<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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-28782
NEOTHERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 788-6700
Indicate by check mark whether the Registrant (1) has filed all reports requ
ired to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Class Outstanding at May 4, 1999
----------------------------- --------------------------
Common Stock, $.001 par value 6,256,673
Page 1 of 22 pages
Exhibit Index on page 22
<PAGE> 2
NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statement regarding financial information............................... 3
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998................................................... 4
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 and for the period from
inception (June 15, 1987) to March 31, 1999......................... 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 and for the period from
inception (June 15, 1987) to March 31, 1999........................ 6
Notes to Condensed Consolidated Financial Statements................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION..................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................... 16
PART II. OTHER INFORMATION...................................................... 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 20
</TABLE>
2
<PAGE> 3
NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by
NeoTherapeutics, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
normally included in the financial statements prepared in accordance with
generally accepted accounting principles has been condensed or omitted pursuant
to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that the financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
3
<PAGE> 4
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 398,400 $ 1,097,341
Marketable securities and short-term investments 3,091,483 1,769,348
Other receivables, principally investment interest 154,162 112,552
Advance deposit to clinical trial vendor -- 265,727
Prepaid expenses and refundable deposits 242,474 157,495
------------ -----------
Total current assets 3,886,519 3,402,463
------------ -----------
PROPERTY AND EQUIPMENT, at cost:
Equipment 2,403,609 2,197,253
Leasehold improvements 1,799,270 1,794,794
Accumulated depreciation and amortization (862,838) (740,413)
------------ -----------
Property and equipment, net 3,340,041 3,251,634
------------ -----------
PREPAID EXPENSES AND DEPOSITS 64,420 172,066
------------ -----------
$ 7,290,980 $ 6,826,163
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,521,820 $ 1,278,954
Accrued payroll and related taxes 88,110 81,370
Note payable to related party 558,304 558,304
Current portion of long-term debt 486,841 445,297
------------ -----------
Total current liabilities 2,655,075 2,363,925
LONG-TERM DEBT, net of current portion 973,559 1,126,174
DEFERRED RENT 53,511 46,308
------------ -----------
Total liabilities 3,682,145 3,536,407
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized:
Issued and outstanding, 400 shares 5%
Series A Preferred with Conversion
Features at March 31, 1999, none at
December 31, 1998, liquidation
preference $4.0 million 3,288,611 --
Common stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 6,256,673 and
6,146,854 shares at March 31, 1999
and December 31, 1998, respectively 29,036,684 27,535,329
Unrealized gains on available-for-sale
securities 5,343 24,207
Deficit accumulated during the development
stage (28,721,803) (24,269,780)
------------ -----------
Total stockholders' equity 3,608,835 3,289,756
------------ -----------
$ 7,290,980 $ 6,826,163
============ ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
<PAGE> 5
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 1998 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
1999 1998 1999
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES, from grants $ -- $ -- $ 497,128
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 3,307,432 1,787,962 19,324,533
General and administrative 1,096,435 740,289 9,989,323
------------ ------------ ------------
4,403,867 2,528,251 29,313,856
------------ ------------ ------------
LOSS FROM OPERATIONS (4,403,867) (2,528,251) (28,816,728)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net (14,731) 28,771 549,915
Other income (expense) -- (8,811) 27,435
------------ ------------ ------------
Total other income (expense) (14,731) 19,960 577,350
------------ ------------ ------------
NET LOSS $ (4,418,598) $ (2,508,291) $(28,239,378)
============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $ (0.71) $ (0.46)
============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 6,204,149 5,467,206
============ ============
</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 CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
1999 1998 1999
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (4,418,598) $ (2,508,291) $(28,239,378)
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation and amortization 122,425 106,735 988,327
Compensation expense arising
from the grant of warrants
and stock options 207,358 134,442 898,572
Amortization of deferred
compensation -- -- 93,749
Increase in deferred rent 7,203 11,576 53,511
Compensation expense for
extension of Debt Conversion
Agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
(Increase) decrease in other
receivables (41,610) 130,478 (153,916)
Decrease (increase) in
prepaid expenses, deferred
charges and refundable
deposits 288,394 (86,848) (211,891)
Increase (decrease) in
accounts payable and
accrued expenses 209,441 (251,308) 1,648,495
Increase in accrued payroll
and related taxes 6,740 79,677 726,804
Decrease in employee expense
reimbursement and accrued
interest to related parties -- -- 300,404
------------ ------------ ------------
Net cash used in operating
activities (3,618,647) (2,383,539) (23,397,475)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (210,832) (61,734) (4,283,182)
Purchases of marketable securities
and short-term investments, net (1,322,135) (58,991) (3,091,483)
Unrealized (loss) gain on available-
for-sale securities (18,864) 1,410 5,343
Payment of organization costs -- -- (66,093)
Proceeds from sale of equipment -- -- 29,665
Issuance of notes receivable -- -- 100,000
------------ ------------ ------------
Net cash used in investing activities (1,551,831) (119,315) (7,305,750)
============ ============ ============
</TABLE>
6
<PAGE> 7
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
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 949,387 55,230 24,618,972
Proceeds from preferred stock issuance,
net of offering costs 3,633,221 -- 3,633,221
Repayment of bank line of credit -- (850,000) --
Decrease in restricted cash -- 935,000 --
Proceeds from long-term debt 33,786 -- 1,860,411
Repayment of long-term debt (144,857) (30,766) (400,011)
Proceeds from exercise of stock
options -- -- 717,080
Receipt of notes from officers and
directors for exercise of stock
options -- -- (286,560)
Proceeds from notes payable to
related parties, net -- -- 757,900
Cash at acquisition -- -- 200,612
------------ ------------ ------------
Net cash provided by
financing activities 4,471,537 109,464 31,101,625
------------ ------------ ------------
Net (decrease) increase in
cash and cash equivalents (698,941) (2,393,390) 398,400
Cash and cash equivalents,
beginning of period 1,097,341 6,063,347 --
------------ ------------ ------------
Cash and cash equivalents,
end of period $ 398,400 $ 3,669,957 $ 398,400
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of accrued payroll into
shares of common stock $ -- $ -- $ 1,141,838
============ ============ ============
Conversion of notes payable to related
parties into shares of common stock $ -- $ -- $ 500,000
============ ============ ============
Conversion of accrued interest into
notes payable to related parties $ -- $ -- $ 300,404
============ ============ ============
Conversion of Revenue Participation
Units into shares of common stock $ -- $ -- $ 676,000
============ ============ ============
Issuance of stock options and warrants
for services $ 207,358 $ 134,442 $ 898,572
============ ============ ============
Issuance of warrants in connection with
equity and debt financings $ 344,610 $ -- $ 389,610
============ ============ ============
Conversion of other accrued liabilities
to shares of common stock $ -- $ -- $ 52,104
============ ============ ============
Dividends on preferred stock payable in
shares of common stock $ 33,425 $ -- $ 33,425
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
7
<PAGE> 8
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of its consolidated financial position at March 31, 1999, and consolidated
results of operations and cash flows for the periods presented. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted and
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 as filed with the Securities and Exchange Commission. Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full year.
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to "NeoTherapeutics, Inc." and in June 1997, the Company was
reincorporated in the state of Delaware. The Company has two wholly-owned
subsidiaries, Advanced ImmunoTherapeutics, Inc., incorporated in California in
June 1987, and NeoTherapeutics, GmbH, incorporated in Switzerland in April 1997.
All references to the "Company" hereinafter refer to NeoTherapeutics, Inc. and
its subsidiaries as a consolidated entity.
The Company is a development-stage biopharmaceutical enterprise engaged in
the discovery and development of novel therapeutic drugs intended to treat
neurodegenerative diseases and conditions such as memory deficits associated
with Alzheimer's disease and dementia, stroke, spinal cord injuries, Parkinson's
disease, migraine, depression and obesity. The accompanying condensed
consolidated financial statements include the results of the Company and its
wholly-owned subsidiaries.
2. LONG-TERM DEBT
In March 1999, the Company financed through its insurance broker, the
premium ($36,333) for a nineteen month insurance policy. The loan is payable
through May 2000 in monthly installments of $2,547, including principal and
8.71% interest.
The Company has $500,000 remaining under a line of credit from a finance
company affiliated with its bank to finance equipment and computer software
purchases. Borrowings under the line are repayable over 42 months and bear
interest at approximately 12%.
8
<PAGE> 9
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS AND CONTINGENCIES
Research and Fellowship Grants:
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of March 31, 1999, the Company had committed to pay, through December 2000,
approximately $650,000 for such grants and fellowships. Grant expense for the
three-month periods ended March 31, 1999 and 1998, amounted to $83,000 and
$71,000, respectively.
4. STOCKHOLDERS' EQUITY
Preferred Stock
On January 29, 1999, the Company entered into an agreement with two private
investors to sell up to $6 million of 5% preferred stock, with rights of
conversion into common stock. The financing consists of two tranches of
preferred stock. The first tranche of $4.0 million was sold on January 29, 1999,
and for an initial period of 120 days is convertible into common stock at a
fixed price of $13.06 per share. Thereafter, the preferred stock is convertible
at the lesser of the fixed price or a variable rate of 101% of the average of
the ten lowest closing bid prices of the common stock during the thirty trading
days immediately preceding the conversion date. In no event can the first
tranche be converted into more than 1,450,000 shares. The second tranche of $2.0
million can be sold, at the Company's option, approximately 6 months after the
effective date of the Preferred Stock Agreement, subject to the satisfaction by
the Company of certain conditions. The preferred stock in the second tranche
will contain terms and conditions for conversion similar to the first tranche,
except that the fixed conversion price will be set at 125% of the average market
price of the common stock at the time of the second closing. Dividends on the
preferred stock are payable in cash or in common stock, at the option of the
Company, at the annual rate of 5%. At March 31, 1999, the Company accrued
dividends payable of $33,425, which are payable in cash or common stock upon
conversion of the preferred shares into common stock. The preferred stock has a
liquidation preference over the common stock equal to the stated value of $4.0
million plus any accrued dividends. Additional features of the preferred stock
issue include, among other things, a redemption feature at the Company's option
if the common stock trades below a floor of $5 per share or above a ceiling of
$20 per share.
The Company paid cash offering expenses of approximately $367,000 for
finder's fees and legal services, which were offset against the proceeds of the
offering in the accompanying financial statements. In connection with the
financing, the Company also granted warrants to purchase an aggregate of 155,000
shares of its common stock to the preferred stock investors and others. The
warrants are exercisable for periods ranging from 3 to 5 years at prices ranging
from $11.00 to $12.98 per share. The valuation of these warrants was determined
using the Black-Scholes Option-Pricing Model with the following assumptions:
<TABLE>
<S> <C>
Expected life 3 to 5 years
Volatility 75.26%
Risk-free interest rate 4.62% to 4.66%
Dividend yield 0%
</TABLE>
9
<PAGE> 10
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The warrants to purchase 155,000 shares of common stock referred to above
include the following: The Company granted to an investment advisor a warrant to
purchase 40,000 shares of common stock as consideration for its waiver of a
preexisting right of first refusal. Using the valuation model described above,
this warrant had a fair value of $204,280, which was charged to current
operations. The Company also granted to the finder in the preferred stock
financing, a warrant to purchase 15,000 shares of common stock having a fair
value of $92,130, which was offset against the offering proceeds. Warrants to
purchase 75,000 shares of common stock were granted to the preferred stock
investors as a part of the offering. As such, $252,480 of the net offering
proceeds was allocated to the investors' warrants based upon their relative fair
value. The remaining warrant to purchase 25,000 shares of common stock was
granted to the Company's existing Equity Line investor as consideration for the
waiver of certain pre-existing anti-dilution rights that might have been
triggered by the preferred stock financing. Because common stock and common
stock equivalents are presented in the same manner, the grant of this warrant
had no impact on the presentation in the accompanying financial statements.
Common Stock
During the quarter ended March 31, 1999, the Company sold to a private
investor, pursuant to its existing Equity Line Agreement, an aggregate of
109,819 shares of common stock for cash proceeds of $950,000.
A summary of the changes in stockholders' equity as a result of the
valuation of the related warrants and costs of the offering as well as other
changes during the quarter follows:
<TABLE>
<CAPTION>
Deficit
Unrealized Accumulated
Common Stock Gains(Losses) During the
Preferred ------------------------ from Development
Stock Shares Amount Securities Stage Total
---------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 $ -- 6,146,854 $27,535,329 $ 24,207 $ (24,269,780) $ 3,289,756
Sale of 400 shares of 5% Series A
Preferred Stock, net of
offering costs 3,633,221 -- -- -- -- 3,633,221
Allocation of warrants to purchase
common stock granted to
investment advisor (92,130) -- 92,130 -- -- --
Sales of common stock to Private
Equity Line investor, net of
costs of issuance -- 109,819 949,387 -- -- 949,387
Allocation of net proceeds of
preferred stock offering to
common stock warrants issued
to investors (252,480) -- 252,480 -- -- --
Fair value of warrants issued as
compensation to investment
advisor -- -- 204,280 -- -- 204,280
Stock options issued for services -- -- 3,078 -- -- 3,078
Unrealized losses on available
for sale securities -- -- -- (18,864) -- (18,864)
Accrued preferred stock dividend -- -- -- -- (33,425) (33,425)
Net loss -- -- -- -- (4,418,598) (4,418,598)
---------- --------- ----------- ----------- ------------- -----------
Balance, March 31, 1999 $3,288,611 6,256,673 $29,036,684 $ 5,343 $ (28,721,803) $ 3,608,835
========== ========= =========== =========== ============= ===========
</TABLE>
10
<PAGE> 11
5. STOCK OPTIONS
During the three month period ended March 31, 1999, there were no new stock
options granted, and none were exercised or forfeited. Stock options to purchase
853,873 shares of common stock remained outstanding for the period at exercise
prices ranging from $0.025 to $12.88 per share.
During the three month periods ended March 31, 1999 and 1998, the Company
recognized compensation expense for vested consultants options pursuant to SFAS
123 aggregating $3,078 and $134,442, respectively. Options granted to
consultants consist of options that vest both immediately and upon the
occurrence of certain events as specified in the related agreements.
6. EQUITY TRANSACTION SUBSEQUENT TO MARCH 31, 1999
On May 11, 1999, the Company completed a private placement of 400,000
shares of common stock and warrants to purchase 80,000 shares of common stock to
a group of private investors for a total purchase price of $4.0 million. Each
warrant entitles the investor to purchase one share of common stock at an
exercise price of $15.00 per share. The warrants expire May 10, 2004, and may be
called by the Company if the closing price of the common stock remains at $30.00
per share or above for any 20 out of any 30 consecutive trading days. The shares
of common stock sold to the investors, and the shares issuable upon exercise of
the warrants, may be resold in compliance with the provisions of Rule 144 under
the Securities Act of 1933, including the one year holding period requirement of
said Rule.
11
<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."
RESULTS OF OPERATIONS
Overview:
From the inception of the Company in 1987 through March 31, 1999, the
Company incurred a cumulative net loss of approximately $28.2 million. The
Company expects its operating expenses to increase over the next several years
as it continues to expand its research and development and commercialization
activities and operations. The Company expects to incur significant additional
operating losses for at least the next several years unless such operating
losses are offset, if at all, by licensing revenues under strategic alliances
with larger pharmaceutical companies which the Company is currently seeking.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998:
There were no revenues during the three months ended March 31, 1999 or the
three months ended March 31, 1998.
Research and development expenses for the three months ended March 31, 1999
increased approximately $1,519,000 or 85% over the same period in 1998. Current
period increases were due primarily to costs and expenses associated with the
conduct of clinical and preclinical trials as the Company continued the
acceleration of its program to commercialize its lead compound, NEOTROFIN(TM).
These costs and expenses were attributable primarily to increases in the number
and duration of outside clinical and preclinical trials, as well as the costs of
manufacturing and formulation by the Company's contract manufacturer of
NEOTROFIN(TM) and other compounds used in the Company's research and testing
programs. In the same period in 1998, the Company had not yet commenced its
Phase 2 clinical trials or any of its major long-term preclinical trials. The
Company expects its research and development expenses to continue to increase as
it expands its laboratories and increases its internal product development and
external preclinical and clinical trial activities.
General and administrative expenses increased approximately $356,000 or 48%
from the same period in 1998 due primarily to a non-cash compensation charge of
approximately $204,000 attributed to the raising of equity capital, professional
fees and investor and public relations fees. The Company expects general and
administrative expenses to increase in future periods in support of the expected
increases in research and development activities as well as sales and marketing
activities should the Company successfully bring one or more of its products to
market. Net interest expense increased by approximately $44,000 due to the use
of invested funds in operations and increased interest expense on borrowings.
The Company expects its net interest expense to continue to increase due to the
use of its funds in current operations and borrowings.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1999, the Company financed its operations
primarily through government grants, sales of equity securities, borrowings and
deferred payment of salaries and other expenses due to related parties. During
September and October 1996, the Company effected the public sale of a total of
2,700,000 units of its common stock and attached warrants to the public. Each
unit consisted of one share of common stock and one warrant to purchase one
share of common stock. The aggregate net proceeds of this offering amounted to
approximately $18.2 million.
In March 1998 the Company entered into an Equity Line Agreement with a
private investor which allows the Company, in its sole discretion and subject to
certain restrictions, to sell ("put") to the investor, through February 2001, up
to $15 million of its common stock. Through March 31, 1999, the Company has put
to the investor 615,868 shares of its common stock and realized gross proceeds
of $4.5 million. As of March 31, 1999, $10.5 million remains available under the
Equity Line Agreement. In April 1999, the Company's registration statement
permitting the investor resale rights expired and the Company is in the process
of renewing the registration statement for an additional 1,000,000 shares.
On January 29, 1999, the Company sold to two private investors $4.0 million
of 5% Series A preferred stock, with rights of conversion. A second tranche of
$2.0 million remains available, subject to the satisfaction by the Company of
certain conditions, to sell to the investors during the period of July 28, 1999
through September 16, 1999. The initial tranche of $4.0 million may be converted
into common stock at a fixed price of $13.06 per share through May 29, 1999.
Thereafter, it is convertible at the lesser of the fixed price or at a variable
rate of 101% of the average market price for the ten lowest of the thirty
trading days immediately preceding the conversion date. Dividends on the
preferred stock are payable in cash or in common stock, at the option of the
Company, at the annual rate of 5%. The Company has elected to pay the initial
dividend due March 31, 1999, in common stock and, accordingly, has accrued a
dividend payable of $33,425. Additional features of the preferred stock issue
include, among other things, a redemption feature at the Company's option if the
common stock trades below or above a specified price per share.
On May 11, 1999, the Company completed a private placement of units
consisting of 400,000 shares of common stock and five-year warrants to purchase
80,000 shares of common stock at an exercise price of $15.00 per share to a
group of private investors for a total purchase price of $4.0 million. The
shares of common stock sold to the investors, and the shares issuable upon
exercise of the warrants, may be resold in compliance with the provisions of
Rule 144 under the Securities Act of 1933, including the one year holding period
requirement of said Rule.
At March 31, 1999, working capital amounted to approximately $1.2 million.
This amount included cash and cash equivalents of approximately $0.4 million and
marketable securities and short-term investments of approximately $3.1 million.
In comparison, at December 31, 1998, the Company had working capital of
approximately $1.0 million, which included cash and cash equivalents of
approximately $1.1 million and short-term investments of approximately $1.8
million. The $0.2 million increase in working capital during the three months is
attributable primarily to the sale of $4.0 million of preferred stock and the
sale of $950,000 of common stock to the Line of Equity investor, offset by (i)
the operating loss for the period, (ii) laboratory equipment purchases and (iii)
long-term debt repayment.
The Company is funding a major clinical trial, which is being conducted by
an independent contract research organization, in three foreign countries
involving approximately 400 patients. The agreement with the contract research
organization, which is cancelable by either party on thirty days notice, is
expected to be completed by December 1999. This clinical trial is expected to
cost the
13
<PAGE> 14
Company between $4.0 and $5.0 million, of which approximately $1.3 million has
been expended through March 31, 1999.
As of March 31, 1999, the Company had committed, on a non-binding basis, to
provide approximately $650,000, through December 2000, for scientific research
grants and fellowships to various Universities and not-for-profit research
organizations.
The Company is in the development stage devoting substantially all of its
efforts to research and development. During its development stage, the Company
has incurred cumulative losses of approximately $28.2 million through March 31,
1999, and expects to incur substantial losses over the next several years. In
addition to the funds derived from its initial public offering and subsequent
private placement equity offerings, the Company will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize its proposed products. The Company's
future capital requirements and availability of capital will depend upon many
factors, including continued scientific progress in research and development
programs, the scope and results of preclinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the cost involved in
filing, prosecuting and enforcing patent claims, the effect of competing
technological developments, the cost of manufacturing scale-up, the cost of
commercialization activities, and other factors which may not be within the
Company's control. While the Company believes that its existing capital
resources will be adequate to fund its capital needs for at least 12 months, the
Company also believes that it will require substantial additional funds in order
to complete the research and development activities currently contemplated and
to commercialize its proposed products.
Without additional funding, the Company may be required to delay, reduce
the scope of, eliminate one or more of its research and development projects, or
obtain funds through arrangements with collaborative partners or others which
may require the Company to relinquish rights to certain technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize on its own, and which could be on terms unfavorable to the
Company.
YEAR 2000 READINESS DISCLOSURE
All statements contained in the following section are "Year 2000 Readiness
Disclosures" within the meaning of the Year 2000 Information and Disclosure Act.
The Year 2000 issue (the "Year 2000 Issue") in computers arises from the
common industry practice of using two digits to represent a date in computer
software code and databases to enhance both processing time and save storage
space. Therefore, when dates in the year 2000 and beyond are indicated and
computer programs read the date "00", the computer may default to the year
"1900" rather than the correct "2000." This could result in incorrect
calculations, faulty data and computer shutdowns, which would cause disruptions
of operations. In addition, the Year 2000 is a leap year and systems need to
recognize it as such.
The Company has developed a multi-phase program for Year 2000 Issues that
consists of the following: (i) assessment of the corporate systems and
operations of the Company that could be affected by the Year 2000 Issue, (ii)
remediation of non-compliant systems and components, if any, and (iii) testing
of systems and components following remediation. The Company has focused its
Year 2000 compliance assessment program on four principal areas: (a) the
Company's internal information technology system applications, including voice
and data systems ("IT Systems"), (b) the Company's internal non-IT facilities
systems, including embedded software in environmental controls, security
systems, fire protection systems, elevators and public utility connections for
gas, electric and telephone
14
<PAGE> 15
systems ("Facilities Systems"), (c) embedded and external software contained in
laboratory and other equipment ("Equipment"), and (d) Year 2000 compliance by
third parties with which the Company has a material relationship, such as
significant vendors, financial institutions and insurers.
The Company has completed an inventory and risk assessment of its own
internal IT Systems, Facilities Systems, and Equipment that it believes could be
adversely affected by the Year 2000 Issue, and believes that its own internal
systems are, at the present time, substantially compliant based upon internal
systems tests, currently available information and reasonable assurance by its
equipment and software vendors. The cost to remediate the Year 2000 Issues with
regard to the Company's IT and Facility Systems and Equipment is not material.
In June of 1998, the Company began sending questionnaires to and/or
contacting its outside vendors regarding their state of readiness with respect
to identifying and remediating their Year 2000 Issues. The Company has completed
its risk assessment of its outside vendors and is currently reviewing their
compliance. It is not possible for the Company to determine or be assured that
adequate remediation of the Year 2000 Issue will be accomplished by such
vendors. Furthermore, it is not possible for the Company to determine or be
assured that third parties upon which the Company's vendors are dependent, will
accomplish adequate remediation of their Year 2000 Issues. Except for the
Company's public utility service vendors, who have indicated that they expect to
be in compliance by mid-1999, the Company believes that, with respect to the
computer systems of its major outside vendors, should a Year 2000 Issue exist
whereby a vendor was unable to address the Company's needs, alternative vendors
have been identified and are readily available that could furnish the Company
with the same or similar supplies or services that it presently receives from
these vendors without undue cost or expense.
Based on currently available information, the Company believes that the
impact of the Year 2000 Issue, as it relates to its IT Systems, Facilities
Systems, Equipment and third parties will not be material. In the event the
Company were to fail to successfully implement the Year 2000 Issues with respect
to its internal systems in a timely manner, the Company believes that while such
events would be disruptive to the Company's operations in the short term, such
circumstances would not have a material adverse effect on the business,
financial condition and results of operations of the Company over the long term.
However, failure of the major third parties, in particular the financial
institutions with which the Company has significant banking and investment
management relationships and the Company's third party manufacturers, to be Year
2000 compliant could have a material adverse effect on the Company's business,
financial condition and results of operations or business prospects.
Readers are cautioned that most of the statements contained in the "Year
2000 Readiness Disclosure" paragraphs are forward-looking and should be read in
conjunction with the Company's disclosures under the heading "PRELIMINARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS" set forth above.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-Q:
The Company has incurred losses in every year of its existence and expects
to continue to incur significant operating losses for the next several years.
The Company has never generated revenues from product sales and there is no
assurance that revenue from product sales will ever be achieved. In addition,
there is no assurance that any of the Company's proprietary products will ever
be successfully
15
<PAGE> 16
developed, receive and maintain required governmental regulatory
approvals, become commercially viable or achieve market acceptance.
The Company has no experience in manufacturing, procuring products in
commercial quantities or marketing, and only limited experience in negotiating,
setting up or maintaining strategic relationships and conducting clinical trials
or other late stage phases of the regulatory approval process, and there is no
assurance that the Company will successfully engage in any of these activities.
The Company's need for additional funding is expected to be substantial and
will be determined by the progress and cost of the development and
commercialization of its products and other activities. The Company believes
that its existing capital resources will be sufficient to satisfy its current
and projected funding requirements for at least the next twelve months. However,
if the Company experiences unanticipated cash requirements during the interim
period or fails to obtain sufficient funding under its line of equity agreement,
the Company could require additional funds sooner. The source, availability, and
terms of such funds have not been determined. Although funds may be received
from the sale of equity securities or the exercise of outstanding warrants and
options to acquire common stock of the Company, there is no assurance any such
funding will occur.
Factors impacting the future success of the Company include, among other
things, the ability to develop products which will be safe and effective in
treating neurological diseases and the ability to obtain government approval.
The Company faces numerous other risks in the operation of its business,
including, but not limited to, protecting its proprietary technology and trade
secrets and not infringing those of others; attaining a competitive advantage;
entering into agreements with others to source, manufacture, market and sell its
products; attracting and retaining key personnel in research and development,
manufacturing, marketing, sales and other operational areas; managing growth, if
any; and avoiding potential claims by others in such areas as product liability
and environmental matters.
The above factors are not intended to be inclusive. A more comprehensive
list of factors which could affect the Company's future operating results can be
found in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, in "Item 1. Description of Business" under the caption "Risk
Factors." Failure to satisfactorily achieve any of the Company's objectives or
avoid any of the above or other risks would likely have a material adverse
effect on the Company's business and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to certain market risks associated with interest
rate fluctuations on its marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. The Company is not subject to risks from
currency rate fluctuations. In addition, the Company does not utilize hedging
contracts or similar instruments.
The Company's exposure to interest rate risk arises from financial
instruments entered into in the normal course of business. Certain of the
Company's financial instruments are fixed rate, short-term investments in
government and corporate notes and bonds, which are available for sale (and have
been marked to market in the accompanying financial statements). Changes in
interest rates generally affect
16
<PAGE> 17
the fair value of these investments, however, because these financial
instruments are considered "available for sale," all such changes are reflected
in the financial statements in the period affected.
The Company's borrowings bear interest at fixed annual rates. Changes in
interest rates generally affect the fair value of such debt, but do not have an
impact on earnings or cash flows. Because of the relatively short-term nature of
the Company's borrowings, fluctuations in fair value are not deemed to be
material.
QUALITATIVE DISCLOSURES
The Company's primary exposures relate to (1) interest rate risk on its
borrowings, (2) the Company's ability to pay or refinance its borrowings at
maturity at market rates, (3) interest rate risk on the value of the Company's
investment portfolio and rate of return, (4) the impact of interest rate
movements on the Company's ability to obtain adequate financing to fund future
cash requirements. The Company manages interest rate risk on its investment
portfolio by matching scheduled investment maturities with its cash
requirements. The Company manages interest rate risk on its outstanding
borrowings by using fixed rate debt. While the Company cannot predict or manage
its ability to refinance existing borrowings and investment portfolio,
management evaluates the Company's financial position on an ongoing basis.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
1. On January 29, 1999 the Company entered into an agreement with two
private investors to sell up to $6.0 million of 5% preferred stock (600 shares
at stated value of $10,000 per share) with rights of conversion into common
stock. The financing consists of two tranches of preferred stock. The first
tranche of $4.0 million (400 shares of 5% Series A Preferred Stock with
Conversion Features) was sold on January 29, 1999, and until May 29, 1999, is
convertible into common stock at a fixed price of $13.06 per share. Thereafter,
the preferred stock is convertible at the lesser of the fixed price or a
variable rate of 101% of the average of the ten lowest closing bid prices of the
common stock during the thirty trading days immediately preceding the conversion
date. In no event can the first tranche be converted into more than 1,450,000
shares. The second tranche of $2.0 million can be sold by the Company, at its
option, during the period commencing July 28, 1999 and ending September 16,
1999, subject to the satisfaction by the Company of certain conditions. The
preferred stock in the second tranche will contain terms and conditions for
conversion similar to the first tranche, except that the fixed conversion price
will be set at 125% of the average market price of the common stock at the time
of the second closing. Dividends on the preferred stock are payable in cash or
in common stock, at the option of the Company, at the annual rate of 5%.
Additional features of the preferred stock include, among other things, a
redemption feature at the Company's option if the common stock trades below a
floor of $5 per share or above a ceiling of $20 per share. The investors also
received warrants to purchase for a period of 5 years, 75,000 shares of the
Company's common stock at $12.98 per share.
2. Brighton Capital, Ltd, ("Brighton") acted as a finder with respect to
the negotiation and execution of the preferred stock agreement described above.
As consideration for the services provided by Brighton in connection with the
Agreement, the Company paid Brighton a cash commission of 6% of the gross sale
proceeds realized from sale of the preferred stock, plus warrants to purchase
15,000 shares of common stock at $12.98 per share. The warrants are exercisable
over a 5 year period and may be called by the Company if the market value of the
common stock equals or exceeds $25.96 for any 10 consecutive days during the
exercise period.
3. On January 25, 1999, the Company issued to Trinity Capital Advisors,
Inc. ("Trinity") a warrant to purchase 40,000 shares of common stock at an
exercise price of $11.00 per share at any time until January 24, 2002. The
warrant was issued in consideration for Trinity waiving certain rights of first
refusal it had with respect to the sale by the Company of the 5% Series A
Preferred Stock with Conversion Features described above.
4. On January 25, 1999, the Company issued to Kingsbridge Capital Limited
("Kingsbridge") a warrant to purchase 25,000 shares of common stock at an
exercise price of $11.00 per share at any time until January 24, 2002. The
warrant was issued in consideration for Kingsbridge waiving certain antidilution
provisions under an existing warrant held by Kingsbridge that might have been
triggered as a result of the issuance of the preferred stock and warrants
described in paragraph 1 above.
5. During the quarter ended March 31, 1999, the Company made two sales of
common stock to Kingsbridge Capital Limited pursuant to the Equity Line
Agreement entered into between the Company and Kingsbridge on March 27, 1998.
The sales occurred on January 25, 1999, and March 30, 1999, whereby the Company
issued to Kingsbridge 78,855 shares and 30,964 shares and realized proceeds of
$700,000 and $250,000, respectively.
18
<PAGE> 19
The securities issued by the Company pursuant to the transactions described
above have been issued without registration under the Securities Act of 1933 in
reliance upon the exemptions from registration provided under Section 4(2) of
the Securities Act and Rule 506 of Regulation D promulgated thereunder. The
foregoing transactions did not involve any public offering, the investors either
received or had access to adequate information about the Company in order to
make an informed investment decision, and the Company reasonably believed that
each of the investors was "sophisticated" within the meaning of Section 4(2) of
the Securities Act.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 1999:
1. Form 8-K dated January 28, 1999, to report a press release issued to
the public on January 27, 1999.
2. Form 8-K dated February 8, 1999, to report under Item 5 the private
placement of 5% Series A Preferred Stock with Conversion Features.
20
<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: May 12, 1999 By: /s/ Alvin J. Glasky
-----------------------------------
Alvin J. Glasky, Ph.D., Chief
Executive Officer and President
Date: May 12, 1999 By: /s/ Samuel Gulko
-----------------------------------
Samuel Gulko, Chief Financial
Officer, Secretary and Treasurer
(Principal Accounting and
Financial Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 398,400
<SECURITIES> 3,091,483
<RECEIVABLES> 154,162
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,886,519
<PP&E> 4,202,879
<DEPRECIATION> 862,838
<TOTAL-ASSETS> 7,290,980
<CURRENT-LIABILITIES> 2,655,075
<BONDS> 973,559
0
3,288,611
<COMMON> 29,036,684
<OTHER-SE> (28,716,460)
<TOTAL-LIABILITY-AND-EQUITY> 7,290,980
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,403,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,016
<INCOME-PRETAX> (4,418,598)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,418,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,418,598)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
