Development, and the Company's drug development highlights
as presented at the Company's Annual Meeting of Shareholders.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIDAK Pharmaceuticals
Date: June 5, 1997 By: /s/ David H. Katz
---------------------------------------
David H. Katz, M.D., President and
Chief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
20
