<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
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 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, 1998, the number of outstanding shares of the Registrant's Common
Stock, par value $0.0001, was 28,377,181.
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1998
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, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and
1997 and for the period from April 20, 1992 (date of
incorporation) to March 31, 1998 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1998 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 and for the
period from April 20, 1992 (date of incorporation) to
March 31, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Change in Securities 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
PART I. Financial Information
Item I. Financial Statements
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,791,423 $ 11,536,687
Prepaid expenses 208,182 210,695
Other receivables 43,338 40,237
------------ ------------
Total current assets 10,042,943 11,787,619
Equipment and leasehold improvements,
net of accumulated depreciation 1,437,056 1,485,847
Notes receivable from related parties 180,000 205,000
Deposits and other assets 48,965 96,633
------------ ------------
Total assets $ 11,708,964 $ 13,575,099
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 775,964 $ 740,809
Accrued private placement commission -- 467,789
Accrued payroll related expenses 451,707 161,280
Other accrued liabilities 108,320 113,503
Deferred rent obligation 297,197 290,408
Short-term portion of note payable 179,040 172,730
------------ ------------
Total current liabilities 1,812,228 1,946,519
Note payable, excluding short-term portion 358,519 409,707
------------ ------------
Total liabilities 2,170,747 2,356,226
------------ ------------
Commitments and contingencies (notes 2, 4, 5 and 6)
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; 28,545,668 and 27,485,850
shares issued and outstanding at March 31, 1998
and December 31, 1997, respectively 2,825 2,719
Common stock to be issued; 75,000 shares and 252,453
at March 31, 1998 and December 31, 1997, respectively 8 26
Additional paid-in capital 45,617,901 44,017,309
Deficit accumulated during the development stage (36,067,342) (32,786,006)
Treasury stock, at cost; 182,012 shares at
March 31, 1998 and December 31, 1997 (15,175) (15,175)
------------ ------------
Total stockholders' equity 9,538,217 11,218,873
------------ ------------
Total liabilities and stockholders' equity $ 11,708,964 $ 13,575,099
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
April 20, 1992
Three Months (Date of
Ended March 31, Incorporation)
------------------------------- to
1998 1997 March 31, 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Revenues:
Grant revenue $ -- $ 22,197 $ 171,744
Funded research -- -- 101,665
License fee revenue -- -- 1,000,000
------------ ------------ ------------
Total revenues -- 22,197 1,273,409
------------ ------------ ------------
Research and development 2,052,938 1,305,814 26,116,266
General and administrative 1,354,672 697,297 11,957,283
------------ ------------ ------------
Total expenses 3,407,610 2,003,111 38,073,549
------------ ------------ ------------
Loss from operations (3,407,610) (1,980,914) (36,800,140)
------------ ------------ ------------
Interest income, net:
Interest income 147,203 130,630 1,153,381
Interest expense (20,529) -- (413,778)
------------ ------------ ------------
Total interest income, net 126,674 130,630 739,603
------------ ------------ ------------
Loss before income taxes (3,280,936) (1,850,284) (36,060,537)
Income taxes 400 400 6,800
------------ ------------ ------------
Net loss $ (3,281,336) $ (1,850,684) $(36,067,337)
============ ============ ============
Net loss per share $ (0.12) $ (0.08)
============ ============
Weighted average shares used
to compute net loss per share 27,992,764 21,967,330
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statement of Stockholders' Equity
For the three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
PREFERRED STOCK COMMON STOCK TO BE ISSUED ACCUMULATED TREASURY STOCK TOTAL
--------------- ------------------ ---------------- ADDITIONAL DURING THE ---------------------- STOCK-
SHARES SHARES PAID-IN DEVELOPMENT SHARES HOLDERS'
ISSUED AMOUNT ISSUED AMOUNT SHARES AMOUNT CAPITAL STAGE REPURCHASED AMOUNT EQUITY
------ ------ ---------- ------ -------- ------ ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1997 -- $ -- 27,485,850 $2,719 252,453 $ 26 $44,017,309 $(32,786,006) (182,012) $(15,175) $11,218,873
Issuance of
common stock
to be issued on
acquisition
of Cardiosol
technology -- -- 75,000 7 (75,000) (7) -- -- -- -- --
Private
placement of
common stock
(net of
issuance
costs) -- -- 891,658 90 (87,453) (9) 1,368,169 -- -- -- 1,368,250
Stock options
exercised -- -- 14,083 1 -- -- 8,377 -- -- -- 8,378
Warrants
exercised -- -- 64,077 6 -- -- 92,213 -- -- -- 92,219
Stock options
granted -- -- -- -- -- -- 131,833 -- -- -- 131,833
Issuance of
common stock
to consultant -- -- 15,000 2 (15,000) (2) -- -- -- -- --
Net loss -- -- -- -- -- -- -- (3,281,336) -- -- (3,281,336)
------ ------ ---------- ------ -------- ------ ----------- ------------ ----------- --------- -----------
Balances at
March 31, 1998 $ -- -- 28,545,668 $2,825 75,000 $ 8 $45,617,901 $(36,067,342) (182,012) $(15,175) $ 9,538,217
====== ====== ========== ====== ======== ------ =========== ============ ========== ======== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
April 20, 1992
Three Months (Date of
Ended March 31, Incorporation)
------------------------------- through
1998 1997 March 31, 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities: $ (3,119,690) $ (2,259,560) $(31,965,180)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- (3,910,150)
Purchase of equipment and leasehold improvments (49,543) (186,036) (2,453,769)
Proceeds from maturity of investments -- -- 4,000,000
Loans to related parties -- (30,000) (205,000)
------------ ------------ ------------
Net cash used in investing activities (49,543) (216,036) (2,568,919)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 1,368,250 1,428,700 40,951,942
Proceeds from notes payable to related parties -- -- 4,694,500
Proceeds from line of credit -- -- 375,000
Proceeds from equipment loan -- -- 701,249
Repayment of notes payable and line of credit (44,878) -- (1,744,801)
Principal payments for obligations under
capital lease -- -- (776,513)
Payments received for notes receivable from
stockholders -- -- 2,147
Repurchase of common stock -- -- (1,510)
Net proceeds from exercise of warrants 92,219 -- 111,724
Net proceeds from exercise of stock options 8,378 -- 11,784
------------ ------------ ------------
Net cash provided by financing activities 1,423,969 1,428,700 44,325,522
------------ ------------ ------------
Net increase (decrease) in cash and cash (1,745,264) (1,046,896) 9,791,423
equivalents
Cash and cash equivalents at beginning of period 11,536,687 10,217,203 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 9,791,423 $ 9,170,307 $ 9,791,423
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
( A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(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, 1998 and December 31, 1997, results of
operations and cash flows for the three months ended March 31, 1998 and
1997 and for the period from April 20, 1992 (date of incorporation) to
March 31, 1998, and changes in stockholders' equity for the three months
ended March 31, 1998.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
for the years ended December 31, 1997 and 1996, which are included as part
of the Company's Annual Report on Form 10-KSB/A for the year ended
December 31, 1997.
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.
The Company has incurred losses since its inception and expects to incur
substantial additional research and development costs prior to reaching
profitability, including costs related to clinical trials and
manufacturing and marketing expenses. The Company does not have any
committed sources of future equity or debt funding. The Company has
implemented certain cost containment measures and established critical
priorities to manage cash to provide for operations through November of
1998. 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
financing or collaborative or other arrangements with corporate partners.
There is no assurance that such additional funds will be available for the
Company to finance its operations on acceptable terms, if at all. Should
the plans contemplated by management not be consummated, the Company may
have to seek alternative sources of capital or reevaluate its operating
plans.
The Company's independent auditors have issued their report on the
Company's 1997 Consolidated Financial Statements which states in part that
the Company has suffered recurring losses which raise substantial doubt
about the ability of the Company to continue as a going concern.
(2) CAPITAL STOCK
In January 1998, the Company issued 75,000 shares of the Company's common
stock in connection with the acquisition of certain patent and other
rights related to Cardiosol, a preservation solution for use during heart
transplantation ("the Cardiosol Acquisition"). These shares were valued at
the fair market value on the date the agreement was entered into. In
addition, the Company issued 15,000 shares of the Company's common stock
to a consultant as consideration for rendering certain advisory services.
These shares were valued at the fair market value on the date of the
grant. At December 31, 1997 the 75,000 shares and 15,000 shares were
included in common stock to be issued.
In January 1998, the Company raised approximately $368,000 (net of
offering costs), through the sale of an additional 229,123 shares of the
Company's common stock at a price of $1.75 per share and completed the
private placement of stock commenced in December 1997 (the "December 1997
Private Placement"). The Company raised a total of approximately $9.4
million (net of offering costs) in the December 1997 Private Placement. In
January 1998, the Company issued 91,106 shares to the placement agent as
sales commission in connection with the December 1997 Private Placement,
of which 87,453 shares were included in common stock to be issued at
December 31, 1997.
In January 1998, the Company also issued warrants to purchase 571,429
shares of the Company's common stock at an exercise price of $2 per share
to the placement agent for the December 1997 Private Placement.
In February 1998, the Company raised $1,000,000 through a private
placement offering and sale of 571,429 shares of the Company's common
stock at a price of $1.75 per share to a related party.
(Continued)
7
<PAGE> 8
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
( A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(2) CAPITAL STOCK (CONTINUED)
In February 1998, the Company issued an option to purchase 250,000 shares
of the Company's common stock to G. Kirk Raab for consulting services
(note 3).
During the quarter ended March 31, 1998, the Company issued 64,077 shares
of the Company's common stock upon exercise of warrants issued at a
purchase price of $92,219. As of March 31, 1998, the Company had warrants
to purchase 1,689,958 shares of stock remaining outstanding.
In March 1998, the Board of Directors approved a proposal, subject to
stockholders approval, to amend the Company's Restated Certificate of
Incorporation to increase the number of shares of common stock authorized
for issuance from 45,000,000 to 60,000,000.
(3) STOCK OPTION PLANS
The following summarizes the Stock Option activity:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------------------
1993 Stock Directors Stock Other Stock
Option Plan Option Plan Option Grants
----------- --------------- -------------
<S> <C> <C> <C>
Balance as of December 31, 1997 1,330,701 60,000 150,000
Options granted 535,500 20,000 410,000
Options canceled or expired (88,341) -- --
Options exercised (14,083) -- --
--------- ------ -------
Balance as of March 31, 1998 1,763,777 80,000 560,000
========= ====== =======
</TABLE>
The Board of Directors has approved an amendment, subject to stockholders
approval, to the 1993 Stock Option Plan to increase the shares of common
stock authorized for issuance from 1,849,850 shares to 3,849,850.
In February 1998, the Company appointed G. Kirk Raab to the Board of
Directors of the Company and also entered into a three year consulting
agreement (Consulting Agreement) with him. Under the Consulting Agreement,
Mr. Raab received options to purchase 250,000 shares of the Company's
common stock at an exercise price equal to the fair market value of the
common stock on the date of the grant. Options to purchase 50,000 shares
of the Company's common stock vested immediately upon signing the
consulting agreement and the balance vest at a rate of 1/36th per month.
The Board of Directors may accelerate the vesting of 100,000 of the stock
options upon achievement of certain milestones. The fair value of these
250,000 options, using the Black Scholes pricing model, with an expected
dividend yield of 0.0%, expected life of ten years, expected volatility of
95.8% and risk-free interest rate of 5.73%, is estimated at approximately
$565,000. Based on the three year term of the consulting agreement and the
vesting schedule of the options, the Company expects to recognize
consulting expenses of approximately $245,000, $151,000, $151,000, and
$18,000 in the years ending December 31, 1998, 1999, 2000, and 2001,
respectively. The Company recognized consulting expense of approximately
$132,000 for the three months ended March 31, 1998.
In March 1998, the Board of Directors approved a resolution to grant each
director who is not an employee or substantial stockholder an option to
acquire 40,000 shares of the Company's common stock upon joining the board
and to grant every director an additional option to acquire 10,000 shares
at the end of each full year of service on the board. In March 1998, in
connection with the aforementioned resolution, the Board of Directors
granted options to purchase 160,000 shares of the Company's
(Continued)
8
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
( A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(3) STOCK OPTION PLANS (continued)
common stock at an exercise price of $2.875 per share, representing the
fair market value of the shares on the date the options were granted.
(4) RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 1998, in connection with the employment
agreement with the Company's President and Chief Operating Officer (COO),
the Company forgave $25,000 of the outstanding loan in the original
principal amount of $175,000. As of March 31, 1998, the principal balance
of $150,000 remained outstanding under the loan.
In February 1998, the Company terminated its Independent Consulting
Agreement with Mark Tomei and included the severance of approximately
$290,000 due to him upon termination of the agreement in general and
administrative expenses. Subject to agreement with Mr. Tomei, the Company
plans to settle the severance in cash or by issuance of common stock of
the Company or both.
(5) LITIGATION
The Company and five of its past or present directors and officers are
named as defendants in Katz vs. Blech, ("Katz") and Degulis vs. LXR
Biotechnology Inc., et al. ("Degulis"). One of the five, Mark Germain, a
former director and former chairman of the Company, is named as a
defendant in the above two cases and also in In re Blech Securities
Litigation, ("In re Blech"). In addition, L. Scott Minick, a former
director and former officer of the Company; James D. Coombes, a former
director and former officer, and Mark J. Tomei, a former director and
former officer, are defendants in Katz and Degulis; and Christopher
Henney, a former director, is a defendant in Katz. The Company was
previously named as a defendant in In re Blech but was dismissed by the
Court on June 6, 1996.
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
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. Document discovery is largely completed
and depositions are underway. Under the current scheduling order, no
deadline for completion of discovery is presently set and no trial date is
set.
None of the complaints in Katz, Degulis or In re Blech state a claim for a
specific amount of monetary damages. The complaint in In re Blech seeks
damages and interest as provided by law, costs and expenses of litigation,
attorneys fees, expert fees, other costs and disbursements, and such other
relief as may be just and proper. The complaint in Katz seeks rescission,
an award of compensatory damages, fees, costs and expenses including
expert fees, and such other relief as the court deems proper. The
complaint in Degulis seeks compensatory damages including rescissionary
damages, interest, punitive damages, counsel fees and other costs of suit,
a constructive trust over the proceeds of the offering, and such other and
further relief as the Court deems just and proper. The Company has
(Continued)
9
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
( A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(5) LITIGATION (CONTINUED)
agreed to indemnify and/or advance defense costs to each of the current or
former officers and directors who are named as defendants in the
litigation. 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, 1998 or the termination of
the tolling agreement.
The Company maintains officers and directors liability insurance under
policies providing aggregate coverage totaling $3 million, which covers
(i) the Company for amounts spent indemnifying directors and officers or
(ii) directors and officers directly if the Company fails to indemnify
them. The policies do not provide coverage to the Company itself with
respect to its own defense costs and liability. The Company and its
insurance carriers are currently involved in disputes relating to the
deductibles and exclusions under the policies. Whether or to what extent
insurance covers any settlement or judgment in the above litigation will
depend on the outcome of the disputes. The Company's primary level of
directors and officers liability insurance carrier has tentatively agreed
to provide coverage. On November 4, 1997, the Company's first level excess
insurer denied coverage based on the related party transactions exclusion
in its policy. The Company reserves the right to contest this denial of
coverage. As a result, the Company cannot predict, at this time, the
amount of insurance reimbursement that will be obtained. During the
quarter ended March 31, 1998, and 1997 the Company incurred expenses of
approximately $13,000 and $23,000, respectively relating to this
litigation. To date, the Company has received no reimbursements for these
expenses. The failure of the Company to obtain reimbursement for the
amounts spent defending the indemnified defendants, along with the
Company's own costs and any judgment or settlement payable by the Company
could have a material adverse effect on the Company's cash flows, results
of operations and financial condition.
The Company denies any wrongdoing and is defending the above cases
vigorously. While it is possible that the litigation may have a material
adverse effect on the Company, 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.
(6) SUBSEQUENT EVENT
In April 1998, Dr. David Tomei stepped down as the Company's Chairman and
Chief Executive Officer and G. Kirk Raab was appointed as the Company's
Chairman and Interim Chief Executive Officer. Dr. Tomei remains a director
of the Company and will serve as its Executive Vice President and Chief
Scientific Officer. Pursuant to this change in position, and in accordance
with a resolution passed by the Board of Directors, Mr. Raab will receive
a base compensation of $180,000 and was granted an option to purchase
500,000 shares of the Company's common stock, and Dr. Tomei was granted
options to purchase 300,000 shares of the Company's common stock. The
Company is currently negotiating the terms of new employment agreements
with Dr. Tomei and Mr. Raab.
10
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for historical information, the following Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward looking statements regarding, among other things, product
development plans, product efficacy, safety 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. The following discussion and analysis should be read
in conjunction with the Company's financial statements and accompanying
notes included herein, the Company's Annual Report on Form 10-KSB/A for
the year ended December 31, 1997, the Company's registration statement on
Form S-3, declared effective by the Securities and Exchange Commission on
May 6, 1998, and "Factors Affecting Future Results", below.
PLAN OF OPERATIONS
The Company's resources are currently limited and therefore focused
primarily on the research and development of the Company's candidate
systems to preserve and protect organ function, including CP-Cardiosol,
HK-Cardiosol and Elirex.
In late 1997, the Company received a notice from the FDA that its IDE for
use of HK-Cardiosol as a heart preservation solution was approved. The
approval authorizes the Company to proceed with clinical trials in up to
eight medical centers and 150 heart transplant patients. In granting the
approval to the Company to commence clinical trials, the FDA had required
the Company to make certain revisions to the protocol. The Company made
revisions to the protocol and submitted an amended IDE to the FDA in May
of 1998. The Company expects to initiate clinical trials of HK-Cardiosol
during 1998. If the trial is successful, a 510K submission or pre-market
application will be made in the USA and an equivalent submission will be
made in Europe. There can be no assurance that the clinical trial of
HK-Cardiosol will be successful, or if it is, that HK-Cardiosol will be
successfully commercialized.
In March 1998, the Company filed an IND with the FDA to begin clinical
studies of CP-Cardiosol for use in cardioplegia. In April of 1998, the
commencement of the Company's planned CP-Cardiosol clinical trials was
delayed by a request from the FDA for additional preclinical data. The
Company believes it will be able to fully respond to the FDA's request by
the third quarter of 1998. See "Factors Affecting Future Results", below.
The Company is currently conducting preclinical studies of Elirex in
animals for ischemic heart attack and stroke applications. The Company has
received final results of animal studies performed at Cleveland Clinic
which showed that the Elirex treated group had a 53% reduction in extent
of myocardial infarction when compared to controls. Experimental evidence
obtained in these studies also showed significant reduction of
inflammation and protection of heart function. Based on the results to
date of the preclinical studies for Elirex, the Company is currently
evaluating its development strategy for Elirex and considering a plan to
seek a collaborative partnership after completing a Phase II clinical
trial. There can be no assurance that the Company will be able to secure a
collaborative partnership or commence clinical trials of Elirex.
The Company also intends to conduct further research on Secreted Apoptosis
Regulatory Proteins (SARP) due to its potential indication for a variety
of diseases including cancer, diabetes, stroke, and myocardial infarction.
The Company expects to continue to support the efforts of Perkin-Elmer
Corporation to develop the Company's Scanning Laser Digital Imaging
technology.
The Company and Boehringer Mannheim are currently conducting preclinical
studies to assess the efficacy and toxicity of Maspin. During the third
quarter of 1997, the Company received preliminary results of small scale
efficacy studies for primary tumor growth and metastic breast cancer
models. Based on the outcome of the final review of these studies, the
Company and Boehringer Mannheim will determine whether to proceed with
further research and development efforts. However, Boehringer Mannheim has
no obligation to proceed with the project, and there can be no assurance
that Boehringer Mannheim will do so.
(Continued)
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PLAN OF OPERATIONS (CONTINUED)
To further expand its remaining research programs, consisting of BAK,
Fas(DELTA)TM, and Urine DNA Analysis, the Company will continue to pursue
business development opportunities such as licensing and collaborative
research agreements.
Although the Company plans to seek additional corporate partners for its
research and development activities, there can be no assurance that the
Company will be able to secure any new corporate partner relationships. In
addition, the Company 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.
The Company has assessed its financial and operational systems and
developed a plan to modify its information systems to be year 2000
compliant. The Company expects the project to be substantially complete by
mid-1999 and the cost of the project is not expected to have a material
impact on the Company's financial condition and results of operations.
As of March 31, 1998, the Company employed 62 employees, including 56
full-time employees. Over the next 12 months, based on the existing
resources and current management plan, the Company expects to increase its
number of employees to approximately 68 to support the Company's research
and development efforts and clinical trial activities. In addition, the
Company is currently in the process of recruiting a Chief Executive
Officer. The Company is currently seeking additional financing upon which
the Company expects a further increase in the number of employees. There
can be no assurance, however, that the Company will be able to obtain such
financing on commercially reasonable terms, if at all. (See "Liquidity
and Capital Resources," below.)
The Company's capital expenditures during the first quarter of 1998 were
approximately $107,000. The Company has prioritized the use of its
existing resources and, under the current management plan, expects to
incur capital expenditures of approximately $124,000 over the next twelve
months. However, if the Company obtains additional financing, the Company
expects capital expenditure to further increase.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The Company's revenues for the quarter ended March 31, 1997 consisted of
grant revenues from the National Institute of Health. The Company did not
generate any revenues for the quarter ended March 31, 1998. The Company
does not have any commercially available products, and does not anticipate
generating any significant product revenues for at least the next several
years.
The Company incurred research and development expenses of approximately
$2,053,000 and $1,306,000 for the three months ended March 31, 1998, and
1997, respectively. These expenses included salaries and related benefits,
laboratory supplies, depreciation of equipment, facility costs, consulting
fees, research collaboration expenses, toxicology study costs, clinical
trial costs, contract manufacturing expenses, legal fees for patents and
other research related expenditures. The increase in research and
development costs for the three months ended March 31, 1998 as compared to
the three months ended March 31, 1997 is primarily due to increased salary
and benefits costs resulting from an increase in the number of development
personnel, increased research collaboration costs resulting from the
agreement with Oxford Asymmetry, Limited and increases in consulting fees,
toxicology and contract manufacturing costs for Cardiosol.
The Company expects research and development expenses to continue to
increase in 1998, in particular to fund anticipated clinical trials of
HK-Cardiosol and CP-Cardiosol. However, the Company's expenditures will be
limited by the Company's efforts to maintain enough cash to operate
through November 1998. See "Liquidity and Capital Resources" below.
(Continued)
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(CONTINUED)
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
remains contingent upon the Company's ability to obtain additional and
adequate amounts of capital resources. Unless and until such funds are
received, research and development activities will be limited by the
Company's available resources. See "Liquidity and Capital Resources"
below.
The Company's general and administrative expenses were approximately
$1,355,000 and $697,000, for the three months ended March 31, 1998 and
1997, respectively. The increase from 1997 to 1998 is primarily due to the
accrued severance obligation resulting from termination of Mark Tomei's
independent consulting agreement, fees relating to the Consulting
Agreement with Mr. Raab, and increased legal costs and travel expenses.
The general and administrative expenses are expected to increase further
to support the Company's expansion of research and development activities,
as well as the potential for increased legal expenses resulting from the
securities lawsuits currently pending against the Company and certain of
its past and present officers and directors. In addition, the Company is
currently in the process of recruiting a Chief Executive Officer which the
Company expects will result in increased costs associated with
recruitment, potential relocation and competitive compensation package.
Interest income was approximately $147,000 and $131,000, for the three
months ended March 31, 1998,and 1997, respectively. The slight increase in
the interest income is primarily due to interest earned on a larger
investment balance. Interest expense was approximately $21,000 for the
three months ended March 31, 1998, there was no interest expense for the
three months ending March 31, 1997. The increase in interest expense is
due to the equipment loan of $700,000 obtained during 1997. The Company
expects interest expense in 1998 to increase due to borrowings under the
Company's Equipment Loan.
The Company incurred net losses of approximately $3,281,000 and
$1,851,000, for the three months ended March 31, 1998, and 1997,
respectively. As of March 31, 1998, the Company had an accumulated deficit
of approximately $36,067,000. The Company expects to continue to incur
substantial losses over the next several years as it expands its research
and development efforts and continues to undertake preclinical and
clinical studies.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1998, the Company raised approximately $1.4
million in net proceeds through the sale of 800,552 shares of the
Company's Common Stock at a price of $1.75 per share in private
placements. In addition, the Company received approximately $100,000 in
proceeds through the exercise of stock options and warrants.
As of March 31, 1998, the Company's remaining sources of capital consist
of approximately $9.8 million in cash and cash equivalents, interest from
investments, and potential milestone payments which may be received under
the Company's collaborative arrangements. There can be no assurance that
any of the milestones will be achieved or payments made.
The Company and five of its past or present directors and officers are
defendants in class action lawsuits. (See "Note 5 of the Condensed
Consolidated Financial Statements".) The Company maintains officers and
directors liability insurance under policies providing aggregate coverage
totaling $3 million, which covers (i) the Company for amounts spent
indemnifying directors and officers or (ii) directors and officers
directly if the Company fails to indemnify them. The policies do not
provide coverage to the Company itself with respect to its own defense
costs and liability. The Company and its insurance carriers are currently
involved in disputes relating to the deductibles and exclusions under the
policies. Whether or to what extent insurance covers any settlement or
judgment in the above litigation will depend on the outcome of the
disputes. The Company's primary level of directors and officers liability
insurance carrier has tentatively agreed to provide coverage. On November
4, 1997, the Company's
(Continued)
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
first level excess insurer denied coverage based on the related party
transactions exclusion in its policy. The Company reserves the right to
contest the denial of coverage. As a result, the Company cannot predict,
at this time, the amount of any insurance reimbursement that will be
obtained. During the quarters ended March 31, 1998, and 1997, the Company
incurred expenses of approximately $13,000 and $23,000, respectively
relating to this litigation. To date the Company has received no
reimbursement for these expenses. The failure of the Company to obtain
reimbursement for the amounts spent defending the indemnified defendants,
along with the Company's own defense costs and any judgment or settlement
payable by the Company, could have a material adverse effect on the
Company's, cash flows, results of operations and financial condition.
The Company does not have any committed sources of future equity or debt
funding. The Company has implemented certain cost containment measures and
established critical priorities to manage cash to provide for operations
through November of 1998. However, there can be no assurance that
unanticipated events affecting the Company's resources will not result in
the Company's depleting its capital resources before that time.
Accordingly, the Company will need to raise substantial additional capital
to fund its operations. Although the Company is currently seeking to
obtain the additional funding necessary to fund the Company's operations
beyond November of 1998, 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.
The Company's independent auditors have issued their report on the
Company's 1997 Consolidated Financial Statements which states in part that
the Company has suffered recurring losses which raise substantial doubt
about the ability of the Company to continue as a going concern.
FACTORS AFFECTING FUTURE RESULTS
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 products and to conduct marketing of any
pharmaceutical 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 purchase
of additional capital equipment and legal expenses incurred in connection
with defending certain lawsuits that have been brought against the Company
and certain of its past and present directors and officers. Based upon its
current plans, the Company believes it has sufficient funds to meet the
Company's operating expenses and capital requirements through November of
1998. However, there can be no assurance that changes in the Company's
research and development plan or other events affecting the Company's
operating expenses will not result in the expenditure of funds 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 or collaborative or other arrangements with corporate partners.
There can be no assurance, however, that additional financing will be
available from any of these sources, or if available, will be available on
favorable or acceptable terms. If the Company raises additional funds
through public or private financings, any such financing may result in
substantial dilution to the Company's stockholders. 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, or to obtain
funds through entering into arrangements with
(Continued)
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING (CONTINUED)
collaborative partners or others that may require the Company to
relinquish rights to certain of its technologies or potential products
that the Company would not otherwise relinquish. Failure to obtain such
needed funds could have a material adverse effect on the Company's
operations.
The Company's independent auditors have issued their report on the
Company's 1997 Consolidated Financial Statements which states in part that
the Company has suffered recurring losses which raise substantial doubt
about the ability of the Company to continue as a going concern.
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
The Company is at an early stage of development. Other than the Scanning
Laser Digital Imaging (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.
All of the Company's drug and medical device candidates except for
HK-Cardiosol, which is now entering the clinical testing phase, and
Lexirin, which is discussed below, are in preclinical development. While
the Company believes that the results attained to date in such preclinical
studies generally 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 Company
reassessed the market for Lexirin in the treatment of AIDS
patients and decided not to proceed with further U.S. clinical trials of
Lexirin in AIDS patients at this time. Similar assessments of market
opportunities and priorities for allocating available resources may again
affect the Company's decision to undertake or continue preclinical and/or
clinical trials or otherwise continue to pursue research and development
programs for its potential products.
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 any of
the Company's research and development activities will be successfully
completed; that clinical trials will be allowed by the FDA or other
regulatory authorities; that clinical trials will commence as planned;
that required United States or foreign regulatory approvals will be
obtained on a timely basis, if at all; or that any products for which
approval is obtained will result in any commercially viable products.
RELIANCE ON NOVEL SCIENTIFIC APPROACH
The Company's product development efforts are based on the novel
scientific approach of therapeutic apoptosis modulation (a process of
regulating genetically programmed cell death), 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,
many of which are much larger and better funded. Biotechnology in general
and apoptosis modulation in
(Continued)
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RELIANCE ON NOVEL SCIENTIFIC APPROACH (CONTINUED)
particular are relatively new fields 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.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred significant operating losses since its inception
in 1992. At March 31, 1998, the Company had an accumulated deficit of
approximately $36 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 payments from
Perkin-Elmer under the "Perkin-Elmer Agreement", payments under the
Company's collaboration agreement with Boehringer, 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 limited scope,
(iii) be able to establish any additional collaborative 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 to successfully 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. In the event that the Company
does enter into any future license agreements, such license agreements may
adversely affect the Company's profit margins on its potential products.
The Company may never achieve significant revenue or profitable
operations.
DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff, including; L. David Tomei, Ph.D., its current
Executive Vice President and Chief Scientific Officer; Donald H. Picker,
Ph.D., its President, and Chief Operating Officer; and Samuil R. Umansky,
Ph.D., Vice President, Molecular Pharmacology. The Company's loss of
services of any of these persons or other members of its staff could have
a material adverse effect on the Company's operations.
G. Kirk Raab is currently serving as the interim Chief Executive Officer
of the Company. Mr. Raab however does not intend to serve indefinitely in
such capacity and is charged with leading the Company's search for a new
Chief Executive Officer. There can be no assurance that the search will be
successful, and if it is not, it could have a material adverse effect on
the Company.
The Company has entered into an employment agreement with Dr. Picker and
is negotiating new agreements with Dr. Tomei and Mr. Raab; however, any of
them may terminate his relationship with the Company at any time. The laws
of the State of California generally prohibit post-employment
noncompetition covenants and, therefore, none of the Company's employees
is subject to any restriction on competition in the future. Accordingly,
there can be no assurance that any of the Company's employees will remain
with the Company or that, in the future, these employees will not organize
competitive businesses or accept employment with companies competitive
with the Company. In addition, the Company is dependent on collaborators
at research institutions and its advisors and consultants. Recruiting and
retaining qualified personnel, collaborators, advisors and consultants
will be critical to the Company's success. There is intense competition
for such qualified personnel in the area of the Company's activities, and
there can be no assurance that the Company will be able to continue to
attract and retain such personnel necessary for the development of the
Company's business. The Company's planned activities will require
additional expertise in areas such as preclinical testing, clinical trial
management, regulatory affairs, manufacturing and marketing. Such
activities will require the addition of new personnel, including
management, and the development of additional expertise by existing
management personnel. The inability to acquire such services or to develop
such expertise could have a material adverse effect on the Company's
operations. (Continued)
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPENDENCE ON OTHERS; COLLABORATIONS
The Company's strategy for the research, development and commercialization
of its potential pharmaceutical products will require the Company to enter
into various arrangements with corporate and academic collaborators,
licensors, licensees and others, in addition to those already established,
and 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. In addition, the Company has entered into a
collaboration with Boehringer to jointly evaluate the development of
Maspin, a naturally occurring protein, for the treatment of breast and
prostate cancer. There can be no assurance that such collaboration will be
successful or that the Company will enter into any further agreements with
Boehringer. There can also be no assurance that the Company will be able
to establish additional collaborative arrangements or license agreements
that the Company deems necessary or acceptable to develop and
commercialize its potential products, or that any of its collaborative
arrangements or license agreements will be successful. 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.
RISKS ASSOCIATED WITH LICENSES
The Company has licenses to technologies developed by various research
institutes and universities. Pursuant to the terms of those agreements,
the Company is obligated to make royalty payments on the sales, if any, of
licensed products and, in some instances, the Company is responsible for
the cost of filing and prosecuting patent applications. The Company's
license agreements also require that the Company exercise diligence in
bringing potential products to market. In some cases, the Company's
license agreements require that the Company make payments that may be
substantial, upon completion of certain milestones occurring in the
clinical trials and regulatory approval of licensed products. In the event
that the Company is unable to meet the diligence requirements, to make the
required milestone payments or ongoing annual license payments or
otherwise to meet its obligations under the license agreements, the
Company could lose its rights to the technologies.
LIMITED MARKETING, SALES, CLINICAL TESTING OR REGULATORY COMPLIANCE
ACTIVITIES
In view of the early stage of the Company and its research and development
programs, the Company has restricted hiring to scientists and a small
administrative staff and has made only a small investment in marketing,
product sales, clinical testing or regulatory compliance resources. If the
Company successfully develops any commercially marketable pharmaceutical
products, it may seek to enter joint venture, sublicense or other
marketing arrangements with parties that have an established marketing
capability or it may chose to pursue the commercialization of such
products on its own. There can be no assurance, however, that the Company
will be able to enter into such marketing arrangements on acceptable
terms, if at all. Further, the Company will need to hire additional
personnel skilled in the clinical testing and regulatory compliance
process and in marketing or product sales if it develops pharmaceutical
products with commercial potential that it determines to commercialize
itself. There can
(Continued)
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIMITED MARKETING, SALES, CLINICAL TESTING OR REGULATORY COMPLIANCE
ACTIVITIES
be no assurance, however, that it will be able to acquire such resources
or personnel. The Company has entered into a Clinical Services Agreement
with Innovex, Inc. ("Innovex"), to begin clinical studies of HK-Cardiosol
for heart preservation in transplant patients. There can be no assurance
that Innovex will be able to provide the data management necessary to
conduct clinical trials which could result in delays of clinical trials.
MANUFACTURING LIMITATIONS
The Company currently does not have the capability to manufacture products
under the current Good Manufacturing Practices ("GMP") requirements
prescribed by the FDA. The Company intends either to independently
manufacture, package, label and distribute its potential pharmaceutical or
other products or to establish arrangements with contract manufacturers or
contract packagers to supply sufficient quantities of such products to
conduct clinical trials as well as for the manufacture, packaging,
labeling and distribution of finished pharmaceutical products if its
potential products are approved for commercialization. If the Company is
unable to manufacture or contract for a sufficient supply of its potential
pharmaceutical products on acceptable terms, the Company's preclinical and
human clinical testing schedule may be delayed, resulting in the delay of
submission of products for regulatory approval and initiation of new
development programs, which may have a material adverse effect on the
Company. If the Company chooses to contract for manufacturing services and
encounters delays or difficulties in establishing relationships with
manufacturers to produce, package, label and distribute its finished
pharmaceutical or other products, market introduction and subsequent sales
of such products would be adversely affected. Moreover, contract
manufacturers that the Company may use must adhere to GMP required by the
FDA. The Company has entered into a manufacturing agreement with
Chesapeake Biological Laboratories, Inc. ("CBL") to manufacture
HK-Cardiosol and CP-Cardiosol for clinical trials. There can be no
assurance that CBL will be able to manufacture sufficient quantities of
HK-Cardiosol or CP-Cardiosol for the Company's clinical trials.
Manufacturing facilities must pass a pre-approval plant inspection before
the FDA grants approval for manufacturing. California manufacturing
companies are also required to obtain a license from the State of
California to manufacture any investigational products which license will
be issued only if the Company is in compliance with the GMP regulations,
as determined by an inspection conducted by the State of California. If
the Company is unable to manufacture its potential products independently
or obtain or retain third party manufacturing on commercially acceptable
terms, it may not be able to commercialize its products as planned. The
Company's potential dependence upon third parties for the manufacture of
its products may adversely affect the Company's profit margins and its
ability to develop and deliver such products on a timely and competitive
basis. The Company has no experience in the manufacture of pharmaceutical
products or medical devices in clinical quantities or for commercial
purposes. Should the Company determine to manufacture products itself, the
Company would be subject to the regulatory requirements described above,
would be subject to similar risks regarding delays or difficulties
encountered in manufacturing any such products and would require
substantial additional capital. In addition, there can be no assurance
that the Company will be able to manufacture any products successfully and
in a cost effective manner.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information in Note 5 to the Condensed Consolidated Financial
Statements included in Part I of this document is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES
In January 1998, the Company sold an additional 229,123 shares of the
Company's common stock at a price of $1.75 per share and completed the
December 1997 Private Placement. In connection with the private placement,
the Company issued 91,106 additional shares for services rendered by the
private placement agent and issued warrants for an additional 571,429
shares, exercisable at $2.00 per share.
In February 1998, the Company completed a private placement of 571,429
shares of its Common Stock at $1.75 per share to a related party for
aggregate gross proceeds of $1 million. Based on representations made by
the Investors, all of these shares were sold pursuant to an exemption
under Section 4(2) of the Securities Act of 1933, as amended.
On May 6, 1998, the Company's registration statement on Form S-3 covering
the resale of 5,820,392 shares of common stock issued or issuable in
connection with the December 1997 Private Placement and 581,176 other
shares of common stock issued or issuable by the Company was declared
effective by the Securities and Exchange Commission.
ITEM 5. OTHER INFORMATION
Brian Brookover, Kirk Raab and William Hambrecht were elected to the
Company's Board of Directors in January 1998. Mr. Brookover replaced Jack
Watson, who resigned from the Company's Board of Directors in January
1998.
In March 1998, John C. Kane was elected to the Company's Board of
Directors.
In April 1998, Donald H. Picker, Ph.D. and Mark J. Tomei resigned from the
Company's Board of Directors.
On April 22, 1998, the Company announced that L. David Tomei, Ph.D., a
co-founder of the Company, had stepped down as its Chairman and Chief
Executive Officer and that G. Kirk Raab was appointed as the Company's
Chairman of the Board of Directors and Interim Chief Executive Officer.
Dr. Tomei remains a director of the Company and continues to serve as its
Executive Vice President and Chief Scientific Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are attached hereto:
<TABLE>
<CAPTION>
Exhibit
Number Title
<S> <C>
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
</TABLE>
- ----------
(b) Reports on Form 8-K.
On January 6, 1998, the Company filed a report on Form 8-K reporting the
final closing of its December 1997 private placement.
On March 17, 1998 the Company filed a report on Form 8-K, reporting the
sale of 571,429 shares of its common stock at $1.75 per share to a related
party.
19
<PAGE> 20
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 15, 1998 By: /s/ SHELLI J. GEER
-------------- ------------------------------------
Shelli J. Geer
Chief Financial Officer and
Secretary (Principal Accounting and
Financial Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Title
<S> <C>
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
</TABLE>
21
<PAGE> 1
LXR Biotechnology Inc. and Subsidiary
Exhibit 11.01
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Loss $ 3,281,336 $ 1,850,684
Weighted average number of
shares outstanding:
Common Stock 27,917,764 21,785,663
Common Stock to be issued 75,000 181,667
----------- -----------
27,992,764 21,967,330
=========== ===========
Net Loss Per Share $ (0.12) $ (0.08)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,791,423
<SECURITIES> 0
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0
0
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</TABLE>
