<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, 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 February 5, 1998
Class A common stock, no par value 38,742,511
Class B common stock, no par value 283,000
<PAGE> 2
LIDAK Pharmaceuticals
FORM 10-Q
For the quarter ended December 31, 1997
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1997 and
December 31, 1997.................................................. 3
Statements of Operations for the three month periods ended
December 31, 1996 and 1997, and the period from August 31, 1988
(inception) to December 31, 1997................................... 4
Statements of Stockholders' Equity (Deficit) for the period
August 31, 1988 (inception) to December 31, 1997.................. 5
Statements of Cash Flows for the three month periods ended
December 31, 1996 and 1997, and the period from August 31, 1988
(inception) to December 31, 1997................................... 10
Notes to Financial Statements...................................... 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 21
SIGNATURES .................................................................. 22
</TABLE>
2
<PAGE> 3
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,428,834 $ 13,093,044
Interest receivable 109,528 210,960
Prepaid and other 231,834 190,112
------------ ------------
Total current assets 14,770,196 13,494,116
PROPERTY - at cost (less accumulated depreciation of $372,951
and $404,750) 219,748 275,639
PATENT COSTS (less accumulated amortization of $68,028 and $75,579) 607,841 595,745
DEBT ISSUE COSTS 93,758 76,831
OTHER ASSETS 35,952 265
------------ ------------
TOTAL $ 15,727,495 $ 14,442,596
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 2,415,461 $ 2,215,461
Accounts payable 765,917 737,292
Accrued compensation and payroll taxes 225,493 273,533
Due to MBI 26,698 26,127
------------ ------------
Total current liabilities 3,433,569 3,252,413
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
38,589,399 and 38,742,511 shares issued and outstanding 57,551,618 57,788,922
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 (45,405,440) (46,746,487)
------------ ------------
Total stockholders' equity 12,293,926 11,190,183
------------ ------------
TOTAL $ 15,727,495 $ 14,442,596
============ ============
</TABLE>
See notes to financial statements.
3
<PAGE> 4
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,1988
DECEMBER 31, (INCEPTION) TO
------------------------------ DECEMBER 31,
1996 1997 1997
<S> <C> <C> <C>
REVENUES:
License fees/Contract research $ 500,000 $ 4,507,625
Federal research grants 57,500 940,646
Interest and other 217,072 $ 219,759 4,320,058
------------ ------------ -------------
Total revenues 774,572 219,759 9,768,329
------------ ------------ -------------
EXPENSES
Research and development 2,179,395 883,561 32,899,499
General and administrative 1,136,959 642,006 17,876,883
Interest 678,976 35,239 5,205,164
Cost of contract research 533,270
------------ ------------ -------------
Total expenses 3,995,330 1,560,806 56,514,814
------------ ------------ -------------
NET LOSS $ (3,220,758) $ (1,341,047) $ (46,746,487)
============ ============ =============
NET LOSS PER SHARE $ (.09) $ (.03)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 35,301,227 38,898,947
============ ============
</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, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------
SERIES A SERIES B
------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- --- --------- ----------
<S> <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)
Issuance of common stock for cash in
June 1990 at $1.00 per share (net of
stock issue costs totaling $97,500)
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
</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>
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) 5,000,000 $ 3,966,820 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) 750,000 652,500 652,500
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 5,750,000 4,619,320 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 DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------
SERIES A SERIES B
------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- --- --------- ----------
<S> <C> <C> <C> <C>
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
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 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)
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 totaling $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 totaling $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 totaling $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 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>
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 (115,000) (5,750)
Net loss $ (1,949,588) (1,949,588)
---------- ----------- ---------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1991 5,865,000 4,625,070 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) 5,650,200 8,157,370 8,157,370
Conversion of common stock 395,000 6,250 (395,000) (6,250)
Net loss (2,361,855) (2,361,855)
---------- ----------- ---------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1992 11,910,200 12,788,690 4,677,500 354,610 (7,040,392) -- 10,443,974
Exercise of Unit Purchase Options
between October 1992 and September
1993 for cash 793,645 600,010 600,010
Exercise of Class A Warrants between
October 1992 and September 1993 at
$.9450 per share for cash 793,645 749,995 749,995
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) 96,897 209,298 209,298
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 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 1,212,376
Exercise of Class E Warrants between
October 1992 and September 1993 at
$.20 per share for cash 315,000 63,000 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 DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<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 totaling $541,340)
Exercise of Class C Warrants between
October 1993 and September 1994 at
$1.00 per share for cash (net of
commissions totaling $4,414)
Exercise of Class D Warrants between
October 1993 and September 1994 at
$1.50 per share for cash (net of
commissions totaling $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>
<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>
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 27,480 $ 37,480 37,480
Compensation expense related to stock
options granted at an exercise price
below fair market value 163,333 163,333
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 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 $(6,139,223) (6,139,223)
---------- ----------- ---------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1993 22,416,905 23,411,234 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 17,202 24,384 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 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) 106,340 101,926 101,926
Exercise of Class D Warrants between
October 1993 and September 1994 at
$1.50 per share for cash (net of
commissions totaling $2,875) 78,335 114,627 114,627
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 113,267 156,048 156,048
Compensation expense related to stock
options granted at an exercise
price below fair market value 245,000 245,000
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 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 (4,813,341) (4,813,341)
---------- ----------- ---------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1994 28,149,971 35,156,504 446,000 232,847 (17,992,956) -- 17,396,395
</TABLE>
(Continued) - 3
7
<PAGE> 8
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------
SERIES A SERIES B
------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- --- --------- ----------
<S> <C> <C> <C> <C>
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 -- -- -- --
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 -- -- -- --
</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>
Exercise of non-redeemable Class B
Warrants in January and February, 1995
at $1.4175 per share for cash 97,202 $ 137,783 $ 137,783
Exercise of Class C Warrants between
October, 1994 and June, 1995 at
$1.00 per share for cash (net of
commissions totaling $26,743) 415,600 388,857 388,857
Exercise of Class D Warrants between
April, 1995 and September, 1995 at
$1.50 per share for cash 153,335 230,003 230,003
Exercise of Class E Warrants in April and
August, 1995 at $0.20 per share for cash 85,000 17,000 17,000
Exercise of stock options between
October, 1994 and September, 1995 at
exercise prices ranging from $0.50 per
share to $3.56 per share 842,956 1,121,771 1,121,771
Compensation expense related to stock
options granted at an exercise price
below fair market value 129,792 129,792
Conversion of common stock 103,000 53,774 (103,000) $(53,774)
Net loss $(10,173,001) (10,173,001)
---------- ----------- ------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1995 29,847,064 37,235,484 343,000 179,073 (28,165,957) -- 9,248,600
Exercise of Class D Warrants between
October, 1995 and September, 1996 at
$1.50 per share for cash 78,334 117,500 117,500
Exercise of Class E Warrants in March,
1996 at $0.20 per share for cash 25,000 5,000 5,000
Issuance of Class A Common Stock in
connection with Stock Purchase
Agreement in November 1995 (net
of issue costs of $83,495) 481,651 1,416,505 1,416,505
Conversion of Convertible Notes to
Class A Common Stock between February
and September, 1996 (including interest
and discount applied of $2,263,276 and
net of issue costs of $402,268) 3,419,166 10,147,676 10,147,676
Exercise of stock options between
October, 1995 and September, 1996 at
exercise prices ranging from $0.50 per
share to $3.56 per share 142,807 263,079 263,079
Conversion of common stock 60,000 31,325 (60,000) (31,325)
Net loss (6,130,241) (6,130,241)
---------- ----------- ------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1996 34,054,022 49,216,569 283,000 147,748 (34,296,198) -- 15,068,119
</TABLE>
(Continued) - 4
8
<PAGE> 9
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------
SERIES A SERIES B
------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- --- --------- ----------
<S> <C> <C> <C> <C>
Exercise of Class D Warrants between
January and September, 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
$684,383 and net of issue costs
of $79,922)
Exercise of stock options between October,
1996 and September, 1997 at exercise
prices ranging from $0.9375 per share
to $1.0625 per share
Compensation expense related to valuation
of 86,167 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 between June, 1997 and
September, 1997 (including interest
of $86,345 and net of issue costs
of $156,593)
Net loss
--------- --- --------- ----------
BALANCE, SEPTEMBER 30, 1997 -- -- -- --
OCTOBER 1, 1997 TO DECEMBER 31, 1997
(Unaudited)
Exercise of stock optionsin October
1997 at an exercise price of
$0.9625 per share
Exercise of Class D warrants in
November 1997 at $1.50 per share
for cash
Conversion of Convertible Note to
Class A Common Stock in December
1997 (including interest of
$10,619 and net of issue costs
of $7,228)
Net loss
--------- --- --------- ----------
BALANCE DECEMBER 31, 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>
Exercise of Class D Warrants between
January and September, 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
$684,383 and net of issue costs
of $79,922) 2,093,852 3,144,577 3,144,577
Exercise of stock options between October,
1996 and September, 1997 at exercise
prices ranging from $0.9375 per share
to $1.0625 per share 33,800 34,564 34,564
Compensation expense related to valuation
of 86,167 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 between June, 1997 and
September, 1997 (including interest
of $86,345 and net of issue costs
of $156,593) 2,011,640 3,514,290 3,514,290
Net loss $(11,109,242) (11,109,242)
---------- ----------- ------- -------- ------------ -------- ------------
BALANCE, SEPTEMBER 30, 1997 38,589,399 57,551,618 283,000 147,748 (45,405,440) -- 12,293,926
OCTOBER 1, 1997 TO DECEMBER 31, 1997
(Unaudited)
Exercise of stock optionsin October
1997 at an exercise price of
$0.9625 per share 5,000 4,813 4,813
Exercise of Class D warrants in
November 1997 at $1.50 per share
for cash 19,400 29,100 29,100
Conversion of Convertible Note to
Class A Common Stock in December
1997 (including interest of
$10,619 and net of issue costs
of $7,228) 128,712 203,391 203,391
Net Loss (1,341,047) (1,341,047)
---------- ----------- ------- -------- ------------ -------- ------------
BALANCE DECEMBER 31, 1997 38,742,511 $57,788,922 283,000 $147,748 $(46,746,487) -- $ 11,190,183
========== =========== ======= ======== ============ ======== ============
</TABLE>
(Concluded) -- 5
See notes to financial statements.
9
<PAGE> 10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, 1988
DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,220,758) $ (1,341,047) $(46,746,487)
Adjustments to reconcile net loss to net cash used for operating activiites:
Depreciation and amortization 102,326 59,668 793,371
Non-cash interest expense 284,744 4,241,464
Technology license fee 3,545,713
Compensation paid with common stock and stock options 661,792
Compensation forgiven by stockholder 66,923
Imputed interest under technology license fees 82,613
Changes in assets and liabilities:
Interest receivable 148,530 (101,432) (210,960)
Prepaid and other 331,644 77,409 (190,377)
Patent costs (20,637) 4,545 (671,324)
Organizational costs (20,242)
Accounts payable (134,725) (28,625) 737,292
Accrued compensation and payroll taxes 51,095 48,040 273,533
Due to MBI (8,316) (571) 26,127
Deferred revenue (500,000)
------------ ------------ ------------
Net cash used for operating activities (2,966,097) (1,282,013) (37,410,562)
------------ ------------ ------------
INVESTING ACTIVITIES:
Short-term investments 1,032,775
Capital expenditures (20,295) (87,690) (680,389)
------------ ------------ ------------
Net cash provided by (used for) investing activities 1,012,480 (87,690) (680,389)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 19,312 33,913 39,243,376
Proceeds from issuance of convertible notes payable 19,500,000
Debt issue costs (1,067,410)
Repayment of convertible notes payable (1,375,539) (2,673,217)
Stock issue costs (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 (used for) financing activities (1,356,227) 33,913 51,183,995
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,309,844) (1,335,790) 13,093,044
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,347,508 14,428,834
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,037,664 $ 13,093,044 $ 13,093,044
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 446,092 $ 45,155 $ 1,038,918
============ ============ ============
</TABLE>
See notes to financial statements.
10
<PAGE> 11
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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/A for the year ended
September 30, 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 December 31, 1997 and
results of operations for the three months ended December 31, 1997 and from
August 31, 1988 (Inception) to December 31, 1997. The results of operations for
the three months ended December 31, 1997 may not be indicative of the results
that may be expected for the year ending September 30, 1998.
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. CONVERTIBLE NOTES PAYABLE
Note Issued in February, 1997 - On February 26, 1997, the Company issued a $6
million Convertible Note Payable (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 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 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.
11
<PAGE> 12
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
3. CONVERTIBLE NOTES PAYABLE (continued)
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 issuance 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. The discount was
amortized as non-cash interest expense over the 90 days from the date of
issuance with a corresponding increase to the principal amount of the 1997 Note.
The $6 million principal amount of the 1997 Note is convertible into an
aggregate maximum of 7,257,465 shares of Class A Common Stock. Through December
31, 1997, 2,140,352 shares of Class A Common Stock and 1,070,176 Class G Stock
Purchase Warrants were issued in connection with the conversion of $3,784,539 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. See Note 5.
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. 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 the issuance of the maximum 5,513,018 shares of stock 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.
12
<PAGE> 13
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
3. CONVERTIBLE NOTES PAYABLE (continued)
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.
4. 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 have been
amortized over the life of the Convertible Notes, to the extent that the notes
are not converted or repaid (see Note 3). To date, the Company has recorded debt
issue costs in the amount of $296,059 in connection with the 1997 Note. Through
December 31, 1997, $55,407 of debt issue costs were amortized and $163,821 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 3 and 5.
5. STOCKHOLDERS' EQUITY
On January 12, 1998, the President, Chief Executive Officer and director of the
Company sold 308,100 shares of Class A Common Stock and 70,200 shares of Class
B Common Stock to HealthMed, Inc., a Nevada corporation ("HealthMed"), for a
total purchase price of $1,528,235. The purchase price was paid in the form of a
promissory note maturing on January 12, 2000. In addition, the President, Chief
Executive Officer and director transferred 718,903 shares of Class A Common
Stock and 163,800 shares of Class B Common Stock into a voting trust controlled
by HealthMed. Upon these transfers, the 70,200 shares of Class B Common Stock
sold and the 163,800 shares of Class B Common Stock transferred automatically
converted to 234,000 shares of Class A Common Stock. The term of the voting
trust is ten (10) years.
On January 12, 1998, Medical Biology Institute ("MBI") sold 65,100 shares of
Class A Common Stock to HealthMed for a total purchase price of $263,004. The
purchase price was paid in the form of a promissory note maturing on January 12,
2000. In addition, MBI transferred 151,900 shares of Class A Common Stock into a
voting trust controlled by HealthMed. The term of the voting trust is ten (10)
years. The President,
13
<PAGE> 14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
5. STOCKHOLDERS EQUITY (continued)
Chief Executive Officer and director of the Company is also the President, Chief
Executive Officer and a director of MBI.
In December 1997 the Company issued 128,712 shares of Class A Common Stock and
64,356 Class G Stock Purchase Warrants from the conversion of $200,000 in
principal amount of the 1997 Note. The amount recorded in Stockholder's Equity
in connection with this conversion included $10,619 of interest expense and was
reduced by a $7,228 reclassification of debt issue costs. See Notes 3 and 4.
On January 12, 1998, the Company received notice of conversion of $1,233,642 in
principal amount of the 1997 Note, which will result in the issuance of 827,836
shares of Class A Common Stock and 413,918 Class G Stock Purchase Warrants.
Between October 1997 and December 1997, the Company issued 5,000 and 19,400
shares of Class A Common Stock from the exercise of stock options and Class D
Warrants, respectively.
6. 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 EPS to
reflect both the "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, as if such equivalents are converted into common
stock, and is calculated substantially in the same manner as fully diluted EPS
in accordance with Accounting Principles Board Opinion ("APB") No. 15, "Earnings
Per Share".
The Company has adopted the new method of reporting EPS for the quarter ended
December 31, 1997. In the accompanying statements of operations for the three
months ended December 31, 1996 and 1997, the Company has presented its net loss
per share under SFAS No. 128. Net loss per share is computed using 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, implementing SFAS No. 128 has not had a material impact on the Company's
net loss per share.
14
<PAGE> 15
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
7. LICENSE AGREEMENT
In February 1996, the Company entered into a license agreement with
Bristol-Myers Squibb Company ("BMS") for the manufacture, marketing and
distribution of LIDAKOL as a topical treatment for oral herpes exclusively in
the U.S., Canada and all remaining major territories throughout the world which
are not currently licensed to other parties, including Mexico, China, South and
Central America, Australia and India, and portions of the Far East. In
connection with this agreement, the Company received an initial license fee with
a portion recorded as revenue in the year ended September 30, 1996 and the
remainder recorded as deferred revenue at September 30, 1996 . In the fiscal
year ended September 30, 1997, the Company recognized the deferred revenue due
to achievement of certain milestones. In November 1996 the Company reacquired
from BMS the rights to market LIDAKOL in all territories covered in the license
agreement, except the United States, Canada and Mexico, and on December 29,
1997, the BMS agreement was cancelled by BMS.
15
<PAGE> 16
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/A for the fiscal year ended September 30,
1997, 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. Since inception in August 1988, the
Company has operated in one business segment -- the conduct of biomedical
research directed towards the development and commercialization of innovative
pharmaceutical products. The Company has moved closest to the commercialization
endpoint with n-docosanol 10% cream (LIDAKOL(R)) as a topical treatment for oral
herpes (cold sores or fever blisters). LIDAKOL is a therapeutic compound,
developed by Company scientists, which has demonstrated a broad spectrum of
anti-viral activities and other therapeutic properties in promoting wound
healing and in reducing acute inflammatory reactions. The Company filed a New
Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") on
December 22, 1997, for marketing approval of LIDAKOL in the U.S. as a treatment
of recurrent oral herpes. The Company is also developing several other potential
therapeutic products derived from an exclusive license agreement with the
Medical Biology Institute, a non-profit research organization. These include a
technology known as Large Multivalent Immunogen ("LMI") which has also reached
the clinical testing phase as an immunotherapeutic vaccine for malignant
melanoma, and potential new drugs for treatment of allergies and asthma,
inflammatory diseases and other human cancers. The Company has not generated any
significant product revenues and has been unprofitable since inception in August
1988. For the period from inception to September 30, 1997, the Company incurred
a cumulative net loss of $46.7 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.
On January 13, 1998, the Company received a preliminary proposal from HealthMed,
Inc., a Nevada corporation based in Beverly Hills, CA. ("HealthMed"), to provide
to the Company up to $130 million of non-dilutive debt financing in multiple
stages over 18 months. The proposal suggests that the working capital be used,
in part, to accelerate research and development of the Company's technologies
and for marketing expenses related to LIDAKOL if approved for marketing by the
FDA. The proposal is subject to certain conditions, including, without
limitation, the following: (i) HealthMed's satisfaction with the results of a
due diligence review of the Company, (ii) HealthMed
16
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW (continued)
receiving sufficient entry of shareholders of the Company in voting trusts in
which HealthMed is the trustee, and (iii) reconfiguring the Board of Directors
of the Company to the satisfaction of HealthMed. A committee composed of four
independent directors of the Company has been formed to evaluate the HealthMed
proposal. There can be no assurance as to whether or not a definitive agreement
will be reached.
In related transactions on January 12, 1998, David H. Katz, M.D., President,
Chief Executive Officer and director of the Company, sold 308,100 shares of
Class A Common Stock and 70,200 shares of Class B Common Stock to HealthMed for
a total purchase price of $1,528,235. The purchase price was paid in the form of
a promissory note maturing on January 12, 2000. In addition, Dr. Katz
transferred 718,903 shares of Class A Common Stock and 163,800 shares of Class B
Common Stock into a voting trust controlled by HealthMed. Upon these transfers,
the 70,200 shares of Class B Common Stock sold and the 163,800 shares of Class B
Common Stock transferred automatically converted to 234,000 shares of Class A
Common Stock. The term of the voting trust is ten (10) years.
On January 12, 1998, MBI sold 65,100 shares of Class A Common Stock to HealthMed
for a total purchase price of $263,004. The purchase price was paid in the form
of a promissory note maturing on January 12, 2000. In addition, MBI transferred
151,900 shares of Class A Common Stock into a voting trust controlled by
HealthMed. The term of the voting trust is ten (10) years. Dr. Katz is the
President, Chief Executive Officer and a director of MBI
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 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. 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.
17
<PAGE> 18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET LOSSES
During the three months ended December 31, 1997 ("the 1997 three months"), the
Company incurred net losses of $1.3 million compared to $3.2 million during the
three months ended December 31, 1996 ("the 1996 three months").
REVENUES
Total revenues for the 1997 three months were $220,000 consisting of interest
and other income. Total revenues for the 1996 three months were $775,000,
consisting of license fee/contract research revenue of $500,000, interest and
other income of $217,000 and federal research grant income of $58,000.
The decrease in revenues in the 1997 three months relative to the 1996 three
months was primarily attributable to higher license fees earned during the 1996
period due to the achievement of certain milestones in connection with a license
agreement. Also contributing to the decreased revenues during the 1997 three
months are decreased revenues from federal research grants issued by the
National Institutes of Health which were not in place during the 1997 three
months.
EXPENSES
Research and development expenses for the 1997 three months decreased to
$884,000 from $2.2 million in the 1996 three months. The decrease in expenses
during the 1997 three months was attributable primarily to fewer activities
related to the U.S. Phase 3 clinical trials of LIDAKOL than were on-going in the
1996 three months.
General and administrative expenses for the 1997 three months decreased to
$642,000 from $1.1 million during the 1996 three months. The decrease in
expenses during the 1997 three months is attributable primarily to non-recurring
expenses incurred in the 1996 period related to reacquiring the rights to market
LIDAKOL in all territories except the U.S., Canada and Mexico from Bristol-Myers
Squibb Company which occurred in November, 1996. See Note 7 to the Financial
Statements.
Interest expense in the 1997 three months decreased to $35,000 compared to
$679,000 in the 1996 three months. This decrease is attributable to the
recognition of the conversion discount on the 95/96 Notes that were outstanding
in the 1996 three months. Interest expense in the 1997 three months is related
to the 1997 Note. See Note 3 to the Financial Statements.
18
<PAGE> 19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 1997 was $51.2 million.
At December 31, 1997, the Company had cash and cash equivalents totaling $13.1
million and working capital of $10.2 million, as compared to $14.4 million and
$11.3 million, respectively, at September 30, 1997. The decrease in cash and
cash equivalents during the 1997 three months is primarily attributable to net
cash used to fund operating activities, as discussed below.
Net cash used by the Company to fund operating activities during the 1997 three
months decreased to $1.3 million from $3.0 million during the 1996 three months.
This decrease is primarily attributable to the decreased expenses and revenues
during the 1997 three months as discussed in "Results of Operations". In
addition, $88,000 of cash was used for capital expenditures during the1997 three
months.
The Company anticipates its cash requirements for the year ending September 30,
1998 to be less than cash used to fund operating activities during the year
ended September 30, 1997, as the clinical trials of LIDAKOL have been completed.
On February 26, 1997, the Company issued the 1997 Note in the amount of $6.0
million as part of a private placement to an institutional investor. 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
7,257,467. 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: 1) a premium equal to
17.64% of such principal plus any accrued and unpaid interest, and 2) 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. As of December
31, 1997, the outstanding principal balance of the 1997 Note was $2,215,461. On
February __, 1998, the Company received notice of conversion of $1,233,642 in
principal amount of the 1997 Note, which will result in the issuance of 827,836
shares of Class A Common Stock and 413,918 Class G Stock Purchase Warrants. See
Notes 3 and 5 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 3
to the Financial Statements.
19
<PAGE> 20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
At December 31, 1997 the Company had exercisable warrants and options
outstanding which, if fully exercised, would result in the aggregate issuance of
approximately 8.3 million shares of the Company's Class A Common Stock and would
result in approximate gross proceeds to the Company of $20 million. Included in
such warrants and options are Class D Warrants, exercisable on or before June
30, 1999 into approximately 1.4 million shares of the Company's Class A Common
Stock at an exercise price of $1.50 per share. Such warrants are redeemable by
the Company, at a price of $.05 per warrant, upon 30 days notice if the average
closing bid price of the Company's Class A Common Stock for the 30 days prior to
the notice exceeds $3.45 per share. In the event the Company does call the Class
D Warrants for redemption, there can be no assurance regarding the number of
warrants which would be exercised or the amount of proceeds which the Company
would receive. Also included in such warrants and options are Class G Stock
Purchase Warrants exercisable into approximately 1.1 million shares of the
Company's Class A Common Stock at an exercise price of $2.97 per share. Such
warrants expire on various dates through 2002 and are not redeemable by the
Company. The remaining exercisable options and warrants are not redeemable by
the Company and can be exercised by the holders at various times through 2007.
The average exercise price of the remaining exercisable options and warrants is
approximately $2.58 per share which is higher than the market price of the
Company's Class A Common Stock on December 31, 1997. There can be no assurance
that voluntary option and warrant exercises will continue to occur in the
future.
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. See
Overview above.
20
<PAGE> 21
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, 1997:
Report on Form 8-K filed on November 12, 1997 - reporting the
appointment of Jeffery B. Weinress to the position of Vice President and
Chief Financial Officer replacing Susan Yeagley-Sullivan
Report on Form 8-K filed on December 31, 1997 - reporting the filing of
a New Drug Application for its herpes drug, LIDAKOL, with the U.S. Food
and Drug Administration
21
<PAGE> 22
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 12, 1998
By: /s/David H. Katz
----------------------------------
David H. Katz, M.D., President and
Chief Executive Officer
(Duly Authorized Officer )
(Principal Executive Officer)
Date: February 12, 1998 By: /s/Jeffery B. Weinress
----------------------------------
Jeffery B. Weinress, Vice President
Chief Financial Officer and
Secretary
22
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LIDAK
PHARMACEUTICALS FIRST QUARTER FISCAL 1998 10Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH DECEMBER 31, 1997 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,093
<SECURITIES> 0
<RECEIVABLES> 211
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,494
<PP&E> 1,352
<DEPRECIATION> 480
<TOTAL-ASSETS> 14,443
<CURRENT-LIABILITIES> 3,252
<BONDS> 0
0
0
<COMMON> 57,937
<OTHER-SE> (46,746)
<TOTAL-LIABILITY-AND-EQUITY> 14,443
<SALES> 0
<TOTAL-REVENUES> 220
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,341)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
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