1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 000-28782
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NEOTHERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 788-6700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Class Outstanding at May 11, 2001
- ------------------------------- ---------------------------
Common Stock, $.001 par value 18,431,791
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NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
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ITEM 1. FINANCIAL STATEMENTS
Statement Regarding Financial Information............................................... 3
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000.................................................. 4
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 and for the period from inception (June 15, 1987)
to March 31, 2001 (unaudited)...................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 2001 and 2000 and for the period from inception (June 15, 1987) to March
31, 2001 (unaudited)............................................................... 6
Notes to Condensed Consolidated Financial Statements.................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION.... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 16
PART II. OTHER INFORMATION....................................................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 18
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NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by
NeoTherapeutics, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States has been condensed
or omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The Company suggests that you read the financial statements included
herein in conjunction with the audited financial statements and notes thereto
included in Amendment No. 1 on Form 10-K/A to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, as filed with the
Securities and Exchange Commission.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND DECEMBER 31, 2000
March 31, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,394,104 $ 6,158,375
Marketable securities and short-term investments 7,704,356 5,311,215
Other receivables 552,016 424,059
Prepaid expenses and refundable deposits 402,656 418,010
------------- -------------
Total current assets 15,053,132 12,311,659
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 3,654,035 3,412,932
Leasehold improvements 1,872,196 1,853,227
Accumulated depreciation and amortization (2,024,693) (1,850,076)
------------- -------------
Property and equipment, net 3,501,538 3,416,083
------------- -------------
OTHER ASSETS 53,143 53,242
------------- -------------
Total assets $ 18,607,813 $ 15,780,984
============= =============
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,514,033 $ 3,708,244
Accrued payroll and related taxes 375,529 265,383
Note payable to related party 285,574 285,574
Current portion of long-term debt 857,460 850,871
------------- -------------
Total current liabilities 4,032,596 5,110,072
OTHER LIABILITIES:
Long-term debt, net of current portion 227,352 474,004
Deferred revenue and other 189,385 86,532
------------- -------------
Total liabilities 4,449,333 5,670,608
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 8,126,211 7,280,111
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share, 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, par value $0.001 per share,
50,000,000 shares authorized:
Issued and outstanding, 17,255,319 and 13,307,227 shares
at March 31, 2001 and December 31, 2000, respectively 109,053,366 100,612,570
Deferred compensation expense (677,674) (959,850)
Unrealized (losses) gains on available-for-sale securities (42,236) 763
Deficit accumulated during the development stage (102,301,187) (96,823,218)
------------- -------------
Total stockholders' equity 6,032,269 2,830,265
------------- -------------
Total liabilities, minority interest and stockholders'
equity $ 18,607,813 $ 15,780,984
============= =============
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
AND 2000 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO MARCH 31, 2001
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
2001 2000 2001
------------ ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
REVENUES, from grants $ -- $ -- $ 497,128
------------ ------------- -------------
OPERATING EXPENSES:
Research and development 3,806,935 8,500,203 78,648,607
General and administrative 1,800,724 955,002 19,265,867
Settlement of litigation -- -- 2,458,359
------------ ------------- -------------
5,607,659 9,455,205 100,372,833
------------ ------------- -------------
LOSS FROM OPERATIONS (5,607,659) (9,455,205) (99,875,705)
OTHER INCOME (EXPENSE), principally
interest income(expense), net 227,190 123,611 (279,139)
------------ ------------- -------------
NET LOSS BEFORE MINORITY
INTEREST IN CONSOLIDATED
SUBSIDIARIES (5,380,469) (9,331,594) (100,154,844)
MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARY
NET LOSS (97,500) -- (1,561,097)
------------ ------------- -------------
NET LOSS $ (5,477,969) $ (9,331,594) $(101,715,941)
============ ============= =============
BASIC AND DILUTED LOSS
PER SHARE $ (0.36) $ (1.02)
============ =============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 15,335,754 9,135,488
============ =============
The accompanying notes are an integral part of these condensed
consolidated statements.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO MARCH 31, 2001
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
2001 2000 2001
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(5,477,969) $(9,331,594) $(101,715,941)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 174,617 139,388 2,149,250
Amortization of discount on convertible
debentures and beneficial
conversion feature -- -- 539,277
Compensation expense arising from
the grant of warrants and stock
options (below fair market
value) 1,129,429 25,279 3,083,639
Issuance of common stock in
settlement of litigation -- -- 2,458,359
Increase in deferred revenue and
other 102,853 2,853 189,384
Compensation expense for extension of
debt conversion agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Minority interest in consolidated
subsidiaries' net loss 97,500 -- 1,561,097
(Increase) decrease in other
receivables (127,957) 3,095 (551,770)
(Increase) decrease in prepaid
expenses, and refundable deposits 15,354 7,153 (360,363)
Increase (decrease) in accounts
payable and accrued expenses (1,194,211) 113,833 2,674,133
Increase in accrued payroll and
related taxes 12,646 2,749 916,723
Decrease in employee expense
reimbursement and accrued interest to
related parties -- -- 300,404
----------- ----------- -------------
Net cash used in operating
activities (5,267,738) (9,037,244) (88,257,960)
----------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (260,072) (99,815) (5,606,534)
Redemption (purchases) of marketable
securities and short-term investments, net (2,393,141) (105,964) (7,704,356)
Unrealized gain (loss) on
available-for-sale securities (42,999) (5,641) (42,236)
Payment of organization costs -- -- (66,093)
Proceeds from sale of equipment -- -- 29,665
Issuance of notes receivable -- -- 100,000
----------- ----------- -------------
Net cash used in investing activities (2,696,212) (211,420) (13,289,554)
----------- ----------- -------------
- Continued -
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
2001 2000 2001
----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants,
net of related offering costs and expenses 8,439,742 9,426,171 86,160,583
Proceeds from preferred stock issuance, net
of offering costs -- -- 3,608,788
Proceeds from sale of preferred stock of
consolidated subsidiary net of issuance
cost -- -- 6,488,493
Proceeds from exercise of stock options
and warrants -- 52,139 887,085
Proceeds from sale of convertible
debentures, net of issuance costs -- -- 9,387,321
Proceeds from long-term debt -- -- 2,660,448
Repayment of long-term debt (240,063) (123,584) (1,575,634)
Proceeds from (issuance of) notes
receivables from officers and directors
for exercise of stock options -- 61,560 (225,000)
Dividends paid to preferred stockholders -- -- (136,246)
(Repayment of) proceeds from notes payable
to related parties, net -- -- 485,170
Cash at acquisition -- -- 200,612
----------- ----------- ------------
Net cash provided by financing activities 8,199,679 9,416,286 107,941,618
----------- ----------- ------------
Net increase in cash and cash equivalents 235,729 167,622 6,394,104
Cash and cash equivalents, beginning of period 6,158,375 6,726,220 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 6,394,104 $ 6,893,842 $ 6,394,104
=========== =========== ============
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of accrued payroll into shares of
common stock $ -- $ -- $ 1,141,838
=========== =========== ============
Issuance of warrants in connection with
equity and debt financings $ -- $ -- $ 2,330,251
=========== =========== ============
Conversion of notes payable to related
parties into shares of common stock $ -- $ -- $ 500,000
=========== =========== ============
Conversion of accrued interest into notes
payable to related parties $ -- $ -- $ 300,404
=========== =========== ============
Conversion of preferred stock and convertible
debentures into shares of common stock $ -- $ -- $ 5,532,876
=========== =========== ============
Conversion of revenue participation
units into shares of common stock $ -- $ -- $ 676,000
=========== =========== ============
Issuance of stock options and warrants for services
and amortization of deferred compensation $ 1,129,429 $ 25,279 $ 3,083,630
=========== =========== ============
Issuance of common stock and warrants
in connection with settlement of litigation $ -- $ -- $ 2,458,359
=========== =========== ============
Conversion of other accrued liabilities to
shares of no par value common stock $ -- $ -- $ 300,729
=========== =========== ============
Dividends on preferred stock payable in shares
of common stock $ -- $ -- $ 82,312
=========== =========== ============
The accompanying notes are an integral part of these condensed
consolidated statements.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF BUSINESS:
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of its consolidated financial position at March 31, 2001, and consolidated
results of operations and cash flows for the periods presented. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted and
should be read in conjunction with the Company's audited financial statements
included in Amendment No. 1 on Form 10-K/A to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission. Results of operations for interim periods
are not necessarily indicative of results to be expected for the full year.
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to "NeoTherapeutics, Inc." and in June 1997, the Company was
reincorporated in the state of Delaware. The Company has five subsidiaries,
Advanced ImmunoTherapeutics, Inc., incorporated in California in June 1987,
NeoTherapeutics, GmbH, incorporated in Switzerland in April 1997, NeoGene
Technologies, Inc., incorporated in California in October 1999, NeoOncoRx, Inc.,
incorporated in California in November 2000 and NeoTravel Inc., incorporated in
California in April 2001. All references to the "Company" hereinafter refer to
NeoTherapeutics, Inc. and its subsidiaries as a consolidated entity.
The Company is a development stage biopharmaceutical enterprise principally
engaged in the discovery and development of novel therapeutic drugs intended to
treat neurological diseases, such as memory deficits associated with Alzheimer's
disease and aging, spinal cord injuries, Parkinson's disease, and other
neurodegenerative and psychiatric diseases. The Company is also engaged in
research involving functional genomics and has recently expanded its clinical
development program to include anti-cancer drugs. The accompanying consolidated
financial statements include the results of the Company and its subsidiaries.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LICENSING AGREEMENTS
On March 15, 2001, the Company's subsidiary, NeoGene Technologies, Inc.
("NeoGene"), entered into a licensing agreement with Pfizer Inc. ("Pfizer").
Under the terms of the agreement, Pfizer will make use of NeoGene's technology
to screen potential drug candidates. In return, NeoGene received an initial
payment of $100,000 and is entitled to receive milestone payments which could
total up to $12 million if Pfizer receives final market approval from the FDA
for a drug candidate identified using NeoGene's technology under the agreement;
however, there can be no assurance that the development project will be
successful and result in the Company receiving any milestone payments. The
initial payment has been recorded as deferred revenue and will be recognized as
revenue over a three year period beginning April 2001. Future licensing revenue
will be recognized at the time the corresponding milestone is achieved in
accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements."
3. COMMITMENTS AND CONTINGENCIES
Research and Fellowship Grants:
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of March 31, 2001, the Company had committed to pay, through May 2005,
approximately $1,461,600 for such grants and fellowships. Grant expense for the
three month periods ended March 31, 2001 and 2000, amounted to $233,800 and
$260,300, respectively.
Major Clinical Trials:
In April 2001, the Company continued the study of its lead compound
Neotrofin(TM), and began a 500 patient trial for Alzheimer's disease. In
addition, in March 2001 the Company began two smaller trials of Neotrofin(TM)
for spinal cord injury and Parkinson's disease. The three trials will be managed
internally and are estimated to cost an aggregate of approximately $9.7 million
over an eighteen-month period.
4. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
The minority interest in consolidated subsidiaries shown in the
accompanying balance sheet represents primarily investments by outside parties
in convertible preferred stock of the Company's consolidated subsidiaries. Also
included in minority interest is deferred compensation related to grants of
stock options in a consolidated subsidiary to employees and consultants of the
consolidated group. The Company will amortize over the next four years
approximately $5.6 million of deferred compensation as the result of NeoGene
issuing to employees and consultants of the consolidated group during January
2001, below-market securities that consist of common stock and stock options.
During the quarter ended March 31, 2001, the Company incurred a compensation
charge of $847,253, representing the common stock portion of the issuance
($500,013) and the initial period of amortization of the issued stock options
($347,240). Amortization will continue on the stock options over the remainder
of a four year vesting period. The minority interest in consolidated
subsidiaries' net loss amounting to $97,500 in the accompanying consolidated
statements of operations consists of dividends on convertible preferred stock
issued by the Company's consolidated subsidiaries. Cumulative losses applicable
to minority interest exceeds the minority interest in the subsidiaries capital,
as such the excess has been charged against the majority interest.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY
Common Stock:
On January 24, 2001, the Company filed with the Securities and Exchange
Commission a "shelf" registration statement permitting the sale of securities
with a maximum aggregate public offering price of $50 million. At May 9, 2001,
$35.5 million remained available under the registration statement.
On January 30, 2001, the Company issued to two investors 1,070,336 shares
of common stock under the first reset provision contained in the adjustable
warrants issued in connection with the September 29, 2000, sale of 968,524
shares of common stock for $8.0 million. The Company agreed to issue additional
900,000 shares of common stock to the two investors in respect of the second and
final reset provision. The Company received no consideration as a result of
issuing shares pursuant to the exercise of the adjustable warrants due to the
application of cash-less exercise provisions.
On February 2, 2001, the Company sold 1,627,756 shares of common stock
under the shelf registration statement to a private investor for $3.5 million in
cash.
On March 8, 2001, the Company sold 1,250,000 shares of common stock under
the shelf registration statement to a private investor for $5.0 million in cash.
The investor also received five year warrants to purchase up to 125,000 shares
of common stock at the exercise price of $5.00 purchase price per share.
On April 6, 2001, in a special meeting, the stockholders of the Company
approved the increase in authorized common stock from 25 million to 50 million
shares.
On April 17, 2001, the Company entered into a financing transaction with
two private investor groups which provide, among other things, for (a) the sale
of approximately 1,176,000 shares of the Company's common stock under the shelf
registration statement for $6.0 million cash, (b) an option to place with the
investor groups two tranches of convertible debenture notes of $10 million and
$8 million within approximately 30 days and seven months of the initial closing,
respectively, at the option of the Company, and (c) five year warrants
exercisable at 125% of the market price of the date of the respective closing of
each of the aforementioned debenture issuances for a number of shares equal to
20% of the number of shares into which the debentures are initially convertible.
The Company has informed the investors that it does not intend to exercise its
option for the first debenture tranche of $10 million and, accordingly, has
become obligated to pay the investor a break-up fee of $1 million. The Company
is presently negotiating substitute financing with the investors and is
attempting to mitigate or eliminate the break-up fee, however, there can be no
assurance that the Company will be successful in these negotiations.
On May 9, 2001 security holders held options and warrants which if
exercised, would obligate the Company to issue up to an additional 11,953,643
shares of common stock. A substantial number of those shares, when issued upon
exercise, will be available for immediate resale in the public market. In
addition, the Company has the ability to sell up to approximately $35.5 million
of its common stock pursuant to a shelf registration that will be eligible for
immediate resale in the market. Furthermore, these amounts do not include the
number of shares of common stock that may become issuable upon conversion of the
securities that we may be required to issue in exchange for shares of NeoGene
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred stock. While this number of shares cannot be accurately determined at
this time, assuming an average conversion price of $5.00 per share, 1,790,000
shares would be issuable and available for resale upon conversion of these
securities.
6. RELATED PARTY TRANSACTION
During February 2001, three of the Company's executive officers purchased
for $500 cash, 5% of the outstanding common stock in the Company's subsidiary,
NeoOncoRx, Inc.
7. STOCK OPTIONS
Stock option activity for the Company during the three-month period ended
March 31, 2001 is as follows:
Option
Shares Price
--------- -------------
Outstanding at January 1, 2001 2,490,175 $3.75-$12.875
Granted 320,000 3.6875-4.406
Exercised -- --
Forfeited -- --
--------- -------------
Outstanding at March 31, 2001 2,810,175 $3.75-$12.875
========= =============
During the three-month periods ended March 31, 2001 and March 31, 2000, the
Company recognized compensation expense for employees/directors and vested
consultants options aggregating $1,129,429 and $25,279, respectively. Options
granted to consultants consist of options that vest both immediately and upon
the occurrence of certain events as specified in the related agreements.
8. EMPLOYEE STOCK PURCHASE PLAN
In January 2001, the Company adopted the NeoTherapeutics Employee Stock
Purchase Plan (the "Plan"). The Plan is subject to the provisions of Section 423
of the Internal Revenue Code. The Plan offers to eligible employees of the
Company, on a tax-advantaged basis, the opportunity to purchase shares of the
Company's common stock, at a discount, through payroll deductions. The Plan
allows the participant to deduct up to a specified maximum percentage of their
gross income each pay period. The Company's common stock will be offered during
the six month offering periods commencing on each June and December. The per
share purchase price of shares of the Company's common stock purchased on the
last trading day of an offering period will be the lesser of 85% of the fair
market value of a share on the first trading day of the period, and 85% of the
fair market value of a share on the last trading day of the period. The Plan
limits the purchase of shares by each employee of the Company's common stock to
a maximum number of shares per offering period and to $25,000 fair market value
of the purchased shares of the Company's common stock in the calendar year. Any
payroll deductions not applied because of these limitations will be refunded to
the participant. There was no activity for the plan for the period ended March
31, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may differ
materially from the results projected in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed below under "Factors Affecting Future Operating Results."
RESULTS OF OPERATIONS
Overview:
From the inception of the Company in 1987 through March 31, 2001, the
Company incurred a cumulative net loss of approximately $101.7 million. We
expect our operating expenses to decrease in the immediate future as compared to
the same period last year, but to increase over the next several years as we
expand our research and development and commercialization activities and
operations. We expect to incur significant additional operating losses for at
least the next several years unless such operating losses are offset, if at all,
by licensing revenues under strategic alliances with larger pharmaceutical
companies, which we are currently seeking.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000:
There were no revenues during the three months ended March 31, 2001 or the
three months ended March 31, 2000 - see Note 2 to the unaudited condensed
consolidated financial statements regarding revenues deferred as of March 31,
2001.
Research and development expenses for the three months ended March 31, 2001
decreased $4,693,268 or 55% over the same period in 2000. The decrease was due
primarily to the termination of several contracts with an outside clinical
research organization and the related clinical trials that the organization was
conducting in 2000. In March and April 2001, we began new Phase 2 clinical
trials of Neotrofin(TM) in Alzheimer's disease and other indications, at higher
dose levels than administered in the previous trials. We estimate that these
trials will cost an aggregate of approximately $9.7 million over an
eighteen-month period. These new trials will be managed internally and we have
increased the number of our employees and consultants for that purpose. Research
and development expenses increased in the category of salaries due to additional
personnel, salary increases and related benefits and the non-cash equity
compensation charge amounting to $804,834. In the immediate future we expect our
research and development costs to increase over the current period but decrease
compared to the same period in the prior year due to the net savings expected
from internally managing our clinical trial program, as compared to the higher
cost of using an outside clinical research organization. Thereafter, we expect
that such expenses will again increase as we expand our clinical trials on
Neotrofin(TM) and other drug candidates, as well as the other research
activities at our subsidiaries.
General and administrative expenses increased $845,722 or 89% from the same
period in 2000 due primarily to expense increases in the category of salaries
due to additional personnel, salary increases and related benefits, travel and
general occupancy expenses, legal and investor relations fees and a non-cash
equity compensation charge amounting to $324,595. The Company expects general
and administrative expenses to increase in future periods in support of the
expected increases in research and development activities, as well as sales and
marketing activities should the Company successfully bring one or more of its
products to market.
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Net interest income increased by $103,579 or 84% due to interest earnings
from higher cash balances resulting from the investments of unused proceeds from
recent equity and debt financings. The Company expects its interest income to
decrease in future periods due to the use of its funds in current operations,
unless offset by revenues or additional equity financings.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 2001, the Company financed its operations
primarily through sales of securities, borrowings, grants and deferred payment
of salaries and other expenses from related parties.
On February 2, 2001, the Company sold 1,627,756 shares of common stock
under the shelf registration statement to a private investor for $3.5 million in
cash.
On March 8, 2001, the Company sold 1,250,000 shares of common stock under
the shelf registration statement to a private investor for $5.0 million in cash.
The investor also received five year warrants to purchase up to 125,000 shares
of common stock at the exercise price of $5.00 purchase price per share.
On March 15, 2001, the Company's subsidiary, NeoGene Technologies, Inc.
("NeoGene"), entered into a licensing agreement with Pfizer Inc. ("Pfizer").
Under the terms of the agreement, Pfizer will make use of NeoGene's technology
to screen potential drug candidates. In return, NeoGene received an initial
payment of $100,000 in April 2001, and is entitled to receive milestone payments
which could total up to $12 million if Pfizer receives final market approval
from the FDA for a drug candidate identified using NeoGene's technology under
the agreement; however, there can be no assurance that the development project
will be successful and result in the Company receiving any milestone payments.
On April 17, 2001, the Company entered into a financing transaction with
two private investor groups which provide, among other things, for (a) the sale
of approximately 1,176,000 shares of the Company's common stock under the shelf
registration statement for $6.0 million cash, (b) an option to place with the
investor groups two tranches of convertible debenture notes of $10 million and
$8 million within approximately 30 days and seven months, of the initial
closing, respectively, at the option of the Company, and (c) five year warrants
exercisable at 125% of the market price of the date of the respective closing of
each of the aforementioned debenture issuances for a number of shares equal to
20% of the number of shares into which the debentures are initially convertible.
The Company has informed the investors that it does not intend to exercise its
option for the first debenture tranche of $10 million and, accordingly, has
become obligated to pay the investor a break-up fee of $1 million. The Company
is presently negotiating substitute financing with the investors and is
attempting to mitigate or eliminate the break-up fee, however, there can be no
assurance that the Company will be successful in these negotiations.
At March 31, 2001, working capital amounted to approximately $11.0 million.
This amount included cash and cash equivalents of approximately $6.4 million and
marketable securities and short-term investments of approximately $7.7 million.
In comparison, at December 31, 2000, the Company had working capital of
approximately $7.2 million, which included cash and cash equivalents of
approximately $6.2 million and short-term investments of approximately $5.3
million. The $ 3.8 million increase in working capital during the three months
is attributable primarily to the sale of approximately $8.5 million of common
stock to private investors, offset principally by the operating loss of $5.3
million for the period, which includes a non-cash compensation charge of $1.1
million.
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the
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Company's research programs. As of March 31, 2001, the Company had committed to
pay, through April 2002, approximately $1,461,600 for such grants and
fellowships.
In April 2001, the Company continued the study of its lead compound
Neotrofin, and began a 500 patient trial for Alzheimer's disease. In addition,
in March 2001 the Company began two smaller trials of Neotrofin for spinal cord
injury and Parkinson's disease. The three trials will be managed internally and
are estimated to cost an aggregate of approximately $9.7 million over an
eighteen-month period.
The Company is in the development stage and devotes substantially all of
its efforts to research and development. The Company has incurred cumulative
losses of approximately $101.7 million through March 31, 2001, and expects to
incur substantial losses over the next several years. In addition to the funds
derived from its public offerings and subsequent private placement equity
offerings, the Company will require substantial additional funds in order to
complete the research and development activities currently contemplated and to
commercialize its proposed products. The Company's future capital requirements
and availability of capital will depend upon many factors, including continued
scientific progress in research and development programs, the scope and results
of preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in filing, prosecuting and
enforcing patent claims, the effect of competing technological developments, the
cost of manufacturing scale-up, the cost of commercialization activities, and
other factors which may not be within the Company's control. While the Company
believes that its existing capital resources, subject to its ability to
negotiate substitute financing for the $10 million in convertible debentures
which were waived, will be adequate to fund its capital needs for at least
twelve months, the Company also believes that it will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize its proposed products.
Without additional funding, the Company may be required to delay, reduce
the scope of, or eliminate, one or more of its research and development
projects, or obtain funds through arrangements with collaborative partners or
others which may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize on its own, and which could be on terms
unfavorable to the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-Q:
The Company has incurred losses in every year of its existence and expects
to continue to incur significant operating losses for the next several years.
The Company has never generated revenues from product sales and there is no
assurance that revenue from product sales will ever be achieved. In addition,
there is no assurance that any of the Company's proprietary products will ever
be successfully developed, receive and maintain required governmental regulatory
approvals, become commercially viable or achieve market acceptance.
The Company has no experience in manufacturing, procuring products in
commercial quantities or marketing, and only limited experience in negotiating,
setting up or maintaining strategic relationships and conducting clinical trials
or other late stage phases of the regulatory approval process, and there is no
assurance that the Company will successfully engage in any of these activities.
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The Company's need for additional funding is expected to be substantial and
will be determined by the progress and cost of the development and
commercialization of its products and other activities. The Company believes
that its existing capital resources, subject to its ability to negotiate
substitute financing for the $10 million in convertible debentures which were
waived, will be sufficient to satisfy its current and projected funding
requirements for at least the next twelve months. However, if the Company
experiences unanticipated cash requirements during the interim period or fails
to obtain sufficient funding under its existing financing agreements, the
Company could require additional funds sooner. The source, availability, and
terms of such funds have not been determined. Although funds may be received
from the sale of equity securities or the exercise of outstanding warrants and
options to acquire common stock of the Company, there is no assurance that any
such funding will occur.
Factors impacting the future success of the Company include, among other
things, the ability to develop products which will be safe and effective in
treating neurological diseases and the ability to obtain government approval.
The Company faces numerous other risks in the operation of its business,
including, but not limited to, protecting its proprietary technology and trade
secrets and not infringing on those of others; attaining a competitive
advantage; entering into agreements with others to source, manufacture, market
and sell its products; attracting and retaining key personnel in research and
development, manufacturing, marketing, sales and other operational areas;
managing growth, if any; and avoiding potential claims by others in such areas
as product liability and environmental matters.
The above factors are not intended to be exclusive. A more comprehensive
list of factors which could affect the Company's future operating results can be
found in Amendment No. 1 on Form 10-K/A to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000, in "Item 1. Description of
Business" under the caption "Risk Factors." Failure to satisfactorily achieve
any of the Company's objectives or avoid any of the above or other risks would
likely have a material adverse effect on the Company's business and results of
operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to certain market risks associated with interest
rate fluctuations on its marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. The Company is not subject to material risks
from currency rate fluctuations, nor does the Company utilize hedging contracts
or similar instruments.
The Company's exposure to interest rate risk arises from financial
instruments entered into in the normal course of business. Certain of the
Company's financial instruments are fixed rate, short-term investments in
government and corporate notes and bonds, which are available for sale (and have
been marked to market in the accompanying financial statements). Changes in
interest rates generally affect the fair value of these investments, however,
because these financial instruments are considered "available for sale," all
such changes are reflected in the financial statements in the period affected.
The Company's borrowings bear interest at fixed annual rates. Changes in
interest rates generally affect the fair value of such debt, but do not have an
impact on earnings or cash flows. Because of the relatively short-term nature of
the Company's borrowings, fluctuations in fair value are not deemed to be
material.
QUALITATIVE DISCLOSURES
The Company's primary exposures relate to (1) interest rate risk on
borrowings, (2) the Company's ability to pay or refinance its borrowings at
maturity at market rates, (3) interest rate risk on the value of the Company's
investment portfolio and rate of return, (4) the impact of interest rate
movements on the Company's ability to obtain adequate financing to fund future
cash requirements. The Company manages interest rate risk on its investment
portfolio by matching scheduled investment maturities with its cash
requirements. The Company manages interest rate risk on its outstanding
borrowings by using fixed rate debt. While the Company cannot predict or manage
its ability to refinance existing borrowings and investment portfolio, the
Company evaluates its financial position on an ongoing basis.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
1. On January 30, 2001, the Company issued to two investors 1,070,336
shares of common stock under the first reset provision contained in the
adjustable warrants issued in connection with the September 29, 2000, sale of
968,524 shares of common stock for $8.0 million. The Company agreed to issue
additional 900,000 shares of common stock to the two investors in respect of the
second and final reset provision. The Company received no consideration as a
result of issuing shares pursuant to the exercise of the adjustable warrants due
to the application of cash-less exercise provisions.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. On January 5, 2001 the Company furnished a report on Form 8-K
announcing that its subsidary NeoOncoRx Inc., has signed a letter of
intent to acquire anti-cancer compound E09 and 79 analogs from
Netherlands based NDDO Research Foundation.
2. On February 16, 2001 the Company filed a report on Form 8-K announcing
a $3.5 million sale of common stock to a private investor.
3. On March 14, 2001 the Company filed a report on Form 8-K announcing a
$5 million sale of common stock and Warrants to a private investor.
4. On March 20, 2001 the Company furnished a report on Form 8-K
announcing that its subsidiary Neogene Technologies, Inc., has entered
into a Drug Pfinder Agreement with Pfizer Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: May 14, 2001 By: /s/ Samuel Gulko
--------------------------
Samuel Gulko, Senior
Vice President
Finance, Chief
Financial Officer
(Principal Accounting
and Financial Officer)
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