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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-28782
NEOTHERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 788-6700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Class Outstanding at August 10, 2001
--------------------------- ------------------------------
Common Stock, $.001 par value 20,777,181
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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 June 30, 2001
(unaudited) and December 31, 2000 ........................................ 4
Condensed Consolidated Statements of Operations for the three months
ended June 30, 2001 and 2000 (unaudited) ...................................... 5
Condensed Consolidated Statements of Operations for the six months
ended June 30, 2001 and 2000 and for the period from
inception (June 15, 1987) to June 30, 2001 (unaudited) ................... 6
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000 and for the period from inception
(June 15, 1987) to June 30, 2001 (unaudited) ............................. 7
Notes to Condensed Consolidated Financial Statements .......................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL POSITION ............................................. 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................... 20
PART II. OTHER INFORMATION ............................................................. 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ..................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................... 22
ITEM 5. OTHER INFORMATION ............................................................. 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................................. 25
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NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by
NeoTherapeutics, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States has been condensed
or omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The Company suggests that you read the financial statements included
herein in conjunction with the audited financial statements and notes thereto
included in Amendment No. 1 on Form 10-K/A to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, as filed with the
Securities and Exchange Commission.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
June 30, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,213,938 $ 6,158,375
Marketable securities and short-term investments 8,392,910 5,311,215
Other receivables 483,169 424,059
Prepaid expenses and refundable deposits 344,426 418,010
------------- -------------
Total current assets 19,434,443 12,311,659
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 4,014,463 3,412,932
Leasehold improvements 1,886,055 1,853,227
Accumulated depreciation and amortization (2,214,846) (1,850,076)
------------- -------------
Property and equipment, net 3,685,672 3,416,083
------------- -------------
OTHER ASSETS 105,527 53,242
------------- -------------
Total assets $ 23,225,642 $ 15,780,984
============= =============
LIABILITIES , MINORITY INTEREST AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,866,340 $ 3,708,244
Accrued payroll and related taxes 412,872 265,383
Note payable to related party 135,574 285,574
Current portion of long-term debt 706,626 850,871
------------- -------------
Total current liabilities 4,121,412 5,110,072
OTHER LIABILITIES:
Long-term debt, net of current portion 277,470 474,004
Deferred revenue and other 183,904 86,532
------------- -------------
Total liabilities 4,582,786 5,670,608
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 6,014,381 7,280,111
CONVERTIBLE REDEEMABLE PREFERRED STOCK
(Liquidation preference of $2,000,000) 1,773,111 --
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share, 5,000,000
shares authorized none issued and outstanding -- --
Common stock, par value $0.001 per share,
50,000,000 shares authorized:
Issued and outstanding, 20,777,181 and 13,307,227 shares
at June 30, 2001 and December 31, 2000, respectively 120,447,857 100,612,570
Deferred compensation expense (564,167) (959,850)
Unrealized (losses) gains on available-for-sale securities (84,609) 763
Deficit accumulated during the development stage (108,943,717) (96,823,218)
------------- -------------
Total stockholders' equity 10,855,364 2,830,265
------------- -------------
Total liabilities, minority interest and
stockholders' equity $ 23,225,642 $ 15,780,984
============= =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Three Months Three Months
Ended Ended
June 30, June 30,
2001 2000
------------ ------------
(Unaudited) (Unaudited)
REVENUES $ 8,334 $ --
------------ ------------
OPERATING EXPENSES:
Research and development 4,750,570 10,206,868
General and administrative 1,994,736 1,180,291
------------ ------------
6,745,306 11,387,159
------------ ------------
LOSS FROM OPERATIONS (6,736,972) (11,387,159)
OTHER INCOME (EXPENSE), principally:
interest income (expense), net 191,943 (958,840)
------------ ------------
NET LOSS BEFORE MINORITY INTEREST (6,545,029) (12,345,999)
MINORITY INTEREST (97,500) --
------------ ------------
NET LOSS $ (6,642,529) $(12,345,999)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.36) $ (1.29)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 18,510,273 9,535,653
============ ============
The accompanying notes are an integral part of these
condensed consolidated statements.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
AND 2000 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO JUNE 30, 2001
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
2001 2000 2001
------------ ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
REVENUES $ 8,334 $ -- $ 505,462
------------ ------------- -------------
OPERATING EXPENSES:
Research and development 8,557,505 18,707,071 83,399,177
General and administrative 3,795,461 2,135,293 21,260,604
Settlement of litigation -- -- 2,458,359
------------ ------------- -------------
12,352,966 20,842,364 107,118,140
------------ ------------- -------------
LOSS FROM OPERATIONS (12,344,632) (20,842,364) (106,612,678)
OTHER INCOME (EXPENSE), principally
interest income (expense), net 419,134 (835,229) (87,195)
------------ ------------- -------------
NET LOSS BEFORE MINORITY INTEREST (11,925,498) (21,677,593) (106,699,873)
MINORITY INTEREST (195,000) -- (1,658,597)
------------ ------------- -------------
NET LOSS $(12,120,498) $ (21,677,593) $(108,358,470)
============ ============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.84) $ (2.50)
============ =============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING 14,503,308 8,656,752
============ =============
The accompanying notes are an integral part of these
condensed consolidated statements.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO JUNE 30, 2001
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
2001 2000 2001
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(12,120,498) $(21,677,593) $(108,358,470)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 364,770 281,779 2,339,403
Amortization of discount on convertible
debentures and beneficial
conversion feature -- 1,013,028 539,277
Compensation expense arising
from the grant of warrants
and stock options (below
fair market value) 916,801 25,279 2,871,011
Issuance of common stock in
settlement of litigation -- -- 2,458,359
Increase in deferred revenue
and other 97,372 5,706 183,903
Compensation expense for extension
of debt conversion agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Minority interest 195,000 -- 1,658,597
(Increase) in other receivables (59,110) (176,858) (482,923)
(Increase) decrease in prepaid
expenses, and refundable deposits 21,300 64,799 (354,417)
Increase (decrease) in accounts
payable and accrued expenses (841,904) 323,070 3,026,440
Increase (decrease) in accrued
payroll and related taxes (47,511) 3,932 856,566
Decrease in employee expense reimbursement
and accrued interest to related parties -- -- 300,404
------------ ------------ -------------
Net cash used in operating activities (11,437,780) (20,136,858) (94,464,002)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (634,359) (199,478) (5,980,821)
Redemption (purchases) of marketable
securities and short-term investments, net (3,081,695) 24,884 (8,392,910)
Unrealized gain(loss) on
available-for-sale securities (85,372) (27,244) (84,609)
Payment of organization costs -- -- (66,093)
Proceeds from sale of equipment -- -- 29,665
Issuance of notes receivable -- -- 100,000
------------ ------------ -------------
Net cash used in investing activities (3,801,426) (201,838) (14,394,768)
------------ ------------ -------------
- Continued -
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
2001 2000 2001
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
and warrants, net of related
offering costs and expenses 19,821,549 16,301,038 97,542,390
Proceeds from preferred stock
issuance, net of offering costs -- -- 3,608,788
Proceeds from sale of preferred
stock of consolidated subsidiary
net of issuance cost -- -- 6,488,493
Proceeds from exercise of stock options and warrants -- 52,889 887,085
Proceeds from sale of convertible debentures,
net of issuance costs -- 9,417,138 9,387,321
Proceeds from long-term debt -- -- 2,660,448
Repayment of long-term debt (340,780) (121,299) (1,676,351)
Proceeds from (issuance of) notes receivables
from officers and directors for
exercise of stock options -- 61,560 (225,000)
Dividends paid to preferred stockholders -- -- (136,246)
(Repayment of) proceeds from notes
payable to related parties, net (150,000) (126,923) 335,168
Cash at acquisition -- -- 200,612
------------ ------------ -------------
Net cash provided by financing activities 19,330,769 25,584,403 119,072,708
------------ ------------ -------------
Net increase in cash and cash equivalents 4,055,563 5,245,707 10,213,938
Cash and cash equivalents, beginning of period 6,158,375 6,726,220 --
------------ ------------ -------------
Cash and cash equivalents, end of period $ 10,213,938 $ 11,971,927 $ 10,213,938
============ ============ =============
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of warrants in connection with
equity and debt financings $ -- $ 1,013,028 $ 2,330,251
============ ============ =============
Conversion of notes payable to related
parties into shares of common stock $ -- $ -- $ 500,000
============ ============ =============
Conversion of accrued interest into notes
payable to related parties $ -- $ -- $ 300,404
============ ============ =============
Conversion of other accrued liabilities to
shares of common stock $ -- $ -- $ 1,442,567
============ ============ =============
Conversion of preferred stock and convertible
debentures into shares of common stock $ -- $ -- $ 5,532,876
============ ============ =============
Conversion of revenue participation
units into shares of common stock $ -- $ -- $ 676,000
============ ============ =============
Issuance of stock options and warrants
for services and amortization of
deferred compensation $ 916,801 $ 25,279 $ 2,871,002
============ ============ =============
Issuance of common stock and warrants
in connection with settlement of litigation $ -- $ -- $ 2,458,359
============ ============ =============
Minority interest net loss $ 195,000 $ -- $ 1,658,597
============ ============ =============
Dividends on preferred stock payable
in shares of common stock $ -- $ -- $ 82,312
============ ============ =============
The accompanying notes are an integral part of these
condensed consolidated statements.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF BUSINESS:
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of its consolidated financial position at June 30, 2001, and consolidated
results of operations and cash flows for the periods presented. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted and
should be read in conjunction with the Company's audited financial statements
included in Amendment No. 1 on Form 10-K/A to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 as filed with the
Securities and Exchange Commission. Results of operations for interim periods
are not necessarily indicative of results to be expected for the full year.
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to "NeoTherapeutics, Inc." and in June 1997, the Company was
reincorporated in the state of Delaware. The Company has five subsidiaries,
Advanced ImmunoTherapeutics, Inc., incorporated in California in June 1987,
NeoTherapeutics, GmbH, incorporated in Switzerland in April 1997, NeoGene
Technologies, Inc., incorporated in California in October 1999, NeoOncoRx, Inc.,
incorporated in California in November 2000 and NeoTravel, Inc., incorporated in
California in April 2001. All references to the "Company" hereinafter refer to
NeoTherapeutics, Inc. and its subsidiaries as a consolidated entity.
The Company is a development stage biopharmaceutical enterprise
principally engaged in the discovery and development of novel therapeutic drugs
intended to treat neurological diseases, such as memory deficits associated with
Alzheimer's disease and aging, spinal cord injuries, Parkinson's disease, and
other neurodegenerative and psychiatric diseases. The Company is also engaged in
research involving functional genomics and has recently expanded its clinical
development program to include anti-cancer drugs. The accompanying consolidated
financial statements include the results of the Company and its subsidiaries.
As shown in the accompanying financial statements, the Company continues
to incur losses and negative cash from operations. At June 30, 2001 the Company
had cash, cash equivalents, marketable securities and short-term investments of
approximately $18.6 million. The Company is currently consuming cash at a rate
of approximately $2.5 million per month. Unless the Company secures additional
financing prior to March 31, 2002, the Company's auditors have informed the
Company that their report on the December 31, 2001 financial statements will
include a going concern qualification.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
effective January 1, 2001. Under the provisions of SFAS 133, the Company is
required to recognize all derivatives as either assets or liabilities in the
consolidated balance sheets and measure these instruments at fair value. The
adoption of SFAS 133 did not have a material effect on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16. "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
We will adopt SFAS 141 for all business combinations initiated after June 30,
2001.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
This pronouncement addresses, among other things, how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Goodwill would no longer be amortized
but would be assessed at least annually for impairment using a fair value
methodology. The Company will adopt this statement for all goodwill and other
intangible assets acquired after June 30, 2001 and for all existing goodwill
and other intangible assets beginning January 1, 2002. The Company does not
anticipate that the adoption of SFAS 142 will have a significant effect on
its financial position or the results of its operations.
2. LICENSING AGREEMENTS
On March 15, 2001, the Company's subsidiary, NeoGene Technologies, Inc.
("NeoGene"), entered into a licensing agreement with Pfizer Inc. ("Pfizer").
Under the terms of the agreement, Pfizer will make use of NeoGene's technology
to screen potential drug candidates. In return, NeoGene received an initial
payment of $100,000 and is entitled to receive milestone payments which could
total up to $12 million if Pfizer receives final market approval from the FDA
for a drug candidate identified using NeoGene's technology under the agreement;
however, there can be no assurance that the development project will be
successful and result in the Company receiving any milestone payments. The
initial payment has been recorded as deferred revenue and is recognized as
revenue over a three year period commencing April 2001. Future licensing revenue
will be recognized at the time the corresponding milestone is achieved in
accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements."
3. COMMITMENTS AND CONTINGENCIES
Research and Fellowship Grants:
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of June 30, 2001, the Company had committed to pay, through May
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2005, approximately $1,238,000 for such grants and fellowships. Grant expense
for the six month periods ended June 30, 2001 and 2000, amounted to $483,887 and
$541,600, respectively.
Major Clinical Trials:
In April 2001, the Company continued the study of its lead compound
Neotrofin(TM), and began a 500 patient trial for Alzheimer's disease. In
addition, in March 2001 the Company began two smaller trials of Neotrofin(TM)
for spinal cord injury and Parkinson's disease. The three trials will be managed
internally and are estimated to cost an aggregate of approximately $9.7 million
over an eighteen-month period.
4. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:
The minority interest in consolidated subsidiaries shown in the
accompanying balance sheet represents primarily investments by outside parties
in convertible preferred stock of the Company's consolidated subsidiaries. Also
included in minority interest is deferred compensation related to grants of
stock options in a consolidated subsidiary (NeoGene) to employees and
consultants of the consolidated group. The Company will amortize over the next
four years approximately $2.4 million of deferred compensation as the result of
the subsidiary issuing to its employees and consultants during January 2001,
below-market securities that consist of common stock and stock options. The
amount recorded reflects the fair value of the subsidiary's common stock as
determined by independent appraisal. At the time of issuance the shares were
valued at $45 per share, an estimated fair value, resulting in a deferred
compensation amount of $847,253. In August 2001, the Company engaged an
independent appraiser, who valued the stock at $18 per share. This resulted in a
reduction of the deferred compensation charge which was recorded in the second
quarter of $475,580. The first quarter was not restated as it would not be
material to the financial statements as a whole. During the six month period
ended June 30, 2001, the Company incurred a compensation charge of $521,118
representing the common stock portion of the issuance ($222,228) and the initial
period of amortization of the issued stock options ($298,890). Amortization will
continue on the stock options over the remainder of a four year vesting period.
The minority interest in consolidated subsidiaries' amounting to $195,000 in the
accompanying consolidated statements of operations consists of dividends on
convertible preferred stock issued by a consolidated subsidiary of the Company.
Cumulative losses applicable to minority interest exceeds the minority interest
in the related subsidiaries capital, as such the excess has been charged against
the majority interest.
5. CONVERTIBLE REDEEMABLE PREFERRED STOCK
On December 18, 2000, the Company's subsidiary, NeoGene, entered into an
agreement with an institutional investor for the issuance and sale of Series B
preferred stock and warrants for aggregate consideration of $2.0 million. Under
the provisions of the agreement, NeoGene issued and sold to the investor a total
of 44,445 shares of its 7% Series B Convertible Preferred Stock, at a purchase
price of $45 per share, and issued a five year warrant to purchase a total of
9,387 shares of NeoGene common stock, at an exercise price of $45 per share. The
investor also received a five year warrant to purchase an aggregate of 30,000
shares of the Company's common stock, at an exercise price of $6.10 per share.
The Company also granted an exchange right to the investor which allows the
investor to exchange its shares of Series B Preferred Stock for similar
preferred stock of the Company. During the month of June 2001, the investor
exercised its right to exchange all of the Series B Preferred shares then held
by the investor for 200 of shares of the Company's Series C Convertible
Redeemable Preferred stock. Under the terms of the exchange right, the investor
forfeited 4,693 or 50% of the previously granted five year warrants to purchase
shares on NeoGene common stock at an exercise price of $45 per share. The shares
of the Company's Series
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C Preferred Stock are redeemable under certain conditions at the option of the
holder and each share is convertible into a number of shares of common stock
equal to $10,000 dividend by the lesser of (i) 100% of the average of the
lowest seven closing bid prices of our common stock in the previous 30 trading
days, or (ii) $5.97.
6. STOCKHOLDERS' EQUITY
Common Stock:
On April 6, 2001, in a special meeting, the stockholders of the Company
approved the increase in authorized common stock from 25 million to 50 million
shares.
On April 17, 2001, the Company entered into a financing transaction with
two private investor groups which provide, among other things, for (a) the sale
of approximately 1,176,000 shares of the Company's common stock under the shelf
registration statement for $6.0 million cash, (b) an option to place with the
investor groups two tranches of convertible debenture notes of $10 million and
$8 million within approximately 30 days and seven months of the initial closing,
respectively, at the option of the Company, and (c) five year warrants
exercisable at 125% of the market price of the date of the respective closing of
each of the aforementioned debenture issuances for a number of shares equal to
20% of the number of shares into which the debentures are initially convertible.
During the second quarter of 2001, the Company informed the investors that it
does not intend to exercise the first option for the debenture tranche of $10
million. A related break-up fee of $1 million has been reduced to $405,000 and
was paid in July 2001, pursuant to the terms of the financing transaction of May
17, 2001. This fee was accrued as a charge to general and administrative expense
in the second quarter of 2001.
On May 17, 2001, the Company sold to the aforementioned two private
investor groups, 1,400,000 shares of the Company's common stock under the shelf
registration statement for $5.95 million cash.
On June 12, 2001 the Company entered into two securities sales
agreements with the maximum aggregate public offering price of $33.4 million.
The securities will be offered through an underwriter as part of a Controlled
Equity Offering, or CEO(sm). Upon agreement between the Company and the
underwriter to sell securities on certain terms, the underwriter will use its
commercially reasonable efforts to sell the securities up to the amount agreed
upon, but will not be required to sell any specific number or dollar amount of
securities. The net proceeds from the sale will be the aggregate sales price at
which the securities were sold after deduction for the underwriter's
commission/discount of up to 4% and is subject to a minimum total fee on the
aggregate sales price of the securities. The Company will issue to the
underwriter a five year warrant to purchase shares of common stock of the
Company in an amount equal to 10% of the number of shares of common stock sold
by the Company pursuant to the offering.
On June 22, 2001 the Company sold to its employees through the provisions
of its Employee Stock Purchase Plan, 40,390 shares of the Company's common stock
for approximately $90,100. The shares were sold at a 15% discount to market on
the date of exercise.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were 20,777,181 issued and outstanding shares of the Company's
common stock as of August 10, 2001. In addition, security holders held options
and warrants as of August 10, 2001 which, if exercised, would obligate the
Company to issue up to an additional 11,533,393 shares of common stock, of which
5,232,610 shares are subject to options or warrants which are currently
exercisable at the sole election of the holder. A substantial number of those
shares, when issued upon exercise, will be available for immediate resale in the
public market. In addition, the Company has the ability to sell up to
approximately $27 million of its common stock or other securities pursuant to a
shelf registration that will be eligible for immediate resale in the market and
has a registration statement on file to issue securities up to an additional
$8.4 million eligible for immediate resale by an underwriter under the same
terms and conditions as the aforementioned shelf registration statement.
Furthermore, these amounts do not include the number of shares of common stock
that the Company may be required to issue in exchange for shares of NeoGene
preferred stock. While this number of shares cannot be accurately determined at
this time, assuming an average conversion price of $4.00 per share and payment
of accrued dividends in shares, up to approximately 657,000 shares could be
issuable and available for resale upon conversion of these securities.
7. STOCK OPTIONS
Stock option activity for the Company during the six-month period ended
June 30, 2001 is as follows:
Option
Shares Price
--------- -----------------
Outstanding at January 1, 2001 2,490,175 $3.75 - $12.875
Granted 554,000 4.04 - 5.62
Exercised -- --
Forfeited -- --
--------- --------------
Outstanding at June 30, 2001 3,044,175 $3.75 - $12.875
========= ===============
During the six month period ended June 30, 2001 and June 30, 2000, the
Company recognized compensation cost for employees/directors and vested
consultants options aggregating $916,801 and $25,279, respectively. Options
granted to consultants consist of options that vest both immediately and upon
the occurrence of certain events as specified in the related agreements.
8. OPERATING SEGMENT AND RELATED INFORMATION
The Company has adopted the Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), Disclosures About Segments of an Enterprise and Related
Information. The increased significance of one of its subsidiary business
segments is newly reportable under the standard.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's reportable segment is engaged in research involving
functional genomics. The reportable segment is identified as a subsidiary of the
Company, NeoGene. The financial results of this reportable segment are presented
in the accompanying consolidated financial statements. The accounting policies
of the reportable segment are the same as the policies utilized for the Company.
The following schedule is the information related to the reportable segment
(prior period data is not material):
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Revenue:
Genomics reportable segment $ 8,334 $ 8,334
Other -- --
----------- -----------
Total revenue $ 8,334 $ 8,334
=========== ===========
Loss from Operations:
Genomics reportable segment $ 183,395 $ 1,472,244
Other 6,553,577 10,872,388
----------- -----------
Total Loss from Operations $ 6,736,972 $12,344,632
=========== ===========
Assets:
Genomics reportable segment $ 4,988,849
Other $18,236,793
-----------
Total assets $23,225,642
===========
The total loss from operations for the three and six month periods ended
June 30, 2001, has been reduced by an adjustment of $475,580 to previously
recorded compensation costs.
9. SUBSEQUENT EVENTS
During July 2001, the Company's subsidiary, NeoOncoRx, Inc., finalized an
exclusive worldwide license for an anti-cancer compound Neoquin (E09) and 79
related analogs from The Netherlands based NDDO Research Foundation. Under the
terms of the agreement the Company paid the initial licensing fee and will issue
30,000 shares of the Company's common stock subject to certain conditions.
Further, the Company is obligated to pay milestone payments which could total up
to $800,000, if the Company receives final market approval in USA, major
European markets, Japan and Australia. The development cost, under the terms of
the agreement will be incurred by the Company.
On August 13, 2001, the Company purchased from two institutional
investors the Series A 5% Preferred Stock of NeoGene for $5.5 million plus
accrued dividends of approximately $219,000. The stock had originally been sold
by NeoGene during September 2000 for $5 million plus warrants which the
investors retained.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may differ
materially from the results projected in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed below under "Factors Affecting Future Operating Results."
RESULTS OF OPERATIONS
Overview:
From the inception of the Company in 1987 through June 30, 2001, the
Company incurred a cumulative net loss of approximately $108.4 million. We
expect our operating expenses to decrease in the immediate future as compared to
the same period last year, but to increase over the next several years as we
expand our research and development and commercialization activities and
operations. We expect to incur significant additional operating losses for at
least the next several years unless such operating losses are offset, if at all,
by licensing revenues under strategic alliances with larger pharmaceutical
companies, which we are currently seeking. Through June 30, 2001, the operations
of our NeoGene subsidiary corporation were considered material under SFAS No.
131 and accordingly, segment information is presented herein.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000:
Revenue for the three months ended June 30, 2001 increased $8,334
versus no revenue over the same period in 2000. The increase is due to the
recognition of revenue from the initial receipt of funds from a licensing
agreement between our NeoGene subsidiary and Pfizer, Inc. Under the terms of
the agreement, Pfizer will make use of NeoGene's technology to screen potential
drug candidates. In return, NeoGene received an initial payment of $100,000 and
is entitled to receive milestone payments which could total up to $12 million
if Pfizer receives final market approval from the FDA for a drug candidate
identified using NeoGene's technology under the agreement; however, there can
be no assurance that the development project will be successful and result in
the Company receiving any milestone payments. The initial payment was recorded
as deferred revenue and is being recognized as revenue over a three year period
beginning April 2001. Future licensing revenue, if any, will be recognized at
the time the corresponding milestone is achieved in accordance with SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
Research and development expenses for the three months ended June 30,
2001 decreased $5,456,297 or 53% over the same period in 2000. The decrease was
due primarily to the termination of several contracts with an outside clinical
research organization and the related clinical trials that the organization was
conducting in 2000, and a non-cash compensation charge of $404,666. The
adjustment is a result of receiving an outside appraisal valuation on the value
of common stock of NeoGene. The valuation was $18 per share which was $27 less
than the amount estimated at the first quarter. In March and April 2001, the
Company began new Phase 2 clinical trials of Neotrofin(TM) in Alzheimer's
disease and other indications, at higher dose levels than administered in the
previous trials. The Company estimates that these trials will cost an aggregate
of approximately $9.7 million over an eighteen-month period. These new trials
will be managed internally and the Company has increased the number of employees
and consultants for that purpose. Research and development expenses increased in
the category of salaries due to additional personnel, salary increases and
related benefits and the non-cash equity compensation charge for the three month
period amounting to $172,278. In the immediate future the Company expects its
research and development costs to increase over the current period but decrease
compared to the same period in the prior year due to the net savings expected
from internally managing its
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clinical trial program, as compared to the higher cost of using an outside
clinical research organization. Thereafter, the Company expects that such
expenses will again increase as it expands clinical trials on Neotrofin(TM) and
other drug candidates, as well as the other research activities at the Company's
subsidiaries.
General and administrative expenses increased $814,445 or 69% from the
same period in 2000 due primarily to expense increases in the category of
salaries due to additional personnel, salary increases and related benefits,
travel and general occupancy expenses, consultant fees, and a break-up fee of
$405,000 paid to investors due to not exercising the first debenture tranche of
$10 million under an April 17, 2001 financing transaction. The Company expects
general and administrative expenses to increase in future periods in support of
the expected increases in research and development activities, as well as sales
and marketing activities should the Company successfully bring one or more of
its products to market.
Net interest income increased by $1,150,783 or 120% due to interest
earnings from higher cash balances resulting from the investments of unused
proceeds from recent equity and debt financings and a non-cash charge in June
2000. The Company expects its interest income to decrease in future periods due
to the use of its funds in current operations, unless offset by revenues or
additional equity financings.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000:
Revenue for the six months ended June 30, 2001 increased $8,334 versus
no revenue over the same period in 2000. The increase is due to the
recognition of revenue from the initial receipt of funds from a licensing
agreement between the Company's NeoGene subsidiary and Pfizer, Inc. Under the
terms of the agreement, Pfizer will make use of NeoGene's technology to screen
potential drug candidates. In return, NeoGene received an initial payment of
$100,000 and is entitled to receive milestone payments which could total up to
$12 million if Pfizer receives final market approval from the FDA for a drug
candidate identified using NeoGene's technology under the agreement; however,
there can be no assurance that the development project will be successful and
result in the Company receiving any milestone payments. The initial payment was
recorded as deferred revenue and is being recognized as revenue over a three
year period beginning April 2001. Future licensing revenue, if any, will be
recognized at the time the corresponding milestone is achieved in accordance
with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements."
Research and development expenses for the six months ended June 30, 2001
decreased $10,149,566 or 54% over the same period in 2000. The decrease was due
primarily to the termination of several contracts with an outside clinical
research organization and the related clinical trials that the organization was
conducting in 2000. In March and April 2001, the Company began new Phase 2
clinical trials of Neotrofin(TM) in Alzheimer's disease and other indications,
at higher dose levels than administered in the previous trials. The Company
estimates that these trials will cost an aggregate of approximately $9.7 million
over an eighteen-month period. The Company is managing these new trials
internally and has increased the number of employees and consultants for that
purpose. Research and development expenses increased in the category of salaries
due to additional personnel, salary increases and related benefits and the
non-cash equity compensation charge amounting to $588,911. In the immediate
future the Company expects its research and development costs to increase over
the current period but decrease compared to the same period in the prior year
due to the net savings expected from internally managing its clinical trial
program, as compared to the higher cost of using an outside clinical research
organization. Thereafter, the Company expects that such expenses will again
increase as it expands clinical trials on Neotrofin(TM) and other drug
candidates, as well as the other research activities at the Company's
subsidiaries.
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General and administrative expenses increased $1,660,168 or 78% from the
same period in 2000 due primarily to expense increases in the category of
salaries due to additional personnel, salary increases and related benefits,
travel and general occupancy expenses, legal and investor relations fees,
break-up penalty fee for $405,000 to investors due to not exercising the first
debenture tranche of $10 million under the April 17, 2001 financing deal, and a
non-cash equity compensation charge amounting to $327,887. The Company expects
general and administrative expenses to increase in future periods in support of
the expected increases in research and development activities, as well as sales
and marketing activities should the Company successfully bring one or more of
its products to market.
Net interest income increased by $1,254,363 or 150% due to interest
earnings from higher cash balances resulting from the investments of unused
proceeds from recent equity and debt financings and a non-cash charge in June
2000. The Company expects its interest income to decrease in future periods due
to the use of its funds in current operations, unless offset by revenues or
additional equity financings.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 2001, the Company financed its operations
primarily through sales of securities, borrowings, grants and deferred payment
of salaries and other expenses from related parties.
In April 2001, the Company continued the study of its lead compound
Neotrofin, and began a 500 patient trial for Alzheimer's disease. In addition,
in March 2001 the Company began two smaller trials of Neotrofin for spinal cord
injury and Parkinson's disease. The three trials will be managed internally and
are estimated to cost an aggregate of approximately $9.7 million over an
eighteen-month period.
On April 17, 2001, the Company entered into a financing transaction with
two private investor groups which provide, among other things, for (a) the sale
of approximately 1,176,000 shares of the Company's common stock under the shelf
registration statement for $6.0 million cash, (b) an option to place with the
investor groups two tranches of convertible debenture notes of $10 million and
$8 million within approximately 30 days and seven months, of the initial
closing, respectively, at the option of the Company, and (c) five year warrants
exercisable at 125% of the market price of the date of the respective closing of
each of the aforementioned debenture issuances for a number of shares equal to
20% of the number of shares into which the debentures are initially convertible.
The Company has informed the investors that it does not intend to exercise its
option for the first debenture tranche of $10 million and, accordingly, has
become obligated to pay the investor a break-up fee of $1 million which was
subsequently reduced to $405,000, and accrued as an expense at June 30, 2001.
On May 17, 2001, the Company sold to two private investor groups
1,400,000 shares of common stock for $5.95 million cash.
On June 12, 2001 the Company entered into two common stock sales
agreements with the maximum aggregate public offering price of $33.4 million.
The securities will be offered through an underwriter as part of a Controlled
Equity Offering, or CEO(sm). Upon agreement between the Company and the
underwriter to sell securities on certain terms, the underwriter will use its
commercially reasonable efforts to sell the securities up to the amount agreed
upon, but will not be required to sell any specific number or dollar amount of
securities. The net proceeds from the sale will be the aggregate sales price at
which the securities were sold after deduction for the underwriter's
commission/discount of up to 4% and is subject to a minimum total fee on the
aggregate sales price of the securities. The Company will issue to the
underwriter a five year warrant to purchase shares of common stock of the
Company in an amount equal to 10% of the number of shares of common stock sold
by the Company pursuant to the offering.
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On June 22, 2001 the Company sold to its employees through the provisions
of the Employee Stock Purchase Plan, 40,390 shares of the Company's common stock
for approximately $90,120.
At June 30, 2001, working capital amounted to approximately $15.3
million. This amount included cash and cash equivalents of approximately $10.2
million and marketable securities and short-term investments of approximately
$8.4 million. In comparison, at December 31, 2000, the Company had working
capital of approximately $7.2 million, which included cash and cash equivalents
of approximately $6.2 million and short-term investments of approximately $5.3
million. The $ 8.1 million increase in working capital during the six months is
attributable primarily to the sale of approximately $20.4 million of common
stock to private investors, offset principally by the operating loss of $12.1
million for the period, less a non-cash compensation and other charge of
approximately $1.6 million.
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of June 30, 2001, the Company had committed to pay, through May 2005,
approximately $1,238,000 for such grants and fellowships.
On August 13, 2001, the Company repurchased from two institutional
investors the Series A 5% Preferred Stock of NeoGene for $5.5 million plus
accrued dividends of approximately $219,000. The stock had originally been sold
by NeoGene during September 2000 for $5 million plus warrants which the
investors retained.
The Company is in the development stage and devotes substantially all of
its efforts to research and development. The Company has incurred cumulative
losses of approximately $108.4 million through June 30, 2001, and expects to
incur substantial losses over the next several years. In addition to the funds
derived from its public offerings and subsequent private placement equity
offerings, the Company will require substantial additional funds in order to
complete the research and development activities currently contemplated and to
commercialize its proposed products. The Company's future capital requirements
and availability of capital will depend upon many factors, including continued
scientific progress in research and development programs, the scope and results
of preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in filing, prosecuting and
enforcing patent claims, the effect of competing technological developments, the
cost of manufacturing scale-up, the cost of commercialization activities, and
other factors which may not be within the Company's control. While the Company
believes that its existing capital resources, and the ability to place the
Company's securities under the common stock sales agreement with an underwriter
with the maximum aggregate price of $33.4 million, will be adequate to fund its
capital needs for at least twelve months, the Company also believes that it will
require substantial additional funds in order to complete the research and
development activities currently contemplated and to commercialize its proposed
products. However, there can be no assurances that the underwriter will be
successful in raising the required funds.
Without additional funding, the Company may be required to delay, reduce
the scope of, or eliminate, one or more of its research and development
projects, or obtain funds through
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arrangements with collaborative partners or others which may require the Company
to relinquish rights to certain technologies, product candidates or products
that the Company would otherwise seek to develop or commercialize on its own,
and which could be on terms unfavorable to the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-Q:
The Company has incurred losses in every year of its existence and
expects to continue to incur significant operating losses for the next several
years. The Company has never generated revenues from product sales and there is
no assurance that revenue from product sales will ever be achieved. In addition,
there is no assurance that any of the Company's proprietary products will ever
be successfully developed, receive and maintain required governmental regulatory
approvals, become commercially viable or achieve market acceptance.
The Company has no experience in manufacturing, procuring products in
commercial quantities or marketing, and only limited experience in negotiating,
setting up or maintaining strategic relationships and conducting clinical trials
or other late stage phases of the regulatory approval process, and there is no
assurance that the Company will successfully engage in any of these activities.
The Company's need for additional funding is expected to be substantial
and will be determined by the progress and cost of the development and
commercialization of its products and other activities. The Company believes
that its existing capital resources, and subject to its ability to place the
securities under the common stock sales agreement with an underwriter with the
maximum aggregate price of $33.4 million, will be sufficient to satisfy its
current and projected funding requirements for at least the next twelve months.
However, if the Company experiences unanticipated cash requirements during the
interim period or fails to obtain sufficient funding under its existing
financing agreements, the Company could require additional funds sooner. The
source, availability, and terms of such funds have not been determined. Although
funds may be received from the sale of equity securities or the exercise of
outstanding warrants and options to acquire common stock of the Company, there
is no assurance that any such funding will occur.
Factors impacting the future success of the Company include, among other
things, the ability to develop products which will be safe and effective in
treating neurological diseases and the ability to obtain government approval.
The Company faces numerous other risks in the operation of its business,
including, but not limited to, protecting its proprietary technology and trade
secrets and not infringing on those of others; attaining a competitive
advantage; entering into agreements with others to source, manufacture, market
and sell its products; attracting and retaining key personnel in research and
development, manufacturing, marketing, sales and other operational areas;
managing growth, if any; and avoiding potential claims by others in such areas
as product liability and environmental matters.
The above factors are not intended to be exclusive. A more comprehensive
list of factors which could affect the Company's future operating results can be
found in Amendment No. 1 on Form 10-K/A to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000, in "Item 1. Description of
Business" under the caption "Risk Factors." Failure to
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satisfactorily achieve any of the Company's objectives or avoid any of the above
or other risks would likely have a material adverse effect on the Company's
business and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to certain market risks associated with interest
rate fluctuations on its marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. The Company is not subject to material risks
from currency rate fluctuations, nor does the Company utilize hedging contracts
or similar instruments.
The Company's exposure to interest rate risk arises from financial
instruments entered into in the normal course of business. Certain of the
Company's financial instruments are fixed rate, short-term investments in
government and corporate notes and bonds, which are available for sale (and have
been marked to market in the accompanying financial statements). Changes in
interest rates generally affect the fair value of these investments, however,
because these financial instruments are considered "available for sale," all
such changes are reflected in the financial statements in the period affected.
The Company's borrowings bear interest at fixed annual rates. Changes in
interest rates generally affect the fair value of such debt, but do not have an
impact on earnings or cash flows. Because of the relatively short-term nature of
the Company's borrowings, fluctuations in fair value are not deemed to be
material.
QUALITATIVE DISCLOSURES
The Company's primary exposures relate to (1) interest rate risk on
borrowings, (2) the Company's ability to pay or refinance its borrowings at
maturity at market rates, (3) interest rate risk on the value of the Company's
investment portfolio and rate of return, (4) the impact of interest rate
movements on the Company's ability to obtain adequate financing to fund future
cash requirements. The Company manages interest rate risk on its investment
portfolio by matching scheduled investment maturities with its cash
requirements. The Company manages interest rate risk on its outstanding
borrowings by using fixed rate debt. While the Company cannot predict or manage
its ability to refinance existing borrowings and investment portfolio, the
Company evaluates its financial position on an ongoing basis.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended June 30, 2001, NeoTherapeutics made three
issuances of its securities which were not registered under the Securities Act
pursuant to the exemption provided by Section 4(2) of the Securities Act.
1. On May 15, 2001, NeoTherapeutics issued an aggregate of 900,000 shares
of common stock to Montrose Investments Ltd. ("Montrose") and Strong River
Investments, Inc. ("Strong River") upon the exercise of adjustable warrants
issued in connection with the sale of 968,524 shares of common stock to Montrose
and Strong River in September 2000. NeoTherapeutics did not receive any
additional consideration upon the exercise of these warrants due to the
operation of net exercise provisions. NeoTherapeutics made no solicitation with
respect to the issuance of the shares, other than communications with Montrose
and Strong River; NeoTherapeutics obtained representations from Montrose and
Strong River regarding their investment intent, experience and sophistication;
and Montrose and Strong River have represented to NeoTherapeutics that they are
"qualified institutional buyers" as defined in Rule 144A promulgated under the
Securities Act.
2. On May 15, 2001, NeoTherapeutics issued 5,000 shares of its common
stock to its public relations firm, Ronald Trahan and Associates ("RTA"), in
consideration of the achievement by RTA of the attainment of certain performance
milestones. NeoTherapeutics made no solicitation in connection with the
issuance, other than communications with RTA; NeoTherapeutics obtained
representations from RTA regarding its investment intent, experience and
sophistication; and the shares were not issued in lieu of the payment for fees
for services and were not part of a plan of financing.
3. On June 27, 2001, NeoTherapeutics issued 200 shares of its Series C
preferred stock in exchange for 44,445 shares of NeoGene's Series B preferred
stock held by Societe Generale, pursuant to the exercise of exchange rights
granted to Societe Generale upon its purchase of the NeoGene preferred stock.
NeoTherapeutics made no solicitation in connection with the transaction, other
than communications with Societe Generale; NeoTherapeutics obtained
representations from Societe Generale regarding its investment intent,
experience and sophistication; and Societe Generale has represented to
NeoTherapeutics that it is a "qualified institutional buyer" as defined in Rule
144A promulgated under the Securities Act. Each share of Series C preferred
stock is convertible into a number of shares of NeoTherapeutics common stock
equal to $10,000 divided by the lesser of (i) $5.97 and (ii) the average of the
lowest seven closing bid prices of the NeoTherapeutics common stock, as reported
by the Nasdaq Stock Market, during the thirty trading days immediately preceding
the conversion.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 6, 2001, at a special meeting, the stockholders of the Company
approved an increase in authorized common stock from 25 million to 50 million
shares.
Votes Cast Number of Shares
---------- ----------------
For 7,567,867
Against 864,295
Abstain 71,379
Broker Non-Votes 7,554,591
The following matters were voted upon at the Annual Meeting of
Stockholders of the Company held on June 11, 2001:
1. The following persons were elected as Class II directors to serve
three-year terms expiring at the Annual Meeting of Stockholders to be held in
2004, or until their successors are elected and qualified:
Number of Votes Cast
------------------------------------
Name For Authority Withheld
---- ---------- ------------------
Mark J. Glasky 15,798,121 260,011
Carol O'Cleireacain, Ph.D. 15,895,307 162,825
Rajesh C. Shrotriya M.D. 15,904,093 154,039
The following persons continued their term of office as directors:
Name Expiration of Term
---- ------------------
Alvin J. Glasky, Ph.D. 2002
Samuel Gulko 2003
Ann C. Kessler, Ph.D. 2002
Armin M. Kessler 2002
Eric L. Nelson, Ph.D. 2003
Paul H. Silverman, Ph.D., D.Sc. 2003
2. A proposal to issue preferred stock or debentures and issue common stock
upon the conversion of the preferred stock or debentures pursuant to exchange
rights granted as part of a financing transaction completed on September 21,
2000, was approved by the following vote:
Votes Cast Number of Shares
---------- ----------------
For 7,567,867
Against 864,295
Abstain 71,379
Broker Non-Votes 7,554,591
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3. A proposal to issue preferred stock and issue common stock upon the
conversion of the preferred stock pursuant to exchange rights granted as part of
a financing transaction completed on December 18, 2000, was approved by the
following vote:
Votes Cast Number of Shares
---------- ----------------
For 7,546,487
Against 884,275
Abstain 72,779
Broker Non-Votes 7,554,591
4. A proposal to issue convertible debentures and warrants, and to issue
common stock upon conversion of the debentures and exercise of the warrants, as
part of a financing transaction, was approved by the following vote:
Votes Cast Number of Shares
---------- ----------------
For 7,540,999
Against 886,863
Abstain 75,679
Broker Non-Votes 7,554,591
5. A proposal to increase the number of shares of common stock issuable
under the 1997 Stock Incentive Plan by 1,000,000 shares, was approved by the
following vote:
Votes Cast Number of Shares
---------- ----------------
For 7,347,660
Against 1,069,940
Abstain 85,941
Broker Non-Votes 7,554,591
6. The NeoTherapeutics, Inc. Employee Stock Purchase Plan was approved by
the following vote:
Votes Cast Number of Shares
---------- ----------------
For 7,614,859
Against 810,528
Abstain 78,154
Broker Non-Votes 7,554,591
7. A proposal to ratify the selection of Arthur Andersen LLP as the
Company's independent public accountants for the current fiscal year was
approved by the following vote:
Votes Cast Number of Shares
---------- ----------------
For 15,940,676
Against 63,202
Abstain 54,254
Broker Non-Votes -0-
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ITEM 5. OTHER INFORMATION
On June 12, 2001, we entered into a Sales Agreement ("Sales Agreement I")
with Cantor Fitzgerald & Co. ("Cantor") to act as underwriter for an offering
from time to time of up to $8.4 million worth of our common stock in one or more
placements. As part of this offering, Cantor may make sales "at the market" or
directly into the Nasdaq National Market, the existing trading market for our
common stock, including sales made to or through a market maker or through an
electronic communications network, at the prevailing market price at the time of
sale or at prices related to those prevailing market prices or at negotiated
prices.
Simultaneous with entering into Sales Agreement I, we entered into
another agreement with Cantor on a similar basis ("Sales Agreement II") for an
offering from time to time of up to $25 million worth of our common stock that
is currently registered under our Registration Statement on Form S-3,
registration number 333-53108 in one or more placements. Unlike Sales Agreement
I, Cantor may not make sales pursuant to Sales Agreement II directly into the
Nasdaq National Market or otherwise in a manner that may be deemed to be an "at
the market" offering as defined in Rule 415 under the Securities Act of 1933, as
amended (the "Securities Act").
Pursuant to both Sales Agreement, we may, but we are under no obligation
to, elect to notify Cantor that we want to sell shares of common stock and the
proposed terms under which we would make the sale. Cantor may, but is under no
obligation to, accept the offer from us. If we agree with Cantor on the terms of
a proposed placement, including the number of shares of common stock to be
offered in the placement and any minimum price below which sales may not be
made, Cantor has agreed to use its commercially reasonable efforts, consistent
with its normal trading and sales practices, to try to sell such shares in
accordance with such terms. In the event that sales are made, Cantor will
provide written notice to us and we will deliver such shares on the third
business day following the date of such sale, unless otherwise specified by the
parties. Both Sales Agreements are terminable by either Cantor or us after one
year, provided that Cantor may terminate either Sales Agreement earlier upon the
occurrence of certain events. We have agreed that, without the written consent
of Cantor, we will not, directly or indirectly, offer to sell, sell, contract to
sell, grant any option to sell or otherwise dispose of any shares of our common
stock, securities convertible into or exchangeable for our common stock,
warrants or any rights to acquire our common stock during the period beginning
on the fifth trading day preceding the date on which we and Cantor agree to the
terms of a placement under either Sales Agreement and ending on the fifth
trading day after the settlement of the final sale made as part of that
placement.
In connection with any sales made pursuant to Sales Agreement I, Cantor
is to receive compensation of 4% of the gross proceeds, and in connection with
any sales under Sales Agreement II, Cantor is to receive compensation of 4.00%
on the first $10 million gross proceeds, 3.50% on the next $10 million gross
proceeds and 3.00% on the next $5 million. We have also agreed to reimburse
Cantor for its out-of-pocket expenses incurred in connection with the sales
agreements and the agreement referred to below, including up to an aggregate of
$100,000 incurred in connection with entering into the sales agreements, and we
are required to advance Cantor $40,000 with respect to certain expenses that may
be incurred under Sales Agreement II, all or part of which may be refundable.
In addition to the two Sales Agreements, we have entered into an
agreement with Cantor (the "Advisory Agreement"), pursuant to which Cantor has
been engaged to provide investment banking and other financial services. The
agreement is terminable at the will of either party. The agreement provides that
Cantor is to receive an annual retainer of $75,000 and reimbursement of its
out-of-pocket expenses incurred in connection with services rendered thereunder.
Upon execution of the agreement, we paid
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Cantor a $75,000 annual retainer and $50,000 as a non-refundable deposit against
our reimbursement obligation. As additional consideration under the Advisory
Agreement, whenever Cantor receives cash compensation pursuant to either Sales
Agreement in connection with sales actually effected by Cantor thereunder or in
connection with Alternative Sales (as defined below), we will issue to Cantor
warrants to purchase shares of common stock in an amount equal to 10% of the
number of shares sold by Cantor at an exercise price equal to 130% of the volume
weighted average sales price of the shares of common stock sold. The warrants
are exercisable for five years and contain a cashless exercise provision
commencing one year after issuance. We have also granted Cantor limited demand
and piggyback registration rights with respect to the common stock underlying
the warrants, which registration rights also commence one year after the
issuance of the warrants.
The Advisory Agreement also contains provisions pursuant to which, until
Cantor receives aggregate cash compensation of $336,000 for sales made under
Sales Agreement I and Sales Agreement II, Cantor, subject to certain exceptions,
is to receive 2% of the gross proceeds in any transaction in which we sell or
issue our common stock for cash to or through a party or parties other than
Cantor or its affiliates ("Alternative Sales").
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1.1 Sales Agreement dated June 11, 2001, by and between the Registrant and
Cantor Fitzgerald & Co. (Filed as Exhibit 1.1 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
1.2 Sales Agreement dated June 11, 2001, by and between the Registrant and
Cantor Fitzgerald & Co. (Filed as Exhibit 1.2 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
4.1 Advisory Agreement dated April 11, 2001, by and between the Registrant
and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to the Registration
Statement on Form S-3 as amended (No. 333-64444), as filed with the
Securities and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
4.2 Amendment to the Advisory Agreement dated June 12, 2001, by and between
the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.2 to the
Registration Statement on Form S-3 as amended (No. 333-64444), as filed
with the Securities and Exchange Commission on July 2, 2001, and
incorporated herein by reference.)
4.3 Securities Purchase Agreement dated April 20, 2001, by and between the
Registrant, Montrose Investments Ltd. and Strong River Investments, Inc.
(Filed as Exhibit 4.63 to the Annual Report on Form 10-K as amended, as
filed with the Securities and Exchange Commission on April 17, 2001, and
incorporated herein by reference.)
4.4 Warrant issued by the Registrant to Montrose Investments Ltd. dated as of
May 18, 2001. (Filed as Exhibit 4.1 to Form 8-K, as filed with the
Securities and Exchange Commission on May 21, 2001, and incorporated
herein by reference.)
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4.5 Warrant issued by the Registrant to Strong River Investments, Inc. dated
as of May 18, 2001. ( Filed as Exhibit 4.2 to Form 8-K, as filed with the
Securities and Exchange Commission on May 21, 2001, and incorporated
herein by reference.)
4.6 Certificate of Designations of the Series C Preferred Stock of the
Registrant. (Filed as Exhibit 4.7 to the Registration Statement on Form
S-3 as amended (No. 333-64432), as filed with the Securities and Exchange
Commission on July 2, 2001, and incorporated herein by reference.)
10.1 Letter Agreement dated April 17, 2001, by and between the Registrant,
Montrose Investments, Ltd., Strong River Investments, Inc. and HBK Master
Fund L.P. (Filed as Exhibit 10.20 to the Annual Report on Form 10-K as
amended, as filed with the Securities and Exchange Commission on April
17, 2001, and incorporated herein by reference.)
10.2 Securities Purchase Agreement dated as of May 17, 2001, by and among the
Registrant, Montrose Investments Ltd. and Strong River Investments, Inc.
(Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and
Exchange Commission on May 21, 2001, and incorporated herein by
reference.)
10.3 Letter Agreement, dated as of May 17, 2001, by and among the Registrant,
Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as
Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange
Commission on May 21, 2001, and incorporated herein by reference.)
10.4 Amendment 2001-1 to the Employee Stock Purchase Plan effective as of June
21, 2001. (Filed as Exhibit 10.22 to the Annual Report on Form 10-K as
amended, as filed with the Securities and Exchange Commission on April
17, 2001, and incorporated herein by reference.)
(b) Reports on Form 8-K
1. On May 21, 2001 the Company filed a report on Form 8-K announcing the
sale of $5.95 million common stock to two private investor groups.
2. On June 12, 2001 the Company furnished a report on Form 8-K referencing a
news release regarding its publicly traded warrants, the text of which is set
forth in Exhibit 99.1 attached to this report. Exhibit 99.1 is incorporated by
reference into this report. NeoTherapeutics, Inc. is furnishing the information
contained in this Current Report on Form 8-K pursuant to the Securities and
Exchange Commission's Regulation FD.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: August 13, 2001 By: /s/Samuel Gulko
-------------------------------------
Samuel Gulko, Senior Vice President
Finance, Chief Financial Officer
(Principal Accounting
and Financial Officer)
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