<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 MARCH 31, 1998 Commission File No. 0-18734
LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0314804
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
11077 N. TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (619) 558-0364
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 24, 1998
<S> <C>
Class A common stock, no par value 39,812,017
Class B common stock, no par value 49,000
</TABLE>
<PAGE> 2
LIDAK Pharmaceuticals
FORM 10-Q
For the quarter ended March 31, 1998
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Balance Sheets at September 30, 1997 and
March 31, 1998 .................................................. 3
Statements of Operations for the three and six month periods
ended March 31, 1997 and 1998, and the period
from August 31, 1988 (inception) to March 31, 1998 .............. 4
Statements of Stockholders' Equity (Deficit) for the period
August 31, 1988 (inception) to March 31, 1998 ................... 5
Statements of Cash Flows for the six month periods
ended March 31, 1997 and 1998, and the period
from August 31, 1988 (inception) to March 31, 1998 .............. 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 1. Legal Proceedings ............................................... 19
Item 5. Other Information ............................................... 19
Item 6. Exhibits and Reports on Form 8-K ................................ 23
SIGNATURES .............................................................. 24
</TABLE>
2
<PAGE> 3
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30 MARCH 31
ASSETS 1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,428,834 $ 10,650,684
Interest receivable 109,528 97,282
Prepaid and other 231,834 371,295
------------ ------------
Total current assets 14,770,196 11,119,261
PROPERTY - at cost (less accumulated depreciation of $372,951 and $434,645) 219,748 260,231
PATENT COSTS (less accumulated amortization of $68,028 and $83,243) 607,841 599,202
DEBT ISSUE COSTS 93,758 29,124
OTHER ASSETS 35,952 265
------------ ------------
TOTAL $ 15,727,495 $ 12,008,083
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 2,415,461 $ 1,000,001
Accounts payable 765,917 486,154
Accrued compensation and payroll taxes 225,493 196,571
Due to MBI 26,698 11,628
------------ ------------
Total current liabilities 3,433,569 1,694,354
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
38,589,399 and 39,805,850 shares issued and outstanding 57,551,618 59,110,620
Class B - 510,000 shares authorized; 283,000 and
49,000 shares issued and outstanding (convertible to
Class A Common Stock) 147,748 25,582
Deficit accumulated during the development stage (45,405,440) (48,822,473)
------------ ------------
Total stockholders' equity 12,293,926 10,313,729
------------ ------------
TOTAL $ 15,727,495 $ 12,008,083
============ ============
</TABLE>
See notes to financial statements.
3
<PAGE> 4
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED AUGUST 31,1988
MARCH 31, MARCH 31, (INCEPTION) TO
------------------------------- ------------------------------- MARCH 31,
1997 1998 1997 1998 1998
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees/Contract research $ 500,000 $ 4,507,625
Federal research grants $ 55,000 112,500 940,646
Interest and other 207,984 $ 132,372 425,056 $ 352,132 4,452,431
------------ ------------ ------------ ------------ ------------
Total revenues 262,984 132,372 1,037,556 352,132 9,900,702
------------ ------------ ------------ ------------ ------------
EXPENSES
Research and development 2,847,147 751,764 5,026,542 1,635,325 33,651,263
General and administrative 734,285 1,426,907 1,871,244 2,068,913 19,303,790
Interest 545,948 29,688 1,224,924 64,927 5,234,852
Cost of contract research 533,270
------------ ------------ ------------ ------------ ------------
Total expenses 4,127,380 2,208,359 8,122,710 3,769,165 58,723,175
------------ ------------ ------------ ------------ ------------
NET LOSS $ (3,864,396) $ (2,075,987) $ (7,085,154) $ (3,417,033) $(48,822,473)
============ ============ ============ ============ ============
NET LOSS PER SHARE $ (0.11) $ (0.05) $ (0.20) $ (0.09)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 36,719,420 39,458,510 36,002,531 39,175,597
============ ============ ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE> 5
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1998
- --------------------------------------------------------------------------------
<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>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
CLASS B 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 MARCH 31, 1998
- --------------------------------------------------------------------------------
<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 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>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
CLASS B DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <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)
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 MARCH 31, 1998
- -------------------------------------------------------------------------------
<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>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
CLASS B 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
</TABLE>
(Continued) - 3
7
<PAGE> 8
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO MARCH 31, 1998
- -------------------------------------------------------------------------------
<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 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
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>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
CLASS B DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Exercise of Class D Warrants
between October, 1995 and
September, 1996 at $1.50 per
share for cash 117,500
Exercise of Class E Warrants
in March, 1996 at $0.20 per
share for cash 5,000
Issuance of Class A Common
Stock in connection with Stock
Purchase Agreement in
November 1995 (net of issue
costs of $83,495) 1,416,505
Conversion of Convertible
Notes to Class A Common Stock
between February and September,
1996 (including interest and
discount applied of $2,263,276
and net of issue costs of $402,268) 10,147,676
Exercise of stock options
between October, 1995 and
September, 1996 at exercise
prices ranging from $0.50
per share to $3.56 per share 263,079
Conversion of common stock (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 MARCH 31, 1998
- --------------------------------------------------------------------------------
<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 Class D Warrants
between January and September,
1997 at $1.50 per share for cash 321,085 $ 481,628
Exercise of Class E Warrants in
October, 1996 at $0.20 per share
for cash 75,000 15,000
Conversion of Convertible Notes
to Class A Common Stock between
October, 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
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
Compensation expense related to
valuation of 86,167 stock options
granted to non-employees between
October 1996 and March 1997 86,167
Discount on Convertible Notes
issued in February, 1997 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
Net loss
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 - - - - 38,589,399 57,551,618
OCTOBER 1, 1997 TO MARCH 31, 1998
(Unaudited) Exercise of stock
options in October, 1997 at an
exercise price of $.9625 per share 5,000 4,813
Exercise of Class D warrants in
November, 1997 at $1.50 per share
for cash 19,400 29,100
Conversion of Convertible Note to
Class A Common Stock between
December,1997 and February 1998
(including interest of $35,223
and net of issue costs of $47,758) 958,051 1,402,923
Conversion of Common Stock 234,000 122,166
Net loss
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1998 - - - - 39,805,850 $59,110,620
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
COMMON STOCK DURING THE RECEIVABLE
CLASS B DEVELOPMENT FROM
SHARES AMOUNT STAGE STOCKHOLDERS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Exercise of Class D Warrants
between January and September,
1997 at $1.50 per share for cash $ 481,628
Exercise of Class E Warrants in
October, 1996 at $0.20 per share
for cash 15,000
Conversion of Convertible Notes
to Class A Common Stock between
October, 1996 and January, 1997
(including interest and discount
applied of $684,383 and net of
issue costs of $79,922) 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 34,564
Compensation expense related to
valuation of 86,167 stock options
granted to non-employees between
October 1996 and March 1997 86,167
Discount on Convertible Notes
issued in February, 1997 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) 3,514,290
Net loss
$(11,109,242) (11,109,242)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 283,000 147,748 (45,405,440) - 12,293,926
OCTOBER 1, 1997 TO MARCH 31, 1998
(Unaudited) Exercise of stock
options in October, 1997 at an
exercise price of $.9625 per share 4,813
Exercise of Class D warrants in
November, 1997 at $1.50 per share
for cash 29,100
Conversion of Convertible Note to
Class A Common Stock between
December,1997 and February 1998
(including interest of $35,223
and net of issue costs of $47,758) 1,402,923
Conversion of Common Stock (234,000) (122,166)
Net loss (3,417,033) (3,417,033)
------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1998 49,000 $25,582 $(48,822,473) - $10,313,729
============ ============ ============ ============ ============
</TABLE>
(Concluded)-5
See notes to financial statements.
9
<PAGE> 10
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 31, 1988
SIX MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
------------------------------- ---------------
1997 1998 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,085,154) $ (3,417,033) $(48,822,473)
Adjustments to reconcile net loss to net cash used
for operating activiites:
Depreciation and amortization 181,548 121,454 855,157
Non-cash interest expense 1,066,679 4,241,464
Technology license fee 3,545,713
Compensation paid with common stock and stock options 86,167 661,792
Compensation forgiven by stockholder 66,923
Imputed interest under technology license fees 82,613
Changes in assets and liabilities:
Interest receivable 152,201 12,246 (97,282)
Prepaid and other 642,123 (103,774) (371,560)
Patent costs (21,408) 975 (674,894)
Organizational costs (20,242)
Accounts payable 502,729 (279,763) 486,154
Accrued compensation and payroll taxes 10,495 (28,922) 196,571
Due to MBI (12,325) (15,070) 11,628
Deferred revenue (500,000)
------------ ------------ ------------
Net cash used for operating activities (4,976,945) (3,709,887) (39,838,436)
------------ ------------ ------------
INVESTING ACTIVITIES:
Short-term investments 4,555,794
Capital expenditures (28,291) (102,176) (694,875)
------------ ------------ ------------
Net cash provided by (used for) investing activities 4,527,503 (102,176) (694,875)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 513,378 33,913 39,243,376
Proceeds from issuance of convertible notes payable 6,000,000 19,500,000
Debt issue costs (288,519) (1,067,410)
Repayment of convertible notes payable (3,341,521) (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 financing activities 2,883,338 33,913 51,183,995
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,433,896 (3,778,150) 10,650,684
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,347,508 14,428,834
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,781,404 $ 10,650,684 $ 10,650,684
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 784,224 $ 79,016 $ 1,072,779
============ ============ ============
</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 and the Company's unaudited Quarterly Report on Form 10-Q for
the quarter ended December 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
March 31, 1998 and results of operations for the three and six months ended
March 31, 1998 and from August 31, 1988 (Inception) to March 31, 1998. The
results of operations for the three and six months ended March 31, 1998 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.
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
11
<PAGE> 12
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
3. CONVERTIBLE NOTES PAYABLE (continued)
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 March 31,
1998, 2,969,691 shares of Class A Common Stock and 1,484,846 Class G Stock
Purchase Warrants were issued in connection with the conversion of $5,000,000 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.
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.
12
<PAGE> 13
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
3. CONVERTIBLE NOTES PAYABLE (continued)
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
March 31, 1998, $62,584 of debt issue costs were amortized and $204,351 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, David H. Katz, former President and Chief Executive Officer
("CEO"), a 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, 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.
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 $1,898 of interest expense and was
reduced by a $7,228 reclassification of debt issue costs. See Notes 3 and 4.
In February 1998 the Company Issued 829,339 shares of Class A Common Stock and
414,670 Class G Stock Purchase Warrants from the conversion of $1,215,460 in
principal amount of the 1997 Note. The amount recorded in Stockholder's Equity
in connection with this conversion included $33,325 of interest expense and was
reduced by a $40,530 reclassification of debt issue costs. See Notes 3 and 4.
Between October 1,1997 and March 31, 1998, 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.
13
<PAGE> 14
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
6. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("EPS").
This Statement requires the presentation of 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 three and six
months ended March 31, 1998. In the accompanying statements of operations for
the three and six months ended March 31, 1997 and 1998, 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.
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.
In addition, in February 1998, Grelan Pharmaceuticals, LIDAK's Japanese
licensee, notified the Company that Takeda Chemical Industries Ltd. had acquired
a controlling interest in their company. As a result, Grelan indicated that it
could no longer commit the resources needed to develop the LIDAKOL product.
Grelan has agreed to work with the Company to find a new Japanese licensing
partner
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain statements of a forward-looking nature relating
to future events or the future performance of the Company. Prospective investors
are cautioned that such statements are only predictions and that actual events
or results may differ materially. In evaluating such statements, prospective
investors should specifically consider various factors identified in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
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 March 31, 1998, the Company incurred a
cumulative net loss of $48.8 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.
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
15
<PAGE> 16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW (continued)
may arise out of these and other risks could have a material adverse effect on
the Company's financial condition and results of operations.
RESULTS OF OPERATIONS
NET LOSSES
During the three and six months ended March 31, 1998 (the "1998 three and six
months"), the Company incurred net losses of $2.1 million and $3.4 Million,
respectively, compared to net losses of $3.9 million and $7.1 million,
respectively, during the three and six months ended March 31, 1997 (the "1997
three and six months").
REVENUES
Total revenues for the 1998 three and six months, consisting of interest and
other income, were $132,000 and $352,000, respectively. Total revenues for the
1997 three and six months were $263,000 and $1.0 million, respectively. For the
three months ended March 31, 1997, (the "1997 three months"), total revenues
consisted of interest and other income of $208,000 and federal research grant
income of $55,000. For the six months ended March 31, 1997, (the "1997 six
months"), total revenues consisted of license fee/contract research revenue of
$500,000, interest and other income of $425,000 and federal research grant
income of $113,000.
The decrease in revenues in the 1998 six months compared to the 1997
six months was attributable primarily to license fees earned during
the 1997 period due to the achievement of certain milestones in connection with
a license agreement. Also contributing to the decreased revenues during the 1998
three and six months are decreased revenues from federal research grants issued
by the National Institutes of Health which were not in place during the 1998
three and six months.
EXPENSES
Research and development expenses for the 1998 three and six months,
respectively, decreased to $752,000 and $1.6 million, respectively, from $2.8
million and $5.0 million in the 1997 three and six months. The decrease in
expenses during the 1998 three and six months was attributable primarily to
decreased activities relating to the U.S. Phase 3 clinical trials of LIDAKOL
that were on-going in the 1997 three and six months.
General and administrative expenses for the 1998 three and six months increased
to $1.4 million and $2.1 million, respectively, from $734,000 and $1.9 million,
respectively, in the 1997 three and six months. The increase in expenses during
the 1998 three and six months was attributable primarily to legal and other
expenses incurred in connection with the January 1998, financing proposal
presented by HealthMed.
16
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Interest expense for the 1998 three and six months decreased to $30,000 and
$65,000, respectively, from $546,000 and $1.2 million, respectively, in the 1997
three and six months. The decrease in expense was attributable primarily to the
Company having reduced interest obligations due to reduction of outstanding
debt, during the 1998 three and six months, due to the retirement of the
unconverted 95/96 Notes in January of 1997 and the subsequent early conversion
of a majority of the 1997 Notes. See Note 3 to the Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through the
sale of equity and debt securities and stockholder loans. Net cash provided from
financing activities through March 31, 1998 was $51.2 million.
At March 31, 1998, the Company had cash and cash equivalents totaling $10.7
million and working capital of $9.4 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 1998 six months is attributable primarily to net
cash used to fund operating activities, as discussed below.
Net cash used by the Company to fund operating activities during the 1998 six
months decreased to $3.7 million from $5.0 million during the 1997 six months.
This decrease is attributable primarily to the decreased expenses and revenues
during the 1998 six months as discussed in "Results of Operations". In addition,
$102,000 of cash was used for capital expenditures during the 1998 six 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 March 31,
1998, the outstanding principal balance of the 1997 Note was $1.0. 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.
17
<PAGE> 18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
At March 31, 1998 the Company had exercisable warrants and options outstanding
which, if fully exercised, would result in the aggregate issuance of
approximately 8.7 million shares of the Company's Class A Common Stock and would
result in approximate gross proceeds to the Company of $21.2 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 1.5 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 $2.52 per share which is higher than the market price of the
Company's Class A Common Stock on March 31, 1998. 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.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 1, 1998, the Company filed a Complaint for Declaratory Relief against
Medical Biology Institute ("MBI") in the San Diego County, California Superior
Court (Case No. 719403). The Complainant alleged that in February of 1998, MBI
wrote LIDAK a letter asserting an equitable lien and constructive trust on any
proceeds from the Company's development of LIDAKOL. In its Complaint, the
Company asserted that Dr. David H. Katz was the owner of the initial patent for
the topical use of docosanl in the treatment of viral and inflammatory disease,
and Dr. Katz had directly assigned that patent to Lidak on Mach 29, 1990. As a
consequence, the Company contends that LIDAK is the sole owner of all right,
title and interest in LIDAKOL, and the Complaint asks that the Court affirm
LIDAK's ownership. In response, MBI has denied that LIDAK is the owner of
LIDAKOL, and in its own Cross-complaint, MBI has alleged that LIDAKOL was
developed through the efforts of its own employees working in conjunction with
LIDAK scientists. The Cross-complaint asserts that Dr. Katz breached the terms
of his Employment Agreement with MBI when he assigned the LIDAKOL patent to
LIDAK, and as a consequence, MBI asserts its own ownership interest in LIDAKOL.
Further, the Cross-complaint alleges that LIDAK has not proceeded diligently to
develop other technologies that have been licensed by MBI to LIDAK. As a result,
MBI contends that LIDAK is in violation of its obligations under the License
Agreement; the Cross-complaint asks that the licensed technologies be returned
to MBI and that its rights to share in the proceeds of LIDAKOL be determined.
LIDAK believes these allegations of a breach under the License Agreement are
governed by an arbitration clause in that agreement; the Company has demanded
that those issues be remanded to arbitration and dismissed from the
Cross-complaint.
ITEM 5: OTHER INFORMATION
On January 13, 1998, the Company received a preliminary proposal from HealthMed,
Inc. ("HealthMed"), a Nevada corporation based in Beverly Hills, California,
relating to the possibility of a substantial loan to the Company by HealthMed
and other lenders affiliated with HealthMed. The Company engaged in discussions
with HealthMed regarding its proposal until March 2, 1998, when discussion
ended.
On March 16, 1998, a group consisting of HealthMed, Mitchell J. Stein, George P.
Rutland, Wallace O. Raubenheimer and David H. Katz, M.D., filed with the
Securities and Exchange Commission (the "Commission") an Amendment No. 1 to the
Schedule 13D of HealthMed, which stated that they had formed a group which might
seek to obtain voting control over a majority of the Company's outstanding
securities through open market purchases, privately negotiated transactions,
placement of shares into voting trusts over which HealthMed would have voting
control, the solicitation of proxies or otherwise.
On March 17, 1998, a group known as the LIDAK Pharmaceuticals Shareholders
Committee (the "Shareholders Committee"), consisting of HealthMed and Wallace O.
Raubenheimer, filed a preliminary proxy statement with the Commission. In its
preliminary proxy statement, the Shareholders Committee indicated that it
intended to solicit proxies from the Company's
19
<PAGE> 20
PART II. ITEM 5: OTHER INFORMATION (continued)
shareholders to be voted in favor of an alternate slate of nominees at the 1998
Annual Meeting, consisting of Edward L. Hennessy Jr., George P. Rutland and
Wallace O. Raubenheimer, for election as directors to hold office until the
Company's 2000 Annual Meeting. If elected, the three nominees of the
Shareholders Committee, together with Dr. Katz, the former President and CEO and
a Director of the Company until the 1999 Annual Meeting, would have constituted
a majority of the Company's seven-member Board of Directors.
Between March 18, 1998 and March 24, 1998, the Company engaged in discussions
with representatives of the Shareholders Committee and its nominees. On March
24, 1998, in order to avoid the probable disruption to the Company's business
and the substantial expenses associated with a proxy contest, the Company's
Board of Directors approved the terms of a proposed settlement with the
Shareholders Committee and its nominees. On March 25, 1998, the Company and the
Shareholders Committee jointly announced that they had entered into an Agreement
of Settlement and Compromise dated as of March 24, 1998 (the "Settlement
Agreement"), pursuant to which the Shareholders Committee and its nominees
agreed to withdraw the preliminary proxy statement and also agreed to certain
other covenants and limitations.
The Settlement Agreement provides for an expanded LIDAK Board of Directors to be
comprised of nine members, including four existing LIDAK directors, three
additional independent nominees (at least one of whom would have significant
pharmaceutical industry experience) (the "Independent Nominees") to be mutually
agreed upon by a joint search committee of the parties, and two nominees of the
Shareholders Committee, Messrs. Rutland and Hennessy. In connection with the
increase in the size of the Board of Directors, the Board adopted, subject to
shareholder approval, a Bylaw amendment expanding the number of authorized
directors to a range with a minimum of five and a maximum of nine directors
(with the exact number of directors to be fixed from time to time within these
limits by the Board of Directors). The Board also adopted, subject to
shareholder approval, an additional Bylaw amendment increasing the number of
classes of directors from two classes to three classes, with Class I serving an
initial term until the 1999 Annual Meeting, Class II serving an initial term
until the 2000 Annual Meeting, and a new Class III serving an initial term until
the 2001 Annual Meeting. The initial terms for all Classes would be followed by
full three-year staggered terms for each such Class. Under the Settlement
Agreement, the Company agreed that the three Classes of the reconstituted Board
of Directors would include the following persons: Class I--Dr. Katz, one
Independent Nominee and one incumbent director; Class II--Mr. Hennessy, one
Independent Nominee and one incumbent director; and Class III--Mr. Rutland, one
Independent Nominee and one incumbent director. The directors in Class I are not
up for election at the 1998 Annual Meeting, except for the vacant director's
seat which is to be filled by one of the Independent Nominees. The proposals to
approve the Bylaw amendments and to elect the nominees to fill the one vacant
directors' seat in Class I, the three directors' seats up for election in Class
II and the three directors' seats up for election in the newly created Class
III, are presented for shareholder approval in the Proxy Statement for
the 1998 Annual Meeting. The Company and the Shareholders Committee and its
nominees have agreed to vote all shares owned by them or as to which they have
the right to direct the vote in favor of these proposals and nominees at the
1998 Annual Meeting.
20
<PAGE> 21
PART II. ITEM 5: OTHER INFORMATION (continued)
The Settlement Agreement further provides that until the completion of the 1998
Annual Meeting, the Company will not, subject to the Board's fiduciary duties,
engage in any extraordinary business combinations, nor enter into any employee
retention agreements except in the ordinary course of business or with certain
specified senior managers of the Company. The Company has agreed to permit Mr.
Rutland to attend meetings of the Company's Board of Directors as an observer
until the completion of the 1998 Annual Meeting, subject to his executing a
customary confidentiality agreement.
Under the Settlement Agreement, the parties have agreed to certain other
covenants and limitations. Until the Company's 2001 Annual Meeting HealthMed and
Mr. Stein will not acquire, or offer or agree to acquire, directly or
indirectly, by purchase or otherwise, beneficial ownership of any LIDAK
securities (or rights, options or warrants to acquire LIDAK securities), other
than those LIDAK securities beneficially owned by them as of the date of the
Settlement Agreement, or encourage any person to acquire, or advise any person
with respect to the acquisition or proposed acquisition of LIDAK securities
other than attempts to dispose of their LIDAK securities, subject to certain
exceptions, including HealthMed's permitted acquisition of LIDAK securities in
amounts necessary to maintain its existing percentage ownership in LIDAK Class A
Common Stock and its permitted acquisition of certain LIDAK securities upon the
exercise of stock options by Dr. Katz, pursuant to a Purchase Rights Agreement
dated January 12, 1998 between HealthMed and Dr. Katz. In addition, until the
Company's 2001 Annual Meeting, the members of the Shareholders Committee and
their nominees will not: (i) solicit, or encourage or assist any other person to
solicit, or become a participant or otherwise engage in any solicitation of, any
proxy, consent or other shareholder solicitations with respect to LIDAK
securities, advise or seek to advise any person with respect to voting LIDAK
securities, submit or encourage or advise or assist any other person with
respect to the submission of any nominations or proposals for consideration by
the Company's shareholders, or take any action to request a special meeting of
any holders of LIDAK securities; (ii) sell or otherwise convey (singly or
collectively) more than five percent of LIDAK's then-current outstanding
securities to any person or group, unless such person or group, and every
member there of, agrees in writing to be bound by the terms of the Settlement
Agreement; (iii) deposit any LIDAK securities into a voting trust or subject
such securities to a voting trust or similar arrangement, or otherwise form or
join a partnership, limited partnership, syndicate or group for the purpose of
acquiring, holding, voting or disposing of any LIDAK securities, except for
the LIDAK securities held in voting trust by the parties as of the date of the
Settlement Agreement; (iv) engage in or offer, agree or propose to engage in
any business combinations involving the Company, (other than to participate as
a shareholder on terms generally available to all shareholders), or arrange or
in any way participate in the financing of any business combination or
purchase, by any person, of LIDAK securities or assets, except for a financing
or investment proposal presented privately to the Company's Board of Directors
or a tender of shares in response to a third party tender offer for all
outstanding shares of a class of LIDAK securities; (v) otherwise act alone or
in concert with others to seek representation on the Company's Board of
Directors or to acquire control of the Company or any of its securities or
assets; (vi) publicly request any amendment of the "standstill" provisions of
the Settlement Agreement; or (vii) assist or advise, or enter into any
agreement or arrangement to assist or advise, any person in taking any of the
foregoing actions. If the Company's Board of Directors invites offers from
third parties for a business combination that would result in a change
of control of the Company, the
21
<PAGE> 22
PART II. ITEM 5: OTHER INFORMATION (CONTINUED)
Settlement Agreement would not prohibit the members of the Shareholders
Committee and their nominees from competing on equal terms with any such third
party.
The Settlement Agreement does not contemplate any changes to the Company's
current executive management. Under the settlement agreement, the members of the
Shareholders Committee and their nominees have agreed, subject to the fiduciary
duties of any such party who may be a member of the Company's Board of
Directors, (i) not to propose, encourage others to propose, or assist or support
in any way, directly or indirectly, the employment or appointment of Dr. Katz in
any capacity as an employee or consultant of the Company, and (ii) except for
the completion of his current term as a director, not to nominate, encourage
others to nominate, vote for the nomination of or assist or support in any way
the nomination or elevation, directly or indirectly, Dr. Katz as a director of
the Company, through the completion of the Company's 2001 Annual Meeting, or
election.
The Settlement Agreement provides that the Company will reimburse HealthMed for
75% of the third party expenses related to its proxy contest, with such payment
not to exceed $150,000. These moneys have been placed in escrow pending the
completion of the 1998 Annual Meeting, and will be disbursed to HealthMed if the
proposals to amend the Bylaws and elect the specified nominees are approved by
the Company's Shareholders at the 1998 Annual Meeting. In the event the
proposals are not approved, the moneys will be returned to the Company, and the
parties will be relieved of all their obligations under the Settlement
Agreement, except for the mutual releases by the parties contained herein. The
Settlement Agreement does not restrict HealthMed from making financing or
investment proposals presented privately to the Board of Directors of the
Company.
The Settlement Agreement also provides that none of the parties will make
publicly any negative statements regarding the other parties, the Company's
Board of Directors, the process by which the Company's Board may seek to enhance
shareholder value, or any proposed, pending or consummated business combination
involving the Company. Each of the parties also has agreed that, subject to his
or its right to pursue legitimate business objectives independently and in good
faith, he or it will not, directly or indirectly, take any action or encourage
any person to take any action, the intent or direct foreseeable result of which
is to interfere with or adversely affect the business activities, contractual
relationships or business opportunities of the other parties to the Settlement
Agreement or their affiliates and associates.
Dr. Katz did not vote in favor of the proposed settlement and was not a party to
the Settlement Agreement. On March 30, 1998, Dr. Katz filed with the Commission
Amendment No. 1 to his schedule 13D, in which he objected to the Settlement
Agreement and disclaimed any further membership in the HealthMed group of
shareholders. On April 11, 1998, Dr. Katz filed a suit against Mitchell J.
Stein, HealthMed and others, seeking recission of his transfer of shares to
HealthMed (including his transfer into the voting trust he entered into with
HealthMed (the "Katz Voting Trust")), monetary damages and other relief. See
Note 5 to Financial Statements.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Statement Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
March 31,1998
Report on Form 8-K filed on January 2, 1998 - press release reporting
the cancellation of the Bristol-Myers Squibb Company licensing
agreement.
Report on Form 8-K filed on January 21, 1998 - press release reporting
the resignation of Daniel J. Paracka as chairman of the board and a
director of the Company.
Report on Form 8-K filed on January 21, 1998 - press release announcing
receipt of a preliminary proposal from HealthMed, Inc. expressing an
interest in providing capital to the Company in the form of a
non-dilutive debt instrument.
Report on Form 8-K filed on March 3, 1998 - press release reporting the
results of operations for the quarter ended December 31, 1998 (the
first quarter of FYE 1998).
Report on Form 8-K filed on March 12, 1998 - reporting the receipt of
correspondence from HealthMed unilaterally terminating all discussions
in regard to loan transaction.
Report on Form 8-K filed on March 12, 1998 - reporting Gerald J.
Yakatan was appointed President and CEO of LIDAK.
Report on Form 8-K filed on March 18, 1998 - reporting a LIDAK board
action adopting a Fourth Amendment and restated Bylaws of LIDAK
Pharmaceuticals.
Report on 8-K filed on March 27, 1998 - reporting that LIDAK had
entered into an Agreement of Compromise with HealthMed Inc., Mitchell
J. Stein, George P. Rutland, Edward l. Hennessy, Jr. and Wallace O.
Raubenheimer.
23
<PAGE> 24
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: April 24, 1998
By:/s/Gerald O. Yakatan
---------------------------------------
Gerald O. Yakatan, President and
Chief Executive Officer
(Duly Authorized Officer )
(Principal Executive Officer)
Date: April, 1998 By: /s/Jeffery B. Weinress
---------------------------------------
Jeffery B. Weinress, Vice President
Chief Financial Officer and
Secretary
24
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