<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
OR
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 1-12968
LXR BIOTECHNOLOGY INC.
(Exact name of small business issuer as specified in its charter)
Delaware 68-0282856
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification No.)
1401 Marina Way South, Richmond, California 94804
(Address of principal executive offices)
(510) 412-9100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period 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 [ ]
At April 30, 1997 the number of outstanding shares of the Registrant's Common
Stock, par value $0.0001, was 21,780,175.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ].
1
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LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and
1996 and for the period from April 20, 1992 (date of
incorporation) to March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 and for the
period from April 20, 1992 (date of incorporation) to
March 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,170,307 $ 10,217,203
Prepaid expenses 261,652 98,881
Private placement receivable -- 1,278,700
Other receivables 46,571 39,500
------------ ------------
Total current assets 9,478,530 11,634,284
Equipment and leasehold improvements, net 687,710 592,093
Notes receivable from related parties 190,000 160,000
Deposits and other assets 80,349 32,315
------------ ------------
Total assets $ 10,436,589 $ 12,418,692
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 134,481 $ 324,606
Accrued expenses 482,686 584,049
Deferred rent obligation 270,044 259,975
------------ ------------
Total current liabilities 887,211 1,168,630
Commitments and contingencies (notes 4, 5 and 7)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.0001 par value; 45,000,000
shares authorized; 21,962,187 and 21,924,687
shares issued and outstanding at March 31, 1997
and December 31, 1996, respectively 2,167 2,163
Common stock subscribed; 187,500 shares at
March 31, 1997 and December 31, 1996 19 19
Additional paid-in capital 34,928,770 34,778,774
Deficit accumulated during the development stage (25,366,403) (23,515,719)
Treasury stock, at cost; 182,012 shares at March 31, 1997
and December 31, 1996 (15,175) (15,175)
------------ ------------
Total stockholders' equity 9,549,378 11,250,062
------------ ------------
Total liabilities and stockholders' equity $ 10,436,589 $ 12,418,692
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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LXR BIOTECHNOLOGY INC.
( A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 20, 1992
THREE MONTHS (DATE OF
ENDED INCORPORATION)
--------------------------------------------- TO
MARCH 31, MARCH 31, MARCH 31,
1997 1996 1997
------------ ------------- ---------------
<S> <C> <C> <C>
Revenues:
Grant revenue $ 22,197 $ 10,544 $ 136,593
License fee revenue -- -- 300,000
------------ -------------- ---------------
Total revenues 22,197 10,544 436,593
------------ -------------- ------------
Expenses incurred in the development stage:
Research and development 1,305,814 1,210,241 18,214,521
General and administrative 697,297 512,707 7,964,741
------------ -------------- ---------------
Total expenses incurred in the development
stage 2,003,111 1,722,948 26,179,262
------------ -------------- ---------------
Loss from operations (1,980,914) (1,712,404) (25,742,669)
Interest income (expense), net:
Interest income 130,630 81,184 736,088
Interest expense -- (20,257) (354,617)
------------ -------------- ---------------
Total interest income (expense), net 130,630 60,927 381,471
------------ -------------- ---------------
Loss before income taxes (1,850,284) (1,651,477) (25,361,198)
Income taxes 400 4,300 5,200
------------ -------------- ---------------
Net loss $(1,850,684) $ (1,655,777) $ (25,366,398)
============ ============= ===============
Net loss per share $ (0.08) $ (0.11)
============ =============
Weighted average shares used to compute
net loss per share 21,967,330 14,559,002
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 20, 1992
(DATE OF
THREE MONTHS ENDED INCORPORATION)
-------------------------------- THROUGH
MARCH 31, MARCH 31, MARCH 31,
1997 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities $(2,259,560) $ (1,877,232) $ (22,408,542)
----------------- ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- (3,910,150)
Purchase of equipment and leasehold improvements (186,036) (64,654) (1,637,070)
Proceeds from maturity of investments -- -- 4,000,000
Loans to related parties (30,000) -- (190,000)
----------------- ------------ ------------
Net cash used in investing activities (216,036) (64,654) (1,737,220)
----------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 150,000 8,664,060 29,303,508
Receipt of Private Placement proceeds 1,278,700 -- 1,278,700
Proceeds from notes payable to related parties -- -- 4,694,500
Proceeds from line of credit -- -- 375,000
Repayment of notes payable and line of credit -- (600,000) (1,581,111)
Principal payments for obligations under
capital lease -- (51,989) (776,513)
Payments received for notes receivable from
stockholders -- -- 2,147
Repurchase of common stock -- -- (1,510)
Net proceeds from exercise of warrants -- -- 19,505
Net proceeds from exercise of stock options -- 638 1,843
----------------- ------------ ------------
Net cash provided by financing activities 1,428,700 8,012,709 33,316,069
----------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,046,896) 6,070,823 9,170,307
Cash and cash equivalents at beginning of period 10,217,203 68,245 --
----------------- ------------ ------------
Cash and cash equivalents at end of period $ 9,170,307 $ 6,139,068 $ 9,170,307
================= ============ ============
Supplemental cash flow information:
Cash paid for income taxes $ -- $ 1,600 $ 4,200
================= ============ ============
Cash paid for interest $ -- $ 30,695 $ 355,139
================= ============ ============
Noncash financing activities:
Common stock issued in exchange for notes
receivable from stockholders $ -- $ -- $ 107,385
================= ============ ============
Equipment purchased under capital
lease obligation $ -- $ -- $ 855,022
================= ============ ============
Stock dividend $ -- $ -- $ 5
================= ============ ============
Common stock issued in exchange for note
payable to David Blech and others $ -- $ -- $ 3,594,500
================= ============ ============
Repurchase of common stock in exchange for notes
receivable from stockholders $ -- $ -- $ 13,665
================= ============ ============
Receivable for common stock issued in
Private Placement $ -- $ -- $ 1,278,700
================= ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of March 31, 1997 and December 31, 1996, and results of operations
for the three months ended March 31, 1997 and 1996 and for the period from April
20, 1992 (date of incorporation) to March 31, 1997, and changes in cash flows
for the three months ended March 31, 1997 and 1996, and for the period from
April 20, 1992 (date of incorporation) to March 31, 1997.
These condensed consolidated statements should be read in conjunction with
the Company's audited consolidated financial statements for the years ended
December 31, 1996 and 1995, which are included as part of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
The Company's condensed consolidated financial statements include the
accounts and results of operations of the Company and its wholly owned
subsidiary, Optical Analytic, Inc. (OAI). All significant intercompany balances
and transactions have been eliminated in consolidation.
Certain items have been reclassified to conform with current financial
statement presentation.
(2) STOCK OPTION PLANS
1993 Stock Option Plan
The fair value of each stock option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997: expected dividend yield 0.0%; expected volatility of 104.7%;
risk-free interest rate of 6.80%; and an expected life of 7 years.
As of March 31, 1997, options to purchase 312,601 shares were exercisable under
the option plan at the weighted average exercise price of $1.41.
During 1997, the Company had the following activity under the 1993 Stock Option
Plan:
<TABLE>
<CAPTION>
Stock Options Outstanding
-------------------------------------------
Weighted-average
Number of exercise
shares price per share
------------------ -------------------
<S> <C> <C>
Balance as of December 31, 1996 953,140 $2.10
Options granted 39,500 2.35
Options canceled or expired (15,969) 1.88
Options exercised - -
Balance as of March 31, 1997 976,671 $1.89
==================
</TABLE>
The weighted average fair value of options granted during 1997 was $2.05.
6
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LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(2) STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------------------- ----------------------------
Range of Weighted-average Weighted-average Weighted-average
exercise Number remaining years exercise Number exercise
prices outstanding to expiration price exercisable price
- ------------ ---------------- ---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$0.03 29,124 5.95 $0.03 22,444 $0.03
1.00 to 1.50 208,334 6.43 1.29 194,390 1.28
1.56 to 2.44 848,129 (1) 8.86 2.05 94,283 1.96
2.50 to 4.81 39,250 9.53 2.65 916 3.55
5.25 to 6.19 1,834 7.95 5.76 568 5.25
--------------- -------
1,126,671 8.54 $1.89 312,601 $1.41
=============== =======
</TABLE>
(1) Includes 150,000 options issued outside of the 1993 Stock Option Plan, which
have the same terms as the 1993 Stock Option Plan.
Directors Stock Option Plan
There was no activity under the Directors Stock Option Plan during 1997.
As of March 31, 1997, options to purchase 10,164 shares were exercisable
under the Directors Option Plan at the weighted-average exercise price of $1.56.
The following table summarizes information on stock options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------------- -----------------------------
Range of Weighted-average Weighted-average Weighted-average
exercise Number remaining years exercise Number exercise
prices outstanding to expiration price exercisable price
- ------------ ----------- ------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
1.00 to 1.38 10,000 7.50 $1.38 4,832 $1.38
1.56 to 1.88 20,000 8.58 1.72 5,332 1.73
2.19 10,000 9.50 2.19 -- ----
------ -------
40,000 8.54 $1.75 10,164 $1.56
====== =======
</TABLE>
7
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LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(2) STOCK OPTION PLANS (CONTINUED)
Pro Forma Disclosure
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C> <C>
Net loss As reported $(1,850,684)
Pro forma $(1,965,986)
Net loss per share As reported $ (.08)
Pro forma $ (.09)
</TABLE>
Pro forma net loss reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of four to five years and compensation cost for options granted prior to
January 1, 1995 is not considered.
(3) CAPITAL STOCK
In January 1997, the Company issued 37,500 shares of the Company's common
stock in connection with the Cardiosol Acquisition. At December 31, 1996 these
shares were included in common stock subscribed.
In January 1997, the Company received $150,000 from Boehringer Mannheim
Corporation for the purchase of 37,500 shares of the Company's common stock at a
price of $4.00 per share pursuant to a binding obligation to purchase such
shares in accordance with the terms of the Boehringer Mannheim letter of intent.
As of March 31, 1997, these shares are included in common stock subscribed.
(4) LITIGATION
The Company and five of its past or present directors and/or officers are
named as defendants in Katz vs. Blech, 95 Civ. 7215 (S.D.N.Y ("Katz") and
Degulis vs. LXR Biotechnology Inc., et al., 95 Civ. 4204 (S.D.N.Y) ("Degulis").
In addition, one of the five, Mark Germain, is named as a defendant in the above
two cases and also in In re Blech Securities Litigation, ("In re Blech"). The
Company was previously named as a defendant in In re Blech but was dismissed by
the Court on June 6, 1996.
8
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LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(4) LITIGATION (CONTINUED)
All three cases are brought on behalf of classes of persons purchasing
common shares of the Company prior to September 21, 1994, and assert claims
arising out of the Company's Initial Public Offering and subsequent trading of
those shares. The suits allege violations of Sections 11 and 12 of the
Securities Act of 1933 and Sections 10(b) and 20 of the Securities and Exchange
Act of 1934, including misrepresentations and omissions in connection with the
Initial Public Offering and manipulation of share prices. The suits also allege
common law claims for fraud and deceit and seek punitive damages. The complaints
allege that defendants, including the Company and the defendant directors and
officers, failed to disclose in securities filings connected with the Initial
Public Offering, the leveraged financial condition of the Company's underwriter,
D. Blech & Co., and its principal David Blech. The suits further allege that
defendants failed to disclose that D. Blech & Co. would act as principle market
maker for the Company's shares following the Initial Public Offering, and that
D. Blech & Co.'s extended financial commitments would affect its ability to
maintain a market for the Company's shares. The suits also allege that
defendants assisted or acquiesced in a post-offering scheme to manipulate the
market for the Company's shares and artificially inflate share prices.
Under the Company's bylaws, individual agreements, and state law, the
Company's current and former directors and officers may have certain rights to
indemnification and defense costs in the event they are named in litigation.
Four individual defendants in Katz and/or Degulis have submitted claims for
indemnity and advancement of defense costs, and the Company has agreed to
advance defense costs and indemnify those individuals to the extent permitted by
law. In addition, on February 12, 1997, the Company authorized advancement of
costs for Mr. Germain's defense in the Katz and Degulis actions (but not In re
Blech), subject to an undertaking to repay those amounts in the event it is
later determined that he is not entitled to indemnity. A demand by the
independent underwriter for contractual indemnity has been denied. Such denial
is subject to contest by the underwriter. The Company and the underwriter have
entered into a tolling agreement whereby the Company agreed that the running of
any statute of limitations applicable to claims of the underwriter against the
Company would be tolled until the earlier of June 30, 1997 and the termination
of the tolling agreement.
The Company's primary level directors and officers liability insurance
carrier has tentatively agreed to provide coverage for reasonable attorneys fees
in the defense of the four current and former directors and/or officers
referenced above, but the carrier has refused to provide indemnity or defense
costs for the Company. The Company and the carrier have entered into an
allocation agreement whereby 83% of the defense costs related to the Katz and
Degulis (not including any defense costs incurred by Mr. Germain) will be borne
by the carrier, with the remaining 17% to be borne by the Company. The carrier
is not obligated to make any payments until a $250,000 deductible (applicable to
all covered claims, in the aggregate) under the policy is exhausted. As of March
31, 1997, claims made for expenses related to this litigation have been expensed
by the Company and have not exceeded the deductible amount of $250,000. No
agreement exists between the Company and the carrier with respect to coverage
for Mr. Germain's defense, or for the Company with respect to defense costs
incurred in In re Blech prior to its dismissal from that action. The extent to
which costs of defending the litigation will ultimately be covered by insurance
is not yet known. The extent to which insurance would cover any settlement or
judgment has not been determined and may not be determined until the litigation
is completed.
The Company denies any wrongdoing and is defending the above cases
vigorously. While an adverse judgment or settlement could have a material
adverse financial impact on the Company, the early stage of litigation,
uncertainty as to whether any material judgment or settlement will result, and
the possibility that some portion of any settlement or judgment may be covered
by insurance make it impossible to predict at this time whether the litigation
will have a material adverse financial impact on the Company.
9
<PAGE> 10
LXR BIOTECHNOLOGY INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(5) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS
University of Tennessee
In January 1997, the Company entered into an exclusive license and
three-year research agreement with the University of Tennessee and the
University of Tennessee Research Corporation related to certain patent
applications and technology. As consideration for the agreement, the Company
agreed to fund research in the amount of $70,000 per year for three years, with
the third year's funding contingent upon meeting certain milestones.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share".
SFAS No. 128 requires the presentation of basic earnings per share ("EPS") and,
for companies with complex capital structures or potentially dilutive
securities, such as convertible debt, options and warrants, diluted EPS. SFAS
No. 128 is effective for annual and interim periods ending after December 31,
1997. The Company does not expect its net loss per share presentation will be
affected by SFAS No. 123.
(7) SUBSEQUENT EVENT
Note Payable
In April 1997, the Company negotiated a loan of $200,000 secured by
existing equipment and a loan of up to $500,000 for the purchase of new
equipment. Loan payments will be made monthly over a three year term with a
final balloon payment equal to 10% of the original loan. In connection with the
loan obligation, the Company has agreed to issue a warrant to purchase 27,000
shares of the Company's common stock at $2.1875 per share. The warrant expires
in April 2004.
Collaborative Research Agreements
In April 1997, the Company entered into a research collaboration agreement
with Oxford Asymmetry, Limited ("Oxford") for the purpose of discovering small
molecule drug candidates that target specific apoptosis pathways. In exchange
for the services to be provided by Oxford, the Company has agreed to make
payments totaling $650,000 through February, 1998 and is obligated to make
certain future royalty payments on any products the Company may develop under
the agreement.
10
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Three Months Ended March 31, 1997 compared to the Three Months Ended March 31,
1996
The following analysis contains forward looking statements regarding, among
other things, product development and effectiveness, corporate partnering,
capital and other expenditures, timing of FDA filings, FDA approval thereof and
clinical trial progress, sufficiency of cash resources and the ability of the
Company to raise additional funding. These forward looking statements concern
matters that involve risks and uncertainties that could cause actual results to
differ materially from those projected in the forward looking statements. Words
such as "believe," "expects," "likely," "may" and "plans" are intended to
identify forward looking statements, although not all forward looking statements
contain these words. For a discussion of certain of these risks and
uncertainties, please see the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996 and "Factors Affecting Future Results" below.
The Company had grant revenues of $22,197 for the three months ended March
31, 1997 compared to grant revenues of $10,544 for the three months ended March
31, 1996. The Company's sources of revenues for 1997 include remaining grant
revenues related to Maspin of approximately $35,000 and potential license fee
revenue under the Perkin-Elmer License Agreement. The Company does not have any
commercially available products (other than the Company's Scanning Laser Digital
Imager, being marketed by Perkin Elmer) and does not anticipate generating any
significant revenues for at least the next several years.
The Company's research and development expenses were $1,305,814 for the
three months ended March 31, 1997 compared to $1,210,241 for the three months
ended March 31, 1996. These expenses included salaries and related benefits,
laboratory supplies, depreciation of equipment, facility costs, consulting fees,
research collaboration expenses, clinical trial costs, legal fees for patents
and other research related expenditures. Research and development costs
increased primarily due to increased salary and benefits costs resulting from an
increase in the number of research personnel. The increase in personnel costs
was partially offset by a decrease in research collaboration costs resulting
from the termination of the research support agreements with the Dana Farber
Cancer Institute and the University of Kentucky, as well as a decrease in patent
legal fees and depreciation.
The Company expects research and development expenses to increase over the
next twelve months in order to continue the Company's research and development
programs for Cardiosol, Lexirin, Elirex, Maspin, and SLDI; to fund possible
clinical trials of Lexirin, HK-Cardiosol and CP-Cardiosol; and to support
limited research in areas such as Bak, SARP and Fas(DELTA)TM. See "Research and
Development Plans" below. Additionally, in April 1997, the Company entered into
a research collaboration agreement with Oxford Asymmetry Limited ("Oxford") for
the purpose of discovering small molecule drug candidates that target specific
apoptosis pathways. This agreement requires the Company to pay Oxford $650,000
over the next twelve months. Although the Company plans for research and
development spending to continue to increase substantially over the next several
years as the Company expands its research and development efforts and undertakes
clinical studies with respect to certain of its projects, such expansion of
operations remain contingent upon the Company's ability to obtain additional
amounts of capital resources. Unless and until such funds are received, research
and development activities will be limited to the Company's available resources.
See "Liquidity and Capital Resources" below.
General and administrative expenses were $697,297 for the three months
ended March 31, 1997 compared to $512,707 for the three months ended March 31,
1996. This increase is primarily due to increased personnel costs, increased
legal costs related to litigation, and an increase in facility costs related to
amending the Company's office lease to add 4,100 square feet. Future general and
administrative expenses are anticipated to increase to support the Company's
expansion of the research and development activities and possibly due to
increased legal expenses resulting from the securities lawsuits brought against
the Company.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Interest income, net of interest expense increased to $130,630 for the
three months ended March 31, 1997 from $60,927 for the three months ended March
31, 1996. The increase in net interest income was due to interest earned on a
larger average investment balance in the first quarter of 1997 as compared to
the first quarter of 1996, as well as a decrease in interest expense in 1997.
The Company expects interest expense to increase as a result of the financing of
up to $700,000 for the construction and purchase of equipment associated with
the Company's GMP manufacturing facility under construction by the Company. See
"Liquidity and Capital Resources" below.
The Company's net loss increased to $1,850,684 for the three months ended
March 31, 1997 compared to $1,655,777 for the three months ended March 31, 1996,
reflecting the Company's increased expenses in 1997. As of March 31, 1997, the
Company had an accumulated deficit of $25,366,403. The Company expects to
continue to incur substantial losses over the next several years as it expands
its research and development efforts and undertakes preclinical and clinical
studies.
Liquidity and Capital Resources
During the first quarter of 1997, the Company received $150,000 from
Boehringer Mannheim ("Boehringer") for the purchase of 37,500 shares of the
Company's common stock at a price of $4.00 per share in accordance with the
Boehringer Mannheim letter of intent. In addition, the Company received
$1,278,700 in cash for the Private Placement receivable. As of March 31, 1997,
the Company's sources of capital consisted of approximately (i) $9.2 million in
cash and cash equivalents, (ii) interest from investments, (iii) grant revenues
related to Maspin of which only $35,000 is currently committed and (iv)
potential payments under the Perkin-Elmer License Agreement. In addition, during
1997 the Company negotiated financing of approximately $700,000 in connection
with the construction of the Company's pilot manufacturing facility. The Company
believes these resources are sufficient to fund the Company's operations through
1997. However, there can be no assurance that unanticipated events affecting the
Company's resources will not result in the Company depleting its funds before
that time.
The Company does not have any committed sources of future equity or debt
funding. Accordingly, the Company will need to raise substantial additional
capital to fund its operations, including the development of its lead compounds,
beyond 1997. Although the Company is currently expending significant efforts to
obtain the additional funding necessary to fund the Company's operations beyond
1997, there can be no assurance that additional funding will be available on
favorable terms, if at all. Failure to raise additional funds in the relatively
near future will have a material adverse effect on the Company.
Research and Development Plans
The Company's resources are currently focused on the research and
development programs for Cardiosol, Lexirin, Elirex, Maspin, and SLDI, on
possible clinical trials of Lexirin, HK-Cardiosol and CP-Cardiosol, and on
limited research in areas such as BAK, SARP and Fas(DELTA)TM. In addition, the
Company has recently entered into the agreement with Oxford for the purpose of
discovering small molecule drug candidates that target specific apoptosis
pathways.
The Company completed its Phase I trials for Lexirin for the suppression of
several diarrhea associated with the pathogenesis of AIDS and a final report on
the results is expected in the second quarter of 1997. During Phase I testing,
Lexirin appears to have been well tolerated by patients. The Company is
currently preparing for the Phase I/II trial which is designed to test higher
doses of Lexirin in HIV patients with chronic diarrhea. The Company intends to
request FDA approval to commence a Phase I/II trial for the suppression of
diarrhea in AIDS patients and a Phase I/IIa trial for the suppression of
chemotherapy induced diarrhea by the end of the third quarter of 1997.
The Company is focusing its research and development efforts relating to
the suppression of apoptosis in the heart on the Cardiosol technology. The
Company plans to file an Investigational Drug Exemption ("IDE") with the FDA to
begin clinical studies of HK-Cardiosol for heart preservation in transplant
patients by the end of the third quarter of 1997. The Company also plans to file
an Investigational New Drug ("IND") application with the FDA to begin clinical
studies of CP-Cardiosol as a cardioplegic solution by the end of the third
quarter of 1997.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Research and Development Plans (continued)
The Company currently is conducting preclinical studies of Elirex in
animals for ischemic heart attack, stroke and liver transplantation. During
1997, the Company expects to evaluate the results of the preclinical data and
determine whether to file an IND to commence clinical studies and/or to pursue
collaborative partnerships for further research and development of Elirex.
Pursuant to the Letter of Intent with Boehringer Mannheim, the Company and
Boehringer are currently conducting preclinical studies to assess the efficacy
and toxicity of Maspin. Based on the results of the studies, which are expected
in the third quarter of 1997, the Company and Boehringer will determine whether
to proceed with further research and development efforts. However, Boehringer
has no obligation to proceed with the project.
The Company expects to continue to support Perkin-Elmer's efforts to
develop the SLDI technology.
The Company plans to seek additional corporate partners for its research
and development activities. However, there can be no assurance that the Company
will be able to secure any new corporate partner relationships. In addition to
the studies mentioned above, the Company expects to fund research at the
University of Tennessee relating to lysophosphatidic acid ("LPA") technology
during 1997, and may enter into research relationships with other universities
and research institutions. The Company also regularly evaluates the possibility
of licensing or otherwise acquiring technologies from third parties.
As of March 31, 1997, the Company employed 58 employees, including 53
full-time employees. Over the next 12 months, the Company expects to increase
its number of employees to approximately 65 to support the Company's increased
research and development efforts and expanding manufacturing and clinical trial
activities. Further increases in employees may occur as the Company increases
its spending in efforts to undertake clinical studies.
In 1996, The Company amended the terms of its laboratory and office lease
to extend the term and add approximately 4,100 square feet of space. The
additional space is being used for the Company's expanding clinical trial
activities and new pilot GMP manufacturing facility for producing materials for
clinical trials.
The Company's capital expenditures for the first quarter of 1997 were
approximately $186,000. The Company expects that capital expenditures for 1997
will continue to increase as a result of the pilot manufacturing facility which
is currently under construction. Over the next twelve months, the Company
estimates the total cost of constructing and equipping the new GMP manufacturing
facility will be approximately $800,000 to $1,000,000. The Company has
negotiated financing for approximately $700,000 to finance a portion of this
construction, as well as the purchase of manufacturing and other laboratory
equipment related thereto. Total capital expenditures for facility enhancements
and related equipment are expected to be approximately $1.2 million over the
next twelve months.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Factors Affecting Future Results
Early Stage of Development; Regulatory and Technological Uncertainties
LXR is at an early stage of development. Other than the SLDI microscope, a
prototype of which was sold to Perkin-Elmer, all of the Company's potential
pharmaceutical and medical device products are currently in research and
development, and no revenues from the sale of such potential products have been
generated to date. Substantially all of the Company's resources have been and
for the foreseeable future will continue to be dedicated to the Company's
research programs and the development of potential pharmaceutical and medical
device products emanating therefrom. There can be no assurance that the Company
will be able to develop a commercial product from these projects. The Company is
awaiting final results of a Phase I clinical trial of its Lexirin drug
candidate, which began in August 1996. All of the Company's other drug and
medical device candidates are in preclinical development. While the Company
believes that the results attained to date in such preclinical studies support
further research and development of these potential products, results attained
in preclinical studies are not necessarily indicative of results that will be
obtained in human clinical testing. Additionally, the Company has not previously
met its forecasted schedule for introducing products into clinical trials.
The potential pharmaceutical products currently under development by the
Company will require significant additional research and development and
preclinical testing and will require extensive clinical testing prior to
submission of any regulatory application for commercial use. The Company's
potential pharmaceutical products are subject to the risks of failure inherent
in the development of pharmaceutical products based on new technologies. These
risks include the possibilities that the Company's novel approach to diagnosis
and therapy will not be successful; that any or all of the Company's potential
pharmaceutical products will be found to be unsafe, ineffective or toxic, or
otherwise fail to receive necessary regulatory clearances; that the products, if
safe and effective, will be difficult to manufacture on a large scale or
uneconomical to market; that proprietary rights of third parties will preclude
the Company from marketing such products; or that third parties will market
superior or equivalent products. As a result, there can be no assurance that the
Company's research and development activities will result in any commercially
viable pharmaceutical products.
The Company's product development efforts are based on the novel scientific
approach of therapeutic apoptosis modulation, which has not been widely studied.
There is, therefore, substantial risk that this approach will not prove to be
successful. Moreover, the Company is applying this novel approach to discover
new treatments for a variety of diseases that are also the subject of research
and development efforts by other companies. Biotechnology is a relatively new
field in which there is a potential for extensive technological innovation in
relatively short periods of time. The Company's competitors may succeed in
developing technologies or products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's technology or proposed products becoming obsolete or noncompetitive.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Future Capital Needs; Uncertainty of Additional Funding
The Company will require substantial additional funds to continue the
research and development programs and preclinical and clinical testing of its
potential pharmaceutical and medical device products and conduct marketing of
any products that may be developed. The Company's capital requirements depend on
numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, the cost of obtaining technological rights, competing technological and
market developments, changes in the Company's existing research relationships,
the ability of the Company to establish collaborative arrangements, the
development of commercialization activities and arrangements, the cost of
constructing and equipping the Company's pilot manufacturing facility, the cost
of purchasing additional capital equipment, and legal expenses incurred in
connection with defending certain lawsuits that have been brought against the
Company (described above in Item 1). Based upon its current plans, the Company
believes it has sufficient funds to meet the Company's operating expenses and
capital requirements through the end of 1997. However, there can be no assurance
that unanticipated changes or other events affecting the Company's operating
expenses will not result in the expenditure of proceeds before the estimated
time.
The Company will need to raise substantial additional capital to fund its
operations, including the development of its lead compounds. The Company intends
to seek such additional funding through public or private financings and/or
collaborative or other arrangements with corporate partners. There can be no
assurance, however, that additional funding will be available from any of these
sources, or if available, will be available on acceptable terms. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate one or more of its research and development programs, including but
not limited to the development of its lead compounds. If the Company raises
additional funds through public or private financings, such financings may
result in substantial dilution to the Company's stockholders. In 1996, the
Company issued a total of approximately 15 million shares and warrants therefor
(or approximately 62% of the Company's total current outstanding stock, assuming
all shares underlying warrants and other rights are outstanding) to raise needed
funds. If the Company is able to enter into corporate partnerships to obtain
funds, such arrangements will require the Company to relinquish rights to
certain of its technologies or potential products that the Company would not
otherwise relinquish. Failure to obtain additional funds will have a material
adverse effect on the Company's operations.
History of Losses; Uncertainty of Future Profitability
The Company has incurred significant operating losses since its inception
in 1992. At March 31, 1997, the Company had an accumulated deficit of
approximately $25.4 million. The Company will be required to conduct significant
research, development, testing and regulatory compliance activities that,
together with projected general and administrative expenses, are expected to
result in significant operating losses for at least the next several years.
Revenues, if any, that the Company may receive in the next few years will be
limited to potential payments from Perkin-Elmer under the Perkin-Elmer License
Agreement, payments from Boehringer under the Maspin Letter of Intent, revenues
from grants currently awarded to the Company and which may be awarded to the
Company in the future, payments under research or product development
relationships that the Company may hereafter establish, payments under license
agreements that the Company may hereafter establish, sales of products that the
Company may acquire in the future, and interest payments. There can be no
assurance, however, that the Company will (i) receive any additional funds under
the Perkin-Elmer Agreement, as Perkin-Elmer may terminate such agreement at any
time in its discretion, (ii) be successful in its collaboration with Boehringer
or that such relationship will be expanded beyond its current very limited
scope, (iii) be able to establish any additional relationships, (iv) enter into
any license agreements, or (v) acquire any products in the future. The Company's
ability to achieve profitability depends upon its ability successfully to
complete either alone or with others, development of its potential products,
conduct clinical trials, obtain required regulatory approvals, and manufacture
and market its products or to enter into license agreements on acceptable terms.
The Company may never achieve significant revenue or profitable operations.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Dependence on Others; Collaborations
The Company's strategy for the research, development and commercialization
of its potential products may require the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others, in addition to those already established, and the Company may therefore
be dependent upon the subsequent success of outside parties in performing their
responsibilities. For example, the Company has provided Perkin-Elmer with
significant exclusive rights to its SLDI product, and is dependent on
Perkin-Elmer to satisfactorily commercialize such product so that the Company
will receive remuneration for its efforts in this area. There can be no
assurance that Perkin-Elmer's efforts to commercialize this product will be
successful, or that the Company will receive any such remuneration. There can
also be no assurance that the Company will be able to establish additional
collaborative arrangements or license agreements to develop and commercialize
its potential products, or that any of its collaborative arrangements or license
agreements will be successful. Moreover, certain of the collaborative
arrangements that the Company may enter into in the future may place
responsibility for preclinical testing and human clinical trials and for
preparing and submitting applications for regulatory approval for potential
products on the collaborative partner. Should a collaborative partner fail to
develop or commercialize successfully any potential product to which it has
rights, the Company's business may be adversely affected. In addition, there can
be no assurance that collaborators will not be pursuing alternative technologies
or developing products either on their own or in collaboration with others,
including the Company's competitors, as a means for developing treatments for
the diseases or disorders targeted by such partners' collaborative programs with
the Company.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information called for by Part II, Item 1 is incorporated by reference
to Note 5 of the Condensed Consolidated Financial Statements included in Part I
of this document.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibits. The following exhibits are attached hereto:
--------
Exhibit
Number Title
------ -----
27.01 Financial Data Schedule.
</TABLE>
- -----------------------
(b) Reports on Form 8-K.
On January 31, 1997, the Company filed a report on Form 8-K reporting the
final closing of its December 1996 private placement.
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
LXR BIOTECHNOLOGY INC.
Date: May , 1997 By: /s/ Mark J. Tomei
--------------------------------------
Mark J. Tomei
Chief Financial Officer and Secretary
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
27.01 Financial Data Schedule.
</TABLE>
- -----------------------
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,170,307
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,478,530
<PP&E> 2,408,651
<DEPRECIATION> 1,720,941
<TOTAL-ASSETS> 10,436,589
<CURRENT-LIABILITIES> 887,211
<BONDS> 0
0
0
<COMMON> 2,167
<OTHER-SE> 9,547,211
<TOTAL-LIABILITY-AND-EQUITY> 10,436,589
<SALES> 0
<TOTAL-REVENUES> 22,197
<CGS> 0
<TOTAL-COSTS> 2,003,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,850,284)
<INCOME-TAX> 400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,850,684)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0.00
</TABLE>
