UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 March 31, 2002
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 May 10, 2002
----- ---------------------------
Common Stock, $.001 par value 26,911,951
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information......................................................... 3
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 ............................................................................... 4
Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2002
and 2001 and for the period from inception (June 15, 1987) to March 31, 2002 (unaudited)......... 5
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2002
and 2001 and for the period from inception (June 15, 1987) to March 31, 2002 (unaudited)......... 6
Notes to Condensed Consolidated Financial Statements (unaudited).................................. 9
ITEM 2. Management's Discussion And Analysis of Financial Condition and Results of Operations............. 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 26
PART II. OTHER INFORMATION ................................................................................ 26
ITEM 1. Legal Proceedings................................................................................. 26
ITEM 2. Changes in Securities and Use of Proceeds......................................................... 26
ITEM 3. Defaults Upon Senior Securities................................................................... 26
ITEM 4. Submission of Matters to a Vote of Security Holders............................................... 26
ITEM 5. Other Information (not previously reported in a Form 8-K)......................................... 26
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 27
SIGNATURES.................................................................................................... 29
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
FORM 10-Q
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2002
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The consolidated financial statements of NeoTherapeutics, Inc. (the
"Company") included herein have been prepared by management, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information normally included in the consolidated 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 consolidated financial statements included herein in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001, filed with the Securities and Exchange Commission.
3
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,632,196 $ 749,213
Marketable securities and short-term investments 179,537 6,407,388
Other receivables 173,664 474,007
Prepaid expenses and refundable deposits 325,334 386,229
------------- -------------
Total current assets 6,310,731 8,016,837
Property and Equipment, at cost:
Equipment 5,442,892 5,397,052
Leasehold improvements 1,937,912 1,937,912
Accumulated depreciation and amortization (2,891,077) (2,646,103)
------------- -------------
Property and equipment, net 4,489,727 4,688,861
Other Assets - prepaid expenses and deposits 122,165 119,164
------------- -------------
Total assets $ 10,922,623 $ 12,824,862
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,114,435 $ 4,186,085
Accrued payroll and related taxes 269,075 236,223
Note payable to related party 135,574 135,574
Current portion of capitalized lease obligations 663,948 654,434
------------- -------------
Total current liabilities 4,183,032 5,212,316
Capital lease obligations, net of current portion 46,901 463,705
Deferred revenue and other non-current liabilities 330,280 361,831
Commitments and Contingencies (note 3)
Stockholders' Equity:
Preferred stock, par value $0.001 per share, 5,000,000 shares
authorized:
None issued or outstanding at March 31, 2002 and December 31, 2001 -- --
Common stock, par value $0.001 per share, 50,000,000 shares authorized:
Issued and outstanding, 26,876,951 and 23,777,158 shares at March 31, 2002
and December 31, 2001, respectively 29,977 23,777
Additional paid in capital 140,479,604 134,659,267
Deferred compensation (1,697,872) (1,889,628)
Notes receivable from directors and officers (615,649) (615,649)
Accumulated other comprehensive income (loss) (50,364) 87,065
Deficit accumulated during the development-stage (131,783,286) (125,477,822)
------------- -------------
Total stockholders' equity 6,362,410 6,787,010
------------- -------------
Total liabilities and stockholders' equity $ 10,922,623 $ 12,824,862
============= =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO MARCH 31, 2002
THREE-MONTH THREE-MONTH INCEPTION
PERIOD ENDED PERIOD ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2002
--------------- --------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues $ 20,001 $ - $ 558,242
Operating expenses:
Research and development 4,924,123 3,806,935 100,376,914
General and administrative 1,478,511 1,800,724 28,981,879
-------------- --------------- ---------------
Total operating expenses 6,402,634 5,607,659 129,358,793
-------------- --------------- ---------------
Loss from operations (6,382,633) (5,607,659) (128,800,551)
Other income (expense), net 77,169 227,190 (65,655)
Minority interest - (97,500) (1,512,050)
-------------- ---------------- ----------------
Net loss $ (6,305,464) $ (5,477,969) $ (130,378,256)
=============== ================ ================
Basic and diluted net loss per share $ (0.26) $ (0.36)
=============== ================
Basic and diluted weighted average common shares outstanding 24,380,039 15,335,754
============== ===============
The accompanying notes are an integral part of these
condensed consolidated statements.
5
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 2002 AND 2001 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO MARCH 31, 2002
THREE-MONTHS THREE-MONTHS INCEPTION
ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2002
---------------- ---------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,305,464) $ (5,477,969) $ (130,378,256)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 244,974 174,617 3,015,634
Amortization of employee stock option compensation 191,756 1,129,429 3,607,306
Minority interest in net loss - (1,153) (162,380)
Amortization of debt discount - - 39,306
Issuance of common stock for services - - 56,844
Beneficial conversion feature related to preferred
stock of consolidated subsidiary - - 1,463,597
Amortization of discount on convertible
debentures and beneficial conversion feature - - 539,277
Fair value of warrants issued for consulting services - - 609,875
Issuance of common stock in settlement of litigation - - 2,458,359
Forgiveness of notes to officers and directors - - 45,000
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, prepaid
expenses and refundable deposits 361,238 (112,603) (80,742)
Increase (decrease) in accounts payable and
accrued expenses (1,071,650) (1,288,102) 2,793,281
Increase in accrued payroll and related taxes 32,852 110,146 907,769
Increase (decrease) in other non-current liabilities (31,551) 102,853 330,279
Proceeds from notes payable to related parties, net - - 135,574
Increase in employee expense reimbursement
and accrued interest to related parties - - 300,404
--------------- --------------- ----------------
Net cash used in operating activities (6,577,845) (5,362,782) (113,821,025)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (45,840) (260,072) (6,755,818)
Redemption (purchases) of marketable securities and
short-term investments, net 6,090,422 (2,436,140) (229,901)
(Increase) decrease in other assets (3,001) 99 (444,640)
Payment of organization costs - - (66,093)
Proceeds from sale of equipment - - 29,665
Issuance of notes receivable - - 100,000
--------------- --------------- ----------------
Net cash provided by (used in) investing activities 6,041,581 (2,696,113) (7,366,787)
The accompanying notes are an integral part of these
condensed consolidated statements.
6
NEOTHERAPEUTICS, INC.
(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,
2002 2001 2002
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants, net of
related offering costs and expenses 5,826,537 8,440,796 111,784,350
Payments made on capital lease obligations (407,290) (146,172) (2,239,904)
Proceeds from issuance of common stock in consolidated
subsidiary - - 1,000
Proceeds from preferred stock issuance, net of offering costs
and expenses - - 3,608,788
Proceeds from sale of preferred stock of consolidated subsidiary,
net of issuance costs and expenses - - 6,488,493
Proceeds from exercise of stock options and warrants - - 863,585
Proceeds from sale of convertible debentures, net of issuance
costs - - 9,387,321
Proceeds from long-term debt - - 2,600,448
Proceeds from notes receivables from officers and directors for
Exercise of stock options - - 61,560
Purchase of preferred stock of consolidated subsidiary - - (4,684,192)
Payment of dividend on preferred stock of consolidated
subsidiary - - (815,807)
Purchase of Series C preferred stock - - (300,000)
Dividends paid to preferred stockholders - - (136,246)
Cash at acquisition - - 200,612
-------------- -------------- ---------------
Net cash provided by financing activities 5,419,247 8,294,624 126,820,008
-------------- -------------- ---------------
Net increase in cash and cash equivalents 4,882,983 235,729 5,632,196
Cash and cash equivalents, beginning of period 749,213 6,158,375 -
-------------- -------------- ---------------
Cash and cash equivalents, end of period $ 5,632,196 $ 6,394,104 $ 5,632,196
============== ============== ===============
The accompanying notes are an integral part of these
condensed consolidated statements.
7
NEOTHERAPEUTICS, INC.
(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,
2002 2001 2002
--------------- --------------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized (gain) loss on marketable securities $ 137,429 $ (42,999) $ 50,364
============== =============== ===============
Stock and stock options granted to employees and
non-employees below fair market value $ - $ 847,253 $ 3,350,968
============== ============== ===============
Fixed assets financed by capital leases $ - $ - $ 2,916,144
============== ============== ===============
Conversion of subsidiary preferred stock into company Series
C preferred stock $ - $ - $ 1,973,488
============== ============== ===============
Conversion of preferred stock and convertible debentures into
shares of common stock $ - $ - $ 3,601,553
============== ============== ===============
Retirement of preferred stock $ - $ - $ (3,977)
============== ============== ===============
Reclassification of warrants and other $ - $ - $ 460,151
============== ============== ===============
Minority interest share of proceeds from issuance of common
stock in consolidated subsidiary $ - $ - $ (100)
============== ============== ===============
Financing of insurance policies and other assets $ - $ - $ 407,260
============== ============== ===============
Issuance of warrants in connection with equity and debt
financings $ - $ - $ 1,860,461
============== ============== ===============
Dividends on preferred stock paid in shares of common stock $ - $ - $ 82,312
============== ============== ===============
Conversion of other accrued liabilities into shares of common
stock $ - $ - $ 1,442,567
============== ============== ===============
Conversion of accrued interest into notes payable to related
parties $ - $ - $ 300,404
============== ============== ===============
Conversion of revenue participation units into shares of
common stock $ - $ - $ 676,000
============== ============== ===============
The accompanying notes are an integral part of these
condensed consolidated statements.
8
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
1. ORGANIZATION AND BUSINESS AND BASIS OF PRESENTATION, LIQUIDITY AND GOING
CONCERN
Organization and Business
Organization
NeoTherapeutics, Inc., was incorporated in Colorado as Americus Funding
Corporation (or 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. NeoTherapeutics had four subsidiaries at March 31, 2002:
NeoOncoRx, Inc., 90.48% owned by NeoTherapeutics and incorporated in California
in November 2000; NeoTherapeutics GmbH, wholly owned by NeoTherapeutics and
incorporated in Switzerland in April 1997; NeoGene Technologies, Inc., 88.4%
owned by NeoTherapeutics and incorporated in California in October 1999; and
NeoTravel, Inc., wholly owned by NeoTherapeutics and incorporated in California
in April 2001. Advanced ImmunoTherapeutics, Inc., a previously wholly owned
subsidiary of NeoTherapeutics, was merged into NeoTherapeutics in 2001. Unless
the context otherwise requires, all references to the "Company", "we", "our",
"us" and "NeoTherapeutics" refer to NeoTherapeutics, Inc., NeoTherapeutics GmbH,
Advanced ImmunoTherapeutics, NeoTravel, NeoGene, and NeoOncoRx as a consolidated
entity.
Business
We are a development-stage pharmaceutical company engaged in the
pharmaceutical business and the functional genomics business. Our pharmaceutical
business historically engaged in discovering and developing novel technology
platforms for the discovery and development, co-development and out-licensing of
therapeutic drugs for nervous system disorders and in the in-licensing and
development, co-development and out-licensing of late-stage cancer drugs. We are
shifting our strategic focus from discovery and development of neurology drugs
to discovery and strategic alliances for these drug candidates. Our oncology
program will continue to seek in-licensing of drug candidates and the further
development and strategic alliances for these drug candidates. Our functional
genomics business engages in discovering gene functions and validating novel
molecular targets for innovative drug development. We conduct our pharmaceutical
activities at NeoTherapeutics and NeoOncoRx, and our functional genomics
activities at NeoGene.
Basis of Presentation, Liquidity and Going Concern
Basis of Presentation
Our independent accountants issued a report on our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2001, that included an explanatory paragraph regarding our
ability to continue as a going concern. However, because we believe that we can
continue to operate as a going concern, we have prepared the accompanying
unaudited condensed consolidated financial statements under the assumption that
we are a going concern. Accordingly, they do not include adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that would be required if we were not able to
continue as a going concern. Additionally, the accompanying unaudited condensed
consolidated financial statements are prepared on a consistent basis in
accordance with generally accepted accounting principles for interim financial
information and with the instruction to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and consolidation and elimination entries) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002. The balance
sheet at December 31, 2001 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2001.
Certain quarterly amounts have been reclassified to conform to the
current period presentation.
9
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2002
(UNAUDITED)
Liquidity and Going Concern
The preliminary results of a clinical trial on our lead drug candidate
Neotrofin for the treatment of patients with mild to moderate Alzheimer's
disease indicated that tests of the patients taking our drug did not reach the
predetermined level of statistical significance when compared to the placebo
group of patients. We will await further analysis, as well as results from our
ongoing phase 2 studies of Neotrofin in other indications and the conclusion of
discussions with potential strategic alliance partners, prior to moving forward
with additional clinical studies of Neotrofin. No further resources will be used
for the development of Neotrofin in the treatment of patients with Alzheimer's
disease.
We are shifting our strategic focus from discovery and development of
neurology drugs to discovery and strategic alliances for these drug candidates.
Our oncology program will continue to seek in-licensing of drug candidates and
the further development and strategic alliances for these drug candidates. As a
result of these changes and the completion of a large Alzheimer's disease
clinical trial, we expect our burn rate to fall from approximately $7 million
per quarter to approximately $3.5 million per quarter over the next few months.
Cost savings will be principally due to reductions in clinical, research and
administrative personnel, the termination of a facility lease for office space
used to administer the Alzheimer's disease clinical trial, and the reduction of
expenses for the manufacturing of Neotrofin supplies.
As shown in the accompanying condensed consolidated financial
statements, we continue to incur significant losses and negative cash flow from
operations. From our inception on June 15, 1987 through March 31, 2002, we
incurred a cumulative loss of approximately $130.4 million. During the
three-month period ended March 31, 2002, we incurred a loss of approximately
$6.3 million. Our cash burn rate during the three-month period ended March 31,
2002 was approximately $7 million. We anticipate that our cash burn will be
reduced to approximately $3.5 million, which should begin to take effect during
the three-month period ending June 30, 2002. At March 31, 2002 we had cash, cash
equivalents, marketable securities and short-term investments of approximately
$5.8 million. Therefore, we will need to raise additional funds by July 2002, or
sooner, through public or private financings, including equity financings, or
through other arrangements, to continue operating our businesses, including
out-licensing our technology, to meet our short-term and long-term cash needs.
Additionally, we continue to seek additional sources of financing at the most
favorable terms available to us.
2. NEW ACCOUNTING STANDARDS
The FASB has issued SFAS No. 142, Goodwill and Other Intangible Assets,
which establishes a new basis for accounting for intangible assets deemed to
have indefinite useful lives. Such assets are no longer amortized but are
reviewed annually for impairment, or more frequently, if indicators of
impairment arise. Intangible assets with definite useful lives will continue to
be amortized over their respective estimated useful lives. This Statement is
required to be adopted by companies for fiscal years beginning after December
15, 2001. The Company adopted the new Statement effective January 1, 2002. The
impact on the consolidated financial statements was not material.
The FASB has issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes, with exceptions, SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 144 retains the basic indicators of impairment
recognition and undiscounted cash-flow measurement model of SFAS No. 121;
however, it removes goodwill from the scope of the analysis, as the accounting
for goodwill is now subject to the provisions of SFAS Nos. 141 and 142. SFAS No.
144 also provides additional guidance on differentiating between assets held and
used, held for sale, and held for disposal other than by sale. This Statement is
required to be adopted by companies for fiscal years beginning after December
15, 2001. The Company adopted the new Statement effective January 1, 2002. The
impact on the consolidated financial statements was not material.
3. DEFERRED REVENUE
As of December 31, 2001 and March 31, 2002, we had deferred revenue of
$258,887 and $238,886 classified as other non-current liabilities in our balance
sheet, respectively. During 2001 we received initial payments of $300,000 from
two licensing agreements that we have between our functional genomic business
segment and Pfizer Inc. and in May 2002, we received our first
10
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2002
(UNAUDITED)
milestone payment of $250,000 from Pfizer (see Footnote 11. Subsequent Events).
Under these agreements, we entered into strategic alliances with Pfizer for
investigating potential drug targets. We may receive additional payments from
Pfizer if they achieve certain milestones as defined in the agreements. In
accordance with our revenue recognition policy these initial payments will be
recognized as revenue over a three-year period from the date of inception of the
respective agreement, whereas substantive milestone payments will be recognized
as revenue upon receipt. We recognized licensing revenue of $20,001 during the
three-month period ended March 31, 2002.
4. COMMITMENTS AND CONTINGENCIES
Research and Fellowship Grants
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. At March 31, 2002, we
had committed to pay approximately $280,000 during the remainder of 2002 and an
aggregate of approximately $528,000 from 2003 through 2005, principally to the
University of California, Irvine to conduct general scientific research
programs. Grant expense for the three-month periods ended March 31, 2002 and
2001, were approximately $139,000 and $234,000, respectively, and is included in
research and development on the consolidated statement of operations.
5. STOCKHOLDERS' EQUITY
Common Stock and Warrant transactions
On March 12 and March 15, 2002, we sold an aggregate of 3,100,000
shares of our common stock off of our shelf registration statement at $2.00 per
share resulting in $6.2 million of gross cash proceeds. The investors also
received warrants to purchase up to 775,000 shares of our common stock at an
exercise price of $2.75 per share. Under a preexisting agreement with a
placement agent, a five-year warrant became exercisable with respect to 6,667
shares of our common stock at an exercise price of $2.00 per share. We also
issued to a placement agent a five-year warrant to purchase up to 20,000 shares
of our common stock at an exercise price of $2.75 per share. The fair value of
the warrant was estimated to be $24,800 using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%; expected volatility
of 75.4% risk free interest rate of 5.0%; and an expected life of five years.
Offering costs including cash commissions paid to placement agents of this
transaction were approximately $360,000.
Comprehensive Loss
During the three-month periods ended March 31, 2002 and 2001,
comprehensive loss was $6,442,893 and $5,520,968, respectively. For the
three-month periods ended March 31, 2002 and 2001, other comprehensive loss of
$137,429 and $42,999 consisted of unrealized losses on our marketable securities
and short-term investments that are held as available-for-sale.
6. EQUITY COMPENSATION
We did not grant any stock options during the three-month period ended
March 31, 2002.
NeoTherapeutics
As of March 31, 2002, we had 2,916,975 shares of our common stock
issuable under outstanding stock options at exercise prices ranging from $2.14
per share to $13.00 per share.
We granted 1,352,000 stock options to employees in 2000 with exercise
prices less than the fair value of our common stock at the measurement date. The
intrinsic value of the option grants amounting to $959,850 was recorded as
deferred compensation and is being amortized to expense over the vesting period,
in accordance with APB Opinion No. 25. During the three-month periods ended
March 31, 2002 and 2001, we recorded compensation expense of $42,311 and
$282,176 respectively, as a result of such amortization.
11
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2002
(UNAUDITED)
NeoGene
We issued 140,654 stock options of our majority owned subsidiary
NeoGene to our employees in 2001 with exercise prices less than the fair market
value of NeoGene's common stock at the measurement date. The intrinsic value of
the option grants amounting to $2,391,118 was recorded as deferred compensation
and is being amortized to expense over the vesting period, in accordance with
APB Opinion No. 25. During the three-month periods ended March 31, 2002 and
2001, we recorded compensation expense of $149,445 and $847,253 respectively, as
a result of such amortization.
As of March 31, 2002, we had 137,654 shares of NeoGene common stock
issuable under outstanding NeoGene stock options at an average exercise price of
$1.16. Of these NeoGene stock options, executive officers Alvin J. Glasky,
Ph.D., Rajesh Shrotriya, M.D., and Samuel Gulko held NeoGene stock options to
purchase up to 40,000, 10,000 and 20,000 shares of NeoGene common stock,
respectively, at an exercise price of $1.00 per share. In July 2001, we received
an outside appraisal that determined the fair value of NeoGene common stock as
of the time the NeoGene stock options were issued was $18 per share. On May 3,
2002, each executive officer, voluntarily and without any consideration, agreed
to cancel their NeoGene stock options. We have reported in our condensed
consolidated financial statements a total amount of deferred compensation
resulting from the grant of all NeoGene stock options of approximately
$2,391,000, of which approximately $1,190,000 is attributed to NeoGene stock
options formerly held by these executive officers. Approximately $1,698,000 was
included in deferred compensation in stockholder's equity at March 31, 2002, of
which approximately $818,000 was attributable to NeoGene stock options formerly
held by these executive officers. The accounting effect of the option
cancellation will be reflected in the second quarter of 2002 which will include
a reduction in compensation expense of approximately $74,000 per quarter over
the remaining vesting period that was associated with the NeoGene stock option
grants (see Footnote 11. Subsequent Events).
7. SEGMENT INFORMATION
We are organized in two business segments: pharmaceutical and
functional genomics. Our pharmaceutical business segment engages in the
discovery and development of novel drugs to treat significant medical diseases
or indications associated with nervous system disorders and cancer. Our
functional genomics business segment is involved in determining the function and
purpose of human genes for the purpose of discovering drugs that combat diseases
associated with these genes. The information shown below for our pharmaceutical
business segment represents the accounts of NeoTherapeutics, NeoOncoRx and all
of our wholly owned subsidiaries. The information shown below for our functional
genomics business segment represents the accounts of our majority owned
subsidiary NeoGene. Summary intercompany transactions and balances are not
shown. Intercompany transactions include primarily cash loaned and general and
administrative services rendered by our pharmaceutical segment to our functional
genomics segment. The allocation of general and administrative services is
carved out from our pharmaceutical business based on our best estimates but may
not be indicative of the cost of these services if they had been rendered by an
independent third party. The information below represents amounts that are
included in the measure of segment operating results that are reviewed by our
management.
THREE-MONTHS ENDED MARCH 31, 2002:
FUNCTIONAL
PHARMACEUTICAL GENOMICS CONSOLIDATED
-------------- -------- ------------
Licensing revenues (Domestic) $ - $ 20,001 $ 20,001
============ ============== =============
Loss from operations (1) (5,208,096) (1,174,537) (6,382,633)
============ ============== =============
BALANCE SHEET DATA AT MARCH 31, 2002:
Total assets (Domestic) $ 9,318,271 $ 1,604,352 $ 10,922,623
============ ============== =============
(1) We allocated approximately $360,000 of the pharmaceutical segment
general and administrative expenses to the functional genomics
segment general and administrative expenses.
12
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2002
(UNAUDITED)
8. LOSS PER SHARE
Basic and diluted loss per share for the three-month period ended March
31, 2002 and 2001 are computed using the weighted average common shares
outstanding during the period, respectively.
9. LITIGATION
We are involved in one matter of litigation that we consider ordinary
routine litigation incidental to our business. Our policy is to accrue during a
period, as a charge to operations, amounts related to legal matters if it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated, as required by SFAS No. 5, Accounting for Contingencies.
Although it is very difficult to accurately predict the ultimate outcome of
pending litigation and threatened litigation, we believe that it will not
materially affect our consolidated financial statements.
10. INCOME TAXES
We did not provide any current or deferred federal or state income tax
provision or benefit for the period presented because we have experienced
operating losses since our inception. A valuation allowance has been recognized
to fully offset the net deferred tax assets as of March 31, 2002 and December
31, 2001 as realization of such assets is uncertain.
11. SUBSEQUENT EVENTS
We are shifting our strategic focus from discovery and development of
neurology drugs to discovery and strategic alliances for these drug candidates.
Our oncology program will continue to seek in-licensing of drug candidates and
the further development and strategic alliances for these drug candidates. As a
result of these changes and the completion of a large Alzheimer's disease
clinical trial, we expect our burn rate to fall from approximately $7 million
per quarter to approximately $3.5 million per quarter over the next few months.
Cost savings will be principally due to reductions in clinical, research and
administrative personnel, the termination of a facility lease for office space
used to administer the Alzheimer's disease clinical trial, and the reduction of
expenses for the manufacturing of Neotrofin supplies. As a result of our shift
in strategic focus, we incurred a restructuring charge subsequent to March 31,
2002 of approximately $120,000 primarily related to personnel and severance
costs. As of May 15, 2002, we had paid cash of $67,000 related to this charge.
On May 1, 2002, we formed a joint venture with J.B. Chemicals &
Pharmaceuticals, Ltd. Of Mumbai, India ("JBCPL") and created a new entity,
NeoJB, LLC, a Delaware limited liability company ("NeoJB"). We will own 80% of
NeoJB and a JBCPL subsidiary will own 20% of NeoJB. The business operations of
NeoJB will initially be to seek U.S. regulatory approval on JBCPL pharmaceutical
products and to subsequently market these products in the U.S. and possibly
other countries. We will initially fund 100% of NeoJB's operating expenses. In
conjunction with the formation of NeoJB, we have agreed to grant a five-year
warrant to JBCPL to purchase up to 100,000 shares of our common stock at an
exercise price equal to the market price of our common stock on the date of
grant.
As of March 31, 2002, we had 137,654 shares of NeoGene common stock
issuable under outstanding NeoGene stock options at an average exercise price of
$1.16. Of these NeoGene stock options, executive officers Alvin J. Glasky,
Ph.D., Rajesh Shrotriya, M.D., and Samuel Gulko held NeoGene stock options to
purchase up to 40,000, 10,000 and 20,000 shares of NeoGene common stock,
respectively, at an exercise price of $1.00 per share. In July 2001, we received
an outside appraisal that determined the fair value of NeoGene common stock as
of the time the NeoGene stock options were issued was $18 per share. On May 3,
2002, each executive officer, voluntarily and without any consideration, agreed
to cancel their NeoGene stock options. We have reported in our condensed
consolidated financial statements a total amount of deferred compensation
resulting from the grant of all NeoGene stock options of approximately
$2,391,000, of which approximately $1,190,000 is attributed to NeoGene stock
options formerly held by these executive officers. Approximately $1,698,000 was
included in deferred compensation in stockholder's equity at March 31, 2002, of
which approximately $818,000 was attributable to NeoGene stock options formerly
held by these executive officers. The accounting effect of the option
cancellation will be reflected in the second quarter of 2002 which will include
a reduction in compensation expense of approximately $74,000 per quarter over
the remaining vesting period that was associated with the NeoGene stock option
grants.
13
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2002
(UNAUDITED)
On May 10, 2002, we received the first milestone payment of $250,000
from Pfizer Inc. under our technology out-license agreement dated March 15, 2001
with Pfizer. This milestone payment became due at the time Pfizer formally
approved the funding and implementation of a research program with respect to a
pharmaceutical lead based on our technology that we licensed to Pfizer. We do
not expect to receive any additional payment in 2002 under the March 15, 2001
agreement with Pfizer. We may receive one milestone payment in 2002 under the
November 8, 2001 agreement with Pfizer.
Subsequent to March 31, 2002 we were not in compliance with one of our
debt covenants under our Master Note and Security Agreement (the "Note") secured
by our lab equipment and computer software. Under the event of default, we have
not maintained the required minimum cash or equivalents balance. We are pursuing
remedies provided for under the Note, however, until a remedy is reached, which
may include payment of all amounts due under the Note, we have reclassified all
amounts due under the Note to a current liability, "Current portion of capital
lease obligations", in our condensed consolidated balance sheet as of March 31,
2002.
14
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. Our 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."
RELATED PARTY TRANSACTIONS
During 1987 and 1988, Alvin J. Glasky, Ph.D., our Chief Executive
Officer (or CEO) who is also a major stockholder of ours, loaned a total of
$270,650 to us for working capital purposes, of which $250,000 plus $2,000 of
accrued interest was canceled in December 1988 in exchange for the issuance of
28 Revenue Participation Units (or RPU's). The RPU's were converted into 112,000
shares of our common stock.
From 1989 through 1993, we borrowed an additional $757,900 from Dr.
Glasky, which, together with accrued interest of $300,404, aggregated $1,058,304
on December 31, 1993, at which time we issued 200,000 shares of common stock to
Dr. Glasky in exchange for cancellation of $500,000 of loans made to us. The
remaining $257,900 in principal and $300,404 of accrued interest were converted
to a $558,304 promissory note which, as amended from time to time, is currently
unsecured, and is payable upon demand. Interest is payable monthly at the annual
rate of 9%. The note was partially repaid in 2000 when we advanced cash to Dr.
Glasky to pay payroll taxes arising from his exercise of a warrant for 88,173
shares of common stock at $3.75 per share in August 2000. The note was partially
repaid in 2001. The note balance at March 31, 2002 was $135,574.
Assignment of Patents by Chief Executive Officer
Dr. Glasky assigned to us all of his rights in nine patents. In
connection with the assignment of these patents to us, we entered into royalty
agreements with Dr. Glasky (or CEO Agreements), which expire concurrently with
the expiration of the underlying patents and any additional patents derived from
the underlying patents. Under each of the CEO Agreements, as amended, we are
obligated to pay Dr. Glasky a royalty of two percent (2%) of all revenues
derived by us from the use and sale by us of any products or methods included in
the patents. Further, in the event that we terminate Dr. Glasky's employment
without cause, the royalty rate under each CEO Agreement will increase from two
percent (2%) to five percent (5%). Finally, in the event of Dr. Glasky's death,
the family or estate is entitled to continue to receive under each CEO Agreement
royalties at a rate of two percent (2%) for the duration of the respective CEO
Agreement.
McMaster University Agreement
On July 10, 1996, we entered into a license agreement with McMaster
University (or McMaster) that allows us the use of certain technologies
developed by McMaster covered in the patents filed jointly by us and McMaster
(US Patent Nos. 5,447,939, 5,801,184, 6,027,936, 6,338,963, and 6,350,752), all
of which are also encumbered by CEO Agreements. Under the agreement, we paid a
one time licensing fee of $15,000 and are obligated to pay to McMaster an annual
royalty of five percent (5%) on net sales of products containing compounds
developed by McMaster. In July 1997, we began, and have continued making, annual
minimum royalty payments of $25,000.
Director and Officer Notes for the Exercise of Equity Instruments
We made loans to certain of our directors and officers for the exercise
of stock options or the purchase of stock. We loaned $286,560 in 1998, and
$435,649 in 2000. During 2000, one individual paid $61,560 back to us and during
2001, in connection with the settlement of a litigation matter, we forgave a
$45,000 note to one individual. At March 31, 2002, $615,649 remained due to us
from directors and officers for the purchase of shares of common stock or the
exercise of stock options. These notes accrue interest at rates between 7% and
9% and are classified as an offset to stockholders' equity.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including cash
requirements resulting from estimating: planned research & development
activities and general and administrative requirements, the retention of key
personnel, certain clinical trial results, maintained market need for our
product candidates and other major business assumptions.
15
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
We believe that our most significant accounting policies that affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements are:
Basis of Presentation
Our independent accountants issued a report on our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2001, that included an explanatory paragraph regarding our
ability to continue as a going concern. However, because we believe that we can
continue to operate as a going concern, we have prepared the accompanying
unaudited condensed consolidated financial statements under the assumption that
we are a going concern. Accordingly, they do not include adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that would be required if we were not able to
continue as a going concern. Additionally, the accompanying unaudited condensed
consolidated financial statements are prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instruction to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002. The balance
sheet at December 31, 2001 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2001.
Liquidity and Going Concern
The preliminary results of a clinical trial on our lead drug candidate
Neotrofin for the treatment of patients with mild to moderate Alzheimer's
disease indicated that tests of the patients taking our drug did not reach the
predetermined level of statistical significance when compared to the placebo
group of patients. We will await further analysis, as well as results from our
ongoing phase 2 studies of Neotrofin in other indications and the conclusion of
discussions with potential strategic alliance partners, prior to moving forward
with additional clinical studies of Neotrofin. No further resources will be used
for the development of Neotrofin in the treatment of patients with Alzheimer's
disease.
We are shifting our strategic focus from discovery and development of
neurology drugs to discovery and strategic alliances for these drug candidates.
Our oncology program will continue to seek in-licensing of drug candidates and
the further development and strategic alliances for these drug candidates. As a
result of these changes and the completion of a large Alzheimer's disease
clinical trial, we expect our burn rate to fall from approximately $7 million
per quarter to approximately $3.5 million per quarter over the next few months.
Cost savings will be principally due to reductions in clinical, research and
administrative personnel, the termination of a facility lease for office space
used to administer the Alzheimer's disease clinical trial, and the reduction of
expenses for the manufacturing of Neotrofin supplies.
As shown in the accompanying financial statements, we continue to incur
significant losses and negative cash flow from operations. From our inception on
June 15, 1987 through March 31, 2002, we incurred a cumulative loss of
approximately $130.4 million. During the three-month period ended March 31,
2002, we incurred a loss of approximately $6.3 million. Our cash burn during the
three-month period ended March 31, 2002 was approximately $7 million. We
anticipate that our cash burn will be reduced to approximately $3.5 million,
which should begin to take effect during the three-month period ending June 30,
2002. At March 31, 2002 we had cash, cash equivalents, marketable securities and
short-term investments of approximately $5.8 million. Therefore, we will need to
raise additional funds by July 2002, or sooner, through public or private
financings, including equity financings, or through other arrangements, to
continue operating our businesses, including out-licensing our technology, to
meet our short-term and long-term cash needs. Additionally, we continue to seek
additional sources of financing at the most favorable terms available to us.
Principles of Consolidation
Our consolidated financial statements include our accounts including
those of our wholly owned and majority owned subsidiaries. We eliminated all
significant intercompany accounts and transactions.
16
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
of commercial paper and demand notes with original maturities of 90 days or
less.
Marketable Securities and Short-Term Investments
We classify investments in debt and equity securities among three
categories: held-to-maturity, trading, and available-for-sale. As of March 31,
2002, all of our debt and equity securities holdings were categorized as
available-for-sale. We carry available-for-sale securities at fair value, with
unrealized gains and losses included as a component of accumulated other
comprehensive income (loss) in stockholders' equity. We use quoted market prices
to determine the fair value of these investments.
Prepaid Expenses and Refundable Deposits
Prepaid expenses are deferred and later recorded as an expense during
the period benefited. Deposits are expected to become refundable at a later
date.
Property and Equipment Purchased or Leased
We carry property and equipment at historical cost, less accumulated
depreciation and amortization. When property and equipment are disposed of, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives:
Equipment 5 to 7 years
Leasehold Improvements The shorter of the estimated useful life or lease term
Research and Development
We expense all research and development activity costs in the period
incurred.
Stock-Based Compensation
We account for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and have adopted the disclosure-only alternative of SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). Options granted to
non-employees, as defined, have been accounted for at fair market value in
accordance with SFAS 123.
Basic and Diluted Net Loss Per Share
We calculate basic and diluted net loss per share using: the weighted
average number of common shares outstanding and the net loss, less preferred
stock dividends, during each year, respectively. We exclude all antidilutive
common stock equivalents from the basic and diluted net loss per share
calculation.
Use of Estimates
The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including cash
requirements resulting from estimating: planned research & development
activities and general and administrative requirements, the retention of key
personnel, certain clinical trial results, maintained market need for our
product candidates and other major business assumptions. Actual results could
differ from our estimates.
We have estimated that our current working capital plus funds raised or
funds we are seeking to raise subsequent to the three-month period ended March
31, 2002 will be sufficient for us to continue as a going concern and therefore
have prepared the financial statements on that basis. That basis includes
estimating future cash requirements of planned research and development
activities and general and administrative
17
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
requirements, the retention of key personnel, certain clinical trial results,
maintained market need for our product candidates, and other major business
assumptions. If these estimates prove to be wrong, we may not be able to
continue as a going concern.
Revenue Recognition
We recognize revenue from each sale contract over each sale contract's
operative life and after all contingencies related to us being due receipt of
such revenue are eliminated.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement bases
and tax bases of existing assets and liabilities. We recorded a valuation
allowance equal to our net deferred tax asset.
RESULTS OF OPERATIONS
From the inception of the Company in 1987 through March 31, 2002, we
incurred a cumulative net loss of approximately $130.4 million. We expect that
our operating expenses will decrease in the immediate future as compared to the
same period last year due to the shift in our strategic focus. If we are able to
raise sufficient additional funds, further discovery and maintenance of our
neurology drug candidate platforms and development of our in-licensed
anti-cancer drug candidates will likely cause our operational expenses to
increase over the next several years. 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. Following is
segment financial information related to our pharmaceutical business and our
functional genomics business:
PHARMACEUTICAL BUSINESS FUNCTIONAL GENOMICS BUSINESS CONSOLIDATED
--------------------------------- -------------------------------- --------------------------------
THREE-MONTHS ENDED MARCH 31, THREE-MONTHS ENDED MARCH 31, THREE-MONTHS ENDED MARCH 31,
--------------- -------------- -------------- -------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------------- -------------- -------------- -------------- -------------- --------------
Revenues - - 20,001 - 20,001 -
Research and Development 4,201,164 2,855,601 722,959 951,334 4,924,123 3,806,935
General and
Administrative 1,001,932 1,463,209 476,579 337,515 1,478,511 1,800,724
Interest Income, net 3,838 105,264 73,331 121,926 77,169 227,190
Pharmaceutical Business
We had no revenues during the three-month periods ended March 31, 2002
and 2001.
Research and development expenses for the three-month period ended
March 31, 2002 compared to 2001 increased due primarily to the costs related to
our clinical trial of Neotrofin in the treatment of patients with Alzheimer's
disease that caused an increase in outside clinical research site costs and
increased salary and related benefit costs due to an increase in research and
development personnel, salary and related benefit costs and general business
expenses related to the development of our oncology related drug candidates, and
an initial in-license fee expensed in 2001 associated with one of our
in-licensed oncology drug candidates. These increases were partially offset by
decreases in pre-clinical costs related to our neurology drug candidates due to
the completion of many of these activities, consultant expense caused by the
additional research and development personnel performing tasks previously
performed by consultants and research grant expense due to a decrease in the
commitments made by us.
General and administrative expenses for the three-month period ended
March 31, 2002 compared to 2001 decreased due primarily to decreases in legal
and financial printing fees, consulting expenses and investor relations outside
expenses, travel and lodging expenses, officer relocation expenses, and an
increase business activities in our functional genomics business that caused an
increase in the amount of general and administrative expense allocated to our
functional genomics business.
18
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Functional Genomics Business
Revenue for the three-month period ended March 31, 2002 resulted from
technology out-licensing agreements entered into during the second and fourth
quarter of 2001. We received initial payments of $300,000 aggregate cash
proceeds from entering into these agreements. In accordance with our revenue
recognition policy, these initial payments are being recognized straight-line
over a three-year period from the date of inception of the each respective
agreement.
Research and development expenses for the three-month period ended
March 31, 2002 compared to 2001 decreased due primarily to a lower compensation
charge associated with stock and stock options granted to employees and officers
below fair market value. The decrease in the compensation charge resulted from a
non-recurring charge during the three-month period ended March 31, 2001 related
to the grant of common stock to one individual and from a decrease in deferred
compensation related to stock options granted to employees and officers,
including Alvin J. Glasky, Ph.D. and Rajesh Shrotriya, M.D., below fair market
value at an exercise price of $1.00 per share. The decrease in deferred
compensation resulted from us receiving an appraisal in July 2001 that valued
NeoGene common stock at $18 per share, which was $27 less per share that the
amount estimated in the three-month period, ended March 31, 2001. These
decreases were partially offset by increases in occupancy and facility costs due
to the building sub-lease entered into in November 2001, depreciation related to
equipment and leasehold improvements that were acquired during 2001, grant
expense caused by an increase in the commitments made by us, and lab supplies
and outside contract research due to increased business activities in 2002
compared to the same period in 2001.
General and administrative expenses for the three-month period ended
March 31, 2002 compared to 2001 increased due primarily to increased business
activities that caused an increase in the allocated expenses from
NeoTherapeutics representing primarily salary and related personnel expenses.
This increase was partially offset by a decrease in deferred compensation
related to stock options granted to employees and officers, including Alvin J.
Glasky, Ph.D., Rajesh Shrotriya, M.D., and Samuel Gulko, below fair market value
at an exercise price of $1.00 per share. The decrease in deferred compensation
resulted from us receiving an appraisal in June 2001 that valued NeoGene common
stock at $18 per share, which was $27 less per share that the amount estimated
in the three-month period, ended March 31, 2001.
Net interest income for the three-month period ended March 31, 2002
compared to 2001 decreased primarily due to a decrease in interest income
resulting from lower average marketable security balances and lower interest
rates.
SUBSEQUENT EVENTS AFFECTING FUTURE RESULTS
We are shifting our strategic focus from discovery and development of
neurology drugs to discovery and strategic alliances for these drug candidates.
Our oncology program will continue to seek in-licensing of drug candidates and
the further development and strategic alliances for these drug candidates. As a
result of these changes and the completion of a large Alzheimer's disease
clinical trial, we expect our burn rate to fall from approximately $7 million
per quarter to approximately $3.5 million per quarter over the next few months.
Cost savings will be principally due to reductions in clinical, research and
administrative personnel, the termination of a facility lease for office space
used to administer the Alzheimer's disease clinical trial, and the reduction of
expenses for the manufacturing of Neotrofin supplies. As a result of our shift
in strategic focus, we incurred a restructuring charge subsequent to March 31,
2002 of approximately $120,000 primarily related to personnel and severance
costs. As of May 15, 2002, we had paid cash of $67,000 related to this charge.
On May 1, 2002, we formed a joint venture with J.B. Chemicals &
Pharmaceuticals, Ltd. Of Mumbai, India ("JBCPL") and created a new entity,
NeoJB, LLC, a Delaware limited liability company ("NeoJB"). We will own 80% of
NeoJB and a JBCPL subsidiary will own 20% of NeoJB. The business operations of
NeoJB will initially be to seek U.S. regulatory approval on JBCPL pharmaceutical
products and to subsequently market these products in the U.S. and possibly
other countries. We will initially fund 100% of NeoJB's operating expenses. In
conjunction with the formation of NeoJB, we have agreed to grant a five-year
warrant to JBCPL to purchase up to 100,000 shares of our common stock at an
exercise price equal to the market price of our common stock on the date of
grant.
As of March 31, 2002, we had 137,654 shares of NeoGene common stock
issuable under outstanding NeoGene stock options at an average exercise price of
$1.16. Of these NeoGene stock options, executive officers Alvin J. Glasky,
Ph.D., Rajesh Shrotriya, M.D., and Samuel Gulko held NeoGene stock options to
purchase up to 40,000, 10,000 and 20,000 shares of NeoGene common stock,
respectively, at an exercise price of $1.00 per share. In July 2001, we received
an appraisal that determined the fair value of NeoGene common stock as of the
time the NeoGene stock options were issued was $18.00 per share. On May 3, 2002,
each executive officer, voluntarily and without any consideration, agreed to
cancel their NeoGene stock options. We have reported in our condensed
consolidated financial statements a total amount of
19
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
deferred compensation resulting from the grant of all NeoGene stock options of
approximately $2,391,000, of which approximately $1,190,000 is attributed to
NeoGene stock options formerly held by these executive officers. Approximately
$1,698,000 was included in deferred compensation in stockholder's equity at
March 31, 2002, of which approximately $818,000 was attributable to these
cancelled NeoGene stock options. The accounting effect of the option
cancellation will be reflected in the second quarter of 2002 which will include
a reduction in compensation expense of approximately $74,000 per quarter over
the remaining vesting period that was associated with the NeoGene stock option
grants.
On May 10, 2002, we received the first milestone payment of $250,000
from Pfizer Inc. under our technology out-license agreement dated March 15, 2001
with Pfizer. This milestone payment became due at the time Pfizer formally
approved the funding and implementation of a research program with respect to a
pharmaceutical lead based on our technology that we licensed to Pfizer. We do
not expect to receive any additional payment in 2002 under the March 15, 2001
agreement with Pfizer. We may receive one milestone payment in 2002 under the
November 8, 2001 agreement with Pfizer.
Subsequent to March 31, 2002 we were not in compliance with one of our
debt covenants under our Master Note and Security Agreement (the "Note") secured
by our lab equipment and computer software. Under the event of default, we have
not maintained the required minimum cash or equivalents balance. We are pursuing
remedies provided for under the Note, however, until a remedy is reached, which
may include payment of all amounts due under the Note, we have reclassified all
amounts due under the Note to a current liability, "Current portion of capital
lease obligations", in our condensed consolidated balance sheet as of March 31,
2002.
FINANCIAL CONDITION
From inception through March 31, 2002, we financed our operations
primarily through sales of securities, borrowings, grants, deferred payment of
salaries and other expenses from related parties and payments received from
technology out-license agreements.
At March 31, 2002, net working capital amounted to approximately $2.1
million. This amount included cash and cash equivalents of approximately $5.6
million and marketable securities and short-term investments of approximately
$0.2 million. In comparison, at December 31, 2001, we had net working capital of
approximately $2.8 million, which included cash and cash equivalents of
approximately $0.75 million and short-term investments of approximately $6.4
million. The $0.7 million decrease in net working capital during the three-month
period ended March 31, 2002 is attributable primarily to the loss of $6.3
million, less non-cash compensation and other items of approximately $0.4
million. Additionally, we used $0.6 million to pay capital lease obligations and
other items. These uses of working capital were offset by net cash proceeds of
approximately $5.8 million from the sale of our common stock.
We are in the development-stage and devote substantially all of our
efforts to research and development. We incurred cumulative losses of
approximately $130.4 million through March 31, 2002, and expect to incur
substantial losses over the next several years. We have historically funded our
operations with funds from public offerings and private placement equity
offerings. We will require substantial additional funds by July 2002, or sooner,
in order to continue and 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.
20
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
CONTRACTUAL AND COMMERCIAL OBLIGATIONS
Debt and Capital Leases
Future installments of debt principal on capital lease obligations are
as follows:
YEAR ENDING
DECEMBER 31: AMOUNT
----------------- ------------
2002 663,948
2003 46,901
---------
$ 710,849
=========
Facility, Property and Equipment Operating Leases
Minimum lease requirements for the remainder of the year ending
December 31, 2002 and for the years ending December 31, 2003 through 2006 under
the property and equipment leases are as follows:
YEAR ENDING
DECEMBER 31: AMOUNT
----------------- -------------
2002 $ 1,070,100
2003 944,200
2004 681,600
2005 405,800
2006 171,500
-----------
$ 3,273,200
===========
Research and Fellowship Grants
At March 31, 2002, we had committed to pay approximately $280,000
during 2002 and an aggregate of approximately $528,000 from 2003 through 2005,
principally to the University of California, Irvine to conduct general
scientific research programs.
Joint Venture
In September 1999, we entered into a three-year joint venture agreement
with the University of California, Irvine (or UCI) to assist in the marketing
and commercialization of discoveries made by certain members of its functional
genomics science department. We are obligated under the agreement to fund the
joint venture for three years with minimum payments of $2.0 million over the
life of the agreement. No obligation remains under this minimum obligation. The
agreement is cancelable by either UCI or us upon giving thirty days notice. We
have the right of first refusal to acquire the licensing rights to any new
discoveries and UCI retains ownership rights to all discoveries under the
agreement.
21
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
FINANCIAL MARKET RISKS
We are exposed to certain market risks associated with interest rate
fluctuations and credit risk on our marketable securities and borrowing
arrangements. All investments in marketable securities and borrowing
arrangements are entered into for purposes other than trading. Our primary
objective of our investment activities is to preserve principal while at the
same time maximizing yields without significantly increasing risk. We do not
utilize hedging contracts or similar instruments.
Our investments during the three-month period ended March 31, 2002 and
as of March 31, 2002 are fixed rate, short-term corporate and government notes
and bonds, which are available for sale. Because the interest rates are fixed,
changes in interest rates affect the fair value of these investments but do not
affect the interest earnings. Because these financial instruments are considered
"available for sale," all changes in fair value is recorded in stockholders'
equity as "Accumulated other comprehensive income (loss)" until the investment
is either sold or matures, at which time the gain or loss, if any, is recognized
as a realized gain or loss in the statement of operations. If a 10% change in
interest rates were to have occurred on March 31, 2002, any decline in the fair
value of our investments would not be material. In addition, we are exposed to
certain market risks associated with corporations' credit ratings of which we
have purchased corporate paper (or bonds). If these companies were to experience
a significant detrimental change in their credit ratings, the fair market value
of such corporate paper may significantly decrease. If these companies were to
default on such corporate paper, we may lose part or all of our principal. We
believe that we effectively manage this market risk by diversifying our
corporate paper investments by purchasing a few bonds of many large, well-known,
companies in a variety of industries.
Our primary exposures relate to (1) interest rate risk on borrowings,
(2) our ability to pay or refinance our borrowings at maturity at market rates,
(3) interest rate risk on our investment portfolio, and (4) credit risk of the
companies' bonds in which we invest. We manage interest rate risk on our
investment portfolio by matching scheduled investment maturities with 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.
Our borrowings bear interest at fixed rates. Changes in interest rates
affect the fair value of our borrowings, but do not have an impact on interest
expense. Because of the relatively short-term nature of our borrowings,
fluctuations in fair value are not deemed to be material.
BUSINESS OUTLOOK
Our future operating results are highly uncertain, and the following
factors should be carefully reviewed in addition to the other information and
references contained in this quarterly report on Form 10-Q:
Pharmaceutical Business
The preliminary results of a clinical trial on our lead drug candidate
Neotrofin for the treatment of patients with mild to moderate Alzheimer's
disease indicated that tests of the patients taking our drug did not reach the
predetermined level of statistical significance when compared to the placebo
group of patients. We will await further analysis, as well as results from our
ongoing phase 2 studies of Neotrofin in other indications and the conclusion of
discussions with potential strategic alliance partners, prior to moving forward
with additional clinical studies of Neotrofin. No further resources will be used
for the development of Neotrofin in the treatment of patients with Alzheimer's
disease.
We are shifting our strategic focus from discovery and development of
neurology drugs to discovery and strategic alliances for these drug candidates.
Our oncology program will continue to seek in-licensing of drug candidates and
the further development and strategic alliances for these drug candidates. As a
result of these changes and the completion of a large Alzheimer's disease
clinical trial, we expect our burn rate to fall from approximately $7 million
per quarter to approximately $3.5 million per quarter over the next few months.
Cost savings will be principally due to reductions in clinical, research and
administrative personnel, the termination of a facility lease for office space
used to administer the Alzheimer's disease clinical trial, and the reduction of
expenses for the manufacturing of Neotrofin supplies.
Our drug platforms, drug candidates, target indications and phase of
development based on our shift in strategic focus are summarized in the
following table:
22
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
NERVOUS SYSTEM
--------------
DRUG PLATFORM DRUG CANDIDATE TARGET INDICATION PHASE OF DEVELOPMENT/STATUS
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
COGNITION PLATFORM Neotrofin Alzheimer's disease Phase 2/3
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
AIT-034 Dementia Pre-clinical: IND filed in 2001
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
NEO-339 Mild cognitive Pre-clinical: IND expected to be filed in
impairment and 2002/2003*
attention deficit
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Novel series of Cognitive and Pre-clinical
compounds from attentional disorders
which a lead
candidate is to be
selected
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
PSYCHOSIS PLATFORM NEO-356 series Psychosis, Pre-clinical: Development candidate(s) expected
schizophrenia, mood to be selected in 2002
disorders
Novel series of Psychosis, Pre-clinical
compounds from schizophrenia, mood
which lead disorders
candidate(s) are to
be selected
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
NEUROREGENERATION PLATFORM Neotrofin Spinal cord injury Phase 1/2: Phase 1/2 study in progress
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Parkinson's disease Phase 2: Phase 2 study in progress
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Peripheral neuropathy Phase 2: Two studies are in progress for
the prevention and treatment of
chemotherapy-induced peripheral
neuropathy
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Other Pre-clinical
neurodegenerative
and psychiatric
diseases
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Novel series of Neurodegenerative Pre-clinical
compounds from diseases
which a lead
candidate is to be
selected
- ---------------------------------------------------------------------------------------------------------------------------------
ONCOLOGY
--------
DRUG PLATFORM DRUG CANDIDATE TARGET INDICATION PHASE OF DEVELOPMENT/STATUS
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
ONCOLOGY PLATFORM Satraplatin Prostate cancer Phase 3: Study expected to begin in 2002*
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Neoquin Bladder cancer Phase 2: Study in progress
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Radiation Phase 1/2: Study expected to begin in 2003*
sensitization
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
Elsamitrucin Non-Hodgkin's Phase 2: Study expected to begin in
lymphoma 2002/2003*
- ------------------------------- --------------------- ---------------------- ----------------------------------------------------
* - Assumes availability of financial resources.
NERVOUS SYSTEM
We are completing the ongoing clinical trials for Neotrofin in
Parkinson's disease, spinal cord injury, treatment of chemotherapy-induced
neuropathy, and prevention of chemotherapy-induced neuropathy. Depending upon
the results of these clinical trials, we will determine whether to support any
more clinical studies or await strategic alliances with other pharmaceutical
companies. We do not intend to conduct clinical trials for our other neurology
drug candidates unless financial resources become available.
23
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
We are working towards developing strategic alliances with other
pharmaceutical companies to further develop our neurology compounds and are
currently in negotiations with several potential partners. We believe that if we
are successful in our negotiations and are able to establish a strategic
alliance for one or more of our neurology compounds, we may receive initial and
milestone payments related to further product candidate development and rights
to royalty payments on product sales if the compounds are ever approved for
marketing and are sold. However, no such strategic alliances have been
established at this time.
ONCOLOGY
We do not intend to initiate new clinical trials on our lead
anti-cancer drug candidate satraplatin and our other oncology related drug
candidates in 2002 unless financial resources become available. All of these
drugs are in the late stage of development.
We are working towards developing strategic alliances with other
pharmaceutical companies to further develop our anti-cancer compounds and are
currently in negotiations with several potential strategic alliance partners. We
believe that if we are successful in our negotiations and are able to establish
a strategic alliance for one or more of our anti-cancer compounds, we may
receive initial and milestone payments related to further product candidate
development and rights to royalty payments on product sales if the compounds are
ever approved for marketing and are sold. However, no such strategic alliances
have been established and we cannot be certain that we will be able to
establish any.
Functional Genomics Business
NeoGene has two agreements with Pfizer for out-licensing two of our
G-protein-coupled receptor system discoveries.
On May 10, 2002 we received the first milestone payment of $250,000
from Pfizer Inc. under our technology out-license agreement dated March 15, 2001
with Pfizer Inc. (the "Agreement"). This milestone payment became due at the
time Pfizer formally approved the funding and implementation of a research
program with respect to a pharmaceutical lead based on the technology that we
licensed to Pfizer, and as described in the Agreement. In addition, the scope of
this agreement may be expanded. The second Pfizer agreement, dated November 8,
2001, may also reach the first milestone during 2002. We anticipate that we will
enter into additional agreements with pharmaceutical or biotechnology companies
during 2002 whereby they would obtain rights to certain of the proprietary
receptor/ligand systems we have discovered.
Additional types of agreements that we anticipate entering into this
year are strategic alliances under collaborative research agreements whereby we
will determine the natural ligands of a company's proprietary receptors. This
type of agreement is anticipated to involve ongoing research funding for several
years. We may also provide cell lines and clones to certain companies for
compensation.
RISK FACTORS
The risk factors described below are not intended to be complete. A
more comprehensive list of factors that could affect our future operating
results can be found in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, in "Item 1. Description of Business" under the caption "Risk
Factors." Failure to satisfactorily achieve any of our objectives or avoid any
of the below or other risks would likely have a material adverse effect on our
business and results of operations.
As shown in the accompanying condensed consolidated financial
statements, we continue to incur significant losses and negative cash flow from
operations. From our inception (June 15, 1987) through March 31, 2002, we
incurred a cumulative loss of approximately $130.4 million. During the
three-month period ended March 31, 2002, we incurred a loss of approximately
$6.3 million. Our cash burn during the three-month period ended March 31, 2002
was approximately $7 million. We anticipate that our cash burn will be reduced
to approximately $3.5 million, which should begin to take effect during the
three-month period ending June 30, 2002. At March 31, 2002 we had cash, cash
equivalents, marketable securities and short-term investments of approximately
$5.8 million. Therefore, we will need to raise additional funds by July 2002, or
sooner, through public or private financings, including equity financings, or
through other arrangements, to continue operating our businesses, including
out-licensing our technology, to meet our short-term and long-term cash needs.
Additionally, we continue to seek additional sources of financing at the most
favorable terms available to us. We do not know whether or not we will be able
to secure sufficient new funds to continue our businesses. If we are not able to
obtain sufficient funding within the time frame estimated by us, we will have to
take other actions that we otherwise would not take, such as selling some or all
of our intellectual property rights and restructuring our operations or a
combination of these activities.
24
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
Our need for additional funding is 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,
availability, and terms of such funds have not been determined and there is no
assurance that we will be able to obtain any funding on acceptable terms or at
all.
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, we have recently
announced that our lead product Neotrofin had been unsuccessful in clinical
trials for its primary indication, for the treatment of patients with mild to
moderate Alzheimer's disease, and 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.
Our business strategy requires that we establish and maintain good
strategic alliances. Currently we are seeking strategic alliances but do not
have any. We have no experience in establishing and maintaining strategic
alliances and we cannot give any assurance that we will be successful in
establishing one or, if we do establish one or more relationships, be able to
maintain the relationship(s) in a manner that is beneficial to us.
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.
We are shifting our strategic focus from discovery and development of
neurology drugs to discovery and strategic alliances for these drug candidates.
Our oncology program will continue to seek in-licensing of drug candidates and
the further development and strategic alliances for these drug candidates. As a
result of these changes we made reductions in clinical, administrative and
research personnel. We believe that we retained the correct and a level of
personnel that are key to our success in executing our strategic focus. We may
be wrong and later require additional personnel or personnel with skills
different than those that we retained.
25
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations", subheading "Financial Market Risks,"
above.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in one matter of litigation that we consider ordinary
routine litigation incidental to our business. Our policy is to accrue
during a period, as a charge to operations, amounts related to legal
matters if it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated, as required by SFAS No. 5,
Accounting for Contingencies. Although it is very difficult to
accurately predict the ultimate outcome of pending litigation and
threatened litigation, we believe that it will not materially affect our
consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION (NOT PREVIOUSLY REPORTED IN A FORM 8-K)
None
26
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1 Form of Warrant issued by the Registrant to certain purchasers
and finders, dated as of March 13, 2002 and March 15, 2002, to
purchase up to an aggregate of 795,000 shares of our common
stock. (Filed as Exhibit 4.47 to Form 10-K for the fiscal year
ended December 31, 2001, as filed with the Securities and
Exchange Commission on April 2, 2002, and incorporated herein
by this reference.)
10.1 Form of Securities Purchase Agreement, by and between the
Registrant and certain investors, dated as of March 12, 2002 and
March 15, 2002, for the purchase of an aggregate of 3,100,000
shares of our common stock. (Filed as Exhibit 10.48 to Form 10-K
for the fiscal year ended December 31, 2001, as filed with the
Securities and Exchange Commission on April 2, 2002, and
incorporated herein by this reference.)
10.2 +* Drug Pfinder Agreement dated as of March 15, 2001, by and
between NeoGene Technologies, Inc. and Pfizer Inc.
10.3 +* Drug Pfinder Agreement dated as of November 8 2001, by and
between NeoGene Technologies, Inc. and Pfizer Inc.
10.4 Letter Agreement dated as of March 11, 2002, by and between the
Registrant and Brighton Capital, Ltd. (Filed as Exhibit 1047 to
Form 10-K for the fiscal year ended December 31, 2001, as filed
with the Securities and Exchange Commission on April 2, 2002, and
incorporated herein by this reference.)
+ Filed herewith
* Confidential portions omitted and filed separately with the U.S. Securities
and Exchange Commission pursuant to Rule 24b-2 promulgated under the
Securities and Exchange Act of 1934, as amended.
27
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
(b) Reports on Form 8-K
1. We filed a Report on Form 8-K on March 14, 2002 to report a press release
issued on March 13, 2002 which announced the completion of an offering of
2,575,000 shares of our common stock at a negotiated purchase price per
share of $2.00 and warrants to purchase up to 643,750 shares of our common
stock at a purchase price per share of $2.75 to 14 investors for aggregate
consideration of $5,150,000. The shares and warrants were issued pursuant
to an effective shelf registration statement on Form S-3, file number
333-53108.
2. We filed a Report on Form 8-K on March 27, 2002 to report that on March
15, 2002, we agreed to issue 525,000 shares of our common stock and
warrants to purchase up to 131,250 shares of our common stock to investors
on the same term as the offering on March 13, 2002, for aggregate
consideration of $1,050,000. The shares and warrants were issued pursuant
to an effective shelf registration statement on Form S-3, file number
333-53108.
28
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
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 15, 2002 By: /s/ Samuel Gulko
--------------------------------------------------
Samuel Gulko, Senior Vice President Finance,
Chief Financial Officer, Secretary and Treasurer
(Principal Accounting and Financial Officer)
29
NEOTHERAPEUTICS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
Exhibit Index:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1 Form of Warrant issued by the Registrant to certain purchasers
and finders, dated as of March 13, 2002 and March 15, 2002, to
purchase up to an aggregate of 795,000 shares of our common
stock. (Filed as Exhibit 4.47 to Form 10-K for the fiscal year
ended December 31, 2001, as filed with the Securities and
Exchange Commission on April 2, 2002, and incorporated herein
by this reference.)
10.1 Form of Securities Purchase Agreement, by and between the
Registrant and certain investors, dated as of March 12, 2002 and
March 15, 2002, for the purchase of an aggregate of 3,100,000
shares of our common stock. (Filed as Exhibit 10.48 to Form 10-K
for the fiscal year ended December 31, 2001, as filed with the
Securities and Exchange Commission on April 2, 2002, and
incorporated herein by this reference.)
10.2 +* Drug Pfinder Agreement dated as of March 15, 2001, by and
between NeoGene Technologies, Inc. and Pfizer Inc.
10.3 +* Drug Pfinder Agreement dated as of November 8 2001, by and
between NeoGene Technologies, Inc. and Pfizer Inc.
10.4 Letter Agreement dated as of March 11, 2002, by and between the
Registrant and Brighton Capital, Ltd. (Filed as Exhibit 1047 to
Form 10-K for the fiscal year ended December 31, 2001, as filed
with the Securities and Exchange Commission on April 2, 2002, and
incorporated herein by this reference.)
+ Filed herewith
* Confidential portions omitted and filed separately with the U.S. Securities
and Exchange Commission pursuant to Rule 24b-2 promulgated under the
Securities and Exchange Act of 1934, as amended.
30