-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RgdwC04mYuZDbA7j5GsNabRRRttCAXGGYntoyR7+0NkKjrwHE2g7Y58piQYJkQKb dDtzOlRdCx8jIg6QIy8ywQ== 0000892569-99-001362.txt : 19990514 0000892569-99-001362.hdr.sgml : 19990514 ACCESSION NUMBER: 0000892569-99-001362 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOTHERAPEUTICS INC CENTRAL INDEX KEY: 0000831547 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 930979187 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28782 FILM NUMBER: 99619788 BUSINESS ADDRESS: STREET 1: 157 TECHNOLOGY DR STREET 2: STE J-821 CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497886700 MAIL ADDRESS: STREET 1: 157 TECHNOLOGY DR STREET 2: STE J-821 CITY: IRVINE STATE: CA ZIP: 92618 FORMER COMPANY: FORMER CONFORMED NAME: AMERICUS FUNDING CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 3/31/99. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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 requ ired 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 4, 1999 ----------------------------- -------------------------- Common Stock, $.001 par value 6,256,673 Page 1 of 22 pages Exhibit Index on page 22 2 NEOTHERAPEUTICS, INC. (A Development-Stage Enterprise) TABLE OF CONTENTS
Page No. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Statement regarding financial information............................... 3 Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998................................................... 4 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 and for the period from inception (June 15, 1987) to March 31, 1999......................... 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 and for the period from inception (June 15, 1987) to March 31, 1999........................ 6 Notes to Condensed Consolidated Financial Statements................... 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION..................................................... 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................... 16 PART II. OTHER INFORMATION...................................................... 18 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 20
2 3 NEOTHERAPEUTICS, INC. (A Development Stage Enterprise) FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 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 generally accepted accounting principles 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. It is suggested that the financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as filed with the Securities and Exchange Commission. 3 4 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
March 31, December 31, 1999 1998 ----------- ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 398,400 $ 1,097,341 Marketable securities and short-term investments 3,091,483 1,769,348 Other receivables, principally investment interest 154,162 112,552 Advance deposit to clinical trial vendor -- 265,727 Prepaid expenses and refundable deposits 242,474 157,495 ------------ ----------- Total current assets 3,886,519 3,402,463 ------------ ----------- PROPERTY AND EQUIPMENT, at cost: Equipment 2,403,609 2,197,253 Leasehold improvements 1,799,270 1,794,794 Accumulated depreciation and amortization (862,838) (740,413) ------------ ----------- Property and equipment, net 3,340,041 3,251,634 ------------ ----------- PREPAID EXPENSES AND DEPOSITS 64,420 172,066 ------------ ----------- $ 7,290,980 $ 6,826,163 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,521,820 $ 1,278,954 Accrued payroll and related taxes 88,110 81,370 Note payable to related party 558,304 558,304 Current portion of long-term debt 486,841 445,297 ------------ ----------- Total current liabilities 2,655,075 2,363,925 LONG-TERM DEBT, net of current portion 973,559 1,126,174 DEFERRED RENT 53,511 46,308 ------------ ----------- Total liabilities 3,682,145 3,536,407 ------------ ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $0.001 per share, 5,000,000 shares authorized: Issued and outstanding, 400 shares 5% Series A Preferred with Conversion Features at March 31, 1999, none at December 31, 1998, liquidation preference $4.0 million 3,288,611 -- Common stock, par value $0.001 per share, 25,000,000 shares authorized: Issued and outstanding, 6,256,673 and 6,146,854 shares at March 31, 1999 and December 31, 1998, respectively 29,036,684 27,535,329 Unrealized gains on available-for-sale securities 5,343 24,207 Deficit accumulated during the development stage (28,721,803) (24,269,780) ------------ ----------- Total stockholders' equity 3,608,835 3,289,756 ------------ ----------- $ 7,290,980 $ 6,826,163 ============ ===========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 4 5 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO MARCH 31, 1999
Three Months Three Months Inception Ended Ended Through March 31, March 31, March 31, 1999 1998 1999 ------------ ------------ ------------- (Unaudited) (Unaudited) (Unaudited) REVENUES, from grants $ -- $ -- $ 497,128 ------------ ------------ ------------ OPERATING EXPENSES: Research and development 3,307,432 1,787,962 19,324,533 General and administrative 1,096,435 740,289 9,989,323 ------------ ------------ ------------ 4,403,867 2,528,251 29,313,856 ------------ ------------ ------------ LOSS FROM OPERATIONS (4,403,867) (2,528,251) (28,816,728) ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income (expense), net (14,731) 28,771 549,915 Other income (expense) -- (8,811) 27,435 ------------ ------------ ------------ Total other income (expense) (14,731) 19,960 577,350 ------------ ------------ ------------ NET LOSS $ (4,418,598) $ (2,508,291) $(28,239,378) ============ ============ ============ BASIC AND DILUTED LOSS PER SHARE $ (0.71) $ (0.46) ============ ============ BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,204,149 5,467,206 ============ ============
The accompanying notes are an integral part of these condensed consolidated statements. 5 6 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO MARCH 31, 1999
Three Months Three Months Inception Ended Ended Through March 31, March 31, March 31, 1999 1998 1999 ------------ ------------ ------------- (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (4,418,598) $ (2,508,291) $(28,239,378) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 122,425 106,735 988,327 Compensation expense arising from the grant of warrants and stock options 207,358 134,442 898,572 Amortization of deferred compensation -- -- 93,749 Increase in deferred rent 7,203 11,576 53,511 Compensation expense for extension of Debt Conversion Agreements, net -- -- 503,147 Gain on sale of assets -- -- (5,299) (Increase) decrease in other receivables (41,610) 130,478 (153,916) Decrease (increase) in prepaid expenses, deferred charges and refundable deposits 288,394 (86,848) (211,891) Increase (decrease) in accounts payable and accrued expenses 209,441 (251,308) 1,648,495 Increase in accrued payroll and related taxes 6,740 79,677 726,804 Decrease in employee expense reimbursement and accrued interest to related parties -- -- 300,404 ------------ ------------ ------------ Net cash used in operating activities (3,618,647) (2,383,539) (23,397,475) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (210,832) (61,734) (4,283,182) Purchases of marketable securities and short-term investments, net (1,322,135) (58,991) (3,091,483) Unrealized (loss) gain on available- for-sale securities (18,864) 1,410 5,343 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 (1,551,831) (119,315) (7,305,750) ============ ============ ============
6 7 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Months Three Months Inception Ended Ended Through March 31, March 31, March 31, 1999 1998 1999 ------------ ------------ ------------- (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issuance including Revenue Participation Units converted to common stock 949,387 55,230 24,618,972 Proceeds from preferred stock issuance, net of offering costs 3,633,221 -- 3,633,221 Repayment of bank line of credit -- (850,000) -- Decrease in restricted cash -- 935,000 -- Proceeds from long-term debt 33,786 -- 1,860,411 Repayment of long-term debt (144,857) (30,766) (400,011) Proceeds from exercise of stock options -- -- 717,080 Receipt of notes from officers and directors for exercise of stock options -- -- (286,560) Proceeds from notes payable to related parties, net -- -- 757,900 Cash at acquisition -- -- 200,612 ------------ ------------ ------------ Net cash provided by financing activities 4,471,537 109,464 31,101,625 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (698,941) (2,393,390) 398,400 Cash and cash equivalents, beginning of period 1,097,341 6,063,347 -- ------------ ------------ ------------ Cash and cash equivalents, end of period $ 398,400 $ 3,669,957 $ 398,400 SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of accrued payroll into shares of common stock $ -- $ -- $ 1,141,838 ============ ============ ============ 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 Revenue Participation Units into shares of common stock $ -- $ -- $ 676,000 ============ ============ ============ Issuance of stock options and warrants for services $ 207,358 $ 134,442 $ 898,572 ============ ============ ============ Issuance of warrants in connection with equity and debt financings $ 344,610 $ -- $ 389,610 ============ ============ ============ Conversion of other accrued liabilities to shares of common stock $ -- $ -- $ 52,104 ============ ============ ============ Dividends on preferred stock payable in shares of common stock $ 33,425 $ -- $ 33,425 ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated statements. 7 8 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements include all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of its consolidated financial position at March 31, 1999, 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 the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 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 two wholly-owned subsidiaries, Advanced ImmunoTherapeutics, Inc., incorporated in California in June 1987, and NeoTherapeutics, GmbH, incorporated in Switzerland in April 1997. 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 engaged in the discovery and development of novel therapeutic drugs intended to treat neurodegenerative diseases and conditions such as memory deficits associated with Alzheimer's disease and dementia, stroke, spinal cord injuries, Parkinson's disease, migraine, depression and obesity. The accompanying condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiaries. 2. LONG-TERM DEBT In March 1999, the Company financed through its insurance broker, the premium ($36,333) for a nineteen month insurance policy. The loan is payable through May 2000 in monthly installments of $2,547, including principal and 8.71% interest. The Company has $500,000 remaining under a line of credit from a finance company affiliated with its bank to finance equipment and computer software purchases. Borrowings under the line are repayable over 42 months and bear interest at approximately 12%. 8 9 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. COMMITMENTS AND CONTINGENCIES Research and Fellowship Grants: The Company periodically makes non-binding commitments to various Universities and not-for-profit research organizations to fund scientific research and fellowship grants that may further the Company's research programs. As of March 31, 1999, the Company had committed to pay, through December 2000, approximately $650,000 for such grants and fellowships. Grant expense for the three-month periods ended March 31, 1999 and 1998, amounted to $83,000 and $71,000, respectively. 4. STOCKHOLDERS' EQUITY Preferred Stock On January 29, 1999, the Company entered into an agreement with two private investors to sell up to $6 million of 5% preferred stock, with rights of conversion into common stock. The financing consists of two tranches of preferred stock. The first tranche of $4.0 million was sold on January 29, 1999, and for an initial period of 120 days is convertible into common stock at a fixed price of $13.06 per share. Thereafter, the preferred stock is convertible at the lesser of the fixed price or a variable rate of 101% of the average of the ten lowest closing bid prices of the common stock during the thirty trading days immediately preceding the conversion date. In no event can the first tranche be converted into more than 1,450,000 shares. The second tranche of $2.0 million can be sold, at the Company's option, approximately 6 months after the effective date of the Preferred Stock Agreement, subject to the satisfaction by the Company of certain conditions. The preferred stock in the second tranche will contain terms and conditions for conversion similar to the first tranche, except that the fixed conversion price will be set at 125% of the average market price of the common stock at the time of the second closing. Dividends on the preferred stock are payable in cash or in common stock, at the option of the Company, at the annual rate of 5%. At March 31, 1999, the Company accrued dividends payable of $33,425, which are payable in cash or common stock upon conversion of the preferred shares into common stock. The preferred stock has a liquidation preference over the common stock equal to the stated value of $4.0 million plus any accrued dividends. Additional features of the preferred stock issue include, among other things, a redemption feature at the Company's option if the common stock trades below a floor of $5 per share or above a ceiling of $20 per share. The Company paid cash offering expenses of approximately $367,000 for finder's fees and legal services, which were offset against the proceeds of the offering in the accompanying financial statements. In connection with the financing, the Company also granted warrants to purchase an aggregate of 155,000 shares of its common stock to the preferred stock investors and others. The warrants are exercisable for periods ranging from 3 to 5 years at prices ranging from $11.00 to $12.98 per share. The valuation of these warrants was determined using the Black-Scholes Option-Pricing Model with the following assumptions: Expected life 3 to 5 years Volatility 75.26% Risk-free interest rate 4.62% to 4.66% Dividend yield 0%
9 10 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The warrants to purchase 155,000 shares of common stock referred to above include the following: The Company granted to an investment advisor a warrant to purchase 40,000 shares of common stock as consideration for its waiver of a preexisting right of first refusal. Using the valuation model described above, this warrant had a fair value of $204,280, which was charged to current operations. The Company also granted to the finder in the preferred stock financing, a warrant to purchase 15,000 shares of common stock having a fair value of $92,130, which was offset against the offering proceeds. Warrants to purchase 75,000 shares of common stock were granted to the preferred stock investors as a part of the offering. As such, $252,480 of the net offering proceeds was allocated to the investors' warrants based upon their relative fair value. The remaining warrant to purchase 25,000 shares of common stock was granted to the Company's existing Equity Line investor as consideration for the waiver of certain pre-existing anti-dilution rights that might have been triggered by the preferred stock financing. Because common stock and common stock equivalents are presented in the same manner, the grant of this warrant had no impact on the presentation in the accompanying financial statements. Common Stock During the quarter ended March 31, 1999, the Company sold to a private investor, pursuant to its existing Equity Line Agreement, an aggregate of 109,819 shares of common stock for cash proceeds of $950,000. A summary of the changes in stockholders' equity as a result of the valuation of the related warrants and costs of the offering as well as other changes during the quarter follows:
Deficit Unrealized Accumulated Common Stock Gains(Losses) During the Preferred ------------------------ from Development Stock Shares Amount Securities Stage Total ---------- --------- ----------- ----------- ------------- ----------- Balances, December 31, 1998 $ -- 6,146,854 $27,535,329 $ 24,207 $ (24,269,780) $ 3,289,756 Sale of 400 shares of 5% Series A Preferred Stock, net of offering costs 3,633,221 -- -- -- -- 3,633,221 Allocation of warrants to purchase common stock granted to investment advisor (92,130) -- 92,130 -- -- -- Sales of common stock to Private Equity Line investor, net of costs of issuance -- 109,819 949,387 -- -- 949,387 Allocation of net proceeds of preferred stock offering to common stock warrants issued to investors (252,480) -- 252,480 -- -- -- Fair value of warrants issued as compensation to investment advisor -- -- 204,280 -- -- 204,280 Stock options issued for services -- -- 3,078 -- -- 3,078 Unrealized losses on available for sale securities -- -- -- (18,864) -- (18,864) Accrued preferred stock dividend -- -- -- -- (33,425) (33,425) Net loss -- -- -- -- (4,418,598) (4,418,598) ---------- --------- ----------- ----------- ------------- ----------- Balance, March 31, 1999 $3,288,611 6,256,673 $29,036,684 $ 5,343 $ (28,721,803) $ 3,608,835 ========== ========= =========== =========== ============= ===========
10 11 5. STOCK OPTIONS During the three month period ended March 31, 1999, there were no new stock options granted, and none were exercised or forfeited. Stock options to purchase 853,873 shares of common stock remained outstanding for the period at exercise prices ranging from $0.025 to $12.88 per share. During the three month periods ended March 31, 1999 and 1998, the Company recognized compensation expense for vested consultants options pursuant to SFAS 123 aggregating $3,078 and $134,442, 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. 6. EQUITY TRANSACTION SUBSEQUENT TO MARCH 31, 1999 On May 11, 1999, the Company completed a private placement of 400,000 shares of common stock and warrants to purchase 80,000 shares of common stock to a group of private investors for a total purchase price of $4.0 million. Each warrant entitles the investor to purchase one share of common stock at an exercise price of $15.00 per share. The warrants expire May 10, 2004, and may be called by the Company if the closing price of the common stock remains at $30.00 per share or above for any 20 out of any 30 consecutive trading days. The shares of common stock sold to the investors, and the shares issuable upon exercise of the warrants, may be resold in compliance with the provisions of Rule 144 under the Securities Act of 1933, including the one year holding period requirement of said Rule. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below under "Factors Affecting Future Operating Results." RESULTS OF OPERATIONS Overview: From the inception of the Company in 1987 through March 31, 1999, the Company incurred a cumulative net loss of approximately $28.2 million. The Company expects its operating expenses to increase over the next several years as it continues to expand its research and development and commercialization activities and operations. The Company expects 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 the Company is currently seeking. Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: There were no revenues during the three months ended March 31, 1999 or the three months ended March 31, 1998. Research and development expenses for the three months ended March 31, 1999 increased approximately $1,519,000 or 85% over the same period in 1998. Current period increases were due primarily to costs and expenses associated with the conduct of clinical and preclinical trials as the Company continued the acceleration of its program to commercialize its lead compound, NEOTROFIN(TM). These costs and expenses were attributable primarily to increases in the number and duration of outside clinical and preclinical trials, as well as the costs of manufacturing and formulation by the Company's contract manufacturer of NEOTROFIN(TM) and other compounds used in the Company's research and testing programs. In the same period in 1998, the Company had not yet commenced its Phase 2 clinical trials or any of its major long-term preclinical trials. The Company expects its research and development expenses to continue to increase as it expands its laboratories and increases its internal product development and external preclinical and clinical trial activities. General and administrative expenses increased approximately $356,000 or 48% from the same period in 1998 due primarily to a non-cash compensation charge of approximately $204,000 attributed to the raising of equity capital, professional fees and investor and public relations fees. 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 expense increased by approximately $44,000 due to the use of invested funds in operations and increased interest expense on borrowings. The Company expects its net interest expense to continue to increase due to the use of its funds in current operations and borrowings. 12 13 LIQUIDITY AND CAPITAL RESOURCES From inception through March 31, 1999, the Company financed its operations primarily through government grants, sales of equity securities, borrowings and deferred payment of salaries and other expenses due to related parties. During September and October 1996, the Company effected the public sale of a total of 2,700,000 units of its common stock and attached warrants to the public. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock. The aggregate net proceeds of this offering amounted to approximately $18.2 million. In March 1998 the Company entered into an Equity Line Agreement with a private investor which allows the Company, in its sole discretion and subject to certain restrictions, to sell ("put") to the investor, through February 2001, up to $15 million of its common stock. Through March 31, 1999, the Company has put to the investor 615,868 shares of its common stock and realized gross proceeds of $4.5 million. As of March 31, 1999, $10.5 million remains available under the Equity Line Agreement. In April 1999, the Company's registration statement permitting the investor resale rights expired and the Company is in the process of renewing the registration statement for an additional 1,000,000 shares. On January 29, 1999, the Company sold to two private investors $4.0 million of 5% Series A preferred stock, with rights of conversion. A second tranche of $2.0 million remains available, subject to the satisfaction by the Company of certain conditions, to sell to the investors during the period of July 28, 1999 through September 16, 1999. The initial tranche of $4.0 million may be converted into common stock at a fixed price of $13.06 per share through May 29, 1999. Thereafter, it is convertible at the lesser of the fixed price or at a variable rate of 101% of the average market price for the ten lowest of the thirty trading days immediately preceding the conversion date. Dividends on the preferred stock are payable in cash or in common stock, at the option of the Company, at the annual rate of 5%. The Company has elected to pay the initial dividend due March 31, 1999, in common stock and, accordingly, has accrued a dividend payable of $33,425. Additional features of the preferred stock issue include, among other things, a redemption feature at the Company's option if the common stock trades below or above a specified price per share. On May 11, 1999, the Company completed a private placement of units consisting of 400,000 shares of common stock and five-year warrants to purchase 80,000 shares of common stock at an exercise price of $15.00 per share to a group of private investors for a total purchase price of $4.0 million. The shares of common stock sold to the investors, and the shares issuable upon exercise of the warrants, may be resold in compliance with the provisions of Rule 144 under the Securities Act of 1933, including the one year holding period requirement of said Rule. At March 31, 1999, working capital amounted to approximately $1.2 million. This amount included cash and cash equivalents of approximately $0.4 million and marketable securities and short-term investments of approximately $3.1 million. In comparison, at December 31, 1998, the Company had working capital of approximately $1.0 million, which included cash and cash equivalents of approximately $1.1 million and short-term investments of approximately $1.8 million. The $0.2 million increase in working capital during the three months is attributable primarily to the sale of $4.0 million of preferred stock and the sale of $950,000 of common stock to the Line of Equity investor, offset by (i) the operating loss for the period, (ii) laboratory equipment purchases and (iii) long-term debt repayment. The Company is funding a major clinical trial, which is being conducted by an independent contract research organization, in three foreign countries involving approximately 400 patients. The agreement with the contract research organization, which is cancelable by either party on thirty days notice, is expected to be completed by December 1999. This clinical trial is expected to cost the 13 14 Company between $4.0 and $5.0 million, of which approximately $1.3 million has been expended through March 31, 1999. As of March 31, 1999, the Company had committed, on a non-binding basis, to provide approximately $650,000, through December 2000, for scientific research grants and fellowships to various Universities and not-for-profit research organizations. The Company is in the development stage devoting substantially all of its efforts to research and development. During its development stage, the Company has incurred cumulative losses of approximately $28.2 million through March 31, 1999, and expects to incur substantial losses over the next several years. In addition to the funds derived from its initial public offering 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 will be adequate to fund its capital needs for at least 12 months, the Company also believes that it will require substantial additional funds in order to complete the research and development activities currently contemplated and to commercialize its proposed products. Without additional funding, the Company may be required to delay, reduce the scope of, eliminate one or more of its research and development projects, or obtain funds through arrangements with collaborative partners or others which may require the Company to relinquish rights to certain technologies, product candidates or products that the Company would otherwise seek to develop or commercialize on its own, and which could be on terms unfavorable to the Company. YEAR 2000 READINESS DISCLOSURE All statements contained in the following section are "Year 2000 Readiness Disclosures" within the meaning of the Year 2000 Information and Disclosure Act. The Year 2000 issue (the "Year 2000 Issue") in computers arises from the common industry practice of using two digits to represent a date in computer software code and databases to enhance both processing time and save storage space. Therefore, when dates in the year 2000 and beyond are indicated and computer programs read the date "00", the computer may default to the year "1900" rather than the correct "2000." This could result in incorrect calculations, faulty data and computer shutdowns, which would cause disruptions of operations. In addition, the Year 2000 is a leap year and systems need to recognize it as such. The Company has developed a multi-phase program for Year 2000 Issues that consists of the following: (i) assessment of the corporate systems and operations of the Company that could be affected by the Year 2000 Issue, (ii) remediation of non-compliant systems and components, if any, and (iii) testing of systems and components following remediation. The Company has focused its Year 2000 compliance assessment program on four principal areas: (a) the Company's internal information technology system applications, including voice and data systems ("IT Systems"), (b) the Company's internal non-IT facilities systems, including embedded software in environmental controls, security systems, fire protection systems, elevators and public utility connections for gas, electric and telephone 14 15 systems ("Facilities Systems"), (c) embedded and external software contained in laboratory and other equipment ("Equipment"), and (d) Year 2000 compliance by third parties with which the Company has a material relationship, such as significant vendors, financial institutions and insurers. The Company has completed an inventory and risk assessment of its own internal IT Systems, Facilities Systems, and Equipment that it believes could be adversely affected by the Year 2000 Issue, and believes that its own internal systems are, at the present time, substantially compliant based upon internal systems tests, currently available information and reasonable assurance by its equipment and software vendors. The cost to remediate the Year 2000 Issues with regard to the Company's IT and Facility Systems and Equipment is not material. In June of 1998, the Company began sending questionnaires to and/or contacting its outside vendors regarding their state of readiness with respect to identifying and remediating their Year 2000 Issues. The Company has completed its risk assessment of its outside vendors and is currently reviewing their compliance. It is not possible for the Company to determine or be assured that adequate remediation of the Year 2000 Issue will be accomplished by such vendors. Furthermore, it is not possible for the Company to determine or be assured that third parties upon which the Company's vendors are dependent, will accomplish adequate remediation of their Year 2000 Issues. Except for the Company's public utility service vendors, who have indicated that they expect to be in compliance by mid-1999, the Company believes that, with respect to the computer systems of its major outside vendors, should a Year 2000 Issue exist whereby a vendor was unable to address the Company's needs, alternative vendors have been identified and are readily available that could furnish the Company with the same or similar supplies or services that it presently receives from these vendors without undue cost or expense. Based on currently available information, the Company believes that the impact of the Year 2000 Issue, as it relates to its IT Systems, Facilities Systems, Equipment and third parties will not be material. In the event the Company were to fail to successfully implement the Year 2000 Issues with respect to its internal systems in a timely manner, the Company believes that while such events would be disruptive to the Company's operations in the short term, such circumstances would not have a material adverse effect on the business, financial condition and results of operations of the Company over the long term. However, failure of the major third parties, in particular the financial institutions with which the Company has significant banking and investment management relationships and the Company's third party manufacturers, to be Year 2000 compliant could have a material adverse effect on the Company's business, financial condition and results of operations or business prospects. Readers are cautioned that most of the statements contained in the "Year 2000 Readiness Disclosure" paragraphs are forward-looking and should be read in conjunction with the Company's disclosures under the heading "PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS" set forth above. 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 15 16 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 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 line of equity agreement, 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 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 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 inclusive. A more comprehensive list of factors which could affect the Company's future operating results can be found in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, in "Item 1. Description of Business" under the caption "Risk Factors." Failure to satisfactorily achieve any of the Company's objectives or avoid any of the above or other risks would likely have a material adverse effect on the Company's business and results of operations. 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 risks from currency rate fluctuations. In addition, the Company does not 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 16 17 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 its 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, management evaluates the Company's financial position on an ongoing basis. 17 18 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS RECENT SALES OF UNREGISTERED SECURITIES 1. On January 29, 1999 the Company entered into an agreement with two private investors to sell up to $6.0 million of 5% preferred stock (600 shares at stated value of $10,000 per share) with rights of conversion into common stock. The financing consists of two tranches of preferred stock. The first tranche of $4.0 million (400 shares of 5% Series A Preferred Stock with Conversion Features) was sold on January 29, 1999, and until May 29, 1999, is convertible into common stock at a fixed price of $13.06 per share. Thereafter, the preferred stock is convertible at the lesser of the fixed price or a variable rate of 101% of the average of the ten lowest closing bid prices of the common stock during the thirty trading days immediately preceding the conversion date. In no event can the first tranche be converted into more than 1,450,000 shares. The second tranche of $2.0 million can be sold by the Company, at its option, during the period commencing July 28, 1999 and ending September 16, 1999, subject to the satisfaction by the Company of certain conditions. The preferred stock in the second tranche will contain terms and conditions for conversion similar to the first tranche, except that the fixed conversion price will be set at 125% of the average market price of the common stock at the time of the second closing. Dividends on the preferred stock are payable in cash or in common stock, at the option of the Company, at the annual rate of 5%. Additional features of the preferred stock include, among other things, a redemption feature at the Company's option if the common stock trades below a floor of $5 per share or above a ceiling of $20 per share. The investors also received warrants to purchase for a period of 5 years, 75,000 shares of the Company's common stock at $12.98 per share. 2. Brighton Capital, Ltd, ("Brighton") acted as a finder with respect to the negotiation and execution of the preferred stock agreement described above. As consideration for the services provided by Brighton in connection with the Agreement, the Company paid Brighton a cash commission of 6% of the gross sale proceeds realized from sale of the preferred stock, plus warrants to purchase 15,000 shares of common stock at $12.98 per share. The warrants are exercisable over a 5 year period and may be called by the Company if the market value of the common stock equals or exceeds $25.96 for any 10 consecutive days during the exercise period. 3. On January 25, 1999, the Company issued to Trinity Capital Advisors, Inc. ("Trinity") a warrant to purchase 40,000 shares of common stock at an exercise price of $11.00 per share at any time until January 24, 2002. The warrant was issued in consideration for Trinity waiving certain rights of first refusal it had with respect to the sale by the Company of the 5% Series A Preferred Stock with Conversion Features described above. 4. On January 25, 1999, the Company issued to Kingsbridge Capital Limited ("Kingsbridge") a warrant to purchase 25,000 shares of common stock at an exercise price of $11.00 per share at any time until January 24, 2002. The warrant was issued in consideration for Kingsbridge waiving certain antidilution provisions under an existing warrant held by Kingsbridge that might have been triggered as a result of the issuance of the preferred stock and warrants described in paragraph 1 above. 5. During the quarter ended March 31, 1999, the Company made two sales of common stock to Kingsbridge Capital Limited pursuant to the Equity Line Agreement entered into between the Company and Kingsbridge on March 27, 1998. The sales occurred on January 25, 1999, and March 30, 1999, whereby the Company issued to Kingsbridge 78,855 shares and 30,964 shares and realized proceeds of $700,000 and $250,000, respectively. 18 19 The securities issued by the Company pursuant to the transactions described above have been issued without registration under the Securities Act of 1933 in reliance upon the exemptions from registration provided under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The foregoing transactions did not involve any public offering, the investors either received or had access to adequate information about the Company in order to make an informed investment decision, and the Company reasonably believed that each of the investors was "sophisticated" within the meaning of Section 4(2) of the Securities Act. 19 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the quarter ended March 31, 1999: 1. Form 8-K dated January 28, 1999, to report a press release issued to the public on January 27, 1999. 2. Form 8-K dated February 8, 1999, to report under Item 5 the private placement of 5% Series A Preferred Stock with Conversion Features. 20 21 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 12, 1999 By: /s/ Alvin J. Glasky ----------------------------------- Alvin J. Glasky, Ph.D., Chief Executive Officer and President Date: May 12, 1999 By: /s/ Samuel Gulko ----------------------------------- Samuel Gulko, Chief Financial Officer, Secretary and Treasurer (Principal Accounting and Financial Officer) 21 22 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1999 MAR-31-1999 398,400 3,091,483 154,162 0 0 3,886,519 4,202,879 862,838 7,290,980 2,655,075 973,559 0 3,288,611 29,036,684 (28,716,460) 7,290,980 0 0 0 0 4,403,867 0 61,016 (4,418,598) 0 (4,418,598) 0 0 0 (4,418,598) (0.71) (0.71)
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