<PAGE> 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, 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 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 2, 1999
- --------------------------------- -------------------------------
Common Stock, $.001 par value 7,952,748
<PAGE> 2
NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Statement regarding financial information.............................................. 3
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998.................................................................. 4
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998....................................................... 5
Condensed Consolidated Statements of Operations for the six months ended June 30,
1999 and 1998 and for the period from inception (June 15, 1987) to June 30,
1999............................................................................... 6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
1999 and 1998 and for the period from inception (June 15, 1987) to June 30,
1999............................................................................... 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............................. 18
PART II. OTHER INFORMATION...................................................................... 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.................................. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 23
</TABLE>
2
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NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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
<PAGE> 4
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,452,130 $ 1,097,341
Marketable securities and short-term investments 2,020,392 1,769,348
Other receivables, principally investment interest 122,637 112,552
Advance deposit to clinical trial vendor -- 265,727
Prepaid expenses and refundable deposits 522,026 157,495
------------ ------------
Total current assets 4,117,185 3,402,463
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 2,503,609 2,197,253
Leasehold improvements 1,802,264 1,794,794
Accumulated depreciation and amortization (992,468) (740,413)
------------ ------------
Property and equipment, net 3,313,405 3,251,634
------------ ------------
PREPAID EXPENSES AND DEPOSITS 53,841 172,066
------------ ------------
$ 7,484,431 $ 6,826,163
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,715,820 $ 1,278,954
Accrued payroll and related taxes 95,783 81,370
Note payable to related party 558,304 558,304
Current portion of long-term debt 498,096 445,297
------------ ------------
Total current liabilities 2,868,003 2,363,925
LONG-TERM DEBT, net of current portion 848,922 1,126,174
DEFERRED RENT 60,714 46,308
------------ ------------
Total liabilities 3,777,639 3,536,407
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share, 5,000,000
shares authorized:
Issued and outstanding, 320 shares 5% Series A Preferred
with Conversion Features at June 30, 1999, none at
December 31, 1998, liquidation preference $3.2 million 2,546,994 --
Common stock, par value $0.001 per share, 25,000,000 shares
authorized:
Issued and outstanding, 6,748,207 and 6,146,854 shares
at June 30, 1999 and December 31, 1998, respectively 33,960,256 27,535,329
Unrealized gains on available-for-sale securities 26,704 24,207
Deficit accumulated during the development stage (32,827,162) (24,269,780)
------------ ------------
Total stockholders' equity 3,706,792 3,289,756
------------ ------------
$ 7,484,431 $ 6,826,163
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
4
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES, from grants $ -- $ --
----------- -----------
OPERATING EXPENSES:
Research and development 3,257,756 1,886,253
General and administrative 748,208 757,222
----------- -----------
4,005,964 2,643,475
----------- -----------
LOSS FROM OPERATIONS (4,005,964) (2,643,475)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income (expense), net (50,509) 66,591
Other income (expense) -- (4,603)
----------- -----------
Total other income (expense) (50,509) 61,988
----------- -----------
NET LOSS $(4,056,473) $(2,581,487)
=========== ===========
BASIC AND DILUTED LOSS
PER SHARE $ (0.63) $ (0.47)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 6,444,026 5,493,280
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
<PAGE> 6
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND 1998 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
1999 1998 1999
----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES, from grants $ -- $ -- $ 497,128
----------- ------------ ------------
OPERATING EXPENSES:
Research and development 6,565,188 3,674,215 22,582,289
General and administrative 1,844,643 1,497,511 10,737,531
----------- ------------ ------------
8,409,831 5,171,726 33,319,820
----------- ------------ ------------
LOSS FROM OPERATIONS (8,409,831) (5,171,726) (32,822,692)
----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net (65,240) 95,362 499,406
Other income (expense) -- (13,414) 27,435
----------- ------------ ------------
Total other income (expense) (65,240) 81,948 526,841
----------- ------------ ------------
NET LOSS $(8,475,071) $ (5,089,778) $(32,295,851)
=========== ============ ============
BASIC AND DILUTED LOSS
PER SHARE $ (1.40) $ (0.93)
=========== ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 6,036,187 5,482,487
=========== ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
6
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO JUNE 30, 1999
<TABLE>
<CAPTION>
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
1999 1998 1999
----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(8,475,071) $(5,089,778) $(32,295,851)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 252,055 224,630 1,117,957
Issuance of common stock, options
and warrants for services 332,143 184,382 1,023,357
Amortization of deferred
compensation -- -- 93,749
Increase in deferred rent 14,406 23,154 60,714
Compensation expense for extension of
Debt Conversion Agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
(Increase) decrease in other
receivables (10,085) 174,864 (122,391)
Decrease (increase) in prepaid
expenses, deferred charges and
refundable deposits 19,421 (11,175) (480,864)
Increase in accounts payable and
accrued expenses 436,866 72,871 1,875,920
Increase in accrued payroll and
related taxes 14,413 77,796 734,477
Increase in employee expense
reimbursement and accrued
interest to related parties -- -- 300,404
----------- ----------- ------------
Net cash used in operating
activities (7,415,852) (4,343,256) (27,194,680)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (313,825) (135,562) (4,386,175)
Purchases of marketable securities and short-term
investments, net (251,044) (132,146) (2,020,392)
Unrealized gain (loss) on available-for-sale
securities 2,497 (4,009) 26,704
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 (562,372) (271,717) (6,316,291)
----------- ----------- ------------
</TABLE>
7
<PAGE> 8
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
1999 1998 1999
----------- -------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance including Revenue
Participation Units converted to common stock 4,933,369 426,420 28,602,954
Proceeds from preferred stock issuance, net
of offering costs 3,614,504 -- 3,614,504
Dividends on preferred stock (82,312) -- (82,312)
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 (258,239) (46,468) (513,393)
Proceeds from exercise of stock options 91,905 -- 808,985
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 8,333,013 464,952 34,963,101
----------- -------------- ------------
Net increase (decrease) in cash and cash
equivalents 354,789 (4,150,021) 1,452,130
Cash and cash equivalents, beginning of period 1,097,341 6,063,347 --
----------- -------------- ------------
Cash and cash equivalents, end of period $ 1,452,130 $ 1,913,326 $ 1,452,130
=========== ============== ============
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
=========== ============== ============
Conversion of preferred stock into shares
of common stock $ 722,900 $ -- $ 722,900
=========== ============== ============
Issuance of stock options and warrants
for services $ 332,143 $ 134,442 $ 1,023,357
=========== ============== ============
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 $ 82,312 $ -- $ 82,312
=========== ============== ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
8
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 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.
The Company believes that its existing capital resources, including the
$9.5 million proceeds (before payment of offering expenses) realized from the
sale of 1,150,000 shares of common stock on July 30, 1999, 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. In order for the Company to continue to operate through the end of the
year 2000, it will need to raise additional funds. While the Company intends to
pursue the raising of such funds, there can be no assurance that the Company
will be successful in these efforts.
9
<PAGE> 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, 1999, the Company has committed to pay, through December 2000,
approximately $570,000 for such grants and fellowships. Grant expense for the
six-month periods ended June 30, 1999 and 1998, amounted to $308,500 and
$248,000, respectively.
3. STOCKHOLDERS' EQUITY
Common Stock
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 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.
During May 1999, the Company issued 12,500 shares of common stock to
its legal counsel, in consideration for legal services rendered in the amount of
$70,000, and a warrant to purchase 25,000 shares of common stock at an exercise
price of $11.40 per share in consideration for a discount of 15% on fees for
legal services rendered during the months of March through December 1999. The
warrant expires May 17, 2004, and may be called by the Company if the closing
price of the common stock remains at $22.80 per share or above for any 10
consecutive trading days. The fair value of the warrant is equal to the
aforementioned discount, which is recorded as invoices are presented from the
legal counsel. For the six months ended June 30, 1999, the total value of the
aforementioned legal services rendered in exchange for these shares and the
warrant was $121,704. The shares of common stock issued for the aforementioned
services 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.
Preferred Stock
On June 18, 1999, the holders of the Company's preferred stock
exercised their conversion privilege and exchanged 80 shares of preferred stock
for 68,434 shares of common stock at the conversion price of $11.69 per share.
10
<PAGE> 11
4. STOCK OPTIONS
Stock option activity during the six month period ended June 30, 1999
are as follows:
<TABLE>
<CAPTION>
Option
Shares Price
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1999 853,873 $0.025-$12.875
Granted 320,000 10.25-13.00
Exercised (1,600) 4.50-8.875
Forfeited -- --
--------- --------------
Outstanding at June 30, 1999 1,172,273 $0.025-$13.00
========= ==============
</TABLE>
During the six month periods ended June 30, 1999 and 1998, the Company
recognized compensation expense for vested consultants options pursuant to SFAS
123 aggregating $332,143 and $184,382, 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.
5. EQUITY TRANSACTION SUBSEQUENT TO JUNE 30, 1999
On July 13, 1999, the holders of the Company's preferred stock
exercised their conversion privilege and exchanged 70 shares of preferred stock
for 54,390 shares of common stock at the conversion price of $12.875 per share.
On July 30, 1999, pursuant to a registration statement filed with the
Securities and Exchange Commission on June 3, 1999, as amended, the Company sold
1,150,000 shares of common stock to the public, including the underwriters'15%
overallotment, at a price of $9.375 per share, before deducting underwriters'
discounts and commissions. The Company realized proceeds of approximately
$9,545,000 from this offering, before deducting certain expenses of the offering
estimated to aggregate approximately $700,000 of which approximately $307,100
had been incurred through June 30, 1999, and is shown in the accompanying
financial statements as a prepaid expense.
11
<PAGE> 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," as well as
in the Company's Annual Report on Form 10-K for the year ended December 31, 1998
under Item 1, "Description of Business - Risk Factors," and in the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 3, 1999, as amended, under "Risk Factors."
RESULTS OF OPERATIONS
Overview:
From the inception of the Company in 1987 through June 30, 1999, the
Company incurred a cumulative net loss of approximately $32.3 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 seeking currently.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998:
There were no revenues during the three months ended June 30, 1999 or
the three months ended June 30, 1998.
Research and development expenses for the three months ended June 30,
1999 increased approximately $1,372,000 or 41% 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 decreased approximately $9,000 or
1% from the same period in 1998. 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 $112,000 due to the use of invested
funds in operations and increased interest expense on higher levels of
borrowings. The
12
<PAGE> 13
Company expects its net interest expense to decrease in the next quarter due to
the reduction of its debt and increase in invested funds from its July 1999
equity financing.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
There were no revenues during the six months ended June 30, 1999 or the
six months ended June 30, 1998.
Research and development expenses for the six months ended June 30,
1999 increased approximately $2,891,000 or 79% 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 $347,000 or
23% from the same period in 1998 due primarily to professional fees, investor
and public relations fees, travel and printing costs. 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 $160,000
due to the use of invested funds in operations and increased interest expense on
higher levels of borrowings. The Company expects its net interest expense to
decline over the next quarter due to the equity financing obtained in July 1999
and the reduction of debt levels due to principal repayments on its outstanding
loans.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 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 the Company's common stock. Through June 30, 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 June 30, 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 900,000
shares.
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<PAGE> 14
On January 29, 1999, the Company sold to two private investors $4.0
million of 5% Series A preferred stock with Conversion Features. 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 is
convertible into common stock 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. On June 18, 1999, the
holders of the preferred shares exercised their conversion right and exchanged
80 preferred shares for 68,434 shares of common stock. On July 13, 1999, 70
preferred shares were converted into 54,390 shares of common stock. 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%, except that dividends accrued on shares
converted into common stock are payable in cash at the time of conversion. At
June 30, 1999, accrued dividends amounted to $66,868. 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 June 30, 1999, working capital amounted to approximately $1.2
million. This amount included cash and cash equivalents of approximately $1.5
million and marketable securities and short-term investments of approximately
$2.0 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 six months is
attributable primarily to the sale of $4.0 million of preferred stock, the sale
of $4.0 million of common stock in a private placement and the sale of $950,000
of common stock to a private investor under the Company's Line of Equity
Agreement. These increases were offset by (i) the operating loss for the period,
(ii) laboratory equipment purchases and (iii) long-term debt repayment.
On July 30, 1999, pursuant to a registration statement filed with the
Securities and Exchange Commission on June 3, 1999, as amended, the Company sold
1,150,000 shares of common stock to the public, including the underwriters'15%
overallotment, at a price of $9.375 per share, before deducting underwriters'
discounts and commissions. The Company realized proceeds of approximately
$9,545,000 from this offering, before deducting certain expenses of the offering
estimated to aggregate approximately $700,000 of which approximately $307,100
had been incurred through June 30, 1999, and is shown in the accompanying
financial statements as a prepaid expense.
14
<PAGE> 15
The Company is funding a major clinical trial involving approximately
400 patients which is being conducted by an independent contract research
organization in three foreign countries. 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. The Company expects to
spend between $4.0 and $5.0 million on this clinical trial, of which
approximately $2.5 had been expended through June 30, 1999. During June 1999,
the Company committed, on a non-binding basis, to fund an additional clinical
trial to take place in the United States using the same independent research
organization. Preliminary work on this additional trial commenced in June 1999.
This additional clinical trial, which also involves the testing of approximately
400 patients, is expected to cost the Company between $7.0 and $8.0 million, of
which approximately $0.2 million has been expended through June 30, 1999.
As of June 30, 1999, the Company committed, on a non-binding basis, to
provide approximately $570,000 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. The Company has incurred cumulative
losses of approximately $32.3 million through June 30, 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 and public
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, including the
$9.5 million proceeds (before payment of offering expenses) realized from the
sale of 1,150,000 shares of common stock on July 30, 1999, 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. In order for the Company to continue to operate through the end of the
year 2000, it will need to raise additional funds. While the Company intends to
pursue the raising of such funds, there can be no assurance that the Company
will be successful in these efforts.
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.
15
<PAGE> 16
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 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 are now
in compliance, 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,
16
<PAGE> 17
will not be material. In the event the Company were to fail to implement
successfully 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 developed successfully, 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 engage in any of these activities successfully.
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 Equity Line 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.
17
<PAGE> 18
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 - Risk
Factors," and in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on June 3, 1999, as amended, under "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.
18
<PAGE> 19
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.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
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
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 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.
During May 1999, the Company issued 12,500 shares of common stock to
its legal counsel, in consideration for legal services rendered in the amount of
$70,000, and a warrant to purchase 25,000 shares of common stock at an exercise
price of $11.40 per share in consideration for a discount of 15% on fees for
legal services rendered during the months of March through December, 1999. The
warrant expires May 17, 2004, and may be called by the Company if the closing
price of the common stock remains at $22.80 per share or above for any 10
consecutive trading days. The shares of common stock issued for the
aforementioned services 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.
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 14, 1999:
1. The following persons were elected as Class II directors to serve for a
two-year term expiring at the Annual Meeting of Stockholders to be held in 2001
or until their successors are elected and qualified:
<TABLE>
<CAPTION>
Name Number of Votes Cast
---- -----------------------------------
For Authority Withheld
--------- ------------------
<S> <C> <C>
Alvin J. Glasky, Ph.D. 5,588,967 291,640
Mark J. Glasky 5,588,967 291,640
Carol O'Cleireacain, Ph.D. 5,588,967 291,640
Joseph Rubinfeld, Ph.D. 5,588,967 291,640
</TABLE>
20
<PAGE> 21
2. A proposal to approve the issuance of common stock pursuant to conversion
rights under a preferred stock financing transaction was approved by the
following vote:
<TABLE>
<CAPTION>
Votes Cast Number of Shares
---------- ----------------
<S> <C>
For 3,064,889
Against 229,723
Abstain 121,238
Broker Non-Votes 2,464,757
</TABLE>
3. A proposal to approve the issuance of common stock pursuant to a private
equity line of credit agreement was approved by the following vote:
<TABLE>
<CAPTION>
Votes Cast Number of Shares
---------- ----------------
<S> <C>
For 3,122,445
Against 319,011
Abstain 33,137
Broker Non-Votes 2,406,014
</TABLE>
4. A proposal to approve an increase in the number of shares of common stock
issuable under the Company's 1997 Stock Incentive Plan by 750,000 was approved
by the following vote:
<TABLE>
<CAPTION>
Votes Cast Number of Shares
---------- ----------------
<S> <C>
For 3,021,284
Against 277,718
Abstain 116,848
Broker Non-Votes 2,464,757
</TABLE>
21
<PAGE> 22
5. A proposal to consider and act upon the ratification of the selection of
Arthur Anderson LLP as independent public accountants of the Company for the
current fiscal year was approved by the following vote:
<TABLE>
<CAPTION>
Votes Cast Number of Shares
---------- ----------------
<S> <C>
For 5,680,415
Against 193,292
Abstain 6,900
</TABLE>
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE> 24
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 6, 1999 By: /s/ ALVIN J. GLASKY
--------------------------------------
Alvin J. Glasky, Ph.D., President
Date: August 6, 1999 By: /s/ SAMUEL GULKO
--------------------------------------
Samuel Gulko, Chief Financial Officer
(Principal Accounting and Financial
Officer)
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,452,130
<SECURITIES> 2,020,392
<RECEIVABLES> 122,637
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,117,185
<PP&E> 4,305,873
<DEPRECIATION> 992,468
<TOTAL-ASSETS> 7,484,431
<CURRENT-LIABILITIES> 2,868,003
<BONDS> 848,922
0
2,546,994
<COMMON> 33,960,256
<OTHER-SE> (32,800,458)
<TOTAL-LIABILITY-AND-EQUITY> 7,484,431
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,409,831
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,240
<INCOME-PRETAX> (8,475,071)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,475,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,475,071)
<EPS-BASIC> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
