SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
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 September 30, 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
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 November 10, 2001
----- --------------------------------
Common Stock, $.001 par value 22,977,282
NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statement Regarding Financial Information.................................................... 3
Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000..................................................................... 4
Condensed Consolidated Statements of Operations for the three-month periods ended
September 30, 2001 and 2000 (unaudited)................................................... 5
Condensed Consolidated Statements of Operations for the nine-month periods ended
September 30, 2001 and 2000 and for the period from inception (June 15, 1987) to
September 30, 2001 (unaudited)............................................................ 6
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 2001 and 2000 and for the period from inception (June 15, 1987) to
September 30, 2001 (unaudited)............................................................ 7
Notes to Condensed Consolidated Financial Statements ........................................ 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION ........ 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 21
PART II. OTHER INFORMATION ........................................................................... 22
ITEM 2. CHANGES IN SECURITIES ....................................................................... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 22
2
NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
FORM 10-Q
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The consolidated 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 recommends 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, filed with the
Securities and Exchange Commission.
3
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 607,774 $ 6,158,375
Marketable securities and short-term investments 7,564,624 5,311,215
Other receivables 452,545 424,059
Prepaid expenses and refundable deposits 340,065 418,010
------------- -------------
Total current assets 8,965,008 12,311,659
PROPERTY AND EQUIPMENT, at cost:
Equipment 4,551,270 3,412,932
Leasehold improvements 1,946,616 1,853,227
Accumulated depreciation and amortization (2,419,379) (1,850,076)
------------- -------------
Property and equipment, net 4,078,507 3,416,083
OTHER ASSETS 232,935 53,242
------------- -------------
Total assets $ 13,276,450 $ 15,780,984
============= =============
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,828,257 $ 3,965,506
Accrued payroll and related taxes 264,359 265,383
Note payable to related party 135,574 285,574
Current portion of capitalized lease obligations 531,314 593,609
------------- -------------
Total current liabilities 3,759,504 5,110,072
OTHER LIABILITIES:
Capital lease obligations, net of current portion 237,112 474,004
Deferred revenue and other liabilities 178,423 86,532
------------- -------------
Total liabilities 4,175,039 5,670,608
COMMITMENTS AND CONTINGENCIES (NOTE 3)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES -- 7,280,111
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share, 5,000,000 shares
authorized:
None issued or outstanding at September 30, 2001 and December 31, 2000 -- --
Common stock, par value $0.001 per share,
50,000,000 shares authorized:
Issued and outstanding, 21,862,772 and 13,307,227 shares
at September 30, 2001 and December 31, 2000, respectively 21,863 13,307
Additional paid in capital 126,915,832 100,599,263
Deferred compensation expense (2,195,824) (959,850)
Unrealized gains on available-for-sale securities 102,058 763
Deficit accumulated during the development stage (115,742,518) (96,823,218)
------------- -------------
Total stockholders' equity 9,101,411 2,830,265
------------- -------------
Total liabilities, minority interest and stockholders' equity $ 13,276,450 $ 15,780,984
============= =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES $ 8,334 $ --
OPERATING EXPENSES:
Research and development 4,710,184 10,499,016
General and administrative 1,506,390 1,276,871
------------ ------------
TOTAL OPERATING EXPENSES 6,216,574 11,775,887
------------ ------------
LOSS FROM OPERATIONS (6,208,240) (11,775,887)
OTHER INCOME (EXPENSE), principally
interest income (expense), net 85,077 (353,356)
------------ ------------
NET LOSS BEFORE MINORITY INTEREST AND
INCOME TAXES (6,123,163) (12,129,243)
MINORITY INTEREST 146,547 (1,091,312)
------------ ------------
NET LOSS BEFORE INCOME TAXES (5,976,616) (13,220,555)
INCOME TAX EXPENSE 2,400 2,400
------------ ------------
NET LOSS $ (5,979,016) $(13,222,955)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.39) $ (1.27)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 17,581,759 10,382,731
============ ============
The accompanying notes are an integral part of these
condensed consolidated statements.
5
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001
AND 2000 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO SEPTEMBER 30, 2001
NINE-MONTH NINE-MONTH INCEPTION
PERIOD ENDED PERIOD ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES $ 16,668 $ -- $ 513,796
OPERATING EXPENSES:
Research and development 13,267,689 29,206,087 88,109,361
General and administrative 5,301,851 3,412,164 22,751,794
Settlement of litigation -- -- 2,458,359
------------- ------------- -------------
TOTAL OPERATING EXPENSES 18,569,540 32,618,251 113,319,514
------------- ------------- -------------
LOSS FROM OPERATIONS (18,552,872) (32,618,251) (112,805,718)
OTHER INCOME (EXPENSE), principally
interest income (expense), net 504,209 (1,188,585) (2,120)
------------- ------------- -------------
NET LOSS BEFORE MINORITY INTEREST AND
INCOME TAXES (18,048,663) (33,806,836) (112,807,838)
MINORITY INTEREST (48,453) (1,091,312) (1,512,050)
------------- ------------- -------------
NET LOSS BEFORE INCOME TAXES (18,097,116) (34,898,148) (114,319,888)
INCOME TAX EXPENSE 2,400 2,400 17,600
------------- ------------- -------------
NET LOSS $ (18,099,516) $ (34,900,548) $(114,337,488)
============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (1.10) $ (3.69)
============= =============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING 17,215,488 9,450,489
============= =============
The accompanying notes are an integral part of these
condensed consolidated statements.
6
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO SEPTEMBER 30, 2001
NINE MONTHS NINE MONTHS INCEPTION
ENDED ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (18,099,516) $ (34,900,548) $(114,337,488)
Non-cash items included in net loss:
Minority interest in net loss (162,380) -- (162,380)
Depreciation and amortization 569,303 433,170 2,543,936
Amortization of debt discount 9,827 9,768 31,663
Compensation expense arising
from the grant of warrants and stock
options (below fair market value) 1,155,144 561,034 3,109,354
Issuance of common stock for services 22,750 23,500 46,250
Beneficial conversion feature related to preferred
stock of consolidated subsidiary -- 1,091,312 1,463,597
Amortization of discount on convertible
debentures and beneficial
conversion feature -- 397,082 539,277
Issuance of common stock in settlement
of litigation -- -- 2,458,359
Compensation expense for extension of
Debt Conversion Agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Changes in operating assets and liabilities:
(Increase) Decrease in other receivables 49,459 (8,077,040) (374,354)
Increase (Decrease) in accounts
payable and accrued expenses (1,137,249) 1,646,516 2,507,103
Increase (Decrease) in accrued
payroll and related taxes (1,024) 40,432 903,053
Increase in deferred revenue and other liabilities 91,897 8,558 178,428
(Repayment of) proceeds from notes
payable to related parties, net (150,000) (272,730) 335,168
Decrease in employee expense reimbursement
and accrued interest to related parties -- -- 300,404
------------- ------------- -------------
Net cash used in operating activities (17,651,789) (39,038,946) (99,959,782)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,034,038) (560,667) (6,380,500)
Redemption (purchases) of marketable
securities and short-term investments, net (2,152,114) (199,938) (7,462,566)
(Increase) decrease in other assets (179,693) 68,005 (555,410)
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 (3,365,845) (692,600) (14,334,904)
- Continued -
7
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS NINE MONTHS INCEPTION
ENDED ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
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 21,772,736 28,578,957 99,493,577
Proceeds from issuance of common stock in
consolidated subsidiary 1,000 -- 1,000
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 -- 4,257,349 6,488,493
Proceeds from exercise of stock options and warrants -- 29,389 863,585
Proceeds from sale of convertible debentures,
net of issuance costs -- 9,466,704 9,387,321
Proceeds from long-term debt -- -- 2,660,448
Payments made on capital lease obligations (506,703) (285,714) (1,640,118)
Proceeds from (issuance of) notes receivables
From officers and directors for
exercise of stock options -- 61,560 (225,000)
Purchase of preferred stock of consolidated subsidiary (4,684,193) -- (4,684,193)
Payment of dividend on preferred stock
of consolidated subsidiary (815,807) -- (815,807)
Purchase of Series C Preferred Stock (300,000) -- (300,000)
Dividends paid to preferred stockholders -- -- (136,246)
------------- ------------- -------------
Cash at acquisition -- -- 200,612
------------- ------------- -------------
Net cash provided by financing activities 15,467,033 42,108,245 114,902,460
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (5,550,601) 2,376,699 607,774
Cash and cash equivalents, beginning of period 6,158,375 6,726,220 --
------------- ------------- -------------
Cash and cash equivalents, end of period $ 607,774 $ 9,102,919 $ 607,774
============= ============= =============
- Continued -
8
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fixed assets financed by capital leases $ 197,689 $ -- $ 2,408,544
=========== =========== ===========
Unrealized (Gain) Loss on marketable securities $ (101,295) $ 11,623 $ 102,821
=========== =========== ===========
Stock and stock options granted to employees
and non-employees below fair market value $ 2,391,118 $ -- $ 3,350,968
=========== =========== ===========
Conversion of preferred stock and convertible
debentures into shares of common stock $ 1,677,465 $ 3,450,000 $ 7,009,915
=========== =========== ===========
Retirement of preferred stock $ 3,977 $ -- $ 39,346
=========== =========== ===========
Reclassification of warrants $ 453,348 $ -- $ 453,348
=========== =========== ===========
Minority interest share of proceeds from issuance
of common stock in consolidated subsidiary $ (100) $ -- $ (100)
=========== =========== ===========
Dividends on preferred stock paid
in shares of common stock $ 6,808 $ -- $ 89,120
=========== =========== ===========
Financing of insurance policies and other assets $ -- $ 379,058 $ 379,058
=========== =========== ===========
Issuance of warrants in connection with
equity and debt financings $ -- $ 1,488,393 $ 1,878,003
=========== =========== ===========
Conversion of other accrued liabilities to
shares of common stock $ -- $ 80,444 $ 132,548
=========== =========== ===========
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 other accrued liabilities to
shares of common stock $ -- $ -- $ 1,442,567
=========== =========== ===========
Conversion of revenue participation
units into shares of common stock $ -- $ -- $ 676,000
=========== =========== ===========
The accompanying notes are an integral part of these
condensed consolidated statements.
9
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 primarily of normal recurring adjustments) necessary for a fair
presentation of its consolidated financial position at September 30, 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 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.
Certain prior year and quarterly amounts have been reclassified to
conform to the current period presentation.
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 four subsidiaries as of
September 30, 2001: NeoTherapeutics GmbH, wholly owned, incorporated in
Switzerland in April 1997 ("NeoGmbH"); NeoGene Technologies, Inc., 88.4% owned,
incorporated in California in October 1999 ("NeoGene"); NeoOncoRx, Inc., 90.48%
owned, incorporated in California in November 2000 ("NeoOncoRx"); and NeoTravel,
Inc., wholly owned, incorporated in California in April 2001 ("NeoTravel").
Advanced ImmunoTherapeutics, Inc., a previously wholly owned subsidiary of
NeoTherapeutics, Inc., was merged into NeoTherapeutics, Inc. in September 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,
neuropathy, and other neurodegenerative and psychiatric diseases. The Company is
also engaged, through NeoGene, in research involving functional genomics to
create new drug targets for out-licensing and, through NeoOncoRx, has recently
expanded its clinical development program to include in-licensing and further
development of later stage anti-cancer drugs. The accompanying consolidated
financial statements include the results of NeoTherapeutics, Inc. and its
subsidiaries.
As shown in the accompanying financial statements, the Company continues
to incur significant losses and negative cash flow from operations. At September
30, 2001 the Company had cash, cash equivalents, marketable securities and
short-term investments of approximately $8.1 million. The Company is currently
consuming cash at an average rate of approximately $2.1 million per month. The
Company is seeking to arrange additional equity financing, however, no
assurances can be given that the Company will be successful in raising new
equity financing. Unless the Company secures sufficient additional financing
prior to March 31, 2002, the Company's independent auditors have informed the
Company that the auditor's report on the December 31, 2001 financial statements
will include a going concern qualification.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
effective January 1, 2001. Under the provisions of SFAS 133, the Company is
required to recognize all derivatives as either assets or liabilities in the
consolidated balance sheets and measure these instruments at fair value. The
adoption of SFAS 133 did not have a material effect on the Company's financial
statements.
10
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16. "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The Company adopted SFAS 141 for all business combinations initiated after
June 30, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets." This
pronouncement addresses, among other things, how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Goodwill shall no longer be amortized but shall be
assessed at least annually for impairment using a fair value methodology. The
Company adopted this statement for all goodwill and other intangible assets
acquired after June 30, 2001 and for all existing goodwill and other intangible
assets beginning January 1, 2002. The Company does not anticipate that the
adoption of SFAS 142 will have a significant effect on its financial position or
the results of its operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 (with
earlier application being encouraged). We do not expect the adoption of SFAS 143
to have a material impact on our financial condition and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
The provisions of SFAS 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, with early application
encouraged and generally are to be applied prospectively. We do not expect the
adoption of SFAS 144 to have a material impact on our financial condition and
results of operations.
2. LICENSING AGREEMENTS
In March 2001, the Company's majority owned 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 is being
recognized as revenue over a three-year period commencing April 2001. The
Company is recognizing licensing revenues in accordance with SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
During July 2001, the Company's subsidiary, NeoOncoRx, Inc., finalized an
exclusive worldwide license for an anti-cancer compound Neoquin(TM) (E09) and 79
related analogs from The Netherlands based NDDO Research Foundation. Under the
terms of the agreement the Company paid an initial licensing fee of $100,000 and
will issue 30,000 shares of the Company's common stock subject to certain
conditions. Further, the Company is obligated to pay milestone payments which
could total up to $800,000, if the Company receives final market approval in the
USA, major European markets, Japan and Australia. The Company will incur the
development cost under the terms of the agreement. The Company will also pay
royalties to NDDO Research Foundation if sales should ever materialize from
Neoquin(TM).
During September 2001, the Company's subsidiary, NeoOncoRx, Inc.,
acquired the worldwide rights to develop and market Satraplatin (JM-216) from
Johnson Matthey plc., a major multi-national chemical company. Under the terms
of the agreement the Company paid an initial licensing fee of $100,000, and is
obligated to pay milestone payments that could total up to $6,900,000 if the
11
Company submits an NDA in the United States, receives FDA approval of the NDA,
receives approval in the first European Union state for a new drug application,
receives approval by the FDA for a second drug indication, and receives approval
in the first European Union state for a second drug indication. The Company will
also pay royalties to Johnson Matthey plc. if sales should ever materialize from
Satraplatin.
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 September 30, 2001, the Company had committed to pay, through May 2005,
approximately $1.1 million for such grants and fellowships. Grant expense for
the nine-month periods ended September 30, 2001 and 2000, were approximately
$0.6 million and $1.0 million, 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. The Company believes that it will have
preliminary results for its Neotrofin(TM) 500 patient trial for Alzheimer's
disease during the first quarter of 2002.
4. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
At December 31, 2000, minority interest in consolidated subsidiaries
consisted of an aggregate of approximately $7 million in Series A and Series B
Preferred Stock of NeoGene and other equity instruments of NeoGene, the
percentage book value in NeoGene of outstanding shares owned by minority common
shareholders, and the percentage book value in NeoOncoRx of outstanding shares
owned by minority common shareholders.
During the nine-month period ended September 30, 2001, all of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock of
NeoGene were either converted into shares of NeoTherapeutics or purchased by
NeoTherapeutics (See Note 5). At September 30, 2001, minority interest in
consolidated subsidiaries consists of the percentage book value in NeoGene and
NeoOncoRx of outstanding shares owned by minority shareholders.
From time to time, since inception of NeoGene and through September 30,
2001, losses incurred by NeoGene have exceeded the minority shareholders'
percentage book value in NeoGene. Therefore, at times when the minority interest
in consolidated subsidiaries was zero, the majority shareholder,
NeoTherapeutics, recorded 100% of the losses of NeoGene. Through September 30,
2001, NeoTherapeutics absorbed approximately $170,000 in minority shareholder
losses that will be credited back to NeoTherapeutics if future NeoGene earnings
materialize.
From time to time, since inception of NeoOncoRx and through September 30,
2001, losses incurred by NeoOncoRx have exceeded the minority shareholders'
percentage book value in NeoOncoRx. Therefore, at times when the minority
interest in consolidated subsidiaries was zero, the majority shareholder,
NeoTherapeutics, recorded 100% of the losses of NeoOncoRx. Through September 30,
2001, NeoTherapeutics absorbed approximately $110,000 in minority shareholder
losses that will be credited back to NeoTherapeutics if future NeoOncoRx
earnings materialize.
5. CONVERTIBLE REDEEMABLE PREFERRED STOCK
On December 18, 2000, NeoGene entered into an agreement with an
institutional investor for the issuance and sale of its Series B Preferred Stock
and warrants to purchase common stock of Neotherapeutics and NeoGene for
aggregate consideration of $2.0 million. Under the provisions of the agreement,
NeoGene issued and sold to the investor a total of 44,445 shares of its Series B
Preferred Stock, at a purchase price of $45 per share, and issued a five year
warrant to purchase a total of 9,387 shares of NeoGene common stock, at an
exercise price of $45 per share. The investor also received a five year warrant
to purchase an aggregate of 30,000 shares of the NeoTherapeutics' common stock,
at an exercise price of $6.10 per share. The Company also granted an exchange
right to the investor that allowed the investor to exchange its shares of Series
B Preferred Stock for preferred stock of the Company. In June 2001, the investor
exercised its right to exchange all of the Series B Preferred stock then held by
the investor for 200 shares of the Company's 7% Series C Preferred stock. Under
the terms
12
of the exchange right, the investor forfeited 4,693 or 50% of the previously
granted five year warrants to purchase shares of NeoGene common stock at an
exercise price of $45 per share. The shares of the Company's 7% Series C
Preferred Stock were redeemable, under certain conditions at the option of the
holder, and each share is convertible into a number of shares of common stock
equal to $10,000 divided by the lesser of (i) 100% of the average of the lowest
seven closing bid prices of our common stock in the previous 30 trading days, or
(ii) $5.97. In August 2001, the holder of the Company's 7% Series C Preferred
Stock converted 170 shares of the 7% Series C Preferred Stock into 482,635
common shares of NeoTherapeutics. In September 2001, NeoTherapeutics purchased
the remaining 30 shares of the Company's 7% Series C Preferred Stock for
$300,000 plus accrued dividends and a settlement fee of approximately $72,000.
The 30 shares of NeoTherapeutics' 7% Series C Preferred Stock are recorded as an
offset to Stockholders' Equity.
On August 13, 2001, NeoTherapeutics purchased from two institutional
investors the Series A Preferred Stock of NeoGene for $5.5 million representing
the $5.0 million face value of the preferred stock plus a $500,000 redemption
fee. The difference between the book value of the preferred stock and the amount
paid (approximately $0.8 million) was recorded as a charge to accumulated
deficit. The Company also paid accrued dividends of approximately $220,000 to
the holders of the preferred stock.
6. STOCKHOLDERS' EQUITY
Common Stock:
On January 2, 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 September 30,
2001, approximately $25.0 million remained available under the registration
statement.
On January 30, 2001, the Company issued to two investors 1,070,336 shares
of its 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 million. On May 15, 2001 the Company also issued an
additional 900,000 shares of common stock to the two investors in respect of the
second and final reset provision. The Company did not receive any consideration
as a result of it issuing shares pursuant to the reset provisions of this
financing transaction. The reset provisions were part of an earlier sale of
common stock and were previously accounted for as a partial allocation of the
proceeds of that sale to common stock. As such, no further accounting is
necessary on the date the reset provision was exercised.
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 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 1,176,472 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 (See Footnote 10, SUBSEQUENT EVENTS),
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 did not exercise the first
option for the debenture tranche of $10 million and paid a break-up fee of
$405,000 in July 2001, pursuant to the terms of the financing transaction of May
17, 2001. This fee was charged to general and administrative expense in the
second quarter of 2001.
On May 17, 2001, the Company sold to the aforementioned two private
investor groups 1,400,000 shares of the Company's common stock under the shelf
registration statement for $5.95 million cash.
13
On June 12, 2001, the Company entered into two securities sales
agreements with an investment banking firm acting as an underwriter to sell the
Company's common stock on a "best efforts" basis with the maximum aggregate
public offering price under both agreements combined of $33.4 million. The
securities will be offered as part of a Controlled Equity Offering, or CEO(SM).
Under one of the sales agreements, the Company may sell up to $8.4 million of
its common stock "at the market" or directly into the established trading market
for the common stock. Under the other sales agreement, the Company may sell up
to $25 million of its common stock in any manner other than "at the market".
Under each agreement, if the Company and the underwriter agree to sell common
stock on certain terms, the underwriter will use its commercially reasonable
efforts to sell the securities up to the amount agreed upon, but will not be
required to sell any specific number or dollar amount of securities. The net
proceeds from the sales will be the aggregate sales price at which the
securities were sold after deduction for the underwriter's commission/discount
of up to 4%. The Company will issue to the underwriter five year warrants to
purchase shares of its common stock in an amount equal to 10% of the number of
shares of common stock sold by us pursuant to the offering at an exercise price
per share equal to 130% of the volume weighted average price at which such
shares were issued.
On June 22, 2001, the Company sold to its employees through the
provisions of its Employee Stock Purchase Plan (the "ESPP"), 40,390 shares of
the Company's common stock for approximately $90,100. Pursuant to the ESPP, the
shares were sold at a 15% discount to market on the date of purchase.
On August 14, 2001, the Company sold 600,000 shares of common stock under
the shelf registration statement to an institutional investor for $2,010,000.
There were 21,862,772 issued and outstanding shares of the Company's
common stock as of September 30, 2001. In addition, security holders held
options and warrants as of September 30, 2001 which, if exercised, would
obligate the Company to issue up to an additional 8,705,383 shares of common
stock, of which 2,408,950 shares are subject to options or warrants which are
currently exercisable at the sole election of the holder. A substantial number
of those shares, when issued upon exercise, will be available for immediate
resale in the public market.
7. STOCK OPTIONS
Stock option activity for the Company during the nine-month period ended
September 30, 2001 is as follows:
OPTION
SHARES PRICE
--------- --------------
Outstanding at January 1, 2001 2,490,175 $3.75 --$13.00
Granted 560,000 3.77 -- 5.62
Exercised -- --
Forfeited (138,000) 4.063-- 13.00
---------
Outstanding at September 30, 2001 2,912,175 $3.75 --$13.00
=========
During the nine-month period ended September 30, 2001 and September 30,
2000, the Company recognized compensation expense for employees, directors and
vested consultants' options aggregating $1,155,144 and $561,034, 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.
14
8. OPERATING SEGMENT AND RELATED INFORMATION
The Company has adopted the Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), Disclosures About Segments of an Enterprise and Related
Information. The increased significance of one of its subsidiary business
segments, NeoGene, is newly reportable under the standard.
NeoGene's financial results are presented below. The accounting policies
of NeoGene are the same as the policies utilized for the Company. The following
schedule is the information related to the reportable segment (prior period data
is not material):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Revenue:
Genomics reportable segment $ 8,334 $ 16,668
=========== ===========
Loss from Operations:
Genomics reportable segment $ 656,670 $ 2,137,248
Neurology, oncology and other
reportable segments 5,551,570 16,415,624
----------- -----------
Total Loss from Operations $ 6,208,240 $18,552,872
=========== ===========
Assets:
Genomics reportable segment $ 3,133,603
Neurology, oncology and other
reportable segments 10,142,847
-----------
Total assets $13,276,450
===========
9. LOSS PER SHARE
Basic and diluted loss per share for the three and nine-month periods
ended September 30, 2001 are computed after increasing the net loss by dividends
amounting to $815,807 paid to Series A Preferred Stock holders that resulted
from the Company's purchase of the preferred stock.
10. SUBSEQUENT EVENTS
On October 19, 2001, the Company's registration statement (File No.
333-64444) related to the "at the market" sales agreement filed with the
Securities and Exchange Commission became effective. This registration statement
allows for the sale of up to $8.4 million of the Company's common stock.
Approximately 125,000 shares of common stock were sold through November 10,
2001, for aggregate cash proceeds of approximately $413,000.
On October 19, 2001, NeoTherapeutics and an investment banking firm
executed amendments to the sales agreements previously entered into by
NeoTherapeutics and the investment banking firm on June 12, 2001, and to the
advisory agreement previously entered into on April 11, 2001 and amended on June
12, 2001. The amendments relate primarily to modifications of the compensation
provisions of the sales agreements.
During November 2001, the Company's subsidiary, NeoOncoRx, Inc., acquired
the worldwide rights to develop and market Elsamitrucin from Bristol-Myers
Squibb Company. Under the terms of the agreement the Company paid an initial
licensing fee of $100,000 and is obligated to pay milestone payments that could
total up to $900,000 if the Company receives approval of an NDA by either the
FDA or any equivalent foreign regulatory authority, whichever occurs first. We
will also pay royalties to Bristol-Myers Squibb Company if sales should ever
materialize from Elsamitrucin.
On November 2, 2001, the Company filed a prospectus supplement for its
existing shelf registration statement (File No. 333-53108) related to the $25
million sales agreement. Through November 10, 2001, approximately 950,000 shares
of common stock have been sold pursuant to this prospectus supplement for
aggregate cash proceeds of $3.8 million.
On November 13, 2001, the Company decided not to exercise the second
option for the debenture tranche of $8 million, pursuant to the April 17, 2001
financing transaction, as amended.
15
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 September 30, 2001, we
incurred a cumulative net loss of approximately $114.3 million. We expect that
our operating expenses will continue 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 that we are currently seeking. Through September 30, 2001, the
operations of our NeoGene subsidiary engaged in functional genomics were
considered material under SFAS No. 131 and accordingly, segment information is
presented herein.
Three-Months Ended September 30, 2001 Compared to Three-Months Ended September
30, 2000:
Revenue for the three-month period ended September 30, 2001 increased to
$8,334 versus no revenue over the same period in 2000. The increase is due to
the recognition of revenue from the initial receipt of funds from a licensing
agreement between our NeoGene subsidiary and Pfizer, Inc. Under the terms of the
agreement, Pfizer will make use of NeoGene's genomics 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 us receiving any milestone payments. The initial payment was recorded
as deferred revenue and is being recognized as revenue over a three-year period
beginning April 2001. We are recognizing revenue in accordance with SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
Research and development expenses for the three-month period ended
September 30, 2001 decreased by approximately $5,789,000 or 55.1% 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, in aggregate,
approximately $9.7 million over an eighteen-month period. These new trials are
being managed internally and we have increased the number of employees and
consultants for that purpose. Partially offsetting this overall decrease in
research and development expenses were salaries that increased due to additional
personnel, salary increases and related benefits, including a non-cash equity
compensation charge for the three-month period ended September 30, 2001 of
approximately $144,000. 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 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),
Neoquin(TM) and other drug candidates, as well as the other research activities
at our subsidiaries.
General and administrative expenses increased by approximately $230,000
or 18.0% from the same period in 2000 due primarily to increases in salaries and
related benefit expenses from increased head count, including a non-cash equity
compensation charge of approximately $94,000, general occupancy expenses and
legal fees. We expect 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 we successfully
bring one or more of our products to market.
Net interest income for the three-month period ended September 30, 2001
increased by approximately $438,000 due primarily to a non-recurring charge to
interest expense during the three-month period ended September 30, 2000. The
increase includes approximately $72,000 of additional interest income during the
current quarter from higher average cash balances resulting from the
16
investments of unused proceeds from recent equity financings. We expect our
interest income to decrease in future periods due to the use of its funds in
current operations, unless offset by revenues or additional equity or debt
financings.
Nine-Months Ended September 30, 2001 Compared to Nine-Months Ended September 30,
2000:
Revenue for the nine-month period ended September 30, 2001 increased to
$16,668 versus no revenue over the same period in 2000. The increase is due to
the recognition of revenue from the initial receipt of funds from a licensing
agreement between our NeoGene subsidiary and Pfizer, Inc. Under the terms of the
agreement, Pfizer will make use of NeoGene's genomics 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 us receiving any milestone payments. The initial payment was recorded
as deferred revenue and is being recognized as revenue over a three-year period
beginning April 2001. We are recognizing revenue in accordance with SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
Research and development expenses for the nine-month period ended
September 30, 2001 decreased by approximately $15,938,000 or 54.6% 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. We are managing these
new trials internally and have increased the number of 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,
including a non-cash equity compensation charge for the nine-month period ended
September 30, 2001 of approximately $790,000. In the immediate future we expect
our research and development expenses to increase over the current period but
decrease compared to the same period in the prior year due to the net savings
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 clinical trials on
Neotrofin(TM) and other drug candidates, as well as the other research
activities at our subsidiaries.
General and administrative expenses for the nine-month period ended
September 30, 2001 increased by approximately $1,890,000 or 55.3% from the same
period in 2000 due primarily to increases in salaries and related benefit
expense from increased head count, including a non-cash equity compensation
charge of approximately $365,000, travel and general occupancy expenses, legal
and investor relations fees, and a break-up penalty fee of approximately
$405,000 related to the first debenture tranche of $10 million under the April
17, 2001 financing. We expect 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 we successfully
bring one or more of our proposed products to market.
Net interest income for the nine-month period ended September 30, 2001
increased by approximately $1,692,000 due primarily to the non-recurrence of
non-cash interest expense during the nine-month period ended September 30, 2000.
The increase includes approximately $171,000 of additional interest income
during the nine-month period from higher average cash balances resulting from
the investments of unused proceeds from recent equity financings. We expect our
interest income to decrease in future periods due to the use of our funds in
current operations, unless offset by revenues or cash from additional equity
financings.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 2001, we financed our operations
primarily through sales of securities, borrowings, grants and deferred payment
of salaries and other expenses from related parties.
On January 2, 2001, we 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 November 10, 2001,
$21.0 million remained available under the registration statement.
17
On January 30, 2001, we 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 million. On May 15, 2001 we also issued an
additional 900,000 shares of common stock to the two investors in respect of the
second and final reset provision. No consideration was received as a result of
our issuing shares pursuant to the reset provisions of this financing
transaction.
On February 2, 2001, we 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, we sold 1,250,000 shares of common stock under the
shelf registration statement to a private investor for $5 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, our stockholders approved an
increase in authorized common stock from 25 million to 50 million shares.
In April 2001, we continued the study of our lead compound Neotrofin(TM),
and began a 500 patient trial for Alzheimer's disease. In addition, in March
2001 we 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.
On April 17, 2001, we entered into a financing transaction with two
private investor groups which provide, among other things, for (a) the sale of
approximately 1,176,472 shares of our 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
our option, 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. We did not exercise our option for the
first debenture tranche of $10 million and paid a break-up fee of $405,000. On
May 17, 2001, we sold to the aforementioned two private investor groups
1,400,000 shares of our common stock under the shelf registration statement for
approximately $5,950,000 in cash.
On May 17, 2001, we sold under the shelf registration statement to the
aforementioned two private investor groups 1,400,000 shares of our common stock
for $5.95 million cash.
On June 12, 2001 we entered into two common stock sales agreements with
an investment banking firm acting as an underwriter to sell our common stock on
a "best efforts" basis up to the maximum aggregate public offering price under
both agreements combined of $33.4 million. The securities will be offered as
part of a Controlled Equity Offering, or CEO(SM). Under one of the sales
agreements, we may sell up to $8.4 million of our common stock "at the market"
or directly into the established trading market for the common stock. Under the
other sales agreement, we may sell up to $25 million of our common stock in any
manner other than "at the market". Under the agreements, if we and the
underwriter agree to sell common stock on certain terms, the underwriter will
use its commercially reasonable efforts to sell the securities up to the amount
agreed upon, but will not be required to sell any specific number or dollar
amount of securities. The net proceeds from the sales will be the aggregate
sales price at which the securities were sold after deduction for the
underwriter's commission/discount of up to 4%. We will issue to the underwriter
five year warrants to purchase shares of our common stock in an amount equal to
10% of the number of shares of common stock sold by us pursuant to the offering
at an exercise price per share equal to 130% of the volume weighted average
price at which such shares were issued.
On June 22, 2001 we sold to our employees through the provisions of its
Employee Stock Purchase Plan (the "ESPP"), 40,390 shares of our common stock for
approximately $90,100. Pursuant to the ESPP, the shares were sold at a 15%
discount to market on the date of purchase.
On August 13, 2001, we purchased from two institutional investors
previously issued Series A Preferred Stock of NeoGene for $5.5 million
representing the face value of the preferred stock plus a $500,000 premium, and
accrued dividends of approximately $220,000.
On August 14, 2001, we sold 600,000 shares of common stock under the
shelf registration statement to an institutional investor for $2,010,000.
18
In August 2001, the holder of our 7% Series C Preferred Stock converted
170 shares of the 7% Series C Preferred Stock into 482,635 shares of our common
stock. In September 2001, we repurchased the remaining 30 shares of the
outstanding 7% Series C Preferred Stock for $300,000 plus accrued dividends and
a settlement fee of aggregating approximately $72,000. The 30 shares of 7%
Series C Preferred Stock are recorded as an offset to Stockholders' Equity.
At September 30, 2001, net working capital amounted to approximately $5.2
million. This amount included cash and cash equivalents of approximately $0.6
million and marketable securities and short-term investments of approximately
$7.6 million. In comparison, at December 31, 2000, we had net 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 $2.0 million decrease in net working capital during the nine-month
period ended September 30, 2001 is attributable primarily to the loss of $18.1
million, less non-cash compensation and other items of approximately $1.6
million plus changes in operating assets and liabilities of $1.1 million, the
purchase of Series A Preferred Stock of NeoGene for $5.5 million and 7% Series C
Preferred Stock of NeoTherapeutics for $0.3 million, other net uses of $0.4
million, offset by the sale of approximately $21.8 million of our common stock.
We periodically make non-binding commitments to various universities and
not-for-profit research organizations to fund scientific research and fellowship
grants that may further our research programs. As of September 30, 2001, we had
committed to pay, through May 2005, approximately $1.1 million for such grants
and fellowships.
We are in the development stage and devote substantially all of our
efforts to research and development. We incurred cumulative losses of
approximately $114.3 million through September 30, 2001, and expect to incur
substantial losses over the next several years. In addition to the funds derived
from our public offerings and subsequent private placement equity offerings, we
will require substantial additional funds in order to complete the research and
development activities currently contemplated and to commercialize our proposed
products. Our 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
our control. We believe that our existing capital resources, assuming that we
are able to sell shares of our common stock under the "best efforts" common
stock sales agreements with an underwriter with the combined maximum aggregate
price of $33.4 million, will be adequate to fund our capital needs for at least
twelve months. However, we also believe that we will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize our proposed products. Additionally,
there can be no assurances that the underwriter or we will be successful in
selling common stock under either of the sales agreements or in raising the
required funds.
Without additional funding, we may be required to delay, reduce the scope
of, or eliminate, one or more of our research and development projects, or
obtain funds through arrangements with collaborative partners or others which
may require us to relinquish rights to certain technologies, product candidates
or products that we would otherwise seek to develop or commercialize on our own,
and which could be on terms unfavorable to us.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Our future operating results 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:
We have incurred losses in every year of our existence and expect to
continue to incur significant operating losses for the next several years. We
have 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 our proposed products will ever be successfully developed,
receive and maintain required governmental regulatory approvals, become
commercially viable or achieve market acceptance.
We have 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 we will successfully engage in any of these activities.
Our need for additional funding is expected to be substantial and will be
determined by the progress and cost of the development and commercialization of
our products and other activities. We believe that we will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize our proposed products. The source,
19
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 our common stock, there is no
assurance that any such funding will occur.
Factors impacting our future success include, among other things, the
ability to develop products that will be safe and effective in treating
neurological diseases and cancer, develop genomic related products, and obtain
government approval for our proposed products.
We face numerous other risks in the operation of our business, including,
but not limited to, protecting our 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 our
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 risk factors are not intended to be complete. A more
comprehensive list of factors that could affect our future operating results can
be found in Amendment No. 1 on Form 10-K/A to our 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 our
objectives or avoid any of the above or other risks would likely have a material
adverse effect on our business and results of operations.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to certain market risks associated with interest rate
fluctuations on our marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. We are not subject to material risks from
currency rate fluctuations, nor do we utilize hedging contracts or similar
instruments.
Our exposure to interest rate risk arises from financial instruments
entered into in the normal course of business. Certain of our 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 and are not deemed material
to the consolidated financial statements.
Our borrowings, consisting primarily of capital lease obligations, 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 our borrowings, fluctuations in
fair value are not deemed material.
QUALITATIVE DISCLOSURES
Our primary exposures relate to (1) interest rate risk on borrowings, (2)
our ability to pay or refinance borrowings at maturity at market rates, (3)
interest rate risk on the value of our investment portfolio and rate of return,
and (4) the impact of interest rate movements on our ability to obtain adequate
financing to fund future cash requirements. We manage interest rate risk on our
investment portfolio by matching scheduled investment maturities with the
estimated timing of our cash requirements. We manage interest rate risk on our
outstanding borrowings by using fixed rate debt. While we cannot predict or
manage our ability to refinance existing borrowings and investment portfolio, we
evaluate our financial position on an ongoing basis.
21
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In August 2001, the holder of our Series C Preferred Stock converted 170
shares of the 7% Series C Preferred Stock into 482,635 shares of our common
stock. We believe the issuance was exempt from registration pursuant to section
3(a)(9) of the Securities Act of 1933, as amended.
In October 2001, we issued a five year warrant to purchase 50,000 shares
of our common stock at an exercise price of $3.50 per share to a clinical
research organization related to a termination settlement in November 2000 of
clinical studies that we previously entered into with such organization. We
believe the issuance of this warrant was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1.1 Sales Agreement dated June 11, 2001, by and between the Registrant and
Cantor Fitzgerald & Co. (Filed as Exhibit 1.1 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
1.2 Sales Agreement dated June 11, 2001, by and between the Registrant and
Cantor Fitzgerald & Co. (Filed as Exhibit 1.2 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
1.3 Amendment to Sales Agreement, dated as of October 19, 2001, by and
between Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 1.1
to Form 8-K, as filed with the Securities and Exchange Commission on
October 24, 2001, and incorporated herein by reference.)
1.4 Amendment to Sales Agreement, dated as of October 19, 2001, by and
between Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 1.2
to Form 8-K, as filed with the Securities and Exchange Commission on
October 24, 2001, and incorporated herein by reference.)
4.1 Advisory Agreement dated April 11, 2001, by and between the Registrant
and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
4.2 Amendment to the Advisory Agreement dated June 12, 2001, by and
between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit
4.2 to the Registration Statement on Form S-3 as amended (No.
333-64444), as filed with the Securities and Exchange Commission on
July 2, 2001, and incorporated herein by reference.)
4.3 Certificate of Designations of the Series C Preferred Stock of the
Registrant. (Filed as Exhibit 4.7 to the Registration Statement on
Form S-3 as amended (No. 333-64432), as filed with the Securities and
Exchange Commission on July 2, 2001, and incorporated herein by
reference.)
4.4 Amendment to Advisory Agreement, dated as of October 19, 2001, by and
between Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1
to Form 8-K, as filed with the Securities and Exchange Commission on
October 24, 2001, and incorporated herein by reference.)
10.1 Stock Purchase Agreement dated as of August 14, 2001, by and between
the Registrant and Summit Capital Management LLC (Filed as Exhibit
10.1 to Form 8-K, filed with the Securities and Exchange Commission on
August 15, 2001, and incorporated herein by reference.)
10.2 Stock Purchase Agreement dated as of August 13, 2001, by and among the
Registrant, NeoGene Technologies, Inc., Montrose Investments Ltd. and
Strong River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K,
filed with the Securities and Exchange Commission on August 27, 2001,
and incorporated herein by reference.)
10.3 Stock Purchase and Settlement Agreement and Release, dated as of
September 19, 2001, by and among Registrant, NeoGene Technologies,
Inc. and Societe Generale. (Filed as Exhibit 10.1 to Form 8-K, filed
with the Securities and Exchange Commission on September 24, 2001, and
incorporated herein by reference.)
10.4 License Agreement dated June 29, 2001, by and between the Registrant
and NDDO Research Foundation.
10.5 License Agreement dated August 28, 2001, by and between the Registrant
and Johnson Matthey plc.
10.6 License Agreement dated October 24, 2001, by and between the
Registrant and Bristol-Myers Squibb Company.
(b) Reports on Form 8-K
1. On August 15, 2001 we filed a report on Form 8-K announcing the sale
of 600,000 shares of our common stock to an institutional investor for
aggregate consideration of $2,010,000 pursuant to a Registration
Statement on Form S-3 (File No. 333-53108).
2. On August 27, 2001 we filed a report on Form 8-K announcing the
purchase from Montrose Investments Ltd. and Strong River Investments,
Inc., of all of the outstanding shares of the Series A Preferred Stock
of NeoGene Technologies, Inc., a majority-owned subsidiary of
NeoTherapeutics, for $5.5 million plus accrued dividends of
$219,959.86.
22
3. On September 24, 2001 we filed a report on Form 8-K announcing the
purchase from Societe Generale of all of the remaining outstanding
shares of the 7% Series C Preferred Stock of NeoTherapeutics for
$300,000 plus accrued dividends and a settlement fee of approximately
$72,000.
4. On October 24, 2001 we filed a report on Form 8-K announcing that
NeoTherapeutics, Inc. and Cantor Fitzgerald & Co. ("Cantor") executed
amendments to the Sales Agreements previously enter into by
NeoTherapeutics, Inc. and Cantor on June 12, 2001, and to the Advisory
Agreement previously entered into on April 11, 2001 and amended on
June 12, 2001. The amendments relate primarily to modifications of the
compensation provisions of the Sales Agreements.
5. On October 30, 2001, we filed a report on Form 8-K regarding the
Alzheimer's disease clinical trial of its lead drug candidate,
Neotrofin(TM).
23
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: November 14, 2001 By: /s/ Samuel Gulko
------------------------------------
Samuel Gulko, Senior Vice President
Finance, Chief Financial Officer,
Secretary and Treasurer
(Principal Accounting and Financial
Officer)
24
EXHIBIT INDEX:
1.1 Sales Agreement dated June 11, 2001, by and between the Registrant and
Cantor Fitzgerald & Co. (Filed as Exhibit 1.1 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
1.2 Sales Agreement dated June 11, 2001, by and between the Registrant and
Cantor Fitzgerald & Co. (Filed as Exhibit 1.2 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
1.3 Amendment to Sales Agreement, dated as of October 19, 2001, by and
between Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 1.1
to Form 8-K, as filed with the Securities and Exchange Commission on
October 24, 2001, and incorporated herein by reference.)
1.4 Amendment to Sales Agreement, dated as of October 19, 2001, by and
between Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 1.2
to Form 8-K, as filed with the Securities and Exchange Commission on
October 24, 2001, and incorporated herein by reference.)
4.1 Advisory Agreement dated April 11, 2001, by and between the Registrant
and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
4.2 Amendment to the Advisory Agreement dated June 12, 2001, by and
between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit
4.2 to the Registration Statement on Form S-3 as amended (No.
333-64444), as filed with the Securities and Exchange Commission on
July 2, 2001, and incorporated herein by reference.)
4.3 Certificate of Designations of the Series C Preferred Stock of the
Registrant. (Filed as Exhibit 4.7 to the Registration Statement on
Form S-3 as amended (No. 333-64432), as filed with the Securities and
Exchange Commission on July 2, 2001, and incorporated herein by
reference.)
4.4 Amendment to Advisory Agreement, dated as of October 19, 2001, by and
between Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1
to Form 8-K, as filed with the Securities and Exchange Commission on
October 24, 2001, and incorporated herein by reference.)
10.1 Stock Purchase Agreement dated as of August 14, 2001, by and between
the Registrant and Summit Capital Management LLC (Filed as Exhibit
10.1 to Form 8-K, filed with the Securities and Exchange Commission on
August 15, 2001, and incorporated herein by reference.)
10.2 Stock Purchase Agreement dated as of August 13, 2001, by and among the
Registrant, NeoGene Technologies, Inc., Montrose Investments Ltd. and
Strong River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K,
filed with the Securities and Exchange Commission on August 27, 2001,
and incorporated herein by reference.)
10.3 Stock Purchase and Settlement Agreement and Release, dated as of
September 19, 2001, by and among Registrant, NeoGene Technologies,
Inc. and Societe Generale. (Filed as Exhibit 10.1 to Form 8-K, filed
with the Securities and Exchange Commission on September 24, 2001, and
incorporated herein by reference.)
10.4 License Agreement dated June 29, 2001, by and between the Registrant
and NDDO Research Foundation.
10.5 License Agreement dated August 28, 2001, by and between the Registrant
and Johnson Matthey plc.
10.6 License Agreement dated October 24, 2001, by and between the
Registrant and Bristol-Myers Squibb Company.
25