<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, 1999
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, 1999, the number of outstanding shares of the Registrant's Common
Stock, par value $0.0001, was 29,645,323.
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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, 1999
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, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and
1998 and for the period from April 20, 1992 (date of
incorporation) through March 31, 1999 4
Condensed Consolidated Statement of Stockholders'
Equity for the three months ended March 31, 1999 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998 and for
the period from April 20, 1992 (date of incorporation)
through March 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Change in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
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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 1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,009,512 $ 3,495,582
Prepaid expenses 91,137 93,811
Other receivables 16,817 133,339
------------ ------------
Total current assets 3,117,466 3,722,732
Equipment and leasehold improvements,
net of accumulated depreciation 873,496 975,284
Notes receivable from related parties 180,000 180,000
Deposits and other assets 36,960 40,898
------------ ------------
Total assets $ 4,207,922 $ 4,918,914
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 462,072 $ 289,542
Accrued payroll related expenses 121,462 133,635
Other accrued liabilities 59,369 36,777
Litigation settlement payable 155,000 170,000
Deferred rent obligation 324,353 317,564
Short-term portion of note payable 206,673 199,388
------------ ------------
Total current liabilities 1,328,929 1,146,906
Note payable, excluding short-term portion 134,371 193,459
------------ ------------
Total liabilities 1,463,300 1,340,365
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.0001 par value; 60,000,000
shares authorized; 28,767,335 and 28,691,669
shares issued and outstanding at March 31, 1999
and December 31, 1998, respectively 2,847 2,839
Common stock to be issued; 1,060,000 shares and 75,000
at March 31, 1999 and December 31, 1998, respectively 106 8
Additional paid-in capital 47,349,915 46,176,875
Deficit accumulated during the development stage (44,593,071) (42,585,998)
Treasury stock, at cost; 182,012 shares at
March 31, 1999 and December 31, 1998 (15,175) (15,175)
------------ ------------
Total stockholders' equity 2,744,622 3,578,549
------------ ------------
Total liabilities and stockholders' equity $ 4,207,922 $ 4,918,914
============ ============
</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
(Date of
Three Months Incorporation)
Ended March 31, through
--------------------------------- March 31,
1999 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Revenues:
Grant revenue $ -- $ -- $ 171,744
Funded research -- -- 215,703
License fee revenue -- -- 1,050,000
------------ ------------ ------------
Total revenues -- -- 1,437,447
------------ ------------ ------------
Research and development 1,275,932 2,052,938 31,471,518
General and administrative 749,264 1,354,672 15,511,402
------------ ------------ ------------
Total expenses 2,025,196 3,407,610 46,982,920
------------ ------------ ------------
Loss from operations (2,025,196) (3,407,610) (45,545,473)
------------ ------------ ------------
Interest income, net:
Interest income 32,062 147,203 1,445,668
Interest expense (13,539) (20,529) (484,861)
------------ ------------ ------------
Total interest income, net 18,523 126,674 960,807
------------ ------------ ------------
Loss before income taxes (2,006,673) (3,280,936) (44,584,666)
Income taxes 400 400 8,400
------------ ------------ ------------
Net loss $ (2,007,073) $ (3,281,336) $(44,593,066)
============ ============ ============
Net loss per share (basic & diluted) $ (0.07) $ (0.12)
============ ============
Weighted average shares used
to compute net loss per share 28,667,508 27,992,764
============ ============
</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, 1999
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK COMMON STOCK TO BE ISSUED
---------------------------- ---------------------------- -----------------------------
SHARES SHARES
ISSUED AMOUNT ISSUED AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 -- $ -- 28,691,669 $ 2,839 75,000 $ 8
Issuance of common stock to be
issued on acquisition of
Cardiosol technology -- -- 75,000 8 (75,000) (8)
Private placement of common
stock (net of issuance
costs) -- -- 1,060,000 106
Stock options exercised -- -- 666 -- -- --
Stock options granted -- -- -- -- -- --
Stock option repricing -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances at March 31, 1999 -- $ -- 28,767,335 $ 2,847 1,060,000 $ 106
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TREASURY STOCK
ADDITIONAL DURING THE ----------------------------- TOTAL STOCK-
PAID-IN DEVELOPMENT SHARES HOLDERS'
CAPITAL STAGE REPURCHASED AMOUNT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $ 46,176,875 $(42,585,998) (182,012) $ (15,175) $ 3,578,549
Issuance of common stock to be
issued on acquisition of
Cardiosol technology -- -- -- -- --
Private placement of common
stock (net of issuance
costs) 949,894 -- -- -- 950,000
Stock options exercised 20 -- -- -- 20
Stock options granted 117,351 -- -- -- 117,351
Stock option repricing 105,775 -- -- -- 105,775
Net loss -- (2,007,073) -- -- (2,007,073)
------------ ------------ ------------ ------------ ------------
Balances at March 31, 1999 $ 47,349,915 $(44,593,071) (182,012) $ (15,175) $ 2,744,622
============ ============ ============ ============ ============
</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
(Date of
Incorporation)
Three Months Ended March 31, through
------------------------------- March 31,
1999 1998 1999
------------ ------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities: $ (1,368,297) $ (3,119,690) $(39,533,681)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments -- -- (3,910,150)
Purchase of equipment and leasehold
improvements (15,990) (49,543) (2,487,953)
Proceeds from maturity of investments -- -- 4,000,000
Loans to related parties -- -- (355,000)
Repayment of loans to related parties -- -- 125,000
------------ ------------ ------------
Net cash used in investing activities (15,990) (49,543) (2,628,103)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 950,000 1,368,250 41,901,942
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 (51,803) (44,878) (1,941,316)
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 20 8,378 104,073
------------ ------------ ------------
Net cash provided by financing
activities 898,217 1,423,969 45,171,296
------------ ------------ ------------
Net increase (decrease) in cash and cash (486,070) (1,745,264) 3,009,512
equivalents
Cash and cash equivalents at beginning of
period 3,495,582 11,536,687 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,009,512 $ 9,791,423 $ 3,009,512
============ ============ ============
</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, 1999
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements and contain all adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the Company's financial position as of March 31, 1999 and December 31,
1998, results of operations and cash flows for the three months ended
March 31, 1999 and 1998 and for the period from April 20, 1992 (date of
incorporation) to March 31, 1999, and changes in stockholders' equity for
the three months ended March 31, 1999.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
for the years ended December 31, 1998 and 1997, which are included as part
of the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
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.
The Company has incurred losses since its inception and expects to incur
additional research and development costs while searching for strategic
alternatives for the Company. 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 August 1999. If the Company
continues as an operating Company, it would need to raise substantial
additional capital to fund its operations, including the development of
its lead compounds. The Company has no immediate plans to seek such
additional funding and will decide on its operating and financing plans
after it completes its evaluation of the strategic alternatives available
to it.
The Company's independent auditors have issued their report on the 1998
Consolidated Financial Statements which states in part that the Company
has suffered recurring losses and has limited liquidity, both of which
raise substantial doubt about the ability of the Company to continue as a
going concern.
(2) CAPITAL STOCK
In January 1999, 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. At
December 31, 1998 the 75,000 shares were included in common stock to be
issued.
In March 1999, the Company raised approximately $950,000 (net of offering
costs), through the sale of 1,000,000 shares of the Company's common stock
at a price of $1.00 per share (the "March 1999 Private Placement"). The
Company also issued 60,000 shares as a sales commission in connection with
the March 1999 Private Placement.
As of March 31, 1999, warrants to purchase 1,689,958 shares of the
Company's common stock remained outstanding.
7
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(3) STOCK OPTION PLANS
The following summarizes the Company's stock option activity during the
quarter ended March 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
Balance as of December 31, 1998 3,860,729
Options granted 61,000
Options canceled or expired (180,265)
Options exercised (666)
---------
Balance as of March 31, 1999 3,740,798
=========
</TABLE>
The Board of Directors has approved an amendment, subject to stockholder
approval, to the 1993 Stock Option Plan to increase the shares of common
stock authorized for issuance from 3,849,850 shares to 4,849,850.
The Company recorded expense of approximately $106,000 in the quarter
ended March 31, 1999 as a result of its October 1998 repricing of stock
options.
(4) RELATED PARTY TRANSACTIONS
In February 1999, the Board approved, at Mr. Raab's request, a temporary
indefinite reduction in Mr. Raab's salary from $180,000 to $90,000 per
year.
(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, James D.
Coombes and Mark J. Tomei, all former directors and former officers of the
Company, 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 to the Company's Initial Public Offering and subsequent
trading of those shares.
The Company announced on January 25, 1999, that it has reached an
agreement in principle with plaintiffs' class action counsel to settle the
above litigation against the Company and the five former officers and
directors. The agreement provides for payment of $500,000, of which
approximately $155,000 is to be paid by the Company and approximately
$345,000 is to be paid by the Company's insurer.
The settlement agreement is subject to negotiation and execution of a
detailed stipulation of settlement between the parties, submission of the
stipulation of settlement to the court, provision of notice to class
members of the settlement terms, a fairness hearing, and financial
approval of the settlement by the court. The Company cannot predict
exactly how long these procedures will take or when final dismissal will
be obtained.
The above settlement agreement does not constitute an acknowledgement of
wrongdoing by the Company or its former officers and directors.
8
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LXR BIOTECHNOLOGY INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(5) LITIGATION (CONTINUED)
The Company has also settled a claim for indemnity from the independent
underwriter in the initial public offering for $12,500.
During the quarter ended March 31, 1999 and 1998, the Company incurred
expenses of approximately $12,000 and $13,000, respectively, relating to
this litigation. As of March 31, 1999, $155,000 has been accrued for
payment of the proposed settlement.
(6) SUBSEQUENT EVENT
In April 1999, the Company announced and began implementing a cash
conservation plan, including a reduction of staff, to enable it to
continue operations while it explores strategic alternatives. The Company
also announced that it has retained the investment banking firm US Bancorp
Piper Jaffray to assist in identifying strategic alternatives for the
Company.
In April 1999, the Company received $200,000 from Roche Diagnostics for
the purchase of 137,099 shares of the Company's common stock under the
terms of the Boehringer Mannheim Letter of Intent. There are no further
obligations under this agreement which was terminated in October 1998.
9
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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, strategic
evaluation of the Company's business and operations, 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-K for the year ended December 31, 1998,
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.
OVERVIEW
In April 1999 the Company announced the preliminary results from
preclinical studies of Elirex(TM), our drug candidate for treatment of
heart attack. The preliminary results suggest that Elirex(TM) did not
reduce infarct size three of four preclinical studies conducted. In a
fourth preclinical study, Elirex(TM) appeared to reduce infarct size by
33% in a pretreatment model of ischemia/reperfusion. Given the results of
these preclinical studies, our need for cash to continue the preclinical
development of these compounds and our present cash-burn rate, we are
considering ways of significantly reducing our operating expenses and
identifying strategic alternatives.
We have retained US Bancorp Piper Jaffray to assist in identifying
strategic alternatives for the Company. We are also devising a cash
conservation plan, including a reduction of staff, to enable us to
continue operations while exploring strategic alternatives. The Company
expects current cash resources to last until August 1999.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
We did not generate any revenues for the quarters ended March 31, 1999 and
1998. We do not have any commercially available products, and do not
anticipate generating any significant product revenues for at least the
next several years.
Research and development expenses included salaries and related benefits,
laboratory supplies, depreciation of equipment, facility costs, consulting
fees, research collaboration expenses, toxicology study costs, contract
manufacturing expenses, legal fees for patents and other research related
expenditures. We incurred research and development expenses of
approximately $1,276,000 for the three months ended March 31, 1999 and
approximately $2,053,000 for the three months ended March 31, 1998. The
decrease in research and development costs for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998 is
primarily due to decreased salary and benefits costs resulting from the
reduction of personnel in June 1998, and decreased research collaboration
costs resulting from the termination of the agreement with Oxford
Asymmetry Limited in April 1998, partially offset by an increase in
preclinical animal study costs for Cardiosol and Elirex.
The Company expects research and development expenses to continue to
decrease in 1999, as a result of the reduction of personnel in April 1999.
The Company's expenditures will be limited by the Company's efforts to
maintain enough cash to operate through August 1999. See "Liquidity and
Capital Resources" below.
General and administrative expenses consist of salaries and related
benefits, legal expenses for litigation and general corporate matters,
depreciation of office furniture and equipment, facility costs, consulting
fees and other administrative expenses. We incurred general and
administrative expenses of approximately $749,000 for the three months
ended March 31, 1999, and $1,355,000 for the three months ended March 31,
1998. The decrease from 1999 to 1998 is primarily due to a reduction in
severance costs paid to a former officer, a reduction of expense related
to option grants and a reduction
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(CONTINUED)
in legal fees. General and administrative expenses are expected to
continue to decrease as a result of the reduction of personnel in April
1999.
Interest income was approximately $32,000 for the three months ended March
31, 1999 and $147,000, for the three months ended March 31, 1998. The
decrease in the interest income is primarily due to interest earned on a
smaller investment balance. Interest expense was approximately $14,000 for
the three months ended March 31, 1999, and $21,000 for the three months
ending March 31, 1998. The decrease in interest expense is due to the
paydown of the equipment loan obtained during 1997. We expect interest
expense in 1999 to decrease due to further paydowns of our equipment loan.
We incurred net losses of approximately $2,007,000 for the three months
ended March 31, 1999 and $3,281,000, for the three months ended March 31,
1998. As of March 31, 1999, we had an accumulated deficit of approximately
$44,593,000. We expect to continue to incur losses while searching for
strategic alternatives for the Company.
YEAR 2000
We have completed our assessment of the impact of the "year 2000" problem
and believe our systems that are critical to our business operations will
be able to recognize a date using "00" as the year 2000. We have tested
and are currently in the process of upgrading, where necessary, our
laboratory instruments to address the year 2000 issue. We intend to
complete upgrading all of our current laboratory instruments by mid-1999.
In addition, we have asked our vendors that provide certain outside
services we rely upon, such as payroll, banking services and research
organizations, to determine their year 2000 readiness. While we believe
these service providers will be ready for the year 2000, failure of them
to be ready for the year 2000 could be disruptive to our business
operations if their systems are unavailable for an extended period of
time. However, we believe our business operations would not be materially
adversely affected by the disruption of such services. We continuously
evaluate our vendors for year 2000 compliance. We believe if our systems
are not year 2000 compliant, our technical personnel would be able to
address and resolve any non-compliance before a material adverse effect
occurs on our business operations. Our key processes could be manually
performed for a sufficient period of time.
To date, we have not incurred substantial costs to address the year 2000
issue. We estimate additional costs, if any, for actions we take to
address the year 2000 problem would not be material. Despite our efforts
to address the year 2000 impact on our systems and business operations, if
the year 2000 problems are more disruptive than we reasonably expect and
our plans prove inadequate, the year 2000 problem could result in a
material disruption of our business or it could have a material adverse
effect on our business, financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1999, we raised approximately $950,000 in net
proceeds through the sale of 1,000,000 shares of our Common Stock at a
price of $1.00 per share in a private placement. In addition, in April
1999 we received $200,000 for the purchase of 137,099 shares of common
stock at $1.4588 per share, under the Boehringer Mannheim Letter of
Intent.
As of March 31, 1999, our remaining sources of capital consist of
approximately $3 million in cash and cash equivalents and interest from
investments.
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".) We maintain 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 we fail
to indemnify them. The policies do not provide coverage to the Company
itself with respect to its own defense costs and liability. On January 25,
1999, we announced that we reached an agreement in principle with the
plaintiffs' class action counsel to settle the above litigation against
the Company and the five former officers and directors. The agreement
provides for payment of $500,000, of which approximately $155,000 is to be
paid by us and approximately $345,000 is to be paid by our insurer. We
incurred expenses of approximately $12,000 in the quarter ended March 31,
1999 and approximately $13,000 in the quarter ended March 31, 1998,
relating to this litigation.
The settlement agreement is subject to negotiation and execution of a
detailed stipulation of settlement between the parties, submission of the
stipulation of settlement to the court, provisions of notice to class
members of the settlement terms, a fairness hearing, and financial
approval of the settlement by the court. We cannot predict exactly how
long these procedures will take or when final dismissal will be obtained.
We also negotiated a settlement agreement and mutual release with
Shoenberg Hieber, Inc., which was named as a defendant in Degulis v. LXR
Biotechnology Inc. Shoenberg acted as an independent underwriter in the
initial public offering and asserted claims for indemnity against us under
the underwriting agreement. We paid $12,500 in March 1999 to settle this
claim.
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 August 1999. 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
would need to raise substantial additional capital to fund its operations
if the evaluation of the Company's strategic alternatives leads us to a
decision to carry on operations. Failure to find a buyer for the Company
or its assets or to raise additional funds in the relatively near future
will have a material adverse effect on the Company.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our independent auditors have issued their report on our 1998 Consolidated
Financial Statements which states in part that we have suffered recurring
losses and have limited liquidity, both of which raise substantial doubt
about our ability to continue as a going concern.
FACTORS AFFECTING FUTURE RESULTS
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
We expect to require additional funds to continue to evaluate strategic
alternatives for the Company beyond August 1999. Our capital requirements
depend on numerous factors, including the following:
- the outcome of our review of the Company's strategic alternatives
- the status of our research and development programs;
- 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 maintaining technological rights;
- competing technological and market developments;
- further changes in our existing research relationships;
- our ability to establish collaborative arrangements; and
- legal expenses incurred in connection with defending certain
lawsuits that have been brought against us and certain of our past
and present directors and officers.
Based upon our current plans, we believe we have sufficient funds to meet
our operating expenses and capital requirements through August 1999. The
factors identified above may result in the expenditure of all available
funds before then.
Depending on the outcome of the review of our strategic alternatives, we
may need to seek additional funding from investors and from collaborative
or other arrangements with corporate partners. Additional financing may
not be available from any of these sources, or may not be available on
favorable or acceptable terms.
Additional financings may result in additional dilution to our security
holders. If we obtain funds by entering into arrangements with
collaborative partners or others, we may relinquish rights to certain of
our technologies. If adequate funds are not available, we may be required
to delay, scale back or eliminate the development of our potential
products to an even greater extent than we have done to date.
Our failure to obtain needed funds would have a material adverse effect on
our operations. This could result in the need to suspend our operations
and could prevent us from continuing to develop our technology.
Our independent auditors' report on our 1998 Consolidated Financial
Statements states in part that we have suffered recurring losses and have
limited liquidity, both of which raise substantial doubt about our ability
to continue as a going concern.
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
We are at an early stage of development. All of our potential
pharmaceutical and medical device products are currently in research and
development. No revenues from the sale of potential products have ever
been generated. Substantially all of our resources have been, and for the
foreseeable future will continue to be, dedicated to our research programs
and the development of potential
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARLY STAGE OF DEVELOPMENT; REGULATORY AND TECHNOLOGICAL UNCERTAINTIES
(CONTINUED)
pharmaceutical, medical device, and medical food/nutriceutical products
resulting from the research programs. We may be unable to develop a
commercial product from these projects.
All of our drug and medical device candidates are in preclinical
development, except for HK-Cardiosol(TM), which received approval to begin
clinical trials, and CP-Cardiosol(TM), which was placed on clinical trial
hold pending the outcome of additional preclinical studies.
In April 1999 we announced the preliminary results from preclinical
studies of Elirex(TM), our drug candidate for treatment of heart attack.
The preliminary results suggest that Elirex(TM) did not reduce infarct
size in three of four preclinical studies conducted. In a fourth
preclinical study, Elirex(TM) appeared to reduce infarct size by 33% in a
pretreatment model of ischemia/reperfusion.
Although these preclinical results pave the way for additional studies
that would be appropriate to fully evaluate the drug, they did not meet
our near-term objectives of confirming the earlier positive results of
Elirex(TM) and identifying the best Elirex(TM) compound to develop
further. Given the results of these preclinical studies, our need for cash
to continue the preclinical development of these compounds and our present
cash-burn rate, we are considering ways of significantly reducing
operating expenses and identifying strategic alternatives.
Assessments of market opportunities and priorities for allocating
available resources may affect development of our potential products.
The potential products we are developing 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. Our 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
following:
- our novel approach to diagnosis and therapy may not be successful;
- any or all of our potential pharmaceutical products may be found to
be unsafe, ineffective or toxic, or otherwise fail to receive
necessary regulatory clearances;
- the products, if safe and effective, will be difficult to
manufacture on a large scale or uneconomical to market;
- proprietary rights of third parties could preclude us from marketing
products; or
- third parties could market superior or equivalent products.
As a result of the above risks:
- our research and development activities may not be successfully
completed;
- clinical trials may not be allowed by the FDA or other regulatory
authorities;
- clinical trials may not commence as planned;
- required U.S. or foreign regulatory approvals may not be obtained on
a timely basis, if at all; and
- products for which approval is obtained may not result in any
commercially viable products.
RELIANCE ON NOVEL SCIENTIFIC APPROACH
Our product development efforts are based on the novel scientific approach
of therapeutic apoptosis modulation, which is a process of regulating
genetically programmed cell death. This process has not been widely
studied and there is substantial risk that this approach will not be
successful.
Moreover, we are 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 these other companies are
much larger and better funded than we are.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RELIANCE ON NOVEL SCIENTIFIC APPROACH (CONTINUED)
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. Our
competitors may succeed in developing technologies or products that are
more effective than ours. Rapid technological change or developments by
others may result in our technology or proposed products becoming obsolete
or noncompetitive.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
We have incurred significant operating losses since our inception in 1992.
At March 31, 1999, we had an accumulated deficit of approximately
$44,593,000. Our research, development, testing and regulatory compliance
activities and our projected general and administrative expenses are
expected to result in significant operating losses for at least the next
several years.
Revenues, if any, that we may receive in the next few years will be
limited to payments from the following sources:
- our agreement with Introgen related to the Bak gene, provided
Introgen exercises its option to enter into a license agreement with
us;
- payments under research or product development relationships that we
may establish in the future;
- payments under license agreements that we may establish in the
future;
- sales of products that we may develop in the future; and
- interest payments.
We may not receive the above payments because we may not be able to (i)
establish any additional collaborative relationships, (ii) enter into any
license agreements, or (iii) develop or acquire any products in the
future.
Our ability to achieve profitability also will depend upon the following:
- our ability to successfully compete either alone or with others;
- development of our potential products;
- clinical trial results regulatory approvals; and
- our ability to manufacture and market our products or to enter into
license agreements on acceptable terms.
DEPENDENCE ON QUALIFIED PERSONNEL AND CONSULTANTS
We are highly dependent on the principal member of our management staff,
Paul J. Hastings, our President and Chief Executive Officer. The departure
of Mr. Hastings or other members of our staff could have a material
adverse effect on operations.
The Company has employment agreements with Mr. Hastings and G. Kirk Raab
and a consulting agreement with L. David Tomei. Any of these people,
however, may terminate his relationship with the Company at any time. The
laws of the State of California generally restrict or prohibit
post-employment noncompetition covenants and, therefore, none of our
employees is subject to any restriction on competition in the future. Any
employees who leave the Company could organize competitive businesses or
accept employment with companies competitive with us.
We are dependent on collaborators at research institutions and our
advisors and consultants. Further development of our technology will
require additional expertise in areas such as preclinical testing,
clinical trial management, regulatory affairs, manufacturing and
marketing.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPENDENCE ON OTHERS; COLLABORATIONS
Our strategy for the research, development and commercialization of our
potential pharmaceutical products requires that we enter into various
arrangements with corporate and academic collaborators, licensors,
licensees and others, in addition to those already established. Our
success may therefore be dependent upon the subsequent success of outside
parties in performing their responsibilities.
For example, we entered into an Evaluation and Exclusive Option Agreement
with Introgen Therapeutics Inc., enabling Introgen to assess the
anti-tumor activity of the Bak gene. The agreement also grants Introgen an
option to enter into an exclusive license agreement with us related to the
Bak gene, however. Introgen is not obligated to enter into a license
agreement with us. Introgen subsequently assigned this agreement to an
affiliate, Gendux Inc.
We may be unable to establish additional collaborative arrangements or
license agreements that we consider necessary or acceptable. Additionally,
we may be unable to develop and commercialize our potential products, and
our collaborative arrangements or license agreements may not be
successful.
Some of our future collaborative arrangements may place responsibility for
preclinical testing and human clinical trials and for preparing and
submitting applications for regulatory approval for potential products on
our collaborative partner. Our business may be adversely affected if a
collaborative partner fails to develop or commercialize successfully any
potential product to which it has rights. Our collaborators may pursue
alternative technologies or develop products either on their own or in
collaboration with others.
RISKS ASSOCIATED WITH LICENSES
We have licensed technologies developed by various research institutes and
universities. Pursuant to the terms of these agreements, we may be
obligated to make royalty payments on the sales, if any, of licensed
products or milestone payments. In some instances, we are responsible for
the cost of filing and prosecuting patent applications. Some of our
license agreements also require that we exercise diligence in bringing
potential products to market. In the event that we are unable to meet our
obligations under the license agreements, we could lose our rights to our
technologies under the license agreements.
MANUFACTURING LIMITATIONS
We currently do not have the capability to manufacture products under the
current Good Manufacturing Practices ("GMP") requirements prescribed by
the FDA. We will need this capability in order to independently
manufacture, package, label and distribute our potential pharmaceutical or
other products. Alternatively, depending on the outcome of the evaluation
of our strategic alternatives, we may seek arrangements with contract
manufacturers or contract packagers to do the following:
- supply sufficient quantities of products to conduct clinical trials,
and
- manufacture, packaging, labeling and distribution of finished
pharmaceutical products.
If we are unable to manufacture or contract for a sufficient supply of
potential pharmaceutical products on acceptable terms, our preclinical and
human clinical testing schedule may be delayed. A delay in the testing
schedule would result in the delay of submission of products for
regulatory approval and initiation of new development programs.
Delays or difficulties in establishing relationships with manufacturers to
produce, package, label and distribute our finished pharmaceutical or
other products could delay the market introduction and subsequent sales of
those products. In addition, contract manufacturers that we may use must
adhere to GMP required by the FDA.
We have entered into a manufacturing agreement with Chesapeake Biological
Laboratories, Inc. ("CBL") to manufacture HK-Cardiosol(TM) and
CP-Cardiosol(TM) for clinical trials. CBL may be unable to manufacture
sufficient quantities of HK-Cardiosol(TM) and CP-Cardiosol(TM).
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANUFACTURING LIMITATIONS (CONTINUED)
California manufacturing companies are required to obtain a license from
the State of California to distribute any investigational products. This
license will be issued to us only if we are in compliance with the GMP
regulations, as determined by an inspection conducted by the State of
California. If we are unable to manufacture our potential products
independently or to obtain or retain third-party manufacturing on
commercially acceptable terms, we may be unable to commercialize our
products as planned. Our potential dependence upon third parties for the
manufacture of our products could harm our profit margins and our ability
to develop and deliver products on a timely and competitive basis.
We have no experience in the manufacture of pharmaceutical products or
medical devices in clinical quantities or for commercial purposes. If we
decide to manufacture products ourselves, the following would occur:
- we would be subject to the regulatory requirements described above;
- we would be subject to similar risks regarding delays or
difficulties encountered in manufacturing those products; and
- we would require substantial additional capital.
Because of these risks, we may not be able to manufacture any products
successfully or in a cost-effective manner.
16
<PAGE> 17
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 March 1999, the Company sold 1,000,000 shares of the Company's common
stock at a price of $1.00 per share in the March 1999 Private Placement.
The Company issued 60,000 additional shares for services rendered in
connection with the private placement.
In April 1999, the Company sold 137,099 shares of the Company's common
stock at a price of $1.4588 under the terms of the Boehringer Mannheim
Letter of Intent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are attached hereto:
Exhibit
Number Title
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
- -----------------------
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period for
which this report was filed.
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LXR BIOTECHNOLOGY INC.
Date: May 17, 1999 By: /s/ Patti M. Childs
------------------------------------
Patti M. Childs
Director, Finance and Administration
(Principal Accounting and Financial
Officer)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
Number Title
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
- -----------------------
<PAGE> 1
EXHIBIT 11.01
LXR Biotechnology Inc. and Subsidiary
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net Loss $ (2,007,073) $ (3,281,336)
------------ ------------
Weighted average number of shares outstanding:
Common Stock 28,585,064 27,917,764
Common Stock to be issued 82,444 75,000
------------ ------------
28,667,508 27,992,764
============ ============
Net Loss Per Share $ (0.07) $ (0. 12)
============ ============
</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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,009,512
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,117,466
<PP&E> 3,639,768
<DEPRECIATION> 2,766,272
<TOTAL-ASSETS> 4,207,922
<CURRENT-LIABILITIES> 1,328,929
<BONDS> 0
0
0
<COMMON> 2,847
<OTHER-SE> 2,741,775
<TOTAL-LIABILITY-AND-EQUITY> 4,207,922
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,025,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,539
<INCOME-PRETAX> (2,006,673)
<INCOME-TAX> 400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,007,073)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
