-----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, E31QfRM8pOiQAetiERUSsJMTn99BFNxrhZaam8NRh3hkzVlYodI7vG3BQaQZhess TB29HX0BOmvDqn0ggmVDYA== /in/edgar/work/20000814/0001095811-00-002778/0001095811-00-002778.txt : 20000921 0001095811-00-002778.hdr.sgml : 20000921 ACCESSION NUMBER: 0001095811-00-002778 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOTHERAPEUTICS INC CENTRAL INDEX KEY: 0000831547 STANDARD INDUSTRIAL CLASSIFICATION: [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: 698537 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 e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 2000 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 June 30, 2000 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 8, 2000 ----------------------------- ----------------------------- Common Stock, $.001 par value 10,236,053 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 June 30, 2000 (unaudited) and December 31, 1999 ................................................................. 4 Condensed Consolidated Statements of Operations for the three months ended June 30, 2000 and 1999 (unaudited).......................................................... 5 Condensed Consolidated Statements of Operations for the six months ended June 30, 2000 and 1999 and for the period from inception (June 15, 1987) to June 30, 2000 (unaudited)....................................................................... 6 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 and for the period from inception (June 15, 1987) to June 30, 2000 (unaudited)................................................................... 7 Notes to Condensed Consolidated Financial Statements................................... 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION... 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................................................ 16 PART II. OTHER INFORMATION...................................................................... 17 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 19
2 3 NEOTHERAPEUTICS, INC. (A Development Stage Enterprise) FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 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 financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission. 3 4 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
June 30, December 31, ASSETS 2000 1999 ------------ ------------ CURRENT ASSETS: (Unaudited) Cash and cash equivalents $ 11,971,927 $ 6,726,220 Marketable securities and short-term investments 2,930,328 2,955,212 Other receivables, principally investment interest 324,893 148,034 Prepaid expenses and refundable deposits 65,403 130,202 ------------ ------------ Total current assets 15,292,551 9,959,668 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Equipment 2,778,849 2,607,741 Leasehold improvements 1,842,537 1,814,167 Accumulated depreciation and amortization (1,542,799) (1,261,220) ------------ ------------ Property and equipment, net 3,078,587 3,160,688 ------------ ------------ OTHER ASSETS: Debt issuance costs, net 582,863 -- Prepaid expenses and Deposits 53,442 53,641 ------------ ------------ 636,305 53,641 ------------ ------------ $ 19,007,443 $ 13,173,997 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 3,936,750 $ 3,613,680 Accrued payroll and related taxes 115,758 111,822 Note payable to related party 431,381 558,304 Current portion of long-term debt 430,177 472,938 ------------ ------------ Total current liabilities 4,914,066 4,756,744 OTHER LIABILITIES: Long-term debt, net of current portion 558,771 637,308 Subordinated convertible debentures, net of original issue discount of $8,986,972 1,013,028 -- Deferred rent 80,826 75,121 ------------ ------------ Total liabilities 6,566,691 5,469,173 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $0.001 per share, 5,000,000 shares authorized, none issued and outstanding at June 30, 2000 and December 31, 1999 -- -- Common stock, par value $0.001 per share, 25,000,000 shares authorized: Issued and outstanding, 10,109,053 and 8,778,370 shares at June 30, 2000 and December 31, 1999, respectively 84,580,094 58,139,327 Unrealized (losses) on available-for-sale securities (65,816) (38,572) Deficit accumulated during the development stage (72,073,526) (50,395,931) ------------ ------------ Total stockholders' equity 12,440,752 7,704,824 ------------ ------------ $ 19,007,443 $ 13,173,997 ============ ============
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 JUNE 30, 2000 AND 1999
Three Months Three Months Ended Ended June 30, June 30, 2000 1999 ------------ ------------ (Unaudited) (Unaudited) REVENUES $ -- $ -- ------------ ----------- OPERATING EXPENSES: Research and development 10,206,868 3,257,756 General and administrative 1,180,291 748,208 ------------ ----------- 11,387,159 4,005,964 ------------ ----------- LOSS FROM OPERATIONS (11,387,159) (4,005,964) ------------ ----------- OTHER INCOME (EXPENSE): Interest (expense), net (958,840) (50,509) ------------ ----------- Total other income (expense) (958,840) (50,509) ------------ ----------- NET LOSS $(12,345,999) $(4,056,473) ============ =========== BASIC AND DILUTED LOSS PER SHARE $ (1.29) $ (0.63) ============ =========== BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,535,653 6,444,026 ============ ===========
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 OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO JUNE 30, 2000
Six Months Six Months Inception Ended Ended Through June 30, June 30, June 30, 2000 1999 2000 ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) REVENUES, from grants $ -- $ -- $ 497,128 ------------ ------------ ------------ OPERATING EXPENSES: Research and development 18,707,071 6,565,188 54,781,859 General and administrative 2,135,293 1,844,643 14,493,624 Settlement of litigation -- -- 2,458,359 ------------ ------------ ------------ 20,842,364 8,409,831 71,733,842 ------------ ------------ ------------ LOSS FROM OPERATIONS (20,842,364) (8,409,831) (71,236,714) ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest (expense), net (835,746) (65,240) (315,243) Other income 517 -- 63,679 ------------ ------------ ------------ Total other income (expense) (835,229) (65,240) (251,564) ------------ ------------ ------------ NET LOSS $(21,677,593) $ (8,475,071) $(71,488,278) ============ ============ ============ BASIC AND DILUTED LOSS PER SHARE $ (2.50) $ (1.40) ============ ============ BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,656,752 6,036,187 ============ ============
The accompanying notes are an integral part of these condensed consolidated statements. 6 7 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A Development-Stage Enterprise) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO JUNE 30, 2000
Six Months Six Months Inception Ended Ended Through June 30, June 30, June 30, 2000 1999 2000 ------------ ----------- ------------ (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $(21,677,593) $(8,475,071) $(71,488,279) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 281,779 252,055 1,667,556 Amortization of discount on convertible debentures and beneficial conversion feature 1,013,028 -- 1,013,028 Compensation expense arising from the grant of warrants and stock options 25,279 332,143 1,110,244 Issuance of common stock in settlement of litigation -- -- 2,458,359 Amortization of deferred compensation -- -- 93,749 Increase in deferred rent 5,706 14,406 80,826 Compensation expense for extension of debt conversion agreements, net -- -- 503,147 Gain on sale of assets -- -- (5,299) Increase in other receivables (176,858) (10,085) (324,646) Decrease (increase) in prepaid expenses, deferred charges and refundable deposits 64,799 19,421 (23,110) Increase in accounts payable and accrued expenses 323,070 436,866 4,096,850 Increase in accrued payroll and related taxes 3,932 14,413 754,448 Decrease in employee expense reimbursement and accrued interest to related parties -- -- 300,404 ------------ ----------- ------------ Net cash used in operating activities (20,136,858) (7,415,852) (59,762,723) ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (199,478) (313,825) (4,701,689) Sales (purchases) of marketable securities and short-term investments, net 24,884 (251,044) (2,930,328) Unrealized (loss) gain on available-for-sale securities (27,244) 2,497 (65,816) 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 (201,838) (562,372) (7,634,261) ------------ ----------- ------------
7 8 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, 2000 1999 2000 ------------ ----------- ------------ (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issuance including revenue participation units converted to common stock 16,301,038 4,933,369 64,019,155 Proceeds from preferred stock issuance, net of offering costs -- 3,614,504 3,608,788 Proceeds from exercise of stock options and warrants 52,889 91,905 864,538 Proceeds from sale of convertible debentures, net of issuance costs 9,417,138 -- 9,417,138 Proceeds from long-term debt -- 33,786 1,862,958 Repayment of long-term debt (121,299) (258,239) (874,009) Repayment (issuance) of notes from officers and directors for exercise of stock options 61,560 -- (225,000) Dividends paid to preferred stockholders -- (82,312) (136,246) (Repayment) proceeds from notes payable to related parties, net (126,923) -- 630,977 Cash at acquisition -- -- 200,612 ------------ ----------- ------------ Net cash provided by financing activities 25,584,403 8,333,013 79,368,911 ------------ ----------- ------------ Net increase in cash and cash equivalents 5,245,707 354,789 11,971,927 Cash and cash equivalents, beginning of period 6,726,220 1,097,341 -- ------------ ----------- ------------ Cash and cash equivalents, end of period $ 11,971,927 $ 1,452,130 $ 11,971,927 ============ =========== ============ SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of warrants in connection with equity and debt financings $ 1,013,028 $ 344,610 $ 1,402,638 ============ =========== ============ 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 preferred stock into shares of common stock $ -- $ 722,900 $ 3,608,788 ============ =========== ============ Conversion of revenue participation Units into shares of common stock $ -- $ -- $ 676,000 ============ =========== ============ Issuance of stock options and warrants for services $ 25,279 $ 332,143 $ 1,110,244 ============ =========== ============ Issuance of common stock and warrants in connection with settlement of litigation $ -- $ -- $ 2,458,359 ============ =========== ============ Conversion of other accrued liabilities to shares of common stock $ -- $ -- $ 52,104 ============ =========== ============ Dividends on preferred stock payable in shares of common stock $ -- $ 82,312 $ 82,312 ============ =========== ============
The accompanying notes are an integral part of these condensed consolidated statements. 8 9 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES -------------------------------------- (A Development-Stage Enterprise) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (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 June 30, 2000, 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, 1999 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 three subsidiaries, Advanced ImmunoTherapeutics, Inc., incorporated in California in June 1987, NeoTherapeutics, GmbH, incorporated in Switzerland in April 1997 and NeoGene Technologies, Inc., incorporated in California in October 1999. All references to the "Company" hereinafter refer to NeoTherapeutics, Inc. and its subsidiaries as a consolidated entity. The Company is a development-stage biopharmaceutical company engaged in the discovery and development of novel therapeutic drugs intended to treat neurological and psychiatric diseases and conditions such as memory deficits associated with Alzheimer's disease, aging, neuropathy, 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 subsidiaries. 9 10 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES -------------------------------------- (A Development-Stage Enterprise) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. 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, 2000, the Company had committed to pay, through April 2002, approximately $1,180,000 for such grants and fellowships. Grant expense for the six month periods ended June 30, 2000 and 1999, amounted to $541,600 and $308,500, respectively. Major Clinical Trials: The Company has entered into agreements with a contract research organization and a University to conduct multiple clinical trials and open-label studies following completion of treatment involving more than 2,000 patients worldwide. The agreements, all of which are cancelable by either party upon thirty days notice, are expected to result in aggregate future expenditures ranging from $30 to $35 million through June 2001. The costs of these clinical trials that were charged to operations for the six months ended June 30, 2000 and 1999 were approximately $15.6 million and $3.0 million, respectively. 3. SUBORDINATED CONVERTIBLE DEBENTURES On April 6, 2000, the Company entered into a financing transaction with two private investors who have invested previously in the Company. The transaction consisted of (a) $10 million in 5% subordinated convertible debentures due April 6, 2005, (b) redeemable warrants to purchase up to 4 million shares of common stock over a two-year period (the "B" warrants) and (c) five-year warrants to purchase from 115,000 up to 265,000 shares of the Company's common stock at an exercise price of $19.672 per share. The "B" warrants can be redeemed in part by the Company as frequently as several times per week and when called for redemption can be exercised by the investors at 97% of the per share closing market price (i.e., a discount of 3%), and are exercisable at the sole option of the investors at the price of $33.75 per share. The number of "B" warrants that are exercisable at each redemption are subject to average daily volume restrictions. To the extent the "B" warrants have not been exercised, the investors have agreed to fund two additional tranches of $10 million each of 5% subordinated convertible debentures, subject to certain restrictions, including the following: o The investors will limit their investment to 10% of the Company's market capitalization at the time of each tranche, such investment not to exceed $10 million; o The additional tranches must be successfully registered with the SEC; and o The Company must maintain the continued listing requirements of the Nasdaq Stock Market. In the event any of these conditions cannot be met and the additional tranches (or other financing alternatives) are not available, the Company may be required to scale-back or cancel certain of its clinical development activities. The debentures are convertible at the lesser of $20.25 per share or 101% of the market price of the common stock as determined under the agreement. The two additional tranches of convertible 10 11 debentures of up to $10 million each, 5 and 10 months after the closing, are at the option of either the Company or the investor. If the Company exercises the option, the two tranches are under similar terms and conditions as the initial tranche. If the investor exercises the option, the convertible debentures in each of the two tranches will be issued at the fixed conversion price of $20 per share. The amount available under the two additional tranches will be reduced pro-rata to the extent that the investors have exercised or the Company has redeemed the "B" warrants to purchase common stock. Based upon an allocation of the proceeds of the offering between the debentures and warrants using certain assumptions about market interest rates and the corresponding fair value of the debentures and (using the Black-Sholes option-pricing model to value the warrants using appropriate assumptions), the Company assigned a value of approximately $9.5 million to the warrants. This has been reflected as original issue discount to the debentures and is being amortized over the term of the debentures using the effective interest method. The beneficial conversion feature was assigned a value of $0.5 million and was fully amortized in the second quarter when the notes first became convertible. 4. STOCKHOLDERS' EQUITY Common Stock: On May 1, 2000 the Company completed a private placement of 500,000 shares of common stock for $7.0 million cash. The investor, a major Canadian financial institution, also received five-year warrants to purchase 125,000 shares of common stock at $17.50 per share. During the quarter ended June 30, 2000, the Company had no sales under its existing Equity Line Agreement with a private investor. At June 30, 2000 and at August 8, 2000, $7.5 million remains available under the agreement. During the quarter ended June 30, 2000, the Company called and the investors exercised 43,400 of the aforementioned "B" Warrants, resulting in the issuance to the investor 43,400 shares of common stock in exchange for $463,078 cash. 5. STOCK OPTIONS Stock option activity during the six month period ended June 30, 2000 are as follows:
Option Shares Price ---------- --------------- Outstanding at January 1, 2000 1,389,373 $ 0.025-$12.875 Granted 383,900 10.25 - 12.375 Exercised (30,125) 0.025- 7.625 Forfeited -- -- ---------- --------------- Outstanding at June 30, 2000 1,743,148 $ 3.75 -$13.00 ========== ===============
During the six month periods ended June 30, 2000 and 1999, the Company recognized compensation expense for vested consultants options pursuant to SFAS 123 aggregating $25,279 and $332,143, 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. 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 June 30, 2000, the Company incurred a cumulative net loss of approximately $71.5 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 June 30, 2000 Compared to Three Months Ended June 30, 1999: There were no revenues during the three months ended June 30, 2000 or the three months ended June 30, 1999. Research and development expenses for the three months ended June 30, 2000 increased approximately $6,949,000 or 213% over the same period in 1999. 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, all of which were conducted by outside organizations, were attributable primarily to increases in the number and duration of outside clinical trials. In addition, increases in quantity requirements for manufacturing and formulation by the Company's contract manufacturer of NEOTROFIN(TM) and other compounds used in the Company's research and testing programs contributed to the increased costs and expenses during the quarter and were partially offset by lower preclinical study costs and legal fees related to patent and trademark activities. Internally, research and development expenses increased in the categories of salaries, due to additional personnel and salary increases. 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 $432,000 or 58% from the same period in 1999 due primarily to increases in salaries and related benefits due to increases in personnel, salary increases, recruiting expenses and increases in consulting and legal fees, which were partially offset by the reduction of investor 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. 12 13 Net interest expense increased by approximately $908,400 due to a non-cash charge of $1,013,000 resulting from the amortization of original issue discount and beneficial conversion feature related to the subordinated convertible debentures issued on April 6, 2000. Interest earnings from higher cash balances resulting from the investments of unallocated proceeds from recent equity and debt financings partially offset this non-cash charge. 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, 2000 Compared to Six Months Ended June 30, 1999: There were no revenues during the six months ended June 30, 2000 or the six months ended June 30, 1999. Research and development expenses for the six months ended June 30, 2000 increased approximately $12,142,000 or 185% over the same period in 1999. Current period increases were due primarily to costs and expenses associated with the conduct of clinical trials as the Company continued the acceleration of its program to commercialize its lead compound, NEOTROFIN(TM). These costs and expenses, all of which were conducted by outside organizations, were attributable primarily to increases in the number and duration of outside clinical trials, and were partially offset by lower quantity requirements for manufacturing and formulation by the Company's contract manufacturer of NEOTROFIN(TM) and other compounds used in the Company's research and testing programs as well as legal fees related to patent and trademark activities. Internally, research and development expenses increased in the categories of salaries, due to additional personnel and salary increases, seminars and consulting. 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 $291,000 or 16% from the same period in 1999 due primarily to increases in salaries and related benefits due to increases in personnel, salary increases, recruiting expenses and increases in legal fees which were partially offset by the reduction of investor 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 $771,000 due to a non-cash charge of $1,013,000 resulting from the amortization of original issue discount and beneficial conversion feature related to the subordinated convertible debentures issued on April 6, 2000. Interest earnings from higher cash balances resulting from the investments of unallocated proceeds from recent equity and debt financings partially offset this non-cash charge. Interest earnings from higher cash balances resulting from the investments of unallocated proceeds from recent equity financings partially offset this non-cash charge. 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. 13 14 LIQUIDITY AND CAPITAL RESOURCES From inception through June 30, 2000, the Company financed its operations primarily through sales of equity securities. The Company has also financed its operations through government grants, borrowings and deferred payment of salaries and other expenses due to related parties. 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 June 30, 2000, the Company has put to the investor 904,403 shares of its common stock and realized gross proceeds of $7.5 million. As of June 30, 2000, $7.5 million remains available under the Equity Line Agreement. On February 25, 2000, the Company sold to two private investors 520,324 shares of common stock for $8.0 million. The investors also received five-year warrants to purchase 104,000 shares of common stock at an exercise price of $21.00 per share. On April 6, 2000, the Company entered into a financing transaction with two private investors and received on that date $10 million cash from the sale of convertible debentures and warrants, representing the initial segment of the transaction. Subject to certain conditions, other elements of this transaction is expected to provide an additional $20 million cash over a ten-month period. On May 1, 2000, the Company completed a private placement of 500,000 shares of common stock for $7.0 million cash. At June 30, 2000, working capital amounted to approximately $10.4 million. This amount included cash and cash equivalents of approximately $12.0 million and marketable securities and short-term investments of approximately $2.9 million. In comparison, at December 31, 1999, the Company had working capital of approximately $5.2 million, which included cash and cash equivalents of approximately $6.7 million and short-term investments of approximately $3.0 million. The $5.2 million increase in working capital during the six months is attributable primarily to the sale of approximately $25.8 million of common stock and convertible debentures to private investors plus proceeds from exercise of stock options, offset by (i) the operating loss for the period, (ii) purchases of property and equipment and (iii) long-term debt repayment. 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, 2000, the Company had committed to pay, through April 2002, approximately $1.2 million for such grants and fellowships. The Company has entered into agreements with a contract research organization and a University to conduct multiple clinical trials, including "open-label" extensions of such clinical trials, in a number of countries involving more than 2,000 patients. The agreements, all of which are cancelable by either party upon thirty days notice, are expected to result in aggregate future expenditures ranging from $30 million to $35 million through June 2001. 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 $71.5 million through June 30, 2000, 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 14 15 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 eight 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. 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 will be sufficient to satisfy its current and projected funding requirements for at least the next eight 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 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. 15 16 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 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, 1999, 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 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. 16 17 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS RECENT SALES OF UNREGISTERED SECURITIES 1. On June 26, 2000 and June 28, 2000 the Company sold to two private investors 43,400 shares of common stock for cash proceeds of $463,078 as a result of the exercise of an equal number of warrants by the investors under a callable warrant agreement entered into on April 6, 2000. 2. Brighton Capital, Ltd, ("Brighton") acted as a finder with respect to the negotiation and execution of the agreement described above. As consideration for the services provided by Brighton in connection with the agreement, the Company paid Brighton a cash commission of $16,208, representing 3 1/2% of the gross sale proceeds realized from sale of the common stock plus 5 year warrants to purchase 2,782 shares of common stock at $15.00 per share. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were voted upon at the Annual Meeting of Stockholders of the Company held on June 12, 2000: 1. The following persons were elected as Class I directors to serve three-year terms expiring at the Annual Meeting of Stockholders to be held in 2003, or until their successors are elected and qualified: Number of Votes Cast --------------------------------- Name For Authority Withheld ---- ------------ ------------------ Samuel Gulko 8,475,310 38,805 Eric L. Nelson, Ph.D. 8,475,310 38,805 Paul H. Silverman, Ph.D., D.Sc. 8,475,310 38,805 2. The following persons were elected as Class III directors to serve for the remaining two years of a three-year term expiring at the Annual Meeting of Stockholders to be held in 2002, or until their successors are elected and qualified: Number of Votes Cast --------------------------------- Name For Authority Withheld ---- ------------ ------------------ Alvin J. Glasky, Ph.D. 8,475,210 38,905 Ann C. Kessler, Ph.D. 8,475,210 38,905 Armin Kessler 8,475,210 38,905 3. A proposal to approve the issuance of common stock and warrants pursuant to a financing transaction completed on February 25, 2000, was approved by the following vote: Votes Cast Number of Shares ---------- ---------------- For 4,248,441 Against 35,712 Abstain 50,455 Broker Non-Votes 4,179,507 17 18 4. A proposal to approve the issuance of common stock pursuant to conversion rights under a convertible debenture and warrant financing transaction completed on April 6, 2000, was approved by the following vote: Votes Cast Number of Shares ---------- ---------------- For 4,231,644 Against 39,209 Abstain 63,755 Broker Non-Votes 4,179,507 5. A proposal to approve an increase in the number of shares of common stock issuable under the 1997 Stock Incentive Plan by 750,000, was approved by the following vote: Votes Cast Number of Shares ---------- ---------------- For 4,191,338 Against 77,560 Abstain 65,710 Broker Non-Votes 4,179,507 6. A proposal to ratify the selection of Arthur Andersen LLP as independent public accountants for the Company, was approved by the following vote: Votes Cast Number of Shares ---------- ---------------- For 8,448,396 Against 25,015 Abstain 40,704 Broker Non-Votes -0- 18 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K 1. On April 3, 2000, the Company filed a report on Form 8-K announcing an $8 million sale of common stock to private investors. 2. On April 21, 2000, the Company filed a report on Form 8-K announcing the sale of $10 million of Subordinated Convertible Debentures and Warrants. 3. On May 25, 2000, the Company filed a report on Form 8-K announcing the sale to a private institutional investor of $7,000,000 of common stock. 19 20 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 14, 2000 By: /s/ Samuel Gulko ------------------------------------- Samuel Gulko, Chief Financial Officer (Principal Accounting and Financial Officer) 20 21 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 27 Financial Data Schedule EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 11,971,927 2,930,328 324,893 0 0 15,292,551 4,621,386 1,542,799 19,007,443 4,914,066 6,566,691 0 0 84,580,094 (72,139,342) 19,007,443 0 0 0 0 20,842,364 0 835,746 (21,677,593) 0 (21,677,593) 0 0 0 (21,677,593) (2.50) (2.50)
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