<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, 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:
<TABLE>
<S> <C>
Class Outstanding at May 8, 2000
--------------------------- --------------------------
Common Stock, $.001 par value 10,065,653
</TABLE>
1
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NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statement regarding financial information......................................... 3
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999............................................................. 4
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 and for the period from
inception (June 15, 1987) to March 31, 2000................................... 5
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 and for the period from inception (June 15,
1987) to March 31, 2000....................................................... 6
Notes to Condensed Consolidated Financial Statements.............................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL POSITION ........................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................................... 14
PART II. OTHER INFORMATION................................................................. 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 16
</TABLE>
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NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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 MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,893,842 $ 6,726,220
Marketable securities and short-term investments 3,061,176 2,955,212
Other receivables, principally investment interest 144,939 148,034
Prepaid expenses and refundable deposits 123,049 130,202
------------ ------------
Total current assets 10,223,006 9,959,668
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 2,707,556 2,607,741
Leasehold improvements 1,814,167 1,814,167
Accumulated depreciation and amortization (1,400,508) (1,261,220)
------------ ------------
Property and equipment, net 3,121,215 3,160,688
------------ ------------
PREPAID EXPENSES AND DEPOSITS 53,542 53,641
------------ ------------
$ 13,397,763 $ 13,173,997
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,727,513 $ 3,613,680
Accrued payroll and related taxes 114,573 111,822
Note payable to related party 558,304 558,304
Current portion of long-term debt 450,459 472,938
------------ ------------
Total current liabilities 4,850,849 4,756,744
LONG-TERM DEBT, net of current portion 536,203 637,308
DEFERRED RENT 77,973 75,121
------------ ------------
Total liabilities 5,465,025 5,469,173
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized:
Issued and outstanding, none at March 31, 2000
and December 31, 1999 - -
Common stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 9,535,653 and
8,778,370 shares at March 31, 2000 and
December 31, 1999, respectively 67,704,476 58,139,327
Unrealized (losses) on available-for-sale securities (44,213) (38,572)
Deficit accumulated during the development stage (59,727,525) (50,395,931)
------------ ------------
Total stockholders' equity 7,932,738 7,704,824
------------ ------------
$ 13,397,763 $ 13,173,997
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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<PAGE> 5
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND 1999 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO MARCH 31, 2000
<TABLE>
<CAPTION>
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
2000 1999 2000
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES, from grants $ - $ - $ 497,128
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 8,500,203 3,307,432 44,574,991
General and administrative 955,002 1,096,435 13,313,333
Settlement of litigation - - 2,458,359
------------ ------------ ------------
9,455,205 4,403,867 60,346,683
------------ ------------ ------------
LOSS FROM OPERATIONS (9,455,205) (4,403,867) (59,849,555)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net 123,120 (14,731) 643,623
Other income 491 - 63,653
------------ ------------ ------------
Total other income (expense) 123,611 (14,731) 707,276
------------ ------------ ------------
NET LOSS $ (9,331,594) $ (4,418,598) $(59,142,279)
============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $ (1.02) $ (0.71)
============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 9,135,488 6,204,149
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE> 6
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO MARCH 31, 2000
<TABLE>
<CAPTION>
Three Months Three Months Inception
Ended Ended Through
March 31, March 31, March 31,
2000 1999 2000
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (9,331,594) $ (4,418,598) $(59,142,279)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 139,388 122,425 1,525,165
Compensation expense arising from
the grant of warrants and stock
options 25,279 207,358 1,110,244
Issuance of common stock in
settlement of litigation - - 2,458,359
Amortization of deferred
compensation - - 93,749
Increase in deferred rent 2,853 7,203 77,973
Compensation expense for extension of
Debt Conversion Agreements, net - - 503,147
Gain on sale of assets - - (5,299)
Decrease (increase) in other
receivables 3,095 (41,610) (144,693)
Decrease (increase) in prepaid
expenses, deferred charges and
refundable deposits 7,153 288,394 (80,756)
Increase in accounts payable and
accrued expenses 113,833 209,441 3,887,613
Increase in accrued payroll and
related taxes 2,749 6,740 753,265
Decrease in employee expense
reimbursement and accrued interest
to related parties - - 300,404
------------ ------------ ------------
Net cash used in operating
activities (9,037,244) (3,618,647) (48,663,108)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (99,815) (210,832) (4,602,026)
Purchases of marketable securities and short-term
investments, net (105,964) (1,322,135) (3,061,176)
Unrealized loss on available-for-sale securities (5,641) (18,864) (44,213)
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 (211,420) (1,551,831) (7,643,843)
------------ ------------ ------------
</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,
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 9,426,171 949,387 57,144,288
Proceeds from preferred stock issuance, net
of offering costs - 3,633,221 3,608,788
Proceeds from exercise of stock options
and warrants 52,139 - 863,788
Proceeds from long-term debt - 33,786 1,862,958
Repayment of long-term debt (123,584) (144,857) (876,295)
Repayment (issuance) of notes from
officers and directors for exercise of stock options 61,560 - (225,000)
Dividends paid to preferred stockholders - - (136,246)
Proceeds from notes payable to related
parties, net - - 757,900
Cash at acquisition - - 200,612
------------ ------------ ------------
Net cash provided by financing
activities 9,416,286 4,471,537 63,200,793
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents 167,622 (698,941) 6,893,842
Cash and cash equivalents,
beginning of period 6,726,220 1,097,341 -
------------ ------------ ------------
Cash and cash equivalents, end of period $ 6,893,842 $ 398,400 $ 6,893,842
============ ============ ============
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 preferred stock into shares
of common stock $ - $ - $ 3,608,788
============ ============ ============
Conversion of Revenue Participation
Units into shares of common stock $ - $ - $ 676,000
============ ============ ============
Issuance of stock options and warrants
for services $ 12,183 $ 207,358 $ 1,097,148
============ ============ ============
Issuance of common stock and warrants
in connection with settlement of litigation $ - $ - $ 2,458,359
============ ============ ============
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
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE> 8
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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, 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.
8
<PAGE> 9
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 March 31, 2000, the Company had committed to pay, through April 2002,
approximately $1,096,600 for such grants and fellowships. Grant expense for the
three-month periods ended March 31, 2000 and 1999, amounted to $260,300 and
$83,000, respectively.
Major Clinical Trials:
The Company has entered into agreements with a contract research
organization and a University to conduct multiple clinical trials in a number of
countries involving approximately 2,500 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 $29 to $35 million through June
2001. The costs of these clinical trials which were incurred and charged to
operations for the three months ended March 31, 2000 and 1999 were approximately
$6.7 million and $1.5 million, respectively.
3. STOCKHOLDERS' EQUITY
Common Stock:
During the quarter ended March 31, 2000, the Company sold to a private
investor, pursuant to its existing Equity Line Agreement, an aggregate of
186,961 shares of common stock for cash proceeds of $2.0 million. At March 31
and May 8, 2000, $7.5 million remains available under the 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 March 2, 2000 the Company issued to the two private investors who
financed a $10 million sale of stock in November 1999, an aggregate of 43,383
additional shares of common stock pursuant to a reset provision in a warrant
issued at the November 1999 closing. Since the reset option was included in the
November 1999 sale of securities, the issuance of shares pursuant to the reset
option for no additional consideration had no net impact on common stock during
the quarter. The investors waived a second reset as consideration for entering
into a new financing which closed on April 6, 2000.
During the quarter ended March 31, 2000, the Company issued (i) 4,490
shares of its common stock pursuant to the exercise of a like amount of public
warrants at $11.40 per share, for aggregate consideration of $51,186; and (ii)
2,000 shares of common stock to two consultants in exchange for their services.
4. STOCK OPTIONS
During the three month period ended March 31, 2000, there were no new
stock options granted. Options were exercised for 125 shares of common stock at
$7.625 per share and none were forfeited. Stock options to purchase 1,389,248
shares of common stock remained outstanding at March 31, 2000 at exercise prices
ranging from $0.025 to $13.00 per share.
9
<PAGE> 10
5. EQUITY TRANSACTIONS SUBSEQUENT TO MARCH 31, 2000
On April 6, 2000, the Company entered into a financing transaction with
two private investors who have invested previously in the Company. The
transaction consists 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:
- 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;
- The shares underlying the April 6, 2000 transaction and the
additional tranches must be successfully registered with the
SEC; and
- 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 into common stock at $20.25 per share for
the first 90 days after the closing. Thereafter, they 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
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.
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.
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<PAGE> 11
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, 2000, the
Company incurred a cumulative net loss of approximately $59.1 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, 2000 Compared to Three Months Ended March 31, 1999:
There were no revenues during the three months ended March 31, 2000 or
the three months ended March 31, 1999.
Research and development expenses for the three months ended March 31,
2000 increased approximately $5,193,000 or 157% 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 and preclinical 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. Internally, research and development expenses increased in
the categories of salaries, due to additional personnel and salary increases,
research grants and seminars. The Company expects its research and development
expenses to continue to increase as it expands its laboratories and increases
its internal product development and external preclinical and clinical trial
activities.
General and administrative expenses decreased approximately $141,000 or
13% from the same period in 1999 due primarily to the reduction of investor
relations, legal and other professional fees which were partially offset by
increases in salaries due to increases in personnel and salary increases. The
Company expects general and administrative expenses to increase in future
periods in support of the expected increases in research and development
activities as well as sales and marketing activities should the Company
successfully bring one or more of its products to market. Net interest income
increased by approximately $138,000 due to interest earnings from higher cash
balances resulting from the investments of unallocated proceeds from recent
equity financings. 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.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 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 March 31, 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 March 31, 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.
At March 31, 2000, working capital amounted to approximately $5.4
million. This amount included cash and cash equivalents of approximately $6.9
million and marketable securities and short-term investments of approximately
$3.1 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 $200,000 increase in working capital during the three months is
attributable primarily to the sale of $9.4 million of common stock 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 March 31, 2000, the Company had committed to pay, through April 2002,
approximately $1.1 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 in a number of
countries involving approximately 2,500 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 $29 million to $35 million through
June 2001.
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
will provide a minimum of 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 million cash.
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 $59.1 million through March 31, 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 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
12
<PAGE> 13
filing, prosecuting and enforcing patent claims, the effect of competing
technological developments, the cost of manufacturing scale-up, the cost of
commercialization activities, and other factors which may not be within the
Company's control. While the Company believes that its existing capital
resources, including the financings subsequent to March 31, 2000, 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.
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 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 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,
13
<PAGE> 14
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.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
1. 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.
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 $400,000, representing 5% of the
gross sale proceeds realized from sale of the preferred stock, plus warrants to
purchase 40,000 shares of common stock at $15.00 per share. The warrants are
exercisable over a five-year period and may be called by the Company if the
market value of the common stock equals or exceeds $30.00 for any 10 consecutive
days during the exercise period.
3. During the quarter ended March 31, 2000, 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 10, 2000, and February 3, 2000, whereby the
Company issued to Kingsbridge 93,721 shares and 93,240 shares and realized
proceeds of $1.0 million from each of the sales.
Equity Transactions Subsequent to March 31, 2000:
The Company entered into two financing transactions subsequent to March
31, 2000. On April 6, 2000, the Company entered into a convertible debenture and
warrant financing transaction with two investors and received an initial amount
of $10 million cash. On May 1, 2000, the Company completed a private placement
of 500,000 shares of common stock for $7 million cash plus warrants. See Note 5
to the Condensed Consolidated Financial Statements included in Part I of this
Form 10-Q, incorporated herein by reference.
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.
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 17
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 15, 2000 By: /s/Samuel Gulko
--------------------------------------------
Samuel Gulko, Chief Financial Officer
(Principal Accounting and Financial Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,893,842
<SECURITIES> 3,061,176
<RECEIVABLES> 144,939
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,223,006
<PP&E> 4,521,723
<DEPRECIATION> 1,400,508
<TOTAL-ASSETS> 13,397,763
<CURRENT-LIABILITIES> 4,850,459
<BONDS> 536,203
0
0
<COMMON> 67,704,476
<OTHER-SE> (59,771,738)
<TOTAL-LIABILITY-AND-EQUITY> 13,397,763
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,455,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,331,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,331,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,331,594)
<EPS-BASIC> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
