<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 JUNE 30, 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.
Class Outstanding at August 8, 1997
Class A common stock, no par value 37,694,442
Class B common stock, no par value 283,000
<PAGE> 2
FORM 10-Q
For the quarter ended June 30, 1997
Index
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheets at June 30, 1997 and September 30, 1996............................3
Statements of Operations for the three and nine month
periods ended June 30, 1997 and 1996 and for the period
from August 31, 1988 (inception) to June 30, 1997.................................4
Statements of Stockholders' Equity (Deficit) from August
31, 1988 (inception) to June 30, 1997.............................................5
Statements of Cash Flows for the nine month periods ended
June 30, 1997 and 1996 and for the period
from August 31, 1988 (inception) to June 30, 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>
<PAGE> 3
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,727,009 $ 13,347,508
Short-term investments 1,100,101 7,026,502
Interest receivable 121,876 338,403
Prepaid and other 97,962 825,924
------------ ------------
Total current assets 16,046,948 21,538,337
PROPERTY - at cost (less accumulated depreciation of $345,476 and $266,668) 233,481 275,972
PATENT COSTS (less accumulated amortization of $60,514 and $39,654) 584,586 581,770
DEBT ISSUE COSTS 243,473 185,015
OTHER ASSETS 265,785 265,785
------------ ------------
TOTAL $ 17,374,273 $ 22,846,879
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 5,488,589 $ 5,721,087
Accounts payable 651,765 1,329,418
Accrued compensation and payroll taxes 267,646 206,445
Due to MBI 46,097 21,810
Deferred revenue 500,000
------------ ------------
Total current liabilities 6,454,097 7,778,760
------------ ------------
COMMITMENTS - (Note 4)
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
36,873,300 and 34,054,022 shares issued and outstanding 54,467,826 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 (43,695,398) (34,296,198)
------------ ------------
Total stockholders' equity 10,920,176 15,068,119
------------ ------------
TOTAL $ 17,374,273 $ 22,846,879
============ ============
</TABLE>
See notes to financial statements
<PAGE> 4
LIDAK PHARMACEUTICALS
(A DEVELOMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
----------------------------- ---------------------------
1997 1996 1997 1996 1997
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees/Contract research $ 500,000 $ 3,000,000 $ 4,482,625
Federal research grants $ 7,869 $ 25,168 120,369 43,000 919,146
Interest and other 243,669 306,050 668,725 775,421 3,888,339
------------ ------------ ----------- ----------- ------------
Total revenues 251,538 331,218 1,289,094 3,818,421 9,290,110
------------ ------------ ----------- ----------- ------------
EXPENSES:
Resarch and development 1,299,578 920,336 6,326,120 3,477,105 30,714,929
General and administrative 520,405 636,654 2,391,649 2,188,506 16,667,991
Cost of contract research 533,270
Interest 745,601 1,115,124 1,970,525 2,505,128 5,069,318
------------ ------------ ----------- ----------- ------------
Total expenses 2,565,584 2,672,114 10,688,294 8,170,739 52,985,508
------------ ------------ ----------- ----------- ------------
NET LOSS $ (2,314,046) $ (2,340,896) $(9,399,200) $(4,352,318) $(43,695,398)
============ ============ =========== =========== ============
NET LOSS PER SHARE $ (0.06) $ (0.07) $ (0.26) $ (0.14)
============ ============ =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 36,854,063 32,488,397 36,286,375 31,358,952
============ ============ =========== ===========
</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 JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------------- -----------------------
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, 1989 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 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 80,000 4,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 80,000 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, 1989 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 5,066,500 306,110 (2,728,949) - 2,196,482
</TABLE>
(Continued) - 1.
5
<PAGE> 6
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
--------------------------------------------------- -----------------------
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 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) 769,670
Conversion of common stock (115,000) (5,750)
Net loss (1,949,588) (1,949,588)
------- ------- ----------- --- ----------
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 (2,361,855) (2,361,855)
------- ------- ---------- --- ----------
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
</TABLE>
(Continued) - 2.
6
<PAGE> 7
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
--------------------------------------------------- -----------------------
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) 4,312,060 9,160,795
Exercise of Class C Warrants
between October 1993
and September 1994 at $1.00
per share for cash
(net of commissions
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
-------------- ------ ---------- --------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK 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 JUNE 30, 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------------- -----------------------
SERIES A SERIES B CLASS A
---------------------- ------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <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
Net loss
------ ------ ------ ------ ---------- -----------
BALANCE, SEPTEMBER 30, 1995 -- -- -- -- 29,847,064 37,235,484
------ ------ ------ ------ ---------- -----------
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
Net loss
------ ------ ------ ------ ---------- -----------
BALANCE, SEPTEMBER 30, 1996 -- -- -- -- 34,054,022 $49,216,569
====== ====== ====== ====== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
------------------ ACCUMULATED NOTES
CLASS B DURING THE RECEIVABLE
------------------ DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------ ------ ----- ------------ -----
<S> <C> <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 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 (103,000) (53,774)
Net loss (10,173,001) (10,173,001)
-------- -------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 1995 343,000 179,073 (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
1,807,785
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 (60,000) (31,325)
Net loss (6,130,241) (6,130,241)
-------- -------- ------------ ----------- -----------
BALANCE, SEPTEMBER 30, 1996 283,000 $147,748 $(34,296,198) -- $15,068,119
======== ======== ============ =========== ===========
</TABLE>
(Continued) - 4.
8
<PAGE> 9
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
AUGUST 31, 1988 (INCEPTION) TO JUNE 30, 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
SERIES A SERIES B
---------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
OCTOBER 1, 1996 TO JUNE 30, 1997
(Unaudited)
Exercise of Class D Warrants
between January and
June, 1997 at $1.50 per share
for cash
Exercise of Class E Warrants in
October, 1996
at $0.20 per share for cash
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)
Exercise of stock options between
October, 1996
and June, 1997 at exercise
prices ranging
from $0.9375 per share to $1.0625
per share
Compensation expense related to
valuation of
stock options granted to
non-employees between
October 1996 and March 1997
Discount on Convertible Notes issued
in February, 1997
Conversion of Convertible Note
to Class A Common Stock in
June, 1997 (including interest
of $9,721 and net of
issue costs of $23,463)
Net loss
---------- ---------- --------- ---------
BALANCE, JUNE 30, 1997 - - - -
========== ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
-------------------------------------------- ACCUMULATED NOTES
CLASS A CLASS B DURING THE RECEIVABLE
---------------------- ----------------- DEVELOPMENT FROM
SHARES AMOUNT SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
-------- ----------- ------ ------ ----- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1996 TO JUNE 30, 1997
(Unaudited)
Exercise of Class D Warrants
between January and
June, 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 June, 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
Conversion of Convertible Note
to Class A Common Stock in
June, 1997 (including interest
of $9,721 and net of
issue costs of $23,463) 312,541 497,666 497,666
Net loss (9,399,200) (9,399,200)
---------- ----------- -------- -------- ------------ -------- ----------
BALANCE, JUNE 30, 1997 36,873,300 $54,467,826 283,000 $147,748 $(43,695,398) - 10,920,176
========== =========== ======== ======== ============ ======== ==========
</TABLE>
9
See notes to financial statements (Concluded-5)
<PAGE> 10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED AUGUST 31, 1988
JUNE 30, (INCEPTION) TO
---------------------------- JUNE 30,
1997 1996 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,399,200) $ (4,352,318) $ (43,695,398)
Adjustments to reconcile net loss to net cash used for operating activities:
Technology license fee 3,545,713
Depreciation and amortization 236,226 239,504 833,109
Non-cash interest expense 1,841,778 2,473,344 4,612,808
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 216,527 (269,319) (121,876)
Prepaid and other 727,962 55,300 (363,747)
Patent costs (3,676) (93,601) (625,100)
Organizational costs (20,242)
Accounts payable (677,653) (1,178,507) 651,765
Accrued compensation and payroll taxes 61,201 87,626 267,646
Due to MBI 24,287 1,629 46,097
Deferred revenue (500,000) 500,000
------------ ------------- -------------
Net cash used for operating activities (7,386,381) (2,536,342) (34,057,897)
------------ ------------- -------------
INVESTING ACTIVITIES:
Short-term investments 5,926,401 (12,919,607) (1,100,101)
Capital expenditures (36,317) (49,488) (578,957)
------------ ------------- -------------
Net cash provided by (used for) investing activities 5,890,084 (12,969,095) (1,679,058)
------------ ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 513,378 1,885,579 39,191,649
Proceeds from the issuance of convertible notes payable 6,000,000 13,500,000 19,500,000
Debt issue costs (296,059) (771,351) (1,067,410)
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 2,875,798 14,530,733 50,463,964
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,379,501 (974,704) 14,727,009
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,347,508 4,244,575
------------ ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,727,009 $ 3,269,871 $ 14,727,009
============ ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 0
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
Reports on Form 10-Q for the quarters ended December 31, 1996 and March
31, 1997. 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 June 30, 1997
and results of operations for the three and nine months ended June 30,
1997 and from August 31, 1988 (Inception) to June 30, 1997. The results of
operations for the three and nine months ended June 30, 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 nine
months ended June 30, 1996 have been restated from amounts previously
disclosed by the Company in its Quarterly Report on Form 10-Q for the
quarter ended June 30, 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 nine months ended June 30, 1997 by $1,083,340 ($0.03 per share)
and $2,473,344 ($0.08 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 85% of the Market
Price per share (as defined in the 1997 Note) on the date of conversion.
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 was 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 June 30, 1997, the total
discount of $1,058,823 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. Through
June 30, 1997, 312,541 shares of Class A Common Stock and 156,271 Class G
Stock Purchase Warrants were issued in connection with the conversion of
$511,411 in principal amount of the 1997 Note. Subsequent to June 30,
1997, 821,142 shares of Class A Common Stock and 410,571 Class G Stock
Purchase Warrants were issued in connection with the conversions of
$1,423,129 in principal amount of the 1997 Note. To date, a total of
1,133,683 shares of Class A Common Stock and 566,842 Class G Stock
Purchase Warrants have been issued in connection with the conversions of
$1,924,539 in principal amount of the 1997 Note. 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
limitation, 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 $296,059 in connection with the
1997 Note. Through June 30, 1997, $29,304 of debt issue costs were
amortized and $23,463 were reclassified to stock issue costs in connection
with conversion of the 1997 Note. 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
In June 1997, the Company issued 312,541 shares of Class A Common Stock
from the conversion of 511,411 in principal amount of the 1997 Note. The
amount recorded in Stockholder's Equity in connection with this conversion
included $9,721 of interest expense and was reduced by a $23,463
reclassification of debt issue costs. (See Notes 4 & 5).
Between October 1996 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
13
<PAGE> 14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (CONTINUED)
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).
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 nine months ended June 30, 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 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 quarter ending December 31, 1997. In this quarterly report on Form
10-Q, the Company has presented its net 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 net loss per share.
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 June 30, 1997, the Company incurred a cumulative net loss of $43.7
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 has
recently completed the enrollment and treatment portion of these studies and
anticipates availability of data during 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 nine months ended June 30, 1997, (the "1997
three and nine months"), the Company incurred net losses of $2.3 million and
$9.4 million, respectively, compared to net losses of $2.3 million and $4.4
million, respectively, during the three and nine months ended June 30, 1996 (the
"1996 three and nine months").
REVENUES
Total revenues for the 1997 three and nine months were $252,000 and
$1.3 million, respectively. For the three months ended June 30, 1997, (the "1997
three months"), total revenues consisted of interest and other income of
$244,000 and federal research grant income of $8,000. For the nine months ended
June 30, 1997, (the "1997 nine months"), total revenues consisted of license
fee/contract research revenue of $500,000, interest and other income of $669,000
and federal research grant income of $120,400. For the three months ended June
30, 1996, (the "1996 three months"), total revenue consisted of interest and
other income of $306,000 and federal research grant income of $25,000. For the
nine months ended June 30, 1996, (the "1996 nine months"), total revenue
consisted of license fees/contract research revenue of $3,000,000, interest and
other income of $775,000 and federal research grant income of $43,000.
The decrease in revenues in the 1997 three months was due primarily
to lower interest income earned in the 1997 period due to a lower average cash
balance during the 1997 period and to the completion of. federal research grants
issued by the National Institutes of Health during the 1997 three months. For
the 1997 nine months, decreased revenues were due primarily to license fees
earned in the 1996 period in connection with certain licensing agreements and
lower interest income as a result of a lower average cash balance in the 1997
nine months. Partially offsetting the overall decrease in revenues in the 1997
nine months are increased revenues from federal research grants.
EXPENSES
Research and development expenses for the 1997 three and nine months
increased to $1.3 million and $6.3 million, respectively, from $920,000 and $3.5
million in the 1996 three and nine months. The increase in expenses during the
1997 three and nine months was attributable primarily to increased activities
related to the on-going U.S. Phase 3 clinical trials of LIDAKOL. During the 1997
nine months, the Company's clinical trial expense increased to $3.6 million,
from $1.0 million in the 1996 period.
General and administrative expenses for the 1997 three months
decreased to $520,000 from $637,000 in the 1996 three month period. The decrease
in expenses in the 1997 three
16
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
month period, compared to the 1996 three month period, is due primarily to lower
legal fees, and decreased costs of consulting services. Also contributing to the
decreased expenses in the 1997 period are decreased non-cash expenses in the
amount of $54,000 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 occupancy
expenses due to an expansion of administrative office space in the 1997 three
months.
During the 1997 nine months, general and administrative expenses
increased to $2.4 million from $2.2 million in the 1996 nine month period. The
increase in expenses during the 1997 nine months, compared to the 1996 nine
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 nine months are increased
non-cash expenses in connection with the recording of compensation expense
related to the issuance of stock options to non-employees. See Note 6 to the
Financial Statements. Partially offsetting the increased expenses in the 1997
nine months, are lower costs of legal fees, investor relations activities and
decreases from non-recurring taxes paid in the 1996 period associated with
license fees earned in the 1996 period. Also partially offsetting the overall
increased expenses in the 1997 nine months are lower non-cash expenses in the
amount of $27,000 from the amortization of deferred debt issue costs.
Interest expense for the 1997 three and nine months decreased to
$746,000 and $2.0 million, respectively, from $1.1 million and $2.5 million,
respectively, in the 1996 three and nine 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 nine months is due
primarily to lower non-cash expenses associated with the 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 June 30, 1997 was $50.5 million.
At June 30, 1997, the Company had cash, cash equivalents and
short-term investments totaling $15.8 million and working capital of $9.6
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 nine 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.
17
<PAGE> 18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (concluded)
Net cash used by the Company to fund operating activities during the
1997 nine months increased to $7.4 million from $2.5 during the 1996 nine
months. This increase is attributable primarily to increased expenses and
decreased revenues during the 1997 period as discussed in "Results of
Operations". In addition, $36,000 of cash was used for capital expenditures
during the period.
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 completed the enrollment
and treatment stage of 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 June 30, 1997, the Company has recorded expenses of
approximately $3.5 million in connection with the recently completed trials. The
Company does not anticipate substantial additional expenses related to these
trials.
The Company anticipates that, it's cash requirements to fund
operating activities for the remainder of the fiscal year ending September 30,
1997 will be lower than the average expenditures of the nine months ended June
30, 1997, due to the fact that the majority of the clinical trial expenses
incurred in the 1997 nine months have been paid. 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 85% of the Market
Price per share (as defined in the 1997 Note) on the date of conversion,
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Statement Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended June
30, 1997. Since that date and prior to the date of filing this
report, the following reports on Form 8-K were filed:
Report on Form 8-K filed on July 9, 1997 - reporting the issuance of
312,541 and 245,100 shares of the Company's Class A Common Stock in
connection with two conversions of $920,923 in total principal
amount of Convertible Notes. The Company also reported the issuance
of 278,820 Class G Stock Purchase Warrants to purchase a like number
of shares of the Company's Class A Common Stock at an exercise price
of $2.97 per share in connection with these conversions.
Report on Form 8-K filed on July 23, 1997 - reporting that the
Company had received notification of allowance from the U.S. Patent
and Trademark Office for its patent application #08/543,449 for Human
Immue System in Non-Human Animal.
Report on Form 8-K filed on July 24, 1997 - reporting the issuance of
301,648 shares of the Company's Class A Common Stock in connection
with the conversion of $513,616 in principal amount of Convertible
Notes. The Company also reported issuance of 150,824 Class G Stock
Purchase Warrants to purchase a like number of shares of the
Company's Class A Common Stock at an exercise price of $2.97 per
share in connection with this conversion.
Report on Form 8-K filed on July 30, 1997 - reporting the issuance of
274,394 shares of the Company's Class A Common Stock in connection
with the conversion of $500,000 in principal amount of Convertible
Notes. The Company also reported the issuance of 137,197 Class G
Stock Purchase Warrants to purchase a like number of shares of the
Company's Class A Common Stock at an exercise price of $2.97 per
share in connection with this conversion.
Report on Form 8-K filed on August 7, 1997 - reporting the
appointment of Susan Yeagley Sullivan to the position of Vice
President and Chief Financial Officer of the Company.
Report on Form 8-K filed August 11, 1997 - reporting an agreement
with Aurora Biosciences ("Aurora") whereby Aurora receives an
exclusive license, with rights to sublicense, the Company's
proprietary fluorescent one-step unbound free fatty acid
determination method (ADIFAB) for the field of screening for
therapeutic compounds.
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: August 13, 1997 By:/s/David H. Katz
----------------
David H. Katz, M.D., President and
Chief Executive Officer
(Duly Authorized Officer )
(Principal Executive Officer)
Date: August 13, 1997 By:/s/Susan Yeagley Sullivan
----------------
Susan Yeagley Sullivan, Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
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