<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 September 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 November 9, 1999
- --------------------------------- --------------------------------
Common Stock, $.001 par value 7,952,898
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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 September 30, 1999 and
December 31, 1998................................................. 4
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998................................. 5
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1999 and 1998 and for the period
from inception (June 15, 1987) to September 30,
1999.............................................................. 6
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 and for the period
from inception (June 15, 1987) to September 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 6. EXHIBITS AND REPORTS ON FORM 8-K......................................20
</TABLE>
2
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NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,091,880 $ 1,097,341
Marketable securities and short-term investments 2,826,616 1,769,348
Other receivables, principally investment interest 140,332 112,552
Advance deposit to clinical trial vendor 1,000,000 265,727
Prepaid expenses 185,373 157,495
------------ ------------
Total current assets 8,244,201 3,402,463
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 2,530,170 2,197,253
Leasehold improvements 1,811,345 1,794,794
Accumulated depreciation and amortization (1,125,482) (740,413)
------------ ------------
Property and equipment, net 3,216,033 3,251,634
------------ ------------
PREPAID EXPENSES AND DEPOSITS 53,742 172,066
------------ ------------
$ 11,513,976 $ 6,826,163
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,555,817 $ 1,278,954
Accrued payroll and related taxes 95,857 81,370
Note payable to related party 558,304 558,304
Current portion of long-term debt 495,071 445,297
------------ ------------
Total current liabilities 3,705,049 2,363,925
LONG-TERM DEBT, net of current portion 735,262 1,126,174
DEFERRED RENT 67,917 46,308
------------ ------------
Total liabilities 4,508,228 3,536,407
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized:
Issued and outstanding, 250 shares 5%
Series A Preferred with Conversion
Features at September 30, 1999,
liquidation preference $2.5 million,
none at December 31, 1998 1,896,752 --
Common stock, par value $0.001 per share, 25,000,000
shares authorized:
Issued and outstanding, 7,952,898 and
6,146,854 shares at September 30, 1999
and December 31, 1998, respectively 43,319,756 27,535,329
Unrealized (losses) gains on available-for-sale
securities (22,147) 24,207
Deficit accumulated during the development stage (38,188,613) (24,269,780)
------------ ------------
Total stockholders' equity 7,005,748 3,289,756
------------ ------------
$ 11,513,976 $ 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 SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $ -- $ --
----------- -----------
OPERATING EXPENSES:
Research and development 4,817,637 2,264,926
General and administrative 607,609 718,792
----------- -----------
5,425,246 2,983,718
----------- -----------
LOSS FROM OPERATIONS (5,425,246) (2,983,718)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income (expense), net 96,505 (10,552)
Other income (expense) -- (5,851)
----------- -----------
Total other income (expense) 96,505 (16,403)
----------- -----------
NET LOSS $(5,328,741) $(3,000,121)
=========== ===========
BASIC AND DILUTED LOSS
PER SHARE $ (.70) $ (0.54)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 7,583,225 5,569,768
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended Through
September 30, September 30, September 30,
1999 1998 1999
------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES, from grants $ -- $ -- $ 497,128
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 11,382,825 5,939,141 27,399,926
General and administrative 2,452,252 2,216,303 11,345,140
------------ ------------ ------------
13,835,077 8,155,444 38,745,066
------------ ------------ ------------
LOSS FROM OPERATIONS (13,835,077) (8,155,444) (38,247,938)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net 31,264 84,810 595,910
Other income (expense) -- (19,265) 27,435
------------ ------------ ------------
Total other income (expense) 31,264 65,545 623,345
------------ ------------ ------------
NET LOSS $(13,803,813) $ (8,089,899) $(37,624,593)
============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $ (2.11) $ (1.47)
============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 6,540,301 5,511,130
============ ============
</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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended Through
September 30, September 30, September 30,
1999 1998 1999
------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(13,803,813) $(8,089,899) $(37,624,593)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 385,069 341,138 1,250,971
Issuance of common stock, options and
warrants for services 362,690 234,323 1,053,904
Increase in deferred rent 21,609 34,731 67,917
(Increase) decrease in other receivables (27,780) 119,178 (140,086)
Decrease (increase) in prepaid expenses,
deferred charges and refundable deposits (643,827) 34,790 (1,144,112)
Increase in accounts payable and accrued expenses 1,276,863 125,593 2,715,917
Increase in accrued payroll and related taxes 14,487 80,468 734,551
Compensation expense for extension of Debt
Conversion Agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Amortization of deferred compensation -- -- 93,749
Increase in employee expense reimbursement
and accrued interest to related parties -- -- 300,404
------------ ----------- ------------
Net cash used in operating activities (12,414,702) (7,119,678) (32,193,530)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (349,468) (180,602) (4,421,818)
(Purchases) sales of marketable securities and
short-term investments, net (1,057,268) 36,922 (2,826,616)
Unrealized gain (loss) on available-for-sale securities (46,354) 21,457 (22,147)
Payment of organization costs -- -- (66,093)
Proceeds from sale of equipment -- -- 29,665
Issuance of notes receivable -- -- 100,000
------------ ----------- ------------
Net cash used in investing activities (1,453,090) (122,223) (7,207,009)
------------ ----------- ------------
</TABLE>
7
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended Through
September 30, September 30, September 30,
1999 1998 1999
------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuances including Revenue
Participation Units converted to common stock 13,614,523 593,481 37,284,108
Proceeds from preferred stock issuance, net
of offering costs 3,609,399 -- 3,609,399
Dividends on preferred stock (115,020) -- (115,020)
Repayment of bank line of credit -- (850,000) --
Decrease in restricted cash -- 935,000 --
Proceeds from long-term debt 33,786 1,500,000 1,860,411
Repayment of long-term debt (374,925) (96,296) (630,079)
Proceeds from exercise of stock options 94,568 -- 811,648
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 16,862,331 2,082,185 43,492,419
------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents 2,994,539 (5,159,716) 4,091,880
Cash and cash equivalents, beginning of period 1,097,341 6,063,347 --
------------ ----------- ------------
Cash and cash equivalents, end of period $ 4,091,880 $ 903,631 $ 4,091,880
============ =========== ============
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of preferred stock into shares
of common stock $ 1,368,037 $ -- $ 1,368,037
============ =========== ============
Issuance of stock options and warrants
for services $ 362,690 $ 234,323 $ 1,053,904
============ =========== ============
Issuance of warrants in connection with
equity and debt financings $ 344,610 $ -- $ 389,610
============ =========== ============
Dividends on preferred stock payable in
shares of common stock $ 115,020 $ -- $ 115,020
============ =========== ============
Conversion of other accrued liabilities to
shares of common stock $ -- $ -- $ 52,104
============ =========== ============
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
============ =========== ============
</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
SEPTEMBER 30, 1999
(Unaudited)
1. 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 September 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.
On October 1, 1999, the Company created a third majority-owned subsidiary
corporation, NeoGene Technologies, Inc., which was established to provide
administrative and financial support for a joint venture with The University of
California, Irvine. All references to the "Company" hereinafter refer to
NeoTherapeutics, Inc. and its wholly and majority-owned 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 and majority-owned subsidiaries.
The Company believes that its existing capital resources will be
adequate to fund its capital needs for at least 8 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
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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 September 30, 1999, the Company has future commitments through 2000 of
approximately $533,000 for such grants and fellowships. Grant expense for the
nine-month periods ended September 30, 1999 and 1998, amounted to approximately
$445,000 and $373,000, respectively.
Joint Venture Agreement with The University of California, Irvine
On September 12, 1999, the Company entered into a joint venture
agreement with The University of California, Irvine. The joint venture involves
the research and administrative support and commercialization (if applicable) of
functional genomics technology developed by science personnel associated with
the University. The Company has committed under the agreement to pay the
University $2 million over a three-year period. However, the agreement is
cancellable by either party after ninety days notice. A new 90% owned
subsidiary, NeoGene Technologies, Inc., was formed on October 1, 1999 to
implement this joint venture.
3. STOCKHOLDERS' EQUITY
Common Stock
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
aggregating approximately $858,000.
Preferred Stock
On June 18, 1999, 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. On July 13,
1999, 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.
10
<PAGE> 11
4. STOCK OPTIONS
Stock option activity during the nine month period ended September 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 (1,900) 4.50-8.875
Forfeited (5,800) 7.625-8.875
---------
Outstanding at September 30, 1999 1,166,173 $0.025-$13.00
========= ==============
</TABLE>
During the nine month periods ended September 30, 1999 and 1998, the
Company recognized compensation expense for vested consultants options pursuant
to SFAS 123 aggregating $362,690 and $234,323, 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 TRANSACTIONS SUBSEQUENT TO SEPTEMBER 30, 1999
On October 15, 1999, the Company filed a Registration Statement on Form
S-1 to register 925,000 shares of its common stock under the $15 million Equity
Line of Credit Agreement entered into with a private investor in 1998. The
Registration Statement was declared effective by the Securities and Exchange
Commission on November 10, 1999. To date, the Company has drawn $4.5 million and
has issued 615,868 shares of stock under the Agreement. The additional shares
are being registered to enable the Company, at its sole option, to draw up to
$10.5 million through February 2001, the expiration date of the Agreement. The
terms and conditions of the original Agreement remain unchanged.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may differ
materially from the results projected in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed below under "Factors Affecting Future Operating Results," 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 October 15, 1999, as amended, under "Risk Factors."
RESULTS OF OPERATIONS
Overview:
From the inception of the Company in 1987 through September 30, 1999,
the Company incurred a cumulative net loss of approximately $37.6 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, 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 September 30, 1999 Compared to Three Months Ended September
30, 1998:
There were no revenues during the three months ended September 30, 1999
or the three months ended September 30, 1998.
Research and development expenses for the three months ended September
30, 1999 increased approximately $2,553,000 or 113% 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 any of its major long-term clinical and 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 $111,000 or
15% from the same period in 1998. The reduction is due primarily to consulting
fees and stock based compensation and relocation costs in the previous period
which were not incurred in the current period. The Company expects general and
administrative expenses to increase in future periods in support of the expected
increases in research and development activities as well as sales and marketing
activities should the Company successfully bring one or more of its products to
market. Net interest income increased by approximately $113,000 due to the
increase of invested funds
12
<PAGE> 13
from the July 1999 equity financing and decreased interest expense on
borrowings. The Company expects its net interest income to decrease in the next
quarter due to use of its invested funds in operations.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998:
There were no revenues during the nine months ended September 30, 1999
or the nine months ended September 30, 1998.
Research and development expenses for the nine months ended September
30, 1999 increased approximately $5,444,000 or 92% 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 any of
its major long-term clinical and 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 $236,000 or
11% 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 income decreased by approximately $54,000
due to the use of invested funds in operations and increased interest expense on
higher levels of borrowings for the periods. The Company expects its net
interest income to decrease over the next quarter due to the use of its invested
financing in operations partially offset by lower interest expense as a result
of the reduction of debt levels due to principal repayments on its outstanding
loans.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 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 September 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 September 30, 1999, $10.5 million remains
available under the Equity Line Agreement.
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<PAGE> 14
On January 29, 1999, the Company sold a total of $4.0 million of 5%
Series A preferred stock with Conversion Features to two private investors. A
second tranche of $2.0 million, which was available to the Company at its
option, expired on September 16, 1999. The initial tranche of $4.0 million is
convertible into common stock at the lesser of the fixed price of $13.06 per
share 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
rights 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 September 30, 1999, accrued dividends amounted to $83,634.
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.
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
aggregating approximately $858,000.
At September 30, 1999, working capital amounted to approximately $4.5
million. This amount included cash and cash equivalents of approximately $4.1
million, marketable securities and short-term investments of approximately $2.8
million and an advance deposit to a clinical trial vendor of $1.0 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 $3.5 million increase in working capital during the nine 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, the sale of $1.0 million
of common stock to a private investor under the Company's Line of Equity
Agreement and the sale of $9.5 million of common stock in a secondary public
offering. These increases were offset by (i) the operating loss for the period,
(ii) laboratory equipment purchases, (iii) advance deposit to clinical trial
vendor, and (iv) long-term debt repayment.
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 $3.7 had been expended through September 30, 1999. The Company is
also funding an additional clinical trial to take place in the United States
using the same independent research organization. This additional
14
<PAGE> 15
trial which commenced in September 1999, and also involves the testing of
approximately 400 patients, is expected to cost the Company approximately $8.0
million, of which approximately $1.8 million has been expended through September
30, 1999. This clinical trial is expected to be completed in the second quarter
of 2000.
The Company is considering the initiation of a third major clinical
trial for the purpose of enabling the Company to obtain European market approval
and has advanced $1.0 million through September 30, 1999 to the clinical trial
vendor who will conduct this trial. This trial, should it commence, is expected
to cost the Company approximately $11.5 million.
As of September 30, 1999, the Company had committed, on a non-binding
basis, to provide approximately $533,000 through December 2000 for scientific
research grants and fellowships to various universities and not-for-profit
research organizations and $2 million over three years to The University of
California, Irvine, pursuant to its joint venture agreement with the University.
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 $37.6 million through September 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 will be adequate
to fund its capital needs for at least 8 months, the Company will require
substantial additional funds in order to complete the research and development
activities currently in process or 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.
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
15
<PAGE> 16
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, 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, the Company's third party manufacturers or its utility
16
<PAGE> 17
suppliers, 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 eight 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.
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.
17
<PAGE> 18
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 October 15, 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: November 15, 1999 By: /s/ Samuel Gulko
-------------------------------------
Samuel Gulko, Chief Financial Officer
(Principal Accounting and Financial
Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,091,880
<SECURITIES> 2,826,616
<RECEIVABLES> 140,332
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,244,201
<PP&E> 4,341,515
<DEPRECIATION> 1,125,482
<TOTAL-ASSETS> 11,513,976
<CURRENT-LIABILITIES> 3,705,049
<BONDS> 735,262
0
1,896,752
<COMMON> 43,319,756
<OTHER-SE> (38,210,760)
<TOTAL-LIABILITY-AND-EQUITY> 11,513,976
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,425,246
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,328,741)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,328,741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,328,741)
<EPS-BASIC> (.70)
<EPS-DILUTED> (.70)
</TABLE>
