<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[ X ] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 July 31, 1997 the number of outstanding shares of the Registrant's Common
Stock, par value $0.0001, was 21,781,175.
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 SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 1997 and 1996 and for
the period from April 20, 1992 (date of incorporation) to June
30, 1997 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 and for the period from
April 20, 1992 (date of incorporation) to
June 30, 1997 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 21
</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>
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,674,730 $ 10,217,203
Prepaid expenses 324,942 98,881
Private placement receivable - 1,278,700
Other receivables 41,577 39,500
------------ ------------
Total current assets 7,041,249 11,634,284
Equipment and leasehold improvements, net 1,063,568 592,093
Notes receivable from related parties 190,000 160,000
Deposits and other assets 46,204 32,315
------------ ------------
Total assets $ 8,341,021 $ 12,418,692
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 139,173 $ 324,606
Accrued expenses 354,347 584,049
Deferred rent obligation 276,833 259,975
Short-term portion of note payable 82,048 -
------------ ------------
Total current liabilities 852,401 1,168,630
Note payable, excluding short-term portion 222,243 -
------------ ------------
Total liabilities 1,074,644 1,168,630
------------ ------------
Commitments and contingencies (notes 2, 5, 6 and 8)
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; 21,963,187 and 21,924,687
shares issued and outstanding at June 30, 1997
and December 31, 1996, respectively 2,167 2,163
Common stock subscribed; 187,500 shares at
June 30, 1997 and December 31, 1996 19 19
Additional paid-in capital 34,933,072 34,778,774
Deficit accumulated during the development stage (27,653,706) (23,515,719)
Treasury stock, at cost; 182,012 shares at June 30,
1997 and December 31, 1996 (15,175) (15,175)
------------ ------------
Total stockholders' equity 7,266,377 11,250,062
------------ ------------
Total liabilities and stockholders' equity $ 8,341,021 $ 12,418,692
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
April 20, 1992
Three Months Six Months (Date of
Ended Ended Incorporation)
---------------------------- ---------------------------- to
June 30, June 30, June 30, June 30, June 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues
Grant revenue $ 17,785 $ 59,702 $ 39,982 $ 70,246 $ 154,378
Funded research 68,211 - 68,211 - 68,211
License fee revenue - - - - 300,000
------------ ------------ ------------ ------------ -------------
Total revenues 85,996 59,702 108,193 70,246 522,589
------------ ------------ ------------ ------------ -------------
Expenses incurred in the development stage
Research and development 1,673,666 1,122,624 2,979,480 2,332,865 19,888,187
General and administrative 807,722 649,715 1,505,019 1,162,422 8,772,463
------------ ------------ ------------ ------------ -------------
Total expenses incurred in the development
stage 2,481,388 1,772,339 4,484,499 3,495,287 28,660,650
------------ ------------ ------------ ------------ -------------
Loss from operations (2,395,392) (1,712,637) (4,376,306) (3,425,041) (28,138,061)
Interest income, net
Interest income 108,489 69,684 239,119 150,868 844,577
Interest expense - (12,882) - (33,139) (354,617)
------------ ------------ ------------ ------------ -------------
Total interest income, net 108,489 56,802 239,119 117,729 489,960
------------ ------------ ------------ ------------ -------------
Loss before income taxes (2,286,903) (1,655,835) (4,137,187) (3,307,312) (27,648,101)
Income taxes 400 4,300 800 8,600 5,600
------------ ------------ ------------ ------------ -------------
Net loss $ (2,287,303) $ (1,660,135) $ (4,137,987) $ (3,315,912) $(27,653,701)
============ ============ ============ ============ ============
Net loss per share $ (0.10) $ (0.11) $ (0.19) $ (0.22)
============ ============ ============ ============
Weighted average shares used to compute
net loss per share 22,006,097 15,684,128 22,002,733 15,121,566
============ ============ ============ ============
</TABLE>
4
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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
(Date of
Incorporation)
through
Six Months Ended June 30, June 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities $ (4,584,585) $ (3,738,299) $(24,733,567)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments - - (3,910,150)
Purchase of equipment and leasehold improvements (662,442) (126,903) (2,113,476)
Proceeds from maturity of investments - - 4,000,000
Loans to related parties (30,000) - (190,000)
------------ ------------ ------------
Net cash used in investing activities (692,442) (126,903) (2,213,626)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 150,000 8,630,967 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
Proceeds from note payable 304,291 - 304,291
Repayment of notes payable and line of credit - (600,000) (1,581,111)
Principal payments for obligations under
capital lease - (105,989) (776,513)
Payments received for notes receivable from
stockholders - - 2,147
Repurchase of common stock - (1,510) (1,510)
Net proceeds from exercise of warrants - - 19,505
Net proceeds from exercise of stock options 1,563 1,424 3,406
------------ ------------ ------------
Net cash provided by financing activities 1,734,554 7,924,892 33,621,923
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,542,473) 4,059,690 6,674,730
Cash and cash equivalents at beginning of period 10,217,203 68,245 -
------------ ------------ ------------
Cash and cash equivalents at end of period $ 6,674,730 $ 4,127,935 $ 6,674,730
============ =========== ============
</TABLE>
(Continued)
5
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
April 20, 1992
(Date of
Incorporation)
through
Six Months Ended June 30, June 30,
1997 1996 1997
-------------- ------------ ----------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for income taxes $ 1,600 $ 5,500 $ 5,800
============== ============ ==========
Cash paid for interest $ - $ 38,114 $ 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 $ - $ 3,500 $ 13,665
============== ============ ==========
Receivable for common stock issued in
Private Placement $ - $ - $1,278,700
============== ============ ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
June 30, 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 June 30, 1997 and December 31, 1996, and results
of operations for the three months and six months ended June 30, 1997 and
1996 and for the period from April 20, 1992 (date of incorporation) to
June 30, 1997, and changes in cash flows for the six months ended June 30,
1997 and 1996, and for the period from April 20, 1992 (date of
incorporation) to June 30, 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) NOTE PAYABLE
In May 1997, the Company entered into an agreement providing for a loan of
$200,000 secured by existing equipment and a loan of up to $500,000 for
the purchase of new equipment ("Equipment Loan"). In accordance with the
Equipment Loan, loan payments will be made monthly over a three year term
with a final balloon payment equal to 10% of the original loan. As of June
30, 1997, there was $304,291 outstanding under the Equipment Loan at an
effective interest rate of approximately 15.6%. In connection with the
Equipment Loan, the Company issued warrants to purchase 27,000 shares of
the Company's common stock at $2.1875 per share. The warrants expire in
May 2004.
The Equipment Loan is secured by furniture and equipment with a net book
value of $625,038 at June 30, 1997.
Future minimum principal payments under the Equipment Loan as of June 30,
1997 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31
-----------
<S> <C>
1997 $ 38,522
1998 90,335
1999 104,476
2000 70,958
--------
$304,291
========
</TABLE>
(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 ("Boehringer") 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 a letter of intent
for a research collaboration with Boehringer related to Maspin (the
"Boehringer Letter of Intent"). As of June 30, 1997, these shares have
not been issued and are included in common stock subscribed.
7
<PAGE> 8
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
June 30, 1997
(4) 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 103.2%; risk-free interest rate of 6.53%; and an
expected life of 7 years.
In June 1997, the Company's shareholders approved the proposal to amend
the Company's 1993 Stock Option Plan to increase the number of shares of
common stock authorized and reserved for issuance from 1,049,850 shares to
1,849,850.
As of June 30, 1997, options to purchase 333,773 shares were exercisable
under the option plan at the weighted average exercise price of $1.44.
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 $1.84
Options granted 72,750 2.27
Options canceled or expired (17,970) 1.86
Options exercised (1,000) 1.56
---------
Balance as of June 30, 1997 1,006,920 $1.90
=========
</TABLE>
The weighted average fair value of options granted during 1997 was $1.96.
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- -------------------------
Weighted Weighted Weighted
Range of average average 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 5.70 $0.03 24,186 $0.03
1.00 to 1.50 208,334 6.18 1.29 198,701 1.28
1.56 to 2.44 870,378(1) 8.65 2.06 108,864 1.98
2.50 to 4.81 47,250 9.40 2.42 1,122 3.55
5.25 to 6.19 1,834 7.70 5.76 900 5.55
--------- -------
1,156,920(1) 8.34 $1.90 333,773 $1.44
========= =======
</TABLE>
(1) Includes 150,000 options issued outside of the 1993 Stock Option
Plan, which have the same terms as options granted under the 1993
Stock Option Plan.
8
<PAGE> 9
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
June 30, 1997
(4) STOCK OPTION PLANS (CONTINUED)
Directors Stock Option Plan
There was no activity under the Directors Stock Option Plan during 1997.
As of June 30, 1997, options to purchase 11,664 shares were exercisable
under the Directors Option Plan at the weighted-average exercise price of
$1.57.
The following table summarizes information on stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- -----------------------
Weighted Weighted Weighted
Range of average average 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 7.25 $1.38 5,332 .38
1.56 to 1.88 20,000 8.33 1.72 6,332 1.73
2.19 10,000 9.25 2.19 -- --
------ -------
40,000 8.29 $1.75 11,664 $1.57
====== ======
</TABLE>
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>
June 30, 1997
-------------
<S> <C> <C>
Net loss As reported $(4,137,987)
Pro forma $(4,375,796)
Net loss per share As reported $ (0.19)
Pro forma $ (0.20)
</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.
9
<PAGE> 10
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
June 30, 1997
(5) 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.
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 and
Company Incorporated ("D. Blech & Co.") and its principal David Blech. The
suits further allege that defendants failed to disclose that D. Blech &
Co. would act as principal 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.
The Company has 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 and the
termination of the tolling agreement.
The Company's primary level directors and officers liability insurance
carrier has tentatively agreed to provide coverage, subject to the terms
and conditions of the policy, for the current and former directors and/or
officers. There is no insurance coverage for the Company itself. 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.
(6) 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.
10
<PAGE> 11
LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
June 30, 1997
(6) LICENSE AND COLLABORATIVE RESEARCH AGREEMENTS (CONTINUED)
Oxford Asymmetry, Limited
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. As of June 30, 1997, the Company has made
payments of $162,500 related to the Oxford agreement of which
approximately $127,000 is included in research and development expense for
the six months ended June 30, 1997.
Boehringer Mannheim
As of June 30, 1997, the Company has received approximately $68,000 from
Boehringer to fund its research of Maspin for the treatment of cancer.
The amount received has been recorded as revenue as of June 30, 1997. In
addition, the Company has received $150,000 for the purchase of 37,500
shares of the Company's common stock. (Note 3)
Other Agreements
The Company has committed to fund up to $435,000 under various other
research and collaborative agreements and up to $490,000 under a clinical
service agreement. In most cases, the Company's obligations under these
agreements can be terminated upon 30 days notice.
(7) 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. 128.
(8) SUBSEQUENT EVENTS
Notes Payable
In July 1997, the Company drew down approximately $206,000 in funds under
the Equipment Loan, resulting in a remaining amount of approximately
$164,000 available under the Equipment Loan. (Note 2)
Stock Options
In August, 1997, pursuant to the 1993 Stock Option Plan, the Company
granted to employees options to purchase approximately 330,300 shares of
Company's common stock at an exercise price of $1.875 per share. These
options vest 25% after one year and as to 2.083% of the shares each month
thereafter.
11
<PAGE> 12
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis contains forward looking statements regarding,
among other things, product development plans, product efficacy and
safety, 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 for the year ended December 31, 1996, the Company's Form 10-QSB for
the quarter ended March 31, 1997 and "Factors Affecting Future Results"
below.
PLAN OF OPERATIONS
The Company's resources are currently focused on the research and
development programs for Cardiosol, Elirex, Maspin, SLDI, and Lexirin, on
possible clinical trials of HK-Cardiosol and CP-Cardiosol, and on limited
research in areas such as BAK, Fas(DELTA)TM, and SARP. The Company will
also conduct limited research on new technology which may permit the sex
of a fetus to be determined as early as six weeks after conception, based
on an analysis of DNA in the mother's urine. The Company believes this
technology may also have applications in cancer detection and diagnosis.
In addition, the Company has entered into an agreement with Oxford
Asymmetry, Limited ("Oxford") for the purpose of discovering small
molecule drug candidates that target specific apoptosis pathways.
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 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 1997.
The Company currently is conducting preclinical studies of Elirex in
animals for ischemic heart attack, stroke and liver transplantation
applications. Based on the results to date of the preclinical studies for
Elirex, the Company expects to pursue a collaborative partnership for
further research and development of Elirex, and to consider filing an IND
to commence clinical studies within the next nine to twelve months.
Pursuant to the Boehringer Letter of Intent, 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 the efforts of the Perkin-Elmer
Corporation ("Perkin-Elmer") to develop the Company's scanning laser
digital imaging ("SLDI") technology.
The Company completed its Phase I trials for Lexirin and preliminary
results indicated it was tolerated in AIDS patients and that no adverse
reactions were encountered. However, in light of the growing use of triple
drug therapy for HIV infection and concomitant decrease in side effects
suffered by patients infected with HIV, LXR has decided to reallocate its
resources to the development of its candidate systems to preserve and
protect organ function, including HK-Cardiosol, CP-Cardiosol and Elirex,
for which the Company believes there are larger markets and more pressing
needs. The Company intends to continue to analyze the market for AIDS
related diarrhea therapy outside the U.S. and to evaluate Lexirin for
potential applications in other markets, including cancer chemotherapy and
radiotherapy.
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 is funding research
at the University of Tennessee 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.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PLAN OF OPERATIONS (CONTINUED)
As of June 30, 1997, the Company employed 62 employees, including 58
full-time employees. Over the next 12 months, the Company expects to
increase its number of employees to approximately 72 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 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 half of 1997 were
approximately $660,000. 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. The Company estimates the
total cost of constructing and equipping the new GMP manufacturing
facility will be approximately $800,000 to $1,000,000, of which
approximately $420,000 has been incurred as of June 30, 1997. The Company
has secured the Equipment Loan of $700,000 to finance capital expenditures
for 1997. Total capital expenditures, including amounts remaining for the
manufacturing facility are expected to be approximately $600,000 over the
next twelve months. In addition, the Company expects to receive
approximately $400,000 in contributed equipment under the Perkin-Elmer
License Agreement (as defined below).
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 compared to the Six Months Ended June 30,
1996
The Company had revenues of $85,996 and $108,193 for the three and six
months ended June 30, 1997 compared to revenues of $59,702 and $70,246 for
the three and six months ended June 30, 1996. The increase in revenue was
primarily due to a $68,211 payment for funded research provided by
Boehringer in the second quarter of 1997, partially offset by reduced
grant revenues. The Company's remaining sources of revenues for 1997
include grant revenues related to Maspin of approximately $17,000,
potential research revenue of up to $182,000 under the Boehringer Letter
of Intent and license fee revenue under a license agreement with the
Perkin-Elmer relating to SLDI technology (the "Perkin-Elmer License
Agreement"). The Company believes it has met a milestone under the
Perkin-Elmer License Agreement and expects to receive $300,000 in cash
milestone payments and $400,000 in equipment during the third quarter of
1997. 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.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
The Company's research and development expenses were $1,673,666 and
$2,979,480 for the three and six months ended June 30, 1997 compared to
$1,122,624 and $2,332,865 for the three and six months ended June 30,
1996. 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, 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, increased research collaboration costs resulting from the new
agreement with Oxford and increases in clinical trial and toxicology study
costs. The increase in research and development expenses was partially
offset by a decrease in patent legal fees, depreciation expense and
certain collaboration expenses resulting from the termination of research
agreements with the University of Kentucky and the Dana Farber Cancer
Institute.
The Company expects research and development expenses to continue to
increase over the next twelve months in order to continue the Company's
research and development programs for Cardiosol, Elirex, Maspin, SLDI and
Lexirin; to fund possible clinical trials of HK-Cardiosol and
CP-Cardiosol; and to support limited research in areas such as Bak, SARP,
Fas(DELTA)TM and certain new technology based upon the detection of DNA in
urine. See "Plan of Operations" above.
Additionally, in April 1997, the Company entered into a research
collaboration agreement with Oxford for the purpose of discovering small
molecule drug candidates that target specific apoptosis pathways. As of
June 30, 1997, the Company has paid $162,500 under the Oxford Agreement
and is committed to $487,500 in payments through February 1998.
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 $807,722 and $1,505,019 for the
three and six months ended June 30, 1997 compared to $649,715 and
$1,162,422 for the three and six months ended June 30, 1996. This increase
is primarily due to increased personnel costs, increased legal costs
related to litigation, and an increase in facility costs due to a larger
facility. Future general and administrative expenses are anticipated to
increase to support the Company's expansion of research and development
activities and possibly due to increased legal expenses resulting from the
securities lawsuits currently pending against the Company and certain of
its past and present officers and directors.
Interest income, net of interest expense, increased to $108,489 and
$239,119 for the three and six months ended June 30, 1997 from $56,802 and
$117,729 for the three and six months ended June 30, 1996. The increase in
net interest income was due to interest earned on a larger average
investment balance in the first half of 1997 as compared to the first half
of 1996, as well as a decrease in interest expense in 1997. The Company
expects interest expense to increase as a result of borrowings under the
Equipment Loan. Further increases are expected as the Company borrows the
remaining amount available under the Equipment Loan. See "Liquidity and
Capital Resources" below.
The Company's net loss increased to $2,287,303 and $4,137,987 for the
three and six months ended June 30, 1997 compared to $1,660,135 and
$3,315,912 for the three and six months ended June 30, 1996, reflecting
the Company's increased expenses in 1997. As of June 30, 1997, the Company
had an accumulated deficit of $27,653,706. 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.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In January 1997, the Company received $150,000 from 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 Letter of Intent. In
addition, the Company received $1,278,700 in cash for the Private
Placement receivable and approximately $330,000 in funds borrowed under
the Company's Equipment Loan. As of June 30, 1997, the Company's sources
of capital consisted of approximately (i) $6.7 million in cash and cash
equivalents, (ii) interest from investments, (iii) $17,000 in currently
committed grant revenues related to Maspin, (iv) potential research
revenue of up to $182,000 under the Boehringer Letter of Intent, (v)
approximately $300,000 in license fee revenue under the Perkin-Elmer
License Agreement and (vi) approximately $400,000 of equipment to be
contributed under the Perkin-Elmer License Agreement. In addition, during
1997, the Company secured financing of approximately $700,000 in
connection with the construction of the Company's pilot manufacturing
facility, of which approximately $370,000 remains available under the
Equipment Loan at June 30, 1997. 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 other than noted above. 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.
FACTORS AFFECTING FUTURE RESULTS
Future Capital Needs; Uncertainty of Additional Funding
The Company will require substantial additional capital to fund its
operations, including its research and development programs and
preclinical and clinical testing of its potential pharmaceutical and
medical device products, and to 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 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 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 available funds before the
end of 1997.
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 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 favorable
or 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
certain rights to certain of its technologies on 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.
Early Stage of Development; Regulatory, Technological and Other
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 any of these projects. All of the Company's drug and medical
device candidates 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. Finally, the Company
recently reassessed the market for Lexirin in the treatment of AIDS
patents 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.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS (CONTINUED)
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 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, many of which are much larger and better funded.
Biotechnology in general and apoptosis modulation in 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.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS (CONTINUED)
History of Losses; Uncertainty of Future Profitability
The Company has incurred significant operating losses since its inception
in 1992. At June 30, 1997, the Company had an accumulated deficit of
approximately $27.7 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, potential payments
from Boehringer under the non-binding Boehringer 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 other than the $300,000 in
license fee revenue and $400,000 in contributed equipment under the
Perkin-Elmer License 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.
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
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE RESULTS (CONTINUED)
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.
18
<PAGE> 19
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 2. CHANGES IN SECURITIES
In May 1997, the Company issued warrants to purchase 27,000 shares of the
Company's common stock at $2.1875 per share in connection with the
Equipment Loan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 11, 1997, the Company held its Annual Meeting of Stockholders with
the following results:
1) The following individuals were elected as directors of the Company:
<TABLE>
<CAPTION>
Shares Voting Shares
in Favor Withheld
------------- -------------
<S> <C> <C>
Eugene Eidenberg 15,696,922 33,699
Donald H. Picker 15,692,322 38,299
L. David Tomei 15,678,222 52,399
Mark J. Tomei 15,684,772 45,849
Jack H. Watson, Jr. 15,695,922 34,699
</TABLE>
2) The proposal to amend the Company's 1993 Stock Option Plan to
increase the number of shares of common stock reserved for issuance
by 800,000 was approved with 15,180,874 shares cast in favor of the
amendment, 453,435 shares voting against and 96,312 shares withheld
and/or abstaining.
3) The selection of KPMG Peat Marwick LLP as the Company's certified
public accountants was ratified with 15,688,072 shares cast in favor
of the selection, 31,850 shares voting against, and 10,699 shares
withheld and/or abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are attached hereto:
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
10.01 1993 Stock Option Plan, as amended to date, and related Stock
Option Agreement and Exercise Agreement.
10.38 Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation dated May 13, 1997.
10.39 Stock Subscription Warrant between the Company and Meier
Mitchell and Company, LLC dated May 13, 1997.
10.40 Stock Subscription Warrant between the Company and
Transamerica Business Credit Corporation dated May 13, 1997.
**10.41 Research and Development Agreement between the Company and
Oxford Asymmetry Limited, dated April 18, 1997.
27.01 Financial Data Schedule.
</TABLE>
** Confidential treatment has been requested with respect to certain
portions of this document.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K.
On April 23, 1997, the Company filed a report on Form 8-K reporting
Kenneth R. McGuire's purchase of 1,606,900 shares of the Company's common
stock from Biotechnology Investment Group, L.L.C. and 437,666 shares of
the Company's common stock from various trusts of which David Blech and
members of Mr. Blech's family are beneficiaries.
On June 13, 1997, the Company filed a report on Form 8-K reporting the
Company's announcement that it would not proceed with further U.S.
clinical trials of Lexirin in AIDS patients at that time.
20
<PAGE> 21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report on Form 10-QSB/A to be signed on its behalf by the
undersigned thereunto duly authorized.
LXR BIOTECHNOLOGY INC.
Date: March 24, 1998 By: /s/ Shelli Geer
-------------------------------------
Shelli Geer
Chief Financial Officer and Secretary
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Title
------ -----
<S> <C>
10.01(1) 1993 Stock Option Plan, as amended to date, and related Stock
Option Agreement and Exercise Agreement.
10.38(1) Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation dated May 13, 1997.
10.39(1) Stock Subscription Warrant between the Company and Meier
Mitchell and Company, LLC dated May 13, 1997.
10.40(1) Stock Subscription Warrant between the Company and
Transamerica Business Credit Corporation dated May 13, 1997.
**10.41(1) Research and Development Agreement between the Company and
Oxford Asymmetry Limited, dated April 18, 1997.
27.01(1) Financial Data Schedule.
</TABLE>
** Confidential treatment has been granted with respect to certain
portions of this document.
(1) Previously filed.
22
