<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-28782
NEOTHERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 788-6700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Class Outstanding at August 8, 2000
----------------------------- -----------------------------
Common Stock, $.001 par value 10,236,053
<PAGE> 2
NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statement Regarding Financial Information.............................................. 3
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 ................................................................. 4
Condensed Consolidated Statements of Operations for the three months ended June 30,
2000 and 1999 (unaudited).......................................................... 5
Condensed Consolidated Statements of Operations for the six months ended June 30,
2000 and 1999 and for the period from inception (June 15, 1987) to June 30, 2000
(unaudited)....................................................................... 6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 and for the period from inception (June 15, 1987) to June 30,
2000 (unaudited)................................................................... 7
Notes to Condensed Consolidated Financial Statements................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................ 16
PART II. OTHER INFORMATION...................................................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 19
</TABLE>
2
<PAGE> 3
NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by
NeoTherapeutics, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States has been condensed
or omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The Company suggests that you read the financial statements included
herein in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999, as filed with the Securities and Exchange Commission.
3
<PAGE> 4
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------------ ------------
CURRENT ASSETS: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 11,971,927 $ 6,726,220
Marketable securities and short-term investments 2,930,328 2,955,212
Other receivables, principally investment interest 324,893 148,034
Prepaid expenses and refundable deposits 65,403 130,202
------------ ------------
Total current assets 15,292,551 9,959,668
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 2,778,849 2,607,741
Leasehold improvements 1,842,537 1,814,167
Accumulated depreciation and amortization (1,542,799) (1,261,220)
------------ ------------
Property and equipment, net 3,078,587 3,160,688
------------ ------------
OTHER ASSETS:
Debt issuance costs, net 582,863 --
Prepaid expenses and Deposits 53,442 53,641
------------ ------------
636,305 53,641
------------ ------------
$ 19,007,443 $ 13,173,997
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,936,750 $ 3,613,680
Accrued payroll and related taxes 115,758 111,822
Note payable to related party 431,381 558,304
Current portion of long-term debt 430,177 472,938
------------ ------------
Total current liabilities 4,914,066 4,756,744
OTHER LIABILITIES:
Long-term debt, net of current portion 558,771 637,308
Subordinated convertible debentures, net of
original issue discount of $8,986,972 1,013,028 --
Deferred rent 80,826 75,121
------------ ------------
Total liabilities 6,566,691 5,469,173
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized, none issued and
outstanding at June 30, 2000 and December 31, 1999 -- --
Common stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 10,109,053 and 8,778,370 shares
at June 30, 2000 and December 31, 1999, respectively 84,580,094 58,139,327
Unrealized (losses) on available-for-sale securities (65,816) (38,572)
Deficit accumulated during the development stage (72,073,526) (50,395,931)
------------ ------------
Total stockholders' equity 12,440,752 7,704,824
------------ ------------
$ 19,007,443 $ 13,173,997
============ ============
</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 JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $ -- $ --
------------ -----------
OPERATING EXPENSES:
Research and development 10,206,868 3,257,756
General and administrative 1,180,291 748,208
------------ -----------
11,387,159 4,005,964
------------ -----------
LOSS FROM OPERATIONS (11,387,159) (4,005,964)
------------ -----------
OTHER INCOME (EXPENSE):
Interest (expense), net (958,840) (50,509)
------------ -----------
Total other income (expense) (958,840) (50,509)
------------ -----------
NET LOSS $(12,345,999) $(4,056,473)
============ ===========
BASIC AND DILUTED LOSS
PER SHARE $ (1.29) $ (0.63)
============ ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 9,535,653 6,444,026
============ ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
<PAGE> 6
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
AND 1999 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
2000 1999 2000
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES, from grants $ -- $ -- $ 497,128
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 18,707,071 6,565,188 54,781,859
General and administrative 2,135,293 1,844,643 14,493,624
Settlement of litigation -- -- 2,458,359
------------ ------------ ------------
20,842,364 8,409,831 71,733,842
------------ ------------ ------------
LOSS FROM OPERATIONS (20,842,364) (8,409,831) (71,236,714)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest (expense), net (835,746) (65,240) (315,243)
Other income 517 -- 63,679
------------ ------------ ------------
Total other income (expense) (835,229) (65,240) (251,564)
------------ ------------ ------------
NET LOSS $(21,677,593) $ (8,475,071) $(71,488,278)
============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $ (2.50) $ (1.40)
============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 8,656,752 6,036,187
============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
6
<PAGE> 7
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO JUNE 30, 2000
<TABLE>
<CAPTION>
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
2000 1999 2000
------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(21,677,593) $(8,475,071) $(71,488,279)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 281,779 252,055 1,667,556
Amortization of discount on convertible
debentures and beneficial
conversion feature 1,013,028 -- 1,013,028
Compensation expense arising from
the grant of warrants and stock
options 25,279 332,143 1,110,244
Issuance of common stock in
settlement of litigation -- -- 2,458,359
Amortization of deferred
compensation -- -- 93,749
Increase in deferred rent 5,706 14,406 80,826
Compensation expense for extension of
debt conversion agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Increase in other receivables (176,858) (10,085) (324,646)
Decrease (increase) in prepaid
expenses, deferred charges and
refundable deposits 64,799 19,421 (23,110)
Increase in accounts payable and
accrued expenses 323,070 436,866 4,096,850
Increase in accrued payroll and
related taxes 3,932 14,413 754,448
Decrease in employee expense
reimbursement and accrued
interest to related parties -- -- 300,404
------------ ----------- ------------
Net cash used in operating
activities (20,136,858) (7,415,852) (59,762,723)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (199,478) (313,825) (4,701,689)
Sales (purchases) of marketable securities and
short-term investments, net 24,884 (251,044) (2,930,328)
Unrealized (loss) gain on available-for-sale
securities (27,244) 2,497 (65,816)
Payment of organization costs -- -- (66,093)
Proceeds from sale of equipment -- -- 29,665
Issuance of notes receivable -- -- 100,000
------------ ----------- ------------
Net cash used in investing
activities (201,838) (562,372) (7,634,261)
------------ ----------- ------------
</TABLE>
7
<PAGE> 8
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Six Months Six Months Inception
Ended Ended Through
June 30, June 30, June 30,
2000 1999 2000
------------ ----------- ------------
(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 16,301,038 4,933,369 64,019,155
Proceeds from preferred stock issuance, net
of offering costs -- 3,614,504 3,608,788
Proceeds from exercise of stock options
and warrants 52,889 91,905 864,538
Proceeds from sale of convertible
debentures, net of issuance costs 9,417,138 -- 9,417,138
Proceeds from long-term debt -- 33,786 1,862,958
Repayment of long-term debt (121,299) (258,239) (874,009)
Repayment (issuance) of notes from
officers and directors for exercise of stock options 61,560 -- (225,000)
Dividends paid to preferred stockholders -- (82,312) (136,246)
(Repayment) proceeds from notes payable to
related parties, net (126,923) -- 630,977
Cash at acquisition -- -- 200,612
------------ ----------- ------------
Net cash provided by financing
activities 25,584,403 8,333,013 79,368,911
------------ ----------- ------------
Net increase in cash and cash
equivalents 5,245,707 354,789 11,971,927
Cash and cash equivalents,
beginning of period 6,726,220 1,097,341 --
------------ ----------- ------------
Cash and cash equivalents, end of
period $ 11,971,927 $ 1,452,130 $ 11,971,927
============ =========== ============
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of warrants in connection with
equity and debt financings $ 1,013,028 $ 344,610 $ 1,402,638
============ =========== ============
Conversion of accrued payroll into shares
of common stock $ -- $ -- $ 1,141,838
============ =========== ============
Conversion of notes payable to related
parties into shares of common stock $ -- $ -- $ 500,000
============ =========== ============
Conversion of accrued interest into notes
payable to related parties $ -- $ -- $ 300,404
============ =========== ============
Conversion of preferred stock into shares
of common stock $ -- $ 722,900 $ 3,608,788
============ =========== ============
Conversion of revenue participation
Units into shares of common stock $ -- $ -- $ 676,000
============ =========== ============
Issuance of stock options and warrants
for services $ 25,279 $ 332,143 $ 1,110,244
============ =========== ============
Issuance of common stock and warrants
in connection with settlement of litigation $ -- $ -- $ 2,458,359
============ =========== ============
Conversion of other accrued liabilities to
shares of common stock $ -- $ -- $ 52,104
============ =========== ============
Dividends on preferred stock payable in shares
of common stock $ -- $ 82,312 $ 82,312
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
8
<PAGE> 9
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business:
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of its consolidated financial position at June 30, 2000, and consolidated
results of operations and cash flows for the periods presented. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted and
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 as filed with the Securities and Exchange Commission. Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full year.
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to "NeoTherapeutics, Inc." and in June 1997, the Company was
reincorporated in the state of Delaware. The Company has three subsidiaries,
Advanced ImmunoTherapeutics, Inc., incorporated in California in June 1987,
NeoTherapeutics, GmbH, incorporated in Switzerland in April 1997 and NeoGene
Technologies, Inc., incorporated in California in October 1999. All references
to the "Company" hereinafter refer to NeoTherapeutics, Inc. and its subsidiaries
as a consolidated entity.
The Company is a development-stage biopharmaceutical company engaged in
the discovery and development of novel therapeutic drugs intended to treat
neurological and psychiatric diseases and conditions such as memory deficits
associated with Alzheimer's disease, aging, neuropathy, stroke, spinal cord
injuries, Parkinson's disease, migraine, depression and obesity. The
accompanying condensed consolidated financial statements include the results of
the Company and its subsidiaries.
9
<PAGE> 10
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS AND CONTINGENCIES
Research and Fellowship Grants:
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of June 30, 2000, the Company had committed to pay, through April 2002,
approximately $1,180,000 for such grants and fellowships. Grant expense for the
six month periods ended June 30, 2000 and 1999, amounted to $541,600 and
$308,500, respectively.
Major Clinical Trials:
The Company has entered into agreements with a contract research
organization and a University to conduct multiple clinical trials and open-label
studies following completion of treatment involving more than 2,000 patients
worldwide. The agreements, all of which are cancelable by either party upon
thirty days notice, are expected to result in aggregate future expenditures
ranging from $30 to $35 million through June 2001. The costs of these clinical
trials that were charged to operations for the six months ended June 30, 2000
and 1999 were approximately $15.6 million and $3.0 million, respectively.
3. SUBORDINATED CONVERTIBLE DEBENTURES
On April 6, 2000, the Company entered into a financing transaction with two
private investors who have invested previously in the Company. The transaction
consisted of (a) $10 million in 5% subordinated convertible debentures due April
6, 2005, (b) redeemable warrants to purchase up to 4 million shares of common
stock over a two-year period (the "B" warrants) and (c) five-year warrants to
purchase from 115,000 up to 265,000 shares of the Company's common stock at an
exercise price of $19.672 per share. The "B" warrants can be redeemed in part by
the Company as frequently as several times per week and when called for
redemption can be exercised by the investors at 97% of the per share closing
market price (i.e., a discount of 3%), and are exercisable at the sole option of
the investors at the price of $33.75 per share. The number of "B" warrants that
are exercisable at each redemption are subject to average daily volume
restrictions. To the extent the "B" warrants have not been exercised, the
investors have agreed to fund two additional tranches of $10 million each of 5%
subordinated convertible debentures, subject to certain restrictions, including
the following:
o The investors will limit their investment to 10% of the Company's
market capitalization at the time of each tranche, such investment
not to exceed $10 million;
o The additional tranches must be successfully registered with the
SEC; and
o The Company must maintain the continued listing requirements of the
Nasdaq Stock Market.
In the event any of these conditions cannot be met and the additional
tranches (or other financing alternatives) are not available, the Company may be
required to scale-back or cancel certain of its clinical development activities.
The debentures are convertible at the lesser of $20.25 per share or
101% of the market price of the common stock as determined under the agreement.
The two additional tranches of convertible
10
<PAGE> 11
debentures of up to $10 million each, 5 and 10 months after the closing, are at
the option of either the Company or the investor. If the Company exercises the
option, the two tranches are under similar terms and conditions as the initial
tranche. If the investor exercises the option, the convertible debentures in
each of the two tranches will be issued at the fixed conversion price of $20 per
share. The amount available under the two additional tranches will be reduced
pro-rata to the extent that the investors have exercised or the Company has
redeemed the "B" warrants to purchase common stock.
Based upon an allocation of the proceeds of the offering between the
debentures and warrants using certain assumptions about market interest rates
and the corresponding fair value of the debentures and (using the Black-Sholes
option-pricing model to value the warrants using appropriate assumptions), the
Company assigned a value of approximately $9.5 million to the warrants. This has
been reflected as original issue discount to the debentures and is being
amortized over the term of the debentures using the effective interest method.
The beneficial conversion feature was assigned a value of $0.5 million and was
fully amortized in the second quarter when the notes first became convertible.
4. STOCKHOLDERS' EQUITY
Common Stock:
On May 1, 2000 the Company completed a private placement of 500,000
shares of common stock for $7.0 million cash. The investor, a major Canadian
financial institution, also received five-year warrants to purchase 125,000
shares of common stock at $17.50 per share.
During the quarter ended June 30, 2000, the Company had no sales under
its existing Equity Line Agreement with a private investor. At June 30, 2000 and
at August 8, 2000, $7.5 million remains available under the agreement.
During the quarter ended June 30, 2000, the Company called and the
investors exercised 43,400 of the aforementioned "B" Warrants, resulting in the
issuance to the investor 43,400 shares of common stock in exchange for $463,078
cash.
5. STOCK OPTIONS
Stock option activity during the six month period ended June 30, 2000
are as follows:
<TABLE>
<CAPTION>
Option
Shares Price
---------- ---------------
<S> <C> <C>
Outstanding at January 1, 2000 1,389,373 $ 0.025-$12.875
Granted 383,900 10.25 - 12.375
Exercised (30,125) 0.025- 7.625
Forfeited -- --
---------- ---------------
Outstanding at June 30, 2000 1,743,148 $ 3.75 -$13.00
========== ===============
</TABLE>
During the six month periods ended June 30, 2000 and 1999, the Company
recognized compensation expense for vested consultants options pursuant to SFAS
123 aggregating $25,279 and $332,143, respectively. Options granted to
consultants consist of options that vest both immediately and upon the
occurrence of certain events as specified in the related agreements.
11
<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 June 30, 2000, the
Company incurred a cumulative net loss of approximately $71.5 million. The
Company expects its operating expenses to increase over the next several years
as it continues to expand its research and development and commercialization
activities and operations. The Company expects to incur significant additional
operating losses for at least the next several years unless such operating
losses are offset, if at all, by licensing revenues under strategic alliances
with larger pharmaceutical companies which the Company is currently seeking.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999:
There were no revenues during the three months ended June 30, 2000 or
the three months ended June 30, 1999.
Research and development expenses for the three months ended June 30,
2000 increased approximately $6,949,000 or 213% over the same period in 1999.
Current period increases were due primarily to costs and expenses associated
with the conduct of clinical and preclinical trials as the Company continued the
acceleration of its program to commercialize its lead compound, NEOTROFIN(TM).
These costs and expenses, all of which were conducted by outside organizations,
were attributable primarily to increases in the number and duration of outside
clinical trials. In addition, increases in quantity requirements for
manufacturing and formulation by the Company's contract manufacturer of
NEOTROFIN(TM) and other compounds used in the Company's research and testing
programs contributed to the increased costs and expenses during the quarter and
were partially offset by lower preclinical study costs and legal fees related to
patent and trademark activities. Internally, research and development expenses
increased in the categories of salaries, due to additional personnel and salary
increases. The Company expects its research and development expenses to continue
to increase as it expands its laboratories and increases its internal product
development and external preclinical and clinical trial activities.
General and administrative expenses increased approximately $432,000 or
58% from the same period in 1999 due primarily to increases in salaries and
related benefits due to increases in personnel, salary increases, recruiting
expenses and increases in consulting and legal fees, which were partially offset
by the reduction of investor relations fees. The Company expects general and
administrative expenses to increase in future periods in support of the expected
increases in research and development activities, as well as sales and marketing
activities should the Company successfully bring one or more of its products to
market.
12
<PAGE> 13
Net interest expense increased by approximately $908,400 due to a
non-cash charge of $1,013,000 resulting from the amortization of original issue
discount and beneficial conversion feature related to the subordinated
convertible debentures issued on April 6, 2000. Interest earnings from higher
cash balances resulting from the investments of unallocated proceeds from recent
equity and debt financings partially offset this non-cash charge. The Company
expects its interest income to decrease in future periods due to the use of its
funds in current operations, unless offset by revenues or additional equity
financings.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999:
There were no revenues during the six months ended June 30, 2000 or the
six months ended June 30, 1999.
Research and development expenses for the six months ended June 30,
2000 increased approximately $12,142,000 or 185% over the same period in 1999.
Current period increases were due primarily to costs and expenses associated
with the conduct of clinical trials as the Company continued the acceleration of
its program to commercialize its lead compound, NEOTROFIN(TM). These costs and
expenses, all of which were conducted by outside organizations, were
attributable primarily to increases in the number and duration of outside
clinical trials, and were partially offset by lower quantity requirements for
manufacturing and formulation by the Company's contract manufacturer of
NEOTROFIN(TM) and other compounds used in the Company's research and testing
programs as well as legal fees related to patent and trademark activities.
Internally, research and development expenses increased in the categories of
salaries, due to additional personnel and salary increases, seminars and
consulting. The Company expects its research and development expenses to
continue to increase as it expands its laboratories and increases its internal
product development and external preclinical and clinical trial activities.
General and administrative expenses increased approximately $291,000 or
16% from the same period in 1999 due primarily to increases in salaries and
related benefits due to increases in personnel, salary increases, recruiting
expenses and increases in legal fees which were partially offset by the
reduction of investor relations fees. The Company expects general and
administrative expenses to increase in future periods in support of the expected
increases in research and development activities as well as sales and marketing
activities should the Company successfully bring one or more of its products to
market.
Net interest expense increased by approximately $771,000 due to a
non-cash charge of $1,013,000 resulting from the amortization of original issue
discount and beneficial conversion feature related to the subordinated
convertible debentures issued on April 6, 2000. Interest earnings from higher
cash balances resulting from the investments of unallocated proceeds from recent
equity and debt financings partially offset this non-cash charge. Interest
earnings from higher cash balances resulting from the investments of unallocated
proceeds from recent equity financings partially offset this non-cash charge.
The Company expects its interest income to decrease in future periods due to the
use of its funds in current operations, unless offset by revenues or additional
equity financings.
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LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 2000, the Company financed its
operations primarily through sales of equity securities. The Company has also
financed its operations through government grants, borrowings and deferred
payment of salaries and other expenses due to related parties.
In March 1998, the Company entered into an Equity Line Agreement with a
private investor which allows the Company, in its sole discretion and subject to
certain restrictions, to sell ("put") to the investor, through February 2001, up
to $15 million of its common stock. Through June 30, 2000, the Company has put
to the investor 904,403 shares of its common stock and realized gross proceeds
of $7.5 million. As of June 30, 2000, $7.5 million remains available under the
Equity Line Agreement.
On February 25, 2000, the Company sold to two private investors 520,324
shares of common stock for $8.0 million. The investors also received five-year
warrants to purchase 104,000 shares of common stock at an exercise price of
$21.00 per share.
On April 6, 2000, the Company entered into a financing transaction with
two private investors and received on that date $10 million cash from the sale
of convertible debentures and warrants, representing the initial segment of the
transaction. Subject to certain conditions, other elements of this transaction
is expected to provide an additional $20 million cash over a ten-month period.
On May 1, 2000, the Company completed a private placement of 500,000
shares of common stock for $7.0 million cash.
At June 30, 2000, working capital amounted to approximately $10.4
million. This amount included cash and cash equivalents of approximately $12.0
million and marketable securities and short-term investments of approximately
$2.9 million. In comparison, at December 31, 1999, the Company had working
capital of approximately $5.2 million, which included cash and cash equivalents
of approximately $6.7 million and short-term investments of approximately $3.0
million. The $5.2 million increase in working capital during the six months is
attributable primarily to the sale of approximately $25.8 million of common
stock and convertible debentures to private investors plus proceeds from
exercise of stock options, offset by (i) the operating loss for the period, (ii)
purchases of property and equipment and (iii) long-term debt repayment.
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of June 30, 2000, the Company had committed to pay, through April 2002,
approximately $1.2 million for such grants and fellowships.
The Company has entered into agreements with a contract research
organization and a University to conduct multiple clinical trials, including
"open-label" extensions of such clinical trials, in a number of countries
involving more than 2,000 patients. The agreements, all of which are cancelable
by either party upon thirty days notice, are expected to result in aggregate
future expenditures ranging from $30 million to $35 million through June 2001.
The Company is in the development stage and devotes substantially all
of its efforts to research and development. The Company has incurred cumulative
losses of approximately $71.5 million through June 30, 2000, and expects to
incur substantial losses over the next several years. In addition to the funds
derived from its initial public offering and subsequent private placement equity
offerings, the
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<PAGE> 15
Company will require substantial additional funds in order to complete the
research and development activities currently contemplated and to commercialize
its proposed products. The Company's future capital requirements and
availability of capital will depend upon many factors, including continued
scientific progress in research and development programs, the scope and results
of preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in filing, prosecuting and
enforcing patent claims, the effect of competing technological developments, the
cost of manufacturing scale-up, the cost of commercialization activities, and
other factors which may not be within the Company's control. While the Company
believes that its existing capital resources, will be adequate to fund its
capital needs for at least eight months, the Company also believes that it will
require substantial additional funds in order to complete the research and
development activities currently contemplated and to commercialize its proposed
products.
Without additional funding, the Company may be required to delay,
reduce the scope of, eliminate one or more of its research and development
projects, or obtain funds through arrangements with collaborative partners or
others which may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize on its own, and which could be on terms
unfavorable to the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of the Company are highly uncertain, and
the following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-Q:
The Company has incurred losses in every year of its existence and
expects to continue to incur significant operating losses for the next several
years. The Company has never generated revenues from product sales and there is
no assurance that revenue from product sales will ever be achieved. In addition,
there is no assurance that any of the Company's proprietary products will ever
be successfully developed, receive and maintain required governmental regulatory
approvals, become commercially viable or achieve market acceptance.
The Company has no experience in manufacturing, procuring products in
commercial quantities or marketing, and only limited experience in negotiating,
setting up or maintaining strategic relationships and conducting clinical trials
or other late stage phases of the regulatory approval process, and there is no
assurance that the Company will successfully engage in any of these activities.
The Company's need for additional funding is expected to be substantial
and will be determined by the progress and cost of the development and
commercialization of its products and other activities. The Company believes
that its existing capital resources will be sufficient to satisfy its current
and projected funding requirements for at least the next eight months. However,
if the Company experiences unanticipated cash requirements during the interim
period or fails to obtain sufficient funding under its existing financing
agreements, the Company could require additional funds sooner. The source,
availability, and terms of such funds have not been determined. Although funds
may be received from the sale of equity securities or the exercise of
outstanding warrants and options to acquire common stock of the Company, there
is no assurance any such funding will occur.
Factors impacting the future success of the Company include, among
other things, the ability to develop products which will be safe and effective
in treating neurological diseases and the ability to obtain government approval.
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<PAGE> 16
The Company faces numerous other risks in the operation of its
business, including, but not limited to, protecting its proprietary technology
and trade secrets and not infringing on those of others; attaining a competitive
advantage; entering into agreements with others to source, manufacture, market
and sell its products; attracting and retaining key personnel in research and
development, manufacturing, marketing, sales and other operational areas;
managing growth, if any; and avoiding potential claims by others in such areas
as product liability and environmental matters.
The above factors are not intended to be inclusive. A more
comprehensive list of factors which could affect the Company's future operating
results can be found in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, in "Item 1. Description of Business" under the
caption "Risk Factors." Failure to satisfactorily achieve any of the Company's
objectives or avoid any of the above or other risks would likely have a material
adverse effect on the Company's business and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to certain market risks associated with interest
rate fluctuations on its marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. The Company is not subject to risks from
currency rate fluctuations. In addition, the Company does not utilize hedging
contracts or similar instruments.
The Company's exposure to interest rate risk arises from financial
instruments entered into in the normal course of business. Certain of the
Company's financial instruments are fixed rate, short-term investments in
government and corporate notes and bonds, which are available for sale (and have
been marked to market in the accompanying financial statements). Changes in
interest rates generally affect the fair value of these investments, however,
because these financial instruments are considered "available for sale," all
such changes are reflected in the financial statements in the period affected.
The Company's borrowings bear interest at fixed annual rates. Changes
in interest rates generally affect the fair value of such debt, but do not have
an impact on earnings or cash flows. Because of the relatively short-term nature
of the Company's borrowings, fluctuations in fair value are not deemed to be
material.
QUALITATIVE DISCLOSURES
The Company's primary exposures relate to (1) interest rate risk on its
borrowings, (2) the Company's ability to pay or refinance its borrowings at
maturity at market rates, (3) interest rate risk on the value of the Company's
investment portfolio and rate of return, (4) the impact of interest rate
movements on the Company's ability to obtain adequate financing to fund future
cash requirements. The Company manages interest rate risk on its investment
portfolio by matching scheduled investment maturities with its cash
requirements. The Company manages interest rate risk on its outstanding
borrowings by using fixed rate debt. While the Company cannot predict or manage
its ability to refinance existing borrowings and investment portfolio,
management evaluates the Company's financial position on an ongoing basis.
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<PAGE> 17
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
1. On June 26, 2000 and June 28, 2000 the Company sold to two private
investors 43,400 shares of common stock for cash proceeds of $463,078 as a
result of the exercise of an equal number of warrants by the investors under a
callable warrant agreement entered into on April 6, 2000.
2. Brighton Capital, Ltd, ("Brighton") acted as a finder with respect
to the negotiation and execution of the agreement described above. As
consideration for the services provided by Brighton in connection with the
agreement, the Company paid Brighton a cash commission of $16,208, representing
3 1/2% of the gross sale proceeds realized from sale of the common stock plus 5
year warrants to purchase 2,782 shares of common stock at $15.00 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the Annual Meeting of Stockholders of
the Company held on June 12, 2000:
1. The following persons were elected as Class I directors to serve three-year
terms expiring at the Annual Meeting of Stockholders to be held in 2003, or
until their successors are elected and qualified:
Number of Votes Cast
---------------------------------
Name For Authority Withheld
---- ------------ ------------------
Samuel Gulko 8,475,310 38,805
Eric L. Nelson, Ph.D. 8,475,310 38,805
Paul H. Silverman, Ph.D., D.Sc. 8,475,310 38,805
2. The following persons were elected as Class III directors to serve for the
remaining two years of a three-year term expiring at the Annual Meeting of
Stockholders to be held in 2002, or until their successors are elected and
qualified:
Number of Votes Cast
---------------------------------
Name For Authority Withheld
---- ------------ ------------------
Alvin J. Glasky, Ph.D. 8,475,210 38,905
Ann C. Kessler, Ph.D. 8,475,210 38,905
Armin Kessler 8,475,210 38,905
3. A proposal to approve the issuance of common stock and warrants pursuant to a
financing transaction completed on February 25, 2000, was approved by the
following vote:
Votes Cast Number of Shares
---------- ----------------
For 4,248,441
Against 35,712
Abstain 50,455
Broker Non-Votes 4,179,507
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4. A proposal to approve the issuance of common stock pursuant to conversion
rights under a convertible debenture and warrant financing transaction completed
on April 6, 2000, was approved by the following vote:
Votes Cast Number of Shares
---------- ----------------
For 4,231,644
Against 39,209
Abstain 63,755
Broker Non-Votes 4,179,507
5. A proposal to approve an increase in the number of shares of common stock
issuable under the 1997 Stock Incentive Plan by 750,000, was approved by the
following vote:
Votes Cast Number of Shares
---------- ----------------
For 4,191,338
Against 77,560
Abstain 65,710
Broker Non-Votes 4,179,507
6. A proposal to ratify the selection of Arthur Andersen LLP as independent
public accountants for the Company, was approved by the following vote:
Votes Cast Number of Shares
---------- ----------------
For 8,448,396
Against 25,015
Abstain 40,704
Broker Non-Votes -0-
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
1. On April 3, 2000, the Company filed a report on Form 8-K
announcing an $8 million sale of common stock to private
investors.
2. On April 21, 2000, the Company filed a report on Form 8-K
announcing the sale of $10 million of Subordinated Convertible
Debentures and Warrants.
3. On May 25, 2000, the Company filed a report on Form 8-K
announcing the sale to a private institutional investor of
$7,000,000 of common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: August 14, 2000 By: /s/ Samuel Gulko
-------------------------------------
Samuel Gulko, Chief Financial Officer
(Principal Accounting and Financial
Officer)
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
