<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
<TABLE>
<CAPTION>
DELAWARE 93-0979187
<S> <C>
(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
</TABLE>
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>
<CAPTION>
Class Outstanding at November 6, 2000
--------------------------------- -------------------------------
<S> <C>
Common Stock, $.001 par value 13,266,927
</TABLE>
1
<PAGE> 2
NEOTHERAPEUTICS, INC.
(A Development-Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Statement Regarding Financial Information.............................................. 3
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999................................................................ 4
Condensed Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 (unaudited)...................................... 5
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2000 and 1999 and for the period
from inception (June 15, 1987) to September 30, 2000 (unaudited)................... 6
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 and for the period from inception (June 15, 1987)
to September 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... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 19
PART II OTHER INFORMATION...................................................................... 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 22
</TABLE>
2
<PAGE> 3
NEOTHERAPEUTICS, INC.
(A Development Stage Enterprise)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 audited 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 SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------ -------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 9,102,919 $ 6,726,220
Marketable securities and short-term investments 3,166,773 2,955,212
Common stock subscription receivable 8,000,000 --
Other receivables, principally investment interest 225,074 148,034
Prepaid expenses 441,554 130,202
------------ ------------
Total current assets 20,936,320 9,959,668
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 3,134,293 2,607,741
Leasehold improvements 1,848,282 1,814,167
Accumulated depreciation and amortization (1,694,390) (1,261,220)
------------ ------------
Property and equipment, net 3,288,185 3,160,688
------------ ------------
OTHER ASSETS:
Debt issuance costs, net of $60,492 amortization 552,186 --
Refundable deposits and other 53,342 53,641
------------ ------------
605,528 53,641
------------ ------------
$ 24,830,033 $ 13,173,997
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,431,296 $ 3,613,680
Accrued payroll and related taxes 152,254 111,822
Note payable to related party 285,574 558,304
Current portion of long-term debt 718,117 472,938
------------ ------------
Total current liabilities 6,587,241 4,756,744
OTHER LIABILITIES:
Long-term debt, net of current portion 324,141 637,308
Subordinated convertible debentures, net of
original issue discount of $5,319,819 1,230,181 --
Deferred rent 83,679 75,121
------------ ------------
Total liabilities 8,225,242 5,469,173
============ ============
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 4,257,349 --
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share, 5,000,000
shares authorized, none issued or outstanding -- --
Common stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 12,090,181 and 8,778,370 shares
at September 30, 2000 and December 31, 1999, respectively 97,670,870 58,139,327
unrealized (losses) on available-for-sale securities (26,949) (38,572)
Deficit accumulated during the development stage (85,296,479) (50,395,931)
------------ ------------
Total stockholders' equity 12,347,442 7,704,824
------------ ------------
$ 24,830,033 $ 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 SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
2000 1999
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $ -- $ --
------------ -----------
OPERATING EXPENSES:
Research and development 10,499,016 4,817,637
General and administrative 1,279,271 607,609
------------ -----------
11,778,287 5,425,246
------------ -----------
LOSS FROM OPERATIONS (11,778,287) (5,425,246)
OTHER INCOME (EXPENSE), principally
interest income(expense), net (353,356) 96,505
------------ -----------
NET LOSS BEFORE MINORITY INTEREST
IN CONSOLIDATED SUBSIDIARY (12,131,643) (5,328,741)
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY NET LOSS (1,091,312) --
------------ -----------
NET LOSS $(13,222,955) $(5,328,741)
============ ===========
BASIC AND DILUTED LOSS
PER SHARE $ (1.27) $ (0.70)
============ ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 10,382,731 7,583,225
============ ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999 AND FOR THE PERIOD FROM
INCEPTION (JUNE 15, 1987) TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended Through
September 30, September 30, September 30,
2000 1999 2000
------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES, from grants $ -- $ -- $ 497,128
------------ ------------ -------------
OPERATING EXPENSES:
Research and development 29,206,087 11,382,825 65,280,875
General and administrative 3,414,564 2,452,252 15,772,895
Settlement of litigation -- -- 2,458,359
------------ ------------ -------------
32,620,651 13,835,077 83,512,129
------------ ------------ ------------
LOSS FROM OPERATIONS (32,620,651) (13,835,077) (83,015,001)
OTHER INCOME (EXPENSE), principally
interest income(expense), net (1,188,585) 31,264 (604,920)
------------ ------------ ------------
NET LOSS BEFORE MINORITY
INTEREST IN CONSOLIDATED
SUBSIDIARY (33,809,236) (13,803,813) (83,619,921)
MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARY
NET LOSS (1,091,312) -- (1,091,312)
------------ ------------ -------------
NET LOSS $(34,900,548) $(13,803,813) $ (84,711,233)
============ ============ =============
BASIC AND DILUTED LOSS
PER SHARE $ (3.69) $ (2.11)
============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 9,450,489 6,540,301
============ ============
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
AND FOR THE PERIOD FROM INCEPTION (JUNE 15, 1987) TO SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended Through
September 30, September 30, September 30,
2000 1999 2000
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(34,900,548) $(13,803,813) $(84,711,233)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 433,170 385,069 1,819,247
Amortization of discount on convertible
debentures and beneficial conversion feature 1,488,393 -- 1,488,393
Compensation expense arising from
the grant of warrants and stock options 561,034 362,690 1,645,999
Issuance of common stock in
settlement of litigation -- -- 2,458,359
Amortization of deferred compensation -- -- 93,749
Increase in deferred rent 8,559 21,609 83,679
Compensation expense for extension of
debt conversion agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Increase in other receivables (8,077,040) (27,780) (8,224,828)
Increase in prepaid expenses, deferred charges
and refundable deposits (311,052) (643,827) (399,261)
Increase in accounts payable and
accrued expenses 1,817,617 1,276,863 5,591,397
Increase in accrued payroll and related taxes 40,430 14,487 790,946
Decrease in employee expense reimbursement and
accrued interest to related parties -- -- 300,404
------------ ------------ ------------
Net cash used in operating activities (38,939,437) (12,414,702) (78,565,301)
============ ============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (560,667) (349,468) (5,062,878)
Purchases of marketable securities and
short-term investments, net (211,561) (1,057,268) (3,166,773)
Unrealized gain(loss) on available-for-sale
securities 11,623 (46,354) (26,949)
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 (760,605) (1,453,090) (8,193,028)
============ ============ ============
</TABLE>
7
<PAGE> 8
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Nine Months Inception
Ended Ended Through
September 30, September 30, September 30,
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 28,578,957 13,614,523 76,297,074
Proceeds from preferred stock issuance, net
of offering costs -- 3,609,399 3,608,788
Proceeds from sale of preferred stock of
subsidiary 4,257,349 -- 4,257,349
Proceeds from exercise of stock options and
warrants 52,889 94,568 864,538
Proceeds from sale of convertible debentures,
net of issuance costs 9,466,704 -- 9,466,704
Proceeds from long-term debt -- 33,786 1,862,958
Repayment of long-term debt (67,988) (374,925) (820,699)
Repayment (issuance) of notes from officers and
directors for exercise of stock options 61,560 -- (225,000)
Dividends paid to preferred stockholders -- (115,020) (136,246)
(Repayment) proceeds from notes payable to related
parties, net (272,730) -- 485,170
Cash at acquisition -- -- 200,612
------------ ------------ ------------
Net cash provided by financing activities 42,076,741 16,862,331 95,861,248
------------ ------------ ------------
Net increase in cash and cash equivalents 2,376,699 2,994,539 9,102,919
Cash and cash equivalents, beginning of period 6,726,220 1,097,341 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 9,102,919 $ 4,091,880 $ 9,102,919
============ ============ ============
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of warrants in connection with
equity and debt financings $ 1,488,393 $ 344,610 $ 1,878,003
============ ============ ============
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 and convertible
debentures into shares of common stock $ 3,450,000 $ 1,368,037 $ 7,058,788
============ ============ ============
Conversion of revenue participation
Units into shares of common stock $ -- $ -- $ 676,000
============ ============ ============
Issuance of stock options and warrants
for services $ 561,035 $ 362,690 $ 1,646,000
============ ============ ============
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 $ 80,444 $ -- $ 132,548
============ ============ ============
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
SEPTEMBER 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 September 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. The Company's
most advanced drug candidate, Neotrofin(TM), is currently being developed for
Alzheimer's disease as its first indication and is being tested in controlled
clinical studies. The Company's research and development program is focused on
designing and developing small molecules capable of treating neurological
diseases and conditions such as peripheral neuropathy, spinal cord injury,
stroke and Parkinson's disease. The Company's product development program
addresses other health issues such as migraine, depression and obesity. A
subsidiary, NeoGene Technologies, Inc, is a functional genomics company engaged
in the development of a broad platform of enabling technology and
receptor-targeted drug design. NeoGene Technologies is using this technology to
search for natural and synthetic compounds that may potentially be developed as
drugs for treating various diseases. 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 September 30, 2000, the Company had committed to pay, through April 2002,
approximately $925,700 for such grants and fellowships. Grant expense for the
nine month periods ended September 30, 2000 and 1999, amounted to $988,314 and
$445,000, respectively.
Major Clinical Trials:
On November 6, 2000, the Company announced that it will exercise its right
to terminate its agreements with a contract research organization that has been
conducting multiple clinical trials and studies involving more than 2,000
patients worldwide. The agreements are cancelable by either party with 30 day
notice. The costs of these clinical trials that were charged to operations for
the nine months ended September 30, 2000 and 1999 were approximately $23.0
million and $3.2 million, respectively. Certain termination costs will be
incurred as a result of discontinuing the clinical trials, however, the Company
has not yet determined the amount or timing of these costs, which is expected to
occur in the fourth quarter of 2000.
Concurrently, the Company announced its intention to initiate new trials
administering higher doses of the Company's lead product candidate,
Neotrofin(TM), for longer periods and clinical studies of Neotrofin(TM) for
other diseases. The cost of these trials and studies, which are expected to
commence during the first quarter of the year 2001, are estimated at $12 to $15
million over approximately an eighteen month period.
3. EQUIPMENT FINANCING
On September 22, 2000 the Company signed an agreement to receive up to $2.5
million in equipment funding from a major equipment leasing and remarketing
company. Under the terms of the lease the Company is required to make quarterly
payments over three years on the used portion of funds. The initial funding of
$205,800 under this agreement occurred subsequent to September 30, 2000.
4. SUBORDINATED CONVERTIBLE DEBENTURES
On April 6, 2000, the Company, as part of a financing transaction, issued
5% subordinated convertible debentures to two private investors, in exchange for
cash of $10 million. Through September 30, 2000, the investors converted
$3,450,000 of the principal of such debentures and $80,444 of accrued interest
into an aggregate of 537,431 shares of common stock. From October 1, 2000
through October 26, 2000, the investors converted the remaining debentures
consisting of $6,550,000 principal plus $168,180 of accrued interest into an
aggregate of 1,056,746 shares of common stock.
10
<PAGE> 11
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. MINORITY INTEREST IN A SUBSIDIARY COMPANY
On September 21, 2000, the Company's subsidiary, NeoGene Technologies, Inc
("NeoGene"), sold 111,110 shares of Series A preferred stock for $5 million in
cash. The preferred stock is initially convertible into an equal number of
shares of common stock, representing approximately 10% ownership of NeoGene. The
investors also received 5 year warrants to purchase up to (i) 80,000 shares of
NeoTherapeutics common stock at an exercise price of $10.47 per share and (ii)
22,676 shares of NeoGene common stock at an exercise price of $45.00 per share.
5% dividends on the preferred stock are payable in common stock or cash at the
option of the Company. The preferred stock is automatically convertible into
NeoGene common stock upon the closing of a public offering meeting certain
criteria. Starting four months after the closing date, the investors have the
right to exchange their NeoGene preferred shares for similar securities of the
Company, which would be ultimately convertible into common stock of the Company,
within five years of September 21, 2000, at a rate based on 101% of the market
price of the common stock of the Company at the time of conversion. The
investors have a similar exchange right if the closing bid price of the
Company's common stock is less than $5.00 per share for five consecutive trading
days.
The Minority Interest in Consolidated Subsidiary shown in the accompanying
balance sheet represents the aforementioned investment and the interests of
other minority stockholders, aggregating a 20% ownership interest in the
subsidiary on a fully diluted basis. The minority interest in consolidated
subsidiary net loss in the accompanying statements of operations consists
primarily of the amortization of beneficial conversion feature attributable to
the convertible preferred stock issued by NeoGene. This amount has been
determined by the Company in accordance with the consensus reached in Emerging
Issues Task Force Issue No. 98-5, "Accounting for Convertible Securities With
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios."
6. STOCKHOLDERS' EQUITY
Common Stock:
During the quarter ended September 30, 2000, the Company called and the
investors exercised 383,000 of the Company's Class B Warrants issued on April 6,
2000, together with the previously mentioned 5% subordinated convertible
debentures, resulting in the issuance to the investor of 383,000 shares of
common stock in exchange for approximately $3,315,000 cash.
On September 29, 2000 the Company entered into an agreement to sell 968,524
shares of its common stock to two private investors for $8 million cash. The
investors also received five year warrants to purchase 193,706 shares of common
stock at $10.13 per share. The agreement contains a reset formula which provides
for the investor to obtain at a nominal cost, additional shares of common stock
based on the market price of the common stock determined thirty and sixty days
after the effective date of the registration statement to be filed for this
transaction. The proceeds of this sale were received by the Company on October
3, 2000, and a common stock subscription receivable was recorded at September
30, 2000 related to this offering.
11
<PAGE> 12
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS
Stock option activity during the nine-month period ended September 30, 2000
is as follows:
<TABLE>
<CAPTION>
Option
Shares Price
--------- --------------
<S> <C> <C>
Outstanding at January 1, 2000 1,389,373 $0.025-$12.875
Granted 634,900 6.0625-12.375
Exercised (122,298) 0.0250- 7.625
Forfeited (48,000) 5.6250-13.000
--------- -------------
Outstanding at September 30, 2000 1,853,975 $0.025-$13.00
========= =============
</TABLE>
During the nine-month periods ended September 30, 2000 and 1999, the
Company recognized compensation expense for employees/directors and vested
consultants options pursuant to SFAS 123 aggregating $561,034 and $362,690,
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.
12
<PAGE> 13
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 September 30, 2000, the
Company incurred a cumulative net loss of approximately $84.7 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 September 30, 2000 Compared to Three Months Ended September
30, 1999:
There were no revenues during the three months ended September 30, 2000 or
the three months ended September 30, 1999.
Research and development expenses for the three months ended September 30,
2000 increased $5,681,379 or 118% 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 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 category 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. On November 6, 2000, the Company announced that it will
exercise its right to terminate its agreements with a contract research
organization that has been conducting multiple clinical trials of the Company
lead candidate, Neotrofin(TM), involving more than 2,000 patients worldwide due
to preliminary results which showed that Neotrofin(TM) did not have the desired
efficacy at the low doses examined in these trials, and which suggested greater
efficacy at higher doses. Certain termination costs will be incurred as a result
of discontinuing the clinical trials, however, the Company has not yet
determined the amount or timing of these costs, which is expected to occur in
the fourth quarter of 2000.
Concurrently, the Company announced its intention to initiate new trials
administering higher doses of Neotrofin(TM) for longer periods and clinical
studies of Neotrofin(TM) in other diseases. The cost of these trials and
studies, which are expected to commence during the first quarter of the year
2001, are estimated at $12 to $15 million over approximately an eighteen month
period.
13
<PAGE> 14
General and administrative expenses increased $671,662 or 111% 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, legal and 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 $449,861 due to a non-cash charge of
$413,810 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.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999:
There were no revenues during the nine months ended September 30, 2000 or
the nine months ended September 30, 1999.
Research and development expenses for the nine months ended September 30,
2000 increased $17,823,262 or 157% 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 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. On November 6, 2000, the Company announced that it will exercise its
right to terminate its agreements with a contract research organization that has
been conducting multiple clinical trials of the Company's lead product
candidate, Neotrofin(TM), involving more than 2,000 patients worldwide due to
preliminary results which showed that Neotrofin(TM) did not have the desired
efficacy at the low doses examined in these trials, and which suggested greater
efficacy at higher doses. Certain termination costs will be incurred as a result
of discontinuing the clinical trials, however, the Company has not yet
determined the amount or timing of these costs, which is expected to occur in
the fourth quarter of 2000.
Concurrently, the Company announced its intention to initiate new trials
administering higher doses of Neotrofin(TM), for longer periods and clinical
studies of Neotrofin(TM) in other diseases. The cost of these trials and
studies, which are expected to commence during the first quarter of the year
2001, are estimated at $12 to $15 million over approximately an eighteen month
period.
General and administrative expenses increased $962,312 or 39% 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.
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<PAGE> 15
Net interest expense increased by $1,157,321 due to a non-cash charge of
$1,424,901 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 investment 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.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 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. For the nine months ended the Company has
put to the investor 186,961 shares of its common stock and realized gross
proceeds of $2.0 million. As of September 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
are expected to provide up to a minimum of $10 million cash over the next
four-months.
On May 1, 2000, the Company completed a private placement of 500,000 shares
of common stock for $7.0 million cash.
On September 21, 2000, the Company's subsidiary, NeoGene Technologies, Inc
("NeoGene"), sold 111,110 shares of Series A preferred stock for $5 million in
cash. The preferred stock is initially convertible into an equal number of
shares of common stock, representing approximately 10% ownership of NeoGene. The
investors also received five year warrants to purchase up to (i) 80,000 shares
of NeoTherapeutics common stock at an exercise price of $10.47 per share and
(ii) 22,676 shares of NeoGene common stock at an exercise price of $45.00 per
share. 5% dividends on the preferred stock are payable in common stock or cash
at the option of the Company. The preferred stock is automatically convertible
into NeoGene common stock upon the closing of a public offering meeting certain
criteria. Starting four months after the closing date, the investors have the
right to exchange their NeoGene preferred shares for similar securities of the
Company, which would be convertible into common stock of the Company, within
five years of September 21, 2000, at a rate based on 101% of the market price of
the common stock of the Company at the time of conversion The investors have a
similar exchange right if the closing bid price of the Company's common stock is
less than $5.00 per share for five consecutive trading days.
On September 29, 2000 the Company entered into an agreement to sell 968,524
shares of its common stock to two private investors for $8 million cash. The
investors also received five year warrants to purchase 193,706 shares of common
stock at $10.13 per share. The agreement contains a reset formula which provides
for the investor to obtain at nominal cost, additional
15
<PAGE> 16
shares of common stock based on the market price of the common stock determined
thirty and sixty days after the effective date of the registration statement to
be filed for this transaction.
At various times from July 7, 2000 through September 18, 2000 the Company
sold to two private investors 383,000 shares of common stock for cash proceeds
of approximately $3,315,000 as a result of the exercise of an equal number of
warrants by the investors under a callable warrant agreement entered into as
part of the April 6, 2000 subordinated convertible debenture financing.
At September 30, 2000, working capital amounted to approximately $14.3
million. This amount included cash and cash equivalents of approximately $9.1
million and marketable securities and short-term investments of approximately
$3.2 million and common stock subscription receivable of $8.0 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 $ 9.1 million increase in working capital during the nine months is
attributable primarily to the sale of approximately $43.3 million of common and
preferred stock and convertible debentures to private investors plus proceeds
from exercise of stock options, offset principally 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 September 30, 2000, the Company had committed to pay, through April 2002,
approximately $925,700 for such grants and fellowships.
On November 6, 2000 the Company announced that it will exercise its right
to terminate its agreements with a contract research organization that has been
conducting multiple clinical trials of the Company's lead product candidate,
Neotrofin(TM), involving more than 2,000 patients worldwide due to preliminary
results which showed that Neotrofin(TM) did not have the desired efficacy at the
low doses examined in these trials, and which suggested greater efficacy at
higher doses. Certain termination costs will be incurred as a result of
discontinuing the clinical trials, however, the Company has not yet determined
the amount or timing of these costs, which is expected to occur in the fourth
quarter of 2000.
Concurrently, the Company announced its intention to initiate new trials
administering higher doses of Neotrofin(TM) for longer periods and clinical
studies of Neotrofin(TM) in other diseases. The cost of these trials and
studies, which are expected to commence during the first quarter of the year
2001, are estimated at $12 to $15 million over approximately an eighteen month
period.
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 $84.7 million through September 30, 2000, and expects to
incur substantial losses over the next several years. In addition to the funds
derived from its public offerings 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 twelve months, the Company also believes that it will
16
<PAGE> 17
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, or 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 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.
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
17
<PAGE> 18
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.
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<PAGE> 19
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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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
1. On July 07, 2000 and July 11, 2000 the Company sold to two private
investors 56,000 shares of common stock for cash proceeds of approximately
$583,940 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. On
July 14, 2000 and July 18, 2000 the Company sold to two private investors 67,000
shares of common stock for cash proceeds of approximately $619,224 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. On September 1, 2000 and
September 5, 2000 the Company sold to two private investors 80,000 shares of
common stock for cash proceeds of approximately $567,450 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. On September 11, 2000 and
September 12, 2000 the Company sold to two private investors 80,000 shares of
common stock for cash proceeds of approximately $690,519 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. On September 13, 2000 and
September 14, 2000 the Company sold to two private investors 60,000 shares of
common stock for cash proceeds of approximately $536,531 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. On September 18, 2000 the
Company sold to two private investors 40,000 share of common stock for cash
proceeds of approximately $317,675 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 $73,926, representing 3 1/2% of the
gross sale proceeds realized from sale of the common stock plus 5 year warrants
to purchase 22,670 shares of common stock at $15.00 per share.
3. On September 21, 2000, the Company's subsidiary NeoGene Technologies,
Inc ("NeoGene") sold 111,110 shares Series A preferred stock for $5 million in
cash. The preferred stock is convertible into an equal number of shares of
common stock, representing approximately 10% ownership of NeoGene. The investors
also received 5 year warrants to purchase up to 22,676 shares of NeoGene common
stock at $45.00 per share and five-year warrants to purchase 80,000 shares of
NeoTherapeutics common stock at an exercise price of $10.47 per share.
4. Brighton acted as a finder with respect to the negotiation and
execution of the agreement described in (3.), above. As consideration for the
services provided by Brighton in connection with the agreement, the Company paid
Brighton a cash commission of $300,000, representing 6% of the $5 million
proceeds plus 5 year warrants to purchase 11,110 shares of NeoGene at $45.00 per
share.
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5. On September 29, 2000 the Company sold 968,524 shares of its common
stock to two private investors for $8 million cash. The investors also received
five year warrants to purchase 193,706 shares of common stock at $10.13 per
share. The agreement contains a reset formula which provides for the investor to
obtain at nominal cost, additional shares of common stock based on the market
price of the common stock determined thirty and sixty days after the effective
date of the registration statement to be filed for this transaction.
6. Brighton acted as a finder with respect to the negotiation and
execution of the agreement described in (5.),above. As consideration for the
services provided by Brighton in connection with the agreement, the Company paid
to Brighton a cash commission of $400,000, representing 5% of the $8 million
proceeds plus 5 year warrants to purchase 40,000 shares of common stock at
$15.00 per share.
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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
None
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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: November 14, 2000 By: /s/Samuel Gulko
------------------------------------
Samuel Gulko, Chief Financial Officer
(Principal Accounting and Financial Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
24
