<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended DECEMBER 31, 1996 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.
Class Outstanding at February 7, 1997
Class A common stock, no par value 36,453,476
Class B common stock, no par value 283,000
<PAGE> 2
LIDAK Pharmaceuticals
FORM 10-Q
For the quarter ended December 31, 1996
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets at September 30, 1996 and
December 31, 1996................................................. 3
Statements of Operations for the three month periods
ended December 31, 1995 and 1996 and for the period
from August 31, 1988 (inception) to December 31, 1996............. 4
Statements of Stockholders' Equity (Deficit) from August 31, 1988
(inception) to December 31, 1996.................................. 5
Statements of Cash Flows for the three month periods ended
December 31, 1995 and 1996 and for the period
from August 31, 1988 (inception) to December 31, 1996.............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)
<TABLE>
<CAPTION>
BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,347,508 $ 10,037,664
Short-term investments 7,026,502 5,993,727
Interest receivable 338,403 189,873
Prepaid and other 825,924 494,280
------------ ------------
Total current assets 21,538,337 16,715,544
PROPERTY - at cost (less accumulated depreciation of $266,668 and $295,480) 275,972 267,455
PATENT COSTS (less accumulated amortization of $39,654 and $46,623) 581,770 595,438
DEBT ISSUE COSTS 185,015 38,615
OTHER ASSETS 265,785 265,785
------------ ------------
TOTAL $ 22,846,879 $ 17,882,837
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 5,721,087 $ 1,458,049
Accounts payable 1,329,418 1,194,693
Accrued compensation and payroll taxes 206,445 257,540
Due to MBI 21,810 13,494
Deferred revenue 500,000
------------- ------------
Total current liabilities 7,778,760 2,923,776
------------- ------------
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
34,054,022 and 36,225,736 shares issued and outstanding 49,216,569 52,328,269
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 (34,296,198) (37,516,956)
------------ ------------
Total stockholders' equity 15,068,119 14,959,061
------------ ------------
TOTAL $ 22,846,879 $ 17,882,837
============ ============
</TABLE>
See notes to financial statements
3
<PAGE> 4
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------------------
THREE MONTHS ENDED AUGUST 31, 1988
DECEMBER 31, (INCEPTION) TO
------------------------------- DECEMBER 31,
1995 1996 1996
<S> <C> <C> <C>
REVENUES:
License fees/Contract research $ 500,000 $ 4,482,625
Federal research grants $ 6,500 57,500 856,277
Interest and other 190,035 217,072 3,436,686
------------ ------------ ------------
Total revenues 196,535 774,572 8,775,588
------------ ------------ ------------
EXPENSES:
Research and development 1,441,423 2,179,395 26,568,204
General and administrative 650,143 1,136,959 15,413,301
Cost of contract research 533,270
Interest 175,374 678,976 3,777,769
------------ ------------ ------------
Total expenses 2,266,940 3,995,330 46,292,544
------------ ------------ ------------
NET LOSS $ (2,070,405) $ (3,220,758) $ (37,516,956)
============ ============ =============
NET LOSS PER SHARE $ (0.07) $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 30,457,152 35,301,227
============ ============
</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 DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON
STOCK
----------------------------------- -----------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------ ------ ------ ------ -------- ---------- ------ ------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ -------- ---------- ------ ------
<S> <C> <C> <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 4,235,000 $ 52,937
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 80,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 80,000 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
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
Collection on notes receivable
Net loss
--------- -- ------ ------ --------- ---------- --------- -------
BALANCE, SEPTEMBER 30, 1989 2,000,000 1 4,795,000 103,437
Conversion of advances to common stock in
October 1989 at $.50 per share 250,000 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $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 totalling $97,500) 750,000 652,500
Exercise of stock options in July and
August 1990 at $.50 per share 21,500 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable
Net loss
--------- -- ------ ------ --------- -------- ---------- --------
BALANCE, SEPTEMBER 30, 1990 2,000,000 1 5,750,000 4,619,320 5,066,500 306,110
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----
<C> <C> <C>
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share $ (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 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 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
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 20,000
Collection on notes receivable 1,635 1,635
Net loss $(409,718) (409,718)
--------- -------- --------
BALANCE, SEPTEMBER 30, 1989 (409,718) (12,890) (319,170)
Conversion of advances to common stock in
October 1989 at $.50 per share 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $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 totalling $97,500)
Exercise of stock options in July and
August 1990 at $.50 per share 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable 12,890 12,890
Net loss (2,319,231) (2,319,231)
---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1990 (2,728,949) - 2,196,482
</TABLE>
5
<PAGE> 6
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------
SERIES A SERIES B
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1990 2,000,000 $ 1
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
totalling $130,339) 960,003 $ 769,670
Conversion of common stock
Net loss
---------------- --- ----------------- ----------
BALANCE, SEPTEMBER 30, 1991 2,000,000 1 960,003 769,670
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $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 totalling $317,930)
Conversion of common stock
Net loss
---------------- --- ----------------- ----------
BALANCE, SEPTEMBER 30, 1992 2,000,000 1 5,226,683 4,341,065
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totalling $8,720)
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totalling $4,122)
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totalling $42,125)
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash
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
---------------------------------------------------------
CLASS A CLASS B
----------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1990 5,750,000 $ 4,619,320 5,066,500 $ 306,110
Exercise of stock options in November
1990 at $.50 per share 2,000 1,000
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339)
Conversion of common stock 115,000 5,750 (115,000) (5,750)
Net loss
------------ ------------ --------- ---------
BALANCE, SEPTEMBER 30, 1991 5,865,000 4,625,070 4,953,500 301,360
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605)
Exercise of stock options in March 1992 at
$.50 per share 119,000 59,500
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totalling $317,930) 5,650,200 8,157,370
Conversion of common stock 395,000 6,250 (395,000) (6,250)
Net loss
------------ ------------ --------- ---------
BALANCE, SEPTEMBER 30, 1992 11,910,200 12,788,690 4,677,500 354,610
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 totalling $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 totalling $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 totalling $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
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1990 $ (2,728,949) - $ 2,196,482
Exercise of stock options in November
1990 at $.50 per share 1,000
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339) 769,670
Conversion of common stock
Net loss (1,949,588) (1,949,588)
------------- --- ------------
BALANCE, SEPTEMBER 30, 1991 (4,678,537) - 1,017,564
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605) 3,571,395
Exercise of stock options in March 1992 at
$.50 per share 59,500
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totalling $317,930) 8,157,370
Conversion of common stock
Net loss (2,361,855) (2,361,855)
------------ --- ------------
BALANCE, SEPTEMBER 30, 1992 (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 totalling $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 totalling $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 totalling $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
</TABLE>
6
<PAGE> 7
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------
SERIES A SERIES B
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <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
Compensation expense related to stock options
granted at an exercise price below fair market
value
Cancellation of Series A Preferred and Class B
Common Stock in July 1993 (1,500,000)
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement
Conversion of preferred and common stock (100,000) (5,642,653) (4,731,065)
Cancellation of partial shares (30)
Net loss
----------- ---- ----------- -----------
BALANCE, SEPTEMBER 30, 1993 400,000 $ 1 - -
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340)
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414)
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875)
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
Compensation expense related to stock options granted
at an exercise price below fair market value
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215)
Conversion of preferred and common stock (400,000) (1) (106,666) (100,000)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994
Cancellation of partial shares
Net loss
----------- ---- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 - - - -
----------- ---- ----------- -----------
</TABLE>
<TABLE>
COMMON STOCK
--------------------------------------------------------
CLASS A CLASS B
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash
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 28,003 (2,240,250) $ (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 6,040,653 4,790,121 (298,000) (59,056)
Cancellation of partial shares
Net loss
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1993 22,416,905 23,411,234 2,139,250 267,551
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 totalling $541,340) 4,312,060 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $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 totalling $2,875) 78,335 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash
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 653,416 113,911 (146,750) (13,910)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 (70,000) 20,794 (1,546,500) (20,794)
Cancellation of partial shares (3)
Net loss
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 28,149,971 35,156,504 446,000 232,847
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
<S> <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
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
Cancellation of partial shares
Net loss $(6,139,223) (6,139,223)
----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1993 (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 totalling $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 totalling $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 totalling $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
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994
Cancellation of partial shares
Net loss (4,813,341) (4,813,341)
----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 (17,992,956) - 17,396,395
----------- ----------- -----------
</TABLE>
7
<PAGE> 8
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------
SERIES A SERIES B
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B
Warrants in January and February, 1995 at
$1.4175 per share for cash
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totaling $26,743)
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share
Compensation expense related to stock options
granted at an exercise price below fair market
value
Conversion of common stock
Net loss
----------- -------- ---------- ----------
BALANCE, SEPTEMBER 30, 1995 - - - -
----------- -------- ---------- ----------
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
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495)
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 of issue costs of $402,268)
Exercise of stock options between October, 1995
and September, 1996 at exercise prices ranging
from $0.50 per share to $3.56 per share
Conversion of common stock
Net loss
---------- ------- ----------- ----------
BALANCE, SEPTEMBER 30, 1996 - - - -
========== ======= =========== ==========
<CAPTION>
COMMON STOCK
---------------------------------------------------------
CLASS A CLASS B
----------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B
Warrants in January and February, 1995 at
$1.4175 per share for cash 97,202 137,783
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totaling $26,743) 415,600 388,857
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash 153,335 230,003
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash 85,000 17,000
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share 842,956 1,121,771
Compensation expense related to stock options
granted at an exercise price below fair market
value 129,792
Conversion of common stock 103,000 53,774 (103,000) (53,774)
Net loss
----------- ------------ ---------- ---------
BALANCE, SEPTEMBER 30, 1995 29,847,064 37,235,484 343,000 179,073
----------- ------------ ---------- ---------
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
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash 25,000 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
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 of issue costs of $402,268) 3,419,166 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
Conversion of common stock 60,000 31,325 (60,000) (31,325)
Net loss
----------- ------------ ------------ ---------
BALANCE, SEPTEMBER 30, 1996 34,054,022 $49,216,569 283,000 $147,748
=========== =========== ============ =========
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----
<S> <C> <C> <C>
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B
Warrants in January and February, 1995 at
$1.4175 per share for cash 137,783
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totaling $26,743) 388,857
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash 230,003
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash 17,000
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share 1,121,771
Compensation expense related to stock options
granted at an exercise price below fair market
value 129,792
Conversion of common stock
Net loss (10,173,001) (10,173,001)
--------------- ------- -----------
BALANCE, SEPTEMBER 30, 1995 (28,165,957) - 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 117,500
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash 5,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495) 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 of issue costs of $402,268) 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 263,079
Conversion of common stock
Net loss (6,130,241) (6,130,241)
--------------- ------- -----------
BALANCE, SEPTEMBER 30, 1996 $(34,296,198) - $15,068,119
============== ======= ===========
</TABLE>
See notes to financial statements.
8
<PAGE> 9
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK (1)
----------------------------------- ------------------------------------
SERIES A SERIES B CLASS A CLASS B
---------------- --------------- ---------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1996 TO DECEMBER 31, 1996 (Unaudited)
Exercise of Class E Warrants in
October, 1996 at $0.20 per share for cash 75,000 15,000
Conversion of Convertible Notes to
Class A Common Stock between October and
December, 1996 (including interest and
discount applied of $634,448 and net
of issue costs of $79,854) 2,092,514 3,092,388
Exercise of stock options between October,
1996 and December, 1996 at exercise
prices ranging from $0.9375 per share
to $1.0625 per share 4,200 4,312
Net loss
------ ------ ------ ------ ---------- ----------- ------- --------
BALANCE, DECEMBER 31, 1996 - - - - 36,225,736 $52,328,269 283,000 $147,748
====== ====== ====== ====== ========== =========== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----
<S> <C> <C> <C>
OCTOBER 1, 1996 TO DECEMBER 31, 1996 (Unaudited)
Exercise of Class E Warrants in
October, 1996 at $0.20 per share for cash 15,000
Conversion of Convertible Notes to
Class A Common Stock between October and
December, 1996 (including interest and
discount applied of $634,448 and net
of issue costs of $79,854) 3,092,388
Exercise of stock options between October,
1996 and December, 1996 at exercise
prices ranging from $0.9375 per share
to $1.0625 per share 4,312
Net loss (3,220,758) (3,220,758)
------------ ------- ------------
BALANCE, DECEMBER 31, 1996 $(37,516,956) - $ 14,959,061
============ ======= ============
</TABLE>
See notes to financial statements. (Concluded)-5
9
<PAGE> 10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED AUGUST 31, 1988
DECEMBER 31, (INCEPTION) TO
-------------------------- DECEMBER 31,
1995 1996 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,070,405) $(3,220,758) $(37,516,956)
Adjustments to reconcile net loss to net cash used for operating activiites:
Technology license fee 3,545,713
Depreciation and amortization 24,897 102,326 699,209
Non-cash interest expense 175,374 284,744 3,055,774
Compensation paid with common stock and stock options 575,625
Compensation forgiven by stockholder 66,923
Imputed interest under technology license fees 82,613
Changes in assets and liabilities:
Interest receivable (11,174) 148,530 (189,873)
Prepaid and other (32,006) 331,644 (760,065)
Patent costs (17,047) (20,637) (642,061)
Organizational costs (20,242)
Accounts payable (230,767) (134,725) 1,194,693
Accrued compensation and payroll taxes 24,091 51,095 257,540
Due to MBI (3,434) (8,316) 13,494
Deferred revenue (500,000)
----------- ----------- ------------
Net cash used for operating activities (2,140,471) (2,966,097) (29,637,613)
----------- ----------- ------------
INVESTING ACTIVITIES:
Short-term investments 2,582,559 1,032,775 (5,993,727)
Capital expenditures (17,165) (20,295) (562,935)
----------- ----------- ------------
Net cash provided by (used for) investing activities 2,565,394 1,012,480 (6,556,662)
----------- ----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 1,672,948 19,312 38,697,583
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 the issuance of convertible notes payable 10,500,000 13,500,000
Debt issue costs (584,467) (771,351)
Repayment of convertible notes payable (1,375,539) (1,375,539)
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 (used for) financing activities 11,504,986 (1,356,227) 46,231,939
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,929,909 (3,309,844) 10,037,664
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,244,575 13,347,508
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,174,484 $10,037,664 $10,037,664
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 446,092 $ 655,631
----------- -----------
</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. 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 December 31, 1996 and results of operations for the three months ended
December 31, 1996 and from August 31, 1988 (Inception) to December 31,
1996. The results of operations for the three months ended December 31,
1996 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 quarter ended
December 31, 1995 have been restated from amounts previously disclosed by
the Company in its Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995. This restatement reflects the impact on those amounts of
an adjustment made in the fourth fiscal quarter for the year ended
September 30, 1996, (as reported in the Company's Annual Report 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 quarter by $175,374
(.01 per share).
4. CONVERTIBLE NOTES PAYABLE
A total of $13.5 million of Convertible Notes Payable ("Notes") were
originally issued by the Company as part of a private placement to
institutional investors in November 1995, December 1995 and January 1996.
The Notes accrued interest at an annual rate of 7%, beginning six months
from the date of issue, with the principal due and payable two years from
the date of issue if and to the extent the Notes were not previously
converted. The Notes were convertible at the option of the holder (subject
to the
11
<PAGE> 12
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES PAYABLE (CONTINUED)
maximum share limitations) into Class A Common Stock at a price equal to
80% of the average closing bid price for the Class A Common Stock on the
NASDAQ for the seven trading days prior to the conversion. The $13.5
million original principal amount of the Notes were convertible into an
aggregate maximum of 5,513,018 shares of the Company's 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.
From October 1, 1996 through December 31, 1996, the Company issued a total
of 2,092,514 shares of its Class A Common Stock in connection with the
conversion of $2,537,794 of the original principal amount of the Notes.
Including these issuances, a total of 5,511,680 shares of Class A Common
Stock were issued in connection with these Notes as of December 31, 1996.
On December 19, 1996, the Company repaid certain noteholders a total of
$1,728,393 representing $1,375,539 of original principal and $352,854 of
premium and accrued interest in accordance with the provisions of this
note.
The conversion of the Notes at 80% of the average closing bid price of the
Company's Class A Common Stock results in the Notes being issued at a 25%
discount (the "Conversion Discount"). The Conversion Discount is being
recognized by the Company as non-cash interest expense over the term of the
Notes with a corresponding increase to the original principal amount of the
Notes. Any portion of the Conversion Discount not recognized upon
conversion of the Notes is recorded as interest expense on that date. In
addition, the stated 7% annual interest was recognized over the term of the
notes until the notes were repaid. During the quarter ended December 31,
1996, a total of $678,976 was recorded as interest expense relating to the
Notes, including $348,840 relating to the Conversion Discount.
On January 10, 1997, the Company issued 1,338 shares of its Class A Common
Stock in connection with the conversions of $2,322 in principal amounts of
Notes resulting in an aggregate issuance of 5,513,018 shares of stock to
date pursuant to the Notes. As a result of this transaction, the noteholder
reached their pro-rata portion of the maximum share limitation as described
above. On January 10, 1997, the Company repaid $1,635,810 representing
$1,297,678 of original principal and $338,132 of premium and accrued
interest to such noteholder pursuant to the terms of the Notes, thus
retiring the entire balance of the principal and interest on the Notes. The
Company has no further obligations under the Notes.
12
<PAGE> 13
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEBT ISSUE COSTS
Debt issue costs represent costs related to the issuance of the Notes which
will be amortized over the life of the Notes, for a maximum of two years
from the date of issuance. As of December 31, 1996, $250,613 of the debt
issue costs have been amortized and $482,122 have been reclassified to
stock issue costs in connection with the conversion of the Notes into
common stock. (See Notes 4 & 6).
6. STOCKHOLDERS' EQUITY
Between October and December 1996, the Company issued and aggregate of
2,092,514 shares of Class A Common Stock from the conversion of $2,537,794
principal amount of the Notes. The amount recorded as Stockholders' Equity
in connection with these conversions included $634,448 of interest and
discount associated with the converted principal and was reduced by $79,854
due to the reclassification of previously recorded debt issue costs (See
Notes 4 & 5).
On January 28, 1997, the Company extended the expiration of its Class D
Warrants from February 26, 1997 to December 31, 1997.
7. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares have been
excluded from the number of shares used in the calculation of weighted
average number of common shares outstanding as their inclusion would be
anti-dilutive.
8. ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-based Compensation," which requires the Company to adopt disclosure
provisions for stock based compensation effective January 1, 1996. The
standard defines a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
This standard encourages rather than requires companies to adopt the fair
value method of accounting for employee stock-based transactions. Companies
are permitted to continue to account for such transactions under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," but will be required to disclose in a note to the financial
statements pro forma net income (loss) and net
13
<PAGE> 14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
8. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
income (loss) per share as if the new method of accounting had been
applied. The Company has elected to continue to apply APB Opinion No. 25 in
its financial statements and will disclose the required pro forma
information in a footnote in the Company's annual report for the year ended
September 30, 1997.
9. LICENSE AGREEMENT
In November 1996, the Company reacquired from Bristol-Myers Squibb Company
the rights to market n-docosanol 10% cream (LIDAKOL (R)) in all territories
covered in the license agreement, except the United States, Canada and
Mexico.
10. DEFERRED REVENUE
During the quarter ended December 31, 1996, the Company realized $500,000
of revenue that was previously classified as deferred due to the
achievement of certain milestones under a licensing agreement.
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain statements of a forward-looking nature
relating to future events or the future performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective 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 December 31, 1996, the Company incurred a cumulative net loss of
$37.5 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 $2.5 million to $3.0 million. The Company anticipates completion
of these studies including data availability, around 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
competition from pharmaceutical and biotechnology
15
<PAGE> 16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 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 months ended December 31, 1996 ("the 1996 three
months"), the Company incurred net losses of $3.2 million compared to $2.1
million during the three months ended December 31, 1995 ("the 1995 three
months").
REVENUES
Total revenues for the 1996 three months were $774,500 consisting of
license fee/contract research revenue of $500,000, interest and other income of
$217,000 and federal research grant income of $57,500. Total revenues for the
1995 three months were $196,500, consisting of $190,000 of interest and other
income and $6,500 of federal research grant income.
The increase in revenues in the 1996 three months was due primarily to
license fees earned during the period that were previously recorded by the
Company as Deferred Revenue. The revenue from these license fees was earned due
to the achievement of certain milestones in connection with a license agreement.
Also contributing to the increased revenues during the period are increased
revenues from federal research grants issued by the National Institutes of
Health which were not in place during the 1995 three months, and increased
interest income.
EXPENSES
Research and development expenses for the 1996 three months increased
to $2.2 million from $1.4 million in the 1995 three months. The increase in
expenses during the 1996 three months was attributable primarily to increased
activities related to the on-going U.S. Phase 3 clinical trials of LIDAKOL.
General and administrative expenses for the 1996 three months increased
to $1.1 million from $650,000 during the 1995 three months. The increase in
expenses during the 1996 three months is attributable primarily to non-recurring
expenses incurred in the period
16
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
related to reacquiring the rights to market LIDAKOL in all territories except
the U.S., Canada and Mexico from Bristol-Myers Squibb Company. See Note 9 to the
Financial Statements. Also contributing to the increased expenses in the 1996
three months are non-cash expenses in the amount of $66,545 from the
amortization of deferred debt issue costs related to the Convertible Notes
Payable (the "Notes"). See Note 5 to the Financial Statements. Partially
offsetting the overall increase in expenses are decreased costs of investor
relations activities and lower legal expenses during the 1996 period.
Interest expense recorded during the 1996 three months represents
interest associated with the Notes. Of the $679,000 of interest expense,
$285,000 represents non-cash interest expense from the recognition of the
conversion discount on the Notes. See Note 4 to the Financial Statements.
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 December 31, 1996 was $46.2 million.
At December 31, 1996, the Company had cash, cash equivalents and
short-term investments totaling $16.0 million and working capital of $13.8
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 1996 three months is attributable primarily to net cash
used to fund operating activities, as discussed below.
Net cash used by the Company to fund operating activities during the
1996 three months increased to $3.0 million from $2.1 million during the 1995
three months. This increase is attributable primarily to the increased net loss
during the 1996 period as discussed in "Results of Operations". In addition,
$21,000 of cash was used for capital expenditures during the period. Also
contributing to cash used during the period is the repayment of $1.7 million of
the Notes to certain noteholders. See Note 4 to the Financial Statements.
The Company anticipates that, on average, future cash requirements to
fund the operating activities for each of the quarters in the fiscal year ending
September 30, 1997 will be consistent with, and similar to, the expenditures of
the quarter ended December 31, 1996 as a result of continuing research and
development, clinical trials and general and administrative expenses.
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 has recently initiated two additional
clinical studies to prove the
17
<PAGE> 18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
efficacy of LIDAKOL versus an alternative placebo which, if successful, would
enable it to file an NDA. The Company estimates that during fiscal 1997, it will
incur direct costs for these two additional clinical studies of approximately
$2.5 million to $3.0 million.
A total of $13.5 million of the Notes were originally issued by the
Company as part of a private placement to institutional investors in November
1995, December 1995 and January 1996. None of these Notes remain outstanding as
of January 10, 1997. See Note 4 to the Financial Statements.
On January 10, 1997, the Company issued 1,338 shares of its Class A
Common Stock in connection with the conversions of $2,322 in principal amounts
of Notes resulting in an aggregate issuance of 5,513,018 shares of stock to date
pursuant to the Notes. As a result of this transaction, the noteholder reached
their pro-rata portion of the maximum share limitation as described above. On
January 10, 1997, the Company repaid $1,635,810 representing $1,297,678 of
original principal and $338,132 of premium and accrued interest to such
noteholder pursuant to the terms of the Notes, thus retiring the entire balance
of the principal and interest on the Notes. The Company has no further
obligations under the Notes.
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, 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 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
December 31, 1996:
Report on Form 8-K was filed on October 15, 1996- reporting under Item
5 the issuance of 523,643 shares of Class A Common Stock in connection
with the conversion of $763,000 principal amount of Convertible Notes.
Report on Form 8-K was filed on November 20, 1996- reporting under Item
5 the issuance of 211,492 shares of Class A Common Stock in connection
with the conversion of $244,000 principal amount of Convertible Notes.
Report on Form 8-K was filed on December 2, 1996- reporting under Item
5 the issuance of 150,630 shares of Class A Common Stock in connection
with the conversion of $170,000 principal amount of Convertible Notes.
Report on Form 8-K was filed on December 3, 1996- reporting under Item
5 that the Company had reacquired from Bristol-Myers Squibb Company the
rights to manufacture, market and sell LIDAKOL for the treatment of
oral herpes in all territories except the U.S., Canada and Mexico.
Report on Form 8-K was filed on December 5, 1996- reporting under Item
5 the issuance of 502,558 shares of Class A Common Stock in connection
with the conversion of $560,000 principal amount of Convertible Notes.
Report on Form 8-K was filed on December 24, 1996- reporting under Item
5 the issuance of 704,171 shares of Class A Common Stock in connection
with the conversion of $800,794 principal amount of Convertible Notes.
Report on Form 8-K was filed on December 30, 1996- reporting under Item
5 the results of the Company's fiscal year ended September 30, 1996.
Included in the report were restatements of the operating results for
the first, second and third quarters of the year ended September 30,
1996 due to the recognition of non-cash interest expense associated
with the Convertible Notes that was not previously included in the
quarterly reports.
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: February 14, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE QUARTER ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 10,037,664
<SECURITIES> 5,993,727
<RECEIVABLES> 189,873
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,715,544
<PP&E> 562,935
<DEPRECIATION> 295,480
<TOTAL-ASSETS> 17,882,837
<CURRENT-LIABILITIES> 2,923,776
<BONDS> 0
0
0
<COMMON> 52,328,269
<OTHER-SE> 147,748
<TOTAL-LIABILITY-AND-EQUITY> 17,882,837
<SALES> 0
<TOTAL-REVENUES> 774,572
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,316,354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678,976
<INCOME-PRETAX> (3,220,758)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,220,758)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
