<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 2, 2000
_______________________________
CELL THERAPEUTICS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Washington 0-28386 91-1533912
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
201 Elliott Avenue West, Suite 400, Seattle, WA 98119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (206) 270-7100
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NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the sale of products to date.
In the fourth quarter of 1995, the Company began to receive revenue under a
collaboration agreement with BioChem Pharma, Inc. ("BioChem Pharma") and in the
fourth quarter of 1996 the Company began to receive revenue under a
collaboration agreement (the "Collaboration Agreement") with subsidiaries of
Johnson & Johnson ("Johnson & Johnson"). Under the terms of the Collaboration
Agreement, Johnson & Johnson paid 60% of the U.S. development costs in
connection with obtaining regulatory approval of lisofylline ("LSF-TM") for use
with bone marrow transplants ("BMT"). After exercising its option in 1997,
Johnson & Johnson expanded its participation in the development of LSF to
include the treatment of patients undergoing induction chemotherapy to treat
acute myeloid leukemia ("AML"). In July 1998, after reviewing the results of the
Company's Phase III clinical trial for LSF among patients receiving BMT from
related donors, in which the primary endpoints were not met, Johnson & Johnson
reached an agreement in principle with the Company to revise the Collaboration
Agreement. On November 16, 1998, the Company and Johnson & Johnson formally
amended the Collaboration Agreement. Under the terms of the amended
Collaboration Agreement, Johnson & Johnson agreed to pay the Company $13.1
million for development cost reimbursements for BMT and AML for the year ended
December 31, 1998. Within sixty days after receiving both the interim data from
the Company's pivotal Phase II/III trial for LSF in patients with acute lung
injury ("ALI") and acute respiratory distress syndrome ("ARDS") and the results
of the Company's Phase III trial for LSF following induction chemotherapy for
AML, both of which are discussed below, Johnson & Johnson may or may not elect
to resume responsibility for the development and commercialization of LSF
subject to certain additional payments upon resumption of its obligations. If
Johnson & Johnson elects not to resume development activities, then the Company
will be free to license LSF to other third parties. As of December 31, 1999 the
Company had recorded approximately $40.8 million in equity payments, license and
milestone fees, and development cost reimbursements with Johnson & Johnson.
On May 28, 1999, the Company announced it had received a recommendation from a
National Heart, Lung and Blood Institute ("NHLBI") appointed Data Safety and
Monitoring Board to discontinue enrollment in the Phase II/III trial of LSF for
ALI and ARDS. The decision was based on predetermined criteria, which required a
positive trend toward improvement in day 28 survival among the LSF recipients
for the trial to continue as a Phase III trial. On May 28, 1999, the NHLBI
discontinued enrollment in this trial in accordance with this recommendation.
On October 11, 1999, the Company announced the results of its Phase III trial
for LSF in treating patients with AML. The Phase III trial studied LSF in
preventing serious infections among patients undergoing high dose induction
chemotherapy for AML. The preliminary endpoint of reduction in the incidence of
serious neutropenia-associated infections was not met. The Company announced
that it has completed enrollment in its LSF bone marrow transplant trial among
unrelated donors and will wind down all other LSF related expenditures and
maintain a cash neutral position with respect to further expenditures on this
compound.
In accordance with the amended Collaboration Agreement, the Company is preparing
the data from each of these trials for Johnson and Johnson's review.
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The Company does not anticipate that Johnson and Johnson will elect to resume
responsibility for development and commercialization of LSF.
On June 30, 1998, the Company entered into an agreement with PG-TXL Company,
L.P. and scientists at the M.D. Anderson Cancer Center, granting the Company an
exclusive worldwide license to the rights to PG-TXL, a water soluble form of the
cancer drug, Taxol(R), and to all potential uses of PG-TXL's polymer technology.
Under the terms of the agreement, the Company will fund the research,
development, manufacture, marketing and sale of anti-cancer drugs developed
using PG-TXL's polymer technology. On December 11, 1998, the Company entered
into an exclusive option agreement with SynChem Research, Inc. ("SynChem") to
acquire an exclusive worldwide license (the "SynChem License") to a novel class
of compounds which are inhibitors of tumor angiogenesis. After evaluating the
compound, the Company elected not to exercise its option to license the compound
from SynChem.
In January 2000, the Company completed the acquisition of PolaRx
Biopharmaceuticals, Inc., a biopharmaceutical company that owns the rights to
Arsenic TriOxide (ATO), an anti-cancer compound. The Company intends to file a
New Drug Application (NDA) with the FDA in the first half of 2000 for ATO and to
focus its ongoing development activities on ATO, PG-TXL and Apra (the Company's
internally developed anti-cancer compound currently in Phase II clinical trials)
as it winds down its LSF development program.
As of December 31, 1999, the Company had incurred aggregate net losses of
approximately $158.4 million since its inception. The Company expects to
continue to incur significant additional operating losses over the next several
years from its research, development and clinical trial efforts. Operating
losses may fluctuate from quarter to quarter as a result of differences in the
timing of expenses incurred and revenues recognized. To date, the Company's
operations have been funded primarily from sales of equity securities, which
have raised aggregate net proceeds of approximately $177.1 million, and from its
collaboration with J&J.
RESULTS OF OPERATIONS
Years ended December 31, 1999 and 1998.
The Company did not record any funding from Johnson & Johnson under the
amended Collaboration Agreement during 1999. Funding received in 1998 was
approximately $13.1 million. The Company also recorded a $100,000 milestone
payment in 1998 from BioChem Pharma in connection with a collaboration
agreement.
Research and development expenses decreased to approximately $27.7 million for
the year ended December 31, 1999 from approximately $29.9 million for the year
ended December 31, 1998. This decrease was due primarily to the winding down of
manufacturing and preclinical development activities for LSF and a reduction in
research and development staff personnel offset in part by preclinical and
manufacturing activities for PG-TXL. The Company intends to substantially reduce
its research and development expenses for LSF in 2000, offset in part by
anticipated increased research and development expenses in connection with ATO,
PG-TXL and Apra.
General and administrative expenses decreased to approximately $9.8 million for
the year ended December 31, 1999 from approximately $10.9 million for the year
ended December 31, 1998. This decrease was due primarily to reduction in general
and administrative staff personnel and operating expenses associated with
supporting the Company's research and development activities.
In January 2000, the Company assumed commitments in connection with the
acquisition of PolaRx Biopharmaceuticals, Inc. and intends to incur pre-
commercialization expenses associated with the prospective commercial launch of
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ATO, should its NDA receive approval from the FDA in the second half of 2000.
Investment income principally comprises interest income from investment of the
Company's cash reserves. Interest expense results primarily from the financing
of laboratory and other equipment. Investment income decreased to approximately
$1.7 for the year ended December 31, 1999 from approximately $3.1 million for
the year ended December 31, 1998. This decrease was associated primarily with
interest earnings on lower average cash balances on hand during the year ended
December 31, 1999 when compared to the year ended December 31, 1998. Interest
expense increased to approximately $502,000 for the year ended December 31, 1999
from approximately $435,000 for the year ended December 31, 1998. This increase
was due primarily to higher average balances of outstanding long-term
obligations.
Years Ended December 31, 1998 and 1997
During the year ended December 31, 1998, the Company recorded $13.1 million
of revenue for development cost reimbursements from Johnson & Johnson in
connection with the Collaboration Agreement and a $100,000 milestone payment
from BioChem Pharma in connection with a collaboration agreement. During the
year ended December 31, 1997, the Company recorded approximately $10.8 million
of revenue for development cost reimbursements from Johnson & Johnson in
connection with the Collaboration Agreement and a $1.0 million milestone payment
in connection with Johnson & Johnson exercising its option to expand its
participation under the Collaboration Agreement to include the development of
LSF for the treatment of patients with newly diagnosed AML undergoing high-dose
induction chemotherapy.
Research and development expenses increased to approximately $29.9 million for
the year ended December 31, 1998 from approximately $27.3 million for the year
ended December 31, 1997. This increase was due primarily to expanded development
activities with respect to LSF and Apra(TM) (CT-2584), the Company's novel small
molecule drug under investigation for the treatment of patients with multidrug
(e.g., chemotherapy) resistant cancers, including the ongoing funding of
multiple clinical trials and the recruitment of additional personnel.
Additionally, the Company commenced funding of diabetes research efforts related
to the Company's Cell City, LLC joint venture with the City of Hope National
Medical Center and research efforts with respect to polyglutamate paclitaxel
("PG-TXL(TM)") in 1998. The Company expects that research and development
expenses will increase in future years as the Company expands its research and
development programs and undertakes additional clinical trials.
General and administrative expenses increased to approximately $10.9 million for
the year ended December 31, 1998 from approximately $10.1 million for the year
ended December 31, 1997. This increase was due primarily to operating expenses
associated with supporting the Company's increased research, development and
clinical activities. Additionally, during 1998 the Company incurred transaction
costs with respect to the establishment of Cell City, LLC for developing novel
pharmacological agents for treating diabetes and diabetes-associated vascular
complications; acquiring the rights to PG-TXL; and the unexercised SynChem
research option. General and administrative expenses are expected to increase to
support the Company's expected increase in research, development and clinical
trial efforts.
Investment income increased to approximately $3.1 million for the year ended
December 31, 1998 from approximately $2.9 million for the year ended December
31, 1997. The increase was associated primarily with interest earnings on higher
average cash balances on hand during 1998 due to the proceeds remaining from
both the Company's IPO and concurrent sale of common stock to Johnson & Johnson
late in the first quarter of 1997, and the Company's Follow-On Offering in the
fourth quarter of 1997. Interest expense increased to approximately $435,000 for
the year ended December 31, 1998 from approximately $378,000 for the year ended
December 31, 1997. This increase was due primarily to higher
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average balances of outstanding long-term obligations, partially offset by lower
average interest rates on those obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
sale of equity securities and from its collaboration with Johnson & Johnson. As
of December 31, 1999, the Company has raised aggregate net proceeds of
approximately $177.1 million through the sale of equity securities including
public offerings of common stock, private placements of Series A, B, and D
convertible preferred stock and common stock, a bridge loan, the exercise of
stock options and warrants and the sale of common stock pursuant to the Employee
Stock Purchase Plan. In addition, the Company financed the purchase of $16.2
million of property and equipment through financing agreements and capital lease
obligations of which approximately $3.4 million remained outstanding as of
December 31, 1999.
At December 31, 1999, the Company had $24.2 million in cash, cash equivalents,
short-term investments and interest receivable. In February 2000, the Company
completed a private placement of 3.3 million shares of common stock at $12.00
per share and received net proceeds of approximately $37.1 million.
The Company invests in U.S. government obligations and other highly rated
liquid corporate debt instruments. The Company intends to use the substantial
portion of its financial resources to fund its research and development
activities with respect to the Company's ATO, PG-TXL and Apra programs,
including preclinical testing, clinical trials and process development
activities, and to fund other research and development activities. The amounts
actually expended for research and development activities and the timing of such
expenditures will depend upon numerous factors, including the progress of the
Company's research and development programs, the results of preclinical and
clinical trials, and timing of regulatory submissions and approvals, if any,
technological advances, determinations as to the commercial potential of the
Company's compounds, and the status and timing of competitive products. The
amount of expenditures will also depend upon the timing and availability of
alternative methods of financing the Company's research and development
activities and preclinical and clinical trials, and the ability of the Company
to establish collaborative agreements with other companies. A variety of other
factors, some of which are beyond the Company's control, could also affect the
amount of the Company's expenditures.
The Company also expects to use portions of its financial resources to improve
facilities, purchase capital equipment and for general corporate purposes. The
Company has not identified precisely the amount it plans to spend on these
specific programs or the timing of such expenditures. Pending such uses, the
Company intends to invest its cash balances in highly rated liquid corporate
debt instruments and U.S. government obligations. In January 2000, the Company
completed the acquisition of PolaRx Biopharmaceuticals, Inc., a
biopharmaceutical company that owns the rights to ATO, an anti-cancer compound
that the Company intends to file an NDA with the FDA in the first half of 2000.
In connection with the PolaRx acquisition, the Company assumed $3.5 million of
notes payable which are due between March and November, 2000. The Company may
also from time to time consider the acquisition of other companies, technologies
or products that complement the business of the Company, although no agreements
or understandings are in effect with respect to any such transactions at this
time.
The Company does not expect to generate a positive cash flow from operations
for several years due to substantial additional research and development costs,
including costs related to drug discovery, preclinical testing, clinical trials,
manufacturing costs and operating expenses associated with supporting such
activities. The Company expects that its existing capital resources, including
the financing completed in February 2000, and the interest earned
5
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thereon will enable the Company to maintain its current and planned operations
at least through mid 2001. The Company will need to raise substantial additional
capital to fund its operations beyond such time. The Company's future capital
requirements will depend on many factors, including the ability of the Company
to establish additional collaborative arrangements and the terms of any
additional collaborative arrangements that the Company may enter into; the
continued scientific progress in the Company's research and development
programs; the magnitude of such programs; the progress of preclinical testing
and clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims; the competing technological and market
developments; the cost of establishing manufacturing facilities; the cost of
commercialization activities and the demand for the Company's products if and
when approved.
The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
arrangements, acquisitions, or otherwise. Because of these long-term capital
requirements, the Company may seek to access the public or private equity
markets from time to time, even if it does not have an immediate need for
additional capital at that time. There can be no assurance that additional
financing will be available to the Company, or, if available, that it will be on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to shareholders may result. If adequate funds are not
available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research, development and clinical activities. If
the Company seeks to obtain funds through arrangements with collaborative
partners or others, such partners may require the Company to relinquish rights
to certain of its technologies, product candidates or products that the Company
would otherwise seek to develop or commercialize by itself.
The Company is exposed to market risk related to changes in interest rates
that could adversely affect the value of the Company's investments. The Company
does not use derivative financial instruments for speculative or trading
purposes. The Company maintains a short-term investment portfolio consisting of
interest bearing securities with an average maturity of less than one year.
These securities are classified as "available-for-sale" securities. The interest
bearing securities are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels at December 31, 1999, the fair
value of the portfolio would decline by an immaterial amount. Because the
Company has the ability to hold its fixed income investments until maturity, it
does not expect its operating results or cash flows to be affected to any
significant degree by a sudden change in market interest rates on its securities
portfolio. As of December 31, 1999, the Company has not entered into any foreign
exchange contracts to hedge any exposure in its primary overseas contract
because such exposure is immaterial.
As of December 31, 1999, the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $152 million and
research and development credit carryforwards of approximately $5.6 million.
These carryforwards begin to expire in 2007. The Company's ability to utilize
its net operating loss and research and development credit carryforwards is
subject to an annual limitation in future periods pursuant to the "change in
ownership" rules under Section 382 of the Internal Revenue Code of 1986.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are outside of the Company's control. The following
discussion highlights some of these risks and others are discussed elsewhere
herein and in other documents filed by the Company with the Securities and
Exchange Commission.
6
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The time frame for market success for any of the Company's potential products
is long and uncertain. The Company is at an early stage of development and its
technology is unproven. All of the Company's proposed products are in research
or development and will require significant additional research and development
efforts prior to any commercial use, including extensive preclinical and
clinical testing as well as lengthy regulatory approval. There can be no
assurance that the Company's research and development and clinical trial efforts
will be successful, that its lead drug candidates, ATO, PG-TXL and Apra, or any
of its other proposed products, will prove to be safe and efficacious in
clinical trials or meet applicable regulatory standards, that unforeseen
problems will not develop with the Company's technologies or applications, or
that any commercially successful products will ultimately be developed by the
Company. The Company faces substantial competition from a variety of sources,
both direct and indirect. There can be no assurance that research and
discoveries by others will not render some or all of the Company's programs or
products noncompetitive or obsolete or that the Company will be able to keep
pace with technological developments or other market factors.
A key element of the Company's strategy is to enhance its drug discovery and
development programs and to fund its capital requirements, in part, by entering
into various collaborative arrangements with corporate partners, as well as
academic collaborators and licensors. However, there can be no assurance that
the Company will be able to negotiate collaborative arrangements with such third
parties or that these collaborations, if entered into, will be on terms
favorable to the Company. If the Company is unable to enter into future
collaborations with capable partners and on commercially reasonable terms, the
development and commercialization of its product candidates would be delayed and
possibly postponed indefinitely.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and potential products. Other risk factors that
may affect the Company's future results include competition, uncertainties
regarding protection of patents and proprietary rights, government regulation
and uncertainties regarding pharmaceutical pricing and reimbursement.
Year 2000
In 1999, the Company undertook a comprehensive review of its information
technology computer and business systems and concluded that the Year 2000 issue
(Y2K) did not pose a significant operational problem. In addition, the Company
surveyed significant vendors to determine any possible Y2K risks. The Company
established contingency plans to address "high-risk" issues that could have
affected day-to-day operations.
Based on a full review of its computer and business systems and significant
third party vendors, the Company has concluded that the change from the year
1999 to the year 2000 did not have an effect on its day-to-day operations.
The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent year 2000 matters that may arise are promptly addressed.
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Item 5. Other Events
The financial statements of Cell Therapeutics have been included herein as
exhibit 99.2.
(c) Exhibits
23.1 Consent of Ernst & Young LLP
99.2 Financial Statements for Cell Therapeutics, Inc. at
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CELL THERAPEUTICS, INC.
Date: March 2, 2000 /s/ James A. Bianco
-------------------
Name: James A. Bianco
Title: Chief Executive Officer
<PAGE>
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
99.2 Financial Statements for Cell Therapeutics, Inc. at December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to use of our report dated February 25, 2000, with respect to the
December 31, 1999 financial statements of Cell Therapeutics, Inc. included in
this Form 8-K.
ERNST & YOUNG LLP
Seattle, Washington
March 2, 1999
<PAGE>
Exhibit 99.2
The Board of Directors and Shareholders
Cell Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Cell
Therapeutics, Inc. (a development stage company) as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cell
Therapeutics, Inc. (a development stage company) at December 31, 1999 and
1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 and for the
period from September 4, 1991 (date of incorporation) to December 31, 1999,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Seattle, Washington
February 25, 2000
<PAGE>
Cell Therapeutics, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------
1999 1998
----- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,674,386 $ 4,362,486
Securities available-for-sale 18,205,630 42,072,276
Interest receivable 367,636 637,330
Collaboration agreement receivables - 3,254,491
Prepaid expenses and other current assets 748,506 920,136
------------- -------------
Total current assets 24,996,158 51,246,719
Property and equipment, net 5,035,683 6,825,897
Other assets and deferred charges 816,050 83,879
------------- -------------
Total assets $ 30,847,891 $ 58,156,495
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,224,994 $ 1,106,832
Accrued expenses 4,940,626 4,816,385
Current portion of long-term obligations 1,125,211 1,180,702
------------- -------------
Total current liabilities 7,290,831 7,103,919
Long-term obligations, less current portion 2,653,111 3,887,603
Commitments
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 10,000,000
Series A and B, 161,118.645 shares designated,
none issued or outstanding - -
Series D, 10,000 shares designated, issued and outstanding,
liquidation preference - $10,000,000 11,384,029 -
Common Stock, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 15,595,536 and 15,534,359
at December 31, 1999 and 1998, respectively 168,235,338 169,618,635
Notes receivable from officers (330,000) (380,000)
Deficit accumulated during development stage (158,350,182) (122,070,032)
Accumulated other comprehensive loss (35,236) (3,630)
------------- -------------
Total shareholders' equity 20,903,949 47,164,973
------------- -------------
Total liabilities and shareholders' equity $ 30,847,891 $ 58,156,495
============= =============
</TABLE>
See accompanying notes.
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Cell Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
September 4,
1991 (Date of
Year Ended December 31, Incorporation) To
----------------------
December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Collaboration agreements $ - $ 13,200,426 $ 11,831,420 $ 34,252,652
Operating expenses:
Research and development 27,682,174 29,941,772 27,284,544 145,069,602
General and administrative 9,788,292 10,889,402 10,090,253 56,220,765
------------ ------------ ------------ -------------
37,470,466 40,831,174 37,374,797 201,290,367
------------ ------------ ------------ -------------
Loss from operations (37,470,466) (27,630,748) (25,543,377) (167,037,715)
Other income (expense):
Investment income 1,691,912 3,094,116 2,894,627 11,654,414
Interest expense (501,596) (435,279) (377,544) (2,966,881)
------------ ------------ ------------ -------------
Net loss (36,280,150) (24,971,911) (23,026,294) (158,350,182)
============ ============ ============ =============
Preferred stock dividend (5,200,513) - - (5,200,513)
------------ ------------ ------------ -------------
Net loss applicable to common shareholders $(41,480,663) $(24,971,911) $(23,026,294) $(163,550,695)
============ ============ ============ =============
Basic and diluted net loss per share $ (2.67) $ (1.62) $ (1.98)
============ ============ ============
Shares used in calculation of basic and
diluted net loss per share 15,551,526 15,409,848 11,634,032
============ ============ ============
</TABLE>
See accompanying notes.
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Cell Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------------
Common Stock Series A Series B Series D
---------------------- ----------------------- ---------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ----------- ---------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders for cash 1,914,313 $ 87,612 - $ - - $ - - $ -
Cash proceeds received from the
issuance of shares and warrants
to chairman of the Board of
Directors 178,572 2,004,000 - - - - - -
Net proceeds from the issuance of
common stock via private
placement equity offering,
net of offering costs of
$3,467,352 2,225,139 35,083,440 - - - - - -
Net loss for the year ended
December 31, 1992 - - - - - - - -
---------- ----------- ---------- ----------- ---------- --------- --------- --------
Balance at December 31, 1992 4,318,024 37,175,052 - - - - - -
Repurchase and cancellation of
common stock (60,343) (2,522) - - - - - -
Share cancellation (1,072) - - - - - - -
Net proceeds from the issuance of
common stock via private
placement equity offering,
net of offering costs of
$1,486,383 438,540 12,326,885 - - - - - -
Net loss for the year ended
December 31, 1993 - - - - - - - -
---------- ----------- ---------- ----------- ---------- --------- --------- ---------
Balance at December 31, 1993 4,695,149 49,499,415 - - - - - -
Net proceeds from the issuance of
common stock via private
placement equity offering,
net of offering costs of
$85,823 25,001 701,677 - - - - - -
Proceeds from stock options
exercised 79 1,375 - - - - - -
Net loss for the year ended
December 31, 1994 - - - - - - - -
---------- ----------- ----------- ----------- ---------- --------- --------- ---------
Balance at December 31, 1994 4,720,229 50,202,467 - - - - - -
Net proceeds from the issuance of
Series A convertible preferred
stock via private placement
equity offering, net of offering
costs of $1,478,541 - - 95,447.004 30,496,204 - - - -
Share cancellation (179) - - - - - - -
Exchange of warrants for common
stock 104,418 - - - - - - -
Issuance of common stock for
purchased research and
development 98,574 1,155,750 - - - - - -
December 1995 proceeds received
from issuance of shares to a
member of the Board of
Directors 5,715 67,000 - - - - - -
Proceeds from stock options
exercised 4,653 56,264 - - - - - -
Comprehensive loss:
Unrealized gains on securities
available-for-sale - - - - - - - -
Net loss for the year ended
December 31, 1995 - - - - - - - -
Comprehensive loss - - - - - - - -
---------- ----------- ----------- ----------- ---------- --------- --------- ---------
Balance at December 31, 1995 4,933,410 $51,481,481 95,447.004 $30,496,204 - $ - - $ -
========== =========== =========== =========== ========== ========= ========= =========
<CAPTION>
Deficit
Notes Accumulated Accumulate
Receivable During the Other
from Development Comprehensive
Officers Stage Income/(Loss) Total
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock to
founders for cash $ - $ _ $ - $ 87,612
Cash proceeds received from the
issuance of shares and
warrants to chairman
of the Board of Directors - - - 2,004,000
Net proceeds from the issuance of
common stock via private
placement equity offering,
net of offering costs of
$3,467,352 - - - 35,083,440
Net loss for the year ended
December 31, 1992 - (5,323,737) - (5,323,737)
------------- -------------- ------------- ------------
Balance at December 31, 1992 - (5,323,737) - 31,851,315
Repurchase and cancellation of
common stock - - - (2,522)
Share cancellation - - - -
Net proceeds from the issuance of
common stock via private
placement equity offering,
net of offering costs of
$1,486,383 - - - 12,326,885
Net loss for the year ended
December 31, 1993 - (15,328,143) - (15,328,143)
------------- -------------- ------------- ------------
Balance at December 31, 1993 - (20,651,880) - 28,847,535
Net proceeds from the issuance of
common stock via private
placement equity offering,
net of offering costs of
$85,823 - - - 701,677
Proceeds from stock options - - - 1,375
exercised
Net loss for the year ended
December 31, 1994 - (19,499,283) - (19,499,283)
------------- -------------- ------------- ------------
Balance at December 31, 1994 - (40,151,163) - 10,051,304
Net proceeds from the issuance of
Series A convertible preferred
stock via private placement
equity offering, net of offering
costs of - - - 30,496,204
$1,478,541
Share cancellation - - - -
Exchange of warrants for common stock - - - -
Issuance of common stock for
purchased research and development - - - 1,155,750
December 1995 proceeds received
from issuance of shares to a
member of the Board of
Directors - - - 67,000
Proceeds from stock options exercised - - - 56,264
Comprehensive loss:
Unrealized gains on securities
available-for-sale - - 24,178 24,178
Net loss for the year ended
December 31, 1995 - (19,992,475) - (19,992,475)
Comprehensive loss - - - (19,968,297)
------------- -------------- ------------- ------------
Balance at December 31, 1995 $ - $ (60,143,638) $ 24,178 $ 21,858,225
============= ============== ============= ============
</TABLE>
See accompanying notes.
4
<PAGE>
Cell Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------
Common Stock Series A Series B
---------------------------- ------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------- -------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net proceeds from the issuance of
Series A convertible preferred
stock via private placement
equity offering, net of offering
costs of $130,000 - $ - 50,746.268 $ 16,870,000 - $ -
Net proceeds from the issuance of
Series B convertible preferred
stock via private placement equity
offering, net of offering costs of
$40,000 - - - - 14,925.373 4,960,000
Exchange of warrants for common stock 151 - - - - -
Proceeds from stock options exercised 1,974 23,121 - - - -
Proceeds from common stock
warrants exercised 7,937 305,558 - - - -
Comprehensive loss:
Unrealized losses on securities
available-for-sale - - - - - -
Net loss for the year ended
December 31, 1996 - - - - - -
Comprehensive loss - - - - - -
---------- ------------ ------------- ------------ ----------- -----------
Balance at December 31,1996 4,943,472 51,810,160 146,193.272 47,366,204 14,925.373 4,960,000
Net proceeds from the issuance of
common stock via initial
public offering, net of offering
costs of $3,197,750 3,000,000 26,802,250 - - - -
Net proceeds from the issuance of
common stock via follow-on
public offering, net of offering
costs of $2,538,000 2,300,000 34,262,000 - - - -
Net proceeds from the issuance of
common stock via private
placement equity offering 300,000 3,000,000 - - - -
Conversion of preferred stock to
common stock 4,784,902 52,326,204 (146,193.272) (47,366,204) (14,925.373) (4,960,000)
Proceeds from stock options
exercised and stock awards 50,045 592,274 - - - -
Non-employee stock option
compensation expense - 100,186 - - - -
Comprehensive loss:
Unrealized losses on
securities available-for-sale - - - - - -
Net loss for the period ended
December 31, 1997 - - - - - -
Comprehensive loss - - - - - -
---------- ------------ ------------- ------------ ----------- -----------
Balance at December 31, 1997 15,378,419 168,893,074 - - - -
Proceeds from stock options
exercised and stock awards 8,570 86,992 - - - -
Non-employee stock option
compensation expense - 422,923 - - - -
Restricted shares issued to
non-employees 51,835 - - - - -
Proceeds from stock sold via
employee stock purchase plan 95,535 215,646 - - - -
Notes receivable from officers - - - - - -
Comprehensive loss:
Unrealized gains on securities
available-for-sale - - - - - -
Net loss for the period ended
December 31, 1998 - - - - - -
Comprehensive loss - - - - - -
---------- ------------ ------------- ------------ ----------- -----------
Balance at December 31, 1998 15,534,359 $ 169,618,635 - $ - - $ -
========== ============ ============= ============ =========== ===========
<CAPTION>
Deficit
Notes Accumulated Accumulated
Receivable During the Other
Series D from Development Comprehensive
----------
Shares Amount Officers Stage Income/(Loss) Total
---------- ------------ ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net proceeds from the issuance of
Series A convertible preferred
stock via private placement
equity offering, net of offering
costs of $130,000 - $ - $ - $ - $ - $ 16,870,000
Net proceeds from the issuance of
Series B convertible preferred
stock via private placement equity
offering, net of offering costs of
$40,000 - - - - - 4,960,000
Exchange of warrants for common stock - - - - - -
Proceeds from stock options exercised - - - - - 23,121
Proceeds from common stock
warrants exercised - - - - - 305,558
Comprehensive loss:
Unrealized losses on securities
available-for-sale - - - - (34,995) (34,995)
Net loss for the year ended
December 31, 1996 - - - (13,928,189) - (13,928,189)
Comprehensive loss - - - - - (13,963,184)
-------- ---------- --------- ------------- --------- ------------
Balance at December 31,1996 - - - (74,071,827) (10,817) 30,053,720
Net proceeds from the issuance of
common stock via initial
public offering, net of offering
costs of $3,197,750 - - - - - 26,802,250
Net proceeds from the issuance of
common stock via follow-on
public offering, net of offering
costs of $2,538,000 - - - - - 34,262,000
Net proceeds from the issuance of
common stock via private
placement equity offering - - - - - 3,000,000
Conversion of preferred stock to
common stock - - - - - -
Proceeds from stock options
exercised and stock awards - - - - - 592,274
Non-employee stock option
compensation expense - - - - - 100,186
Comprehensive loss:
Unrealized losses on
securities available-for-sale - - - - (23,832) (23,832)
Net loss for the period ended
December 31, 1997 - - - (23,026,294) - (23,026,294)
-----------
Comprehensive loss - - - - - (23,050,126)
-------- ---------- --------- ------------ ----------- ----------
Balance at December 31, 1997 - - - (97,098,121) (34,649) 71,760,304
Proceeds from stock options
exercised and stock awards - - - - - 86,992
Non-employee stock option
compensation expense - - - - 422,923
Restricted shares issued to
non-employees - - - - - -
Proceeds from stock sold via
employee stock purchase plan - - - - - 215,646
Notes receivable from officers - - (380,000) - - (380,000)
Comprehensive loss:
Unrealized gains on securities
available-for-sale - - - - 31,019 31,019
Net loss for the period ended
December 31, 1998 - - - (24,971,911) - (24,971,911)
------------
Comprehensive loss - - - - - (24,940,892)
-------- ---------- --------- ------------- -------------- ------------
Balance at December 31, 1998 - $ - $(380,000) $(122,070,032) $ (3,630) $ 47,164,973
======== ========== ========= ============= ============== ============
</TABLE>
See accompanying notes.
5
<PAGE>
Cell Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------------
Common Stock Series A Series B Series D
------------------------ ---------------------- -------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------ --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net proceeds from the issuance of
Series D convertible
preferred stock and warrants
to acquire common stock
via private placement equity
offering, net of offering
costs of $755,040 (including
warrants issued to placement
agent value at $100,000) - $3,117,000 - $ - $ - - 10,000.000 $ 6,227,960
Preferred stock dividend - (5,200,513) - - - - - 5,156,069
Proceeds from stock options
exercised and stock awards 4,932 14,002 - - - - - -
Non-employee equity based
compensation expense - 568,767 - - - - - -
Proceeds from stock sold via
employee stock purchase plan 56,245 117,447 - - - - - -
Reclass to current asset for - - - - - - - -
former officer
Comprehensive loss:
Unrealized losses on
securities available-for-sale - - - - - - - -
Net loss for the period ended
December 31, 1999 - - - - - - - -
Comprehensive loss - - - - - - - -
---------- ------------ --------- --------- --------- --------- ---------- -----------
Balance at December 31, 1999 15,595,536 $168,235,338 - $ - - $ - 10,000.000 $11,384,029
========== ============ ========= ========= ========= ========= ========== ===========
<CAPTION>
Deficit
Notes Accumulated Accumulated
Receivable During the Other Total
from Development Comprehensive Shareholders'
Officers Stage Income/(Loss) Equity
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net proceeds from the issuance of
Series D convertible
preferred stock and warrants
to acquire common stock via
private placement equity
offering, net of offering
costs of $755,040 (including
warrants issued to placement
agent valued at $100,000) $ - $ - $ - $ 9,344,960
Preferred stock dividend - - - (44,444)
Proceeds from stock options
exercised and stock awards - - - 14,002
Non-employee equity based
compensation expense - - 568,767
Proceeds from stock sold via
employee stock purchase plan - - - 117,447
Reclass to current asset for 50,000 - - 50,000
former officer
Comprehensive loss:
Unrealized losses on
securities
available-for-sale - - (31,606) (31,606)
Net loss for the period ended
December 31, 1999 - (36,280,150) - (36,280,150)
Comprehensive loss - - - (36,311,756)
------------ ------------- ------------- --------------
Balance at December 31, 1999 $(330,000) $(158,350,182) $(35,236) $ 20,903,949
============ ============= ============= ==============
</TABLE>
See accompanying notes
6
<PAGE>
Cell Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows)
<TABLE>
<CAPTION>
Period From
September 4,
1991 (Date of
Year Ended December 31, Incorporation)
-------------------------------------------
To December 31,
1999 1998 1997 1999
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Operating Activities
Net loss applicable to common shareholders $(41,480,663) $(24,971,911) $(23,026,294) $(163,550,695)
Adjustments to reconcile net loss applicable to common shareholders
to net cash used in operating activities:
Preferred stock dividend 5,200,513 - - 5,200,513
Depreciation and amortization 1,822,593 1,880,535 1,748,618 11,913,007
Noncash research and development expense - - - 1,155,750
Noncash interest expense - - - 25,918
Noncash rent expense (benefit) (171,088) (42,986) 74,109 354,323
Noncash compensation expense 568,767 422,923 100,186 1,091,876
Loss on disposition of property and equipment 525,784 - 15,831 693,084
Investment premium (discount) amortization (accretion) 366,054 200,118 (177,947) 910,286
(Gain) loss on sale of investment securities 4,563 (31,603) - (27,040)
Changes in assets and liabilities:
Interest receivable 269,694 (36,726) (401,162) (97,942)
Collaboration agreement receivables 3,254,491 428,540 (3,683,031) -
Prepaid expenses and other current assets 221,630 (819,009) 256,651 (698,506)
Other assets (732,171) 215,985 239,551 (927,275)
Accounts payable 118,162 944,363 (488,661) 1,224,994
Accrued expenses 79,797 104,153 1,646,935 4,896,182
------------ ------------ ------------ --------------
Total adjustments 11,528,789 3,266,293 (668,920) 25,715,170
------------ ------------ ------------ --------------
Net cash provided by (used in) operating activities (29,951,874) (21,705,618) (23,695,214) (137,835,525)
------------ ------------ ------------ --------------
Investing activities
Purchases of securities available-for-sale (29,561,916) (63,891,102) (85,364,597) (254,913,894)
Proceeds from sales of securities available-for-sale 11,111,339 26,025,226 1,999,444 54,026,322
Proceeds from maturities of securities available-for-sale 41,915,000 56,622,884 47,845,281 181,482,952
Purchases of property and equipment (558,163) (2,801,332) (2,540,798) (17,235,229)
------------ ------------ ------------ --------------
Net cash used in investing activities 22,906,260 15,955,676 (38,060,670) (36,639,849)
------------ ------------ ------------ --------------
Financing activities
Sale of common stock to founders - - - 80,000
Proceeds from borrowings from shareholders - - - 850,000
Sale of common stock via public offerings, net of offering costs - - 61,064,250 61,064,250
Sale of Series A preferred stock via private placement, net of
offering costs - - - 47,366,204
Sale of Series B preferred stock via private placement, net of
offering costs - - - 4,960,000
Sale of Series D preferred stock via private placement, net of
offering costs 9,344,960 - - 9,344,960
Sale of common stock via private placement, net of offering costs - - 3,000,000 52,307,084
Repurchase of common stock - - - (2,522)
Notes receivable from officers to acquire common stock - (380,000) - (380,000)
Proceeds from common stock options exercised 14,002 86,992 592,274 774,028
Proceeds from common stock warrants exercised - - - 305,558
Proceeds from employee stock purchase plan 117,447 215,646 - 333,093
Repayment of long-term obligations (1,118,895) (1,880,361) (1,226,971) (12,697,496)
Proceeds from the issuance of long-term obligations - 3,193,161 1,719,806 15,844,601
------------ ------------ ------------ --------------
Net cash provided by financing activities 8,357,514 1,235,438 65,149,359 180,149,760
------------ ------------ ------------ --------------
Net increase (decrease) in cash and cash equivalents 1,311,900 (4,514,504) 3,393,475 5,674,386
Cash and cash equivalents at beginning of period 4,362,486 8,876,990 5,483,515 -
------------ ------------ ------------ --------------
Cash and cash equivalents at end of period $ 5,674,386 $ 4,362,486 $ 8,876,990 $ 5,674,386
============ ============ ============ ==============
Supplemental schedule of noncash investing and financing activities
Acquisition of equipment pursuant to capital lease obligations $ - $ - $ - $ 362,425
============ ============ ============ ==============
Conversion of convertible debt and related accrued interest into $ - $ - $ - $ 875,918
common stock ============ ============ ============ ==============
Conversion of Series A and B preferred stock into common stock $ - $ - $ 52,326,204 $ 52,326,204
============ ============ ============ ==============
Common stock warrants issued in conjunction with Series D $ 3,117,000 $ - $ - $ 3,117,000
============ ============ ============ ==============
Reclass to current assets of note receivable from former officer $ 50,000 $ - $ - $ 50,000
============ ============ ============ ==============
Supplemental disclosure of cash flow information
Cash paid during the period for interest obligations $ 501,596 $ 435,279 $ 377,544 $ 2,966,881
============ ============ ============ ==============
</TABLE>
See accompanying notes.
<PAGE>
CELL THERAPEUTICS, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
1. Summary of Significant Accounting Policies
Description of Business
Cell Therapeutics, Inc. (the "Company") focuses on the discovery,
development, and commercialization of drugs for the treatment of cancer. The
Company currently anticipates being a development stage company until
commercialization begins. The Company's principal business strategy is to focus
its activities on cancer therapeutics, an area that represents a large market
opportunity which is not adequately served by existing therapies. The Company
commenced operations February 1992.
The Company operates in a highly regulated and competitive environment.
The manufacturing and marketing of pharmaceutical products require approval
from, and are subject to, ongoing oversight by the Food and Drug Administration
in the United States and by comparable agencies in other countries. Obtaining
approval for a new therapeutic product is never certain and may take several
years and involve expenditure of substantial resources. Competition in
researching, developing, and marketing pharmaceutical products is intense. Any
of the technologies covering the Company's existing products under development
could become obsolete or diminished in value by discoveries and developments of
other organizations. As the Company operates as one segment, no additional
disclosures are required in accordance with FASB Statement No. 131 "Disclosures
about Segments of an Enterprise and Related Information."
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary, and its 70% interest in a joint venture. All
intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less at the time acquired to be cash equivalents. Cash
equivalents represent short-term investments consisting of investment-grade
corporate and government obligations, carried at market value, which
approximates cost.
Securities Available-for-Sale
Management determines the appropriate classification of debt securities at
the time of purchase. Management currently classifies its investment portfolio
as available-for-sale and carries the securities at fair value based on quoted
market prices with unrealized gains and losses included in accumulated other
comprehensive income and loss. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and accretion are included in investment income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in investment income.
The cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale is included in
investment income.
Management of Credit Risk
The Company is subject to concentration of credit risk primarily from its
cash investments. Under the Company's investment guidelines, credit risk is
managed by diversification of the investment portfolio and by the purchase of
investment-grade securities.
8
<PAGE>
Collaboration Agreement Receivables and Revenues
Collaboration agreement receivables represent amounts earned, but not yet
collected, under collaboration and license agreements. Revenue under
collaboration agreements represents reimbursement of development costs, license
fees, and milestone payments. Revenue from milestone payments is recognized
upon satisfaction of related obligations. Other revenue under collaboration
agreements is recognized as the earnings process is completed, based on the
provisions of each agreement.
Property and Equipment
Property and equipment, including assets pledged as security in financing
agreements, are carried at cost, less accumulated depreciation and amortization.
Leasehold improvements are amortized over the lesser of the useful life or the
term of the applicable lease using the straight-line method. Depreciation
commences at the time assets are placed in service and is computed using the
straight-line method over the estimated useful lives of the assets (three to
five years).
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
market price of the Company's common stock at the date of grant over the stock
option exercise price. Under the Company's plans, stock options are generally
granted at fair market value.
Stock compensation expense for options granted to non-employees has been
determined in accordance with SFAS 123 and the Emerging Issues Task Force
consensus in Issue No. 96-18, "Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18"), as the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measured. The fair value of options granted to non-employees is periodically
remeasured as the underlying options vest.
Net Loss per Share
Basic loss per share is calculated based on the net loss applicable to
common shareholders divided by the weighted average number of common shares
outstanding for the period excluding any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share, if separately
presented, would assume the conversion of all dilutive securities, such as
options, warrants and convertible preferred stock. Due to the Company's history
of losses, all such securities are anti-dilutive.
Other Financial Instruments
At December 31, 1999 and 1998, the carrying value of financial instruments
such as receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. Additionally, the carrying value of
long-term liabilities approximated fair values because the underlying interest
rates reflect market rates at the balance sheet dates.
Income Taxes
The Company accounts for income taxes using the liability method under
Statement of Accounting Standards No. 109, "Accounting for Income Taxes."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
9
<PAGE>
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which provides the Staff's views on applying generally accepted
accounting principles to revenue recognition issues. The Company is currently
evaluating its revenue recognition policies and has not yet determined the
impact of SAB 101 on the results of operations or financial position.
Reclassifications
Certain prior year items have been reclassified to conform to the current
year presentation.
2. Securities Available-for-Sale
Securities available-for-sale consist of the following as of December 31:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----------- ------ ----------
<S> <C> <C> <C> <C>
Municipal government obligations $ 398,339 $ - $ (663) $ 397,676
Corporate obligations 17,842,527 419 (34,992) 17,807,954
-------------- ----------- ---------- -----------
$ 18,240,866 $ 419 $ (35,655) $18,205,630
============== =========== ========== ===========
<CAPTION>
1999
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----------- ------ ----------
<S> <C> <C> <C> <C>
U.S. government obligations $ 498,510 $ 397 $ - $ 498,907
Municipal government obligations 1,107,616 1,815 - 1,109,431
Corporate obligations 40,469,780 39,862 (45,704) 40,463,938
-------------- ----------- ---------- ------------
$ 42,075,906 $ 42,074 $ (45,704) $ 42,072,276
============== =========== ========== ============
</TABLE>
As of December 31, 1999 and 1998, the securities available-for-sale had
contractual maturities of less than one year. Expected maturities will differ
from contractual maturities because issuers of the securities may have the right
to prepay obligations without prepayment penalties. Gross realized gains and
losses have not been material.
3. Property and Equipment
Property and equipment are composed of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Leasehold improvements $ 4,551,176 $ 4,877,241
Lab equipment 5,843,911 5,630,646
Furniture and office equipment 6,154,966 6,009,787
----------- -----------
16,550,053 16,517,674
Less: accumulated
depreciation and amortization 11,514,370 9,691,777
----------- -----------
$ 5,035,683 $ 6,825,897
=========== ===========
</TABLE>
10
<PAGE>
As of both December 31, 1999 and 1998, furniture and office equipment
included $232,585 of equipment acquired under capitalized leases. Accumulated
depreciation related to this equipment totaled $212,628 and $195,521 at December
31, 1999 and 1998, respectively. These leases are secured by the underlying
assets.
4. Capital Stock
In 1992, the Company completed a private placement of 2,225,139 shares of
common stock generating net proceeds of $35.1 million. In 1993, the Company
concluded a second equity financing through a private offering of common stock
and warrants generating net proceeds of $12.3 million.
In 1994, the Company sold additional units of common stock and warrants
under terms equivalent to those of the second round of equity financing. The
Company received net proceeds of $702,000.
In 1995, the Company concluded a third round of equity financing through a
private offering of Series A convertible preferred stock generating net proceeds
of $30.5 million. In 1996, the Company concluded two rounds of equity financing
through private offerings of Series A convertible preferred stock generating net
proceeds of $16.9 million.
In 1996, the Company also completed a placement of Series B convertible
preferred stock to Johnson & Johnson Development Corporation generating net
proceeds of $5.0 million.
In November 1996, the Board of Directors approved a shareholder rights plan
whereby a Right attaches to each share of common stock. Upon the occurrence of
certain acquisition related events, each Right entitles the holder of each
outstanding share of common stock to purchase one one-thousandth of a share of
Series C preferred stock at $175 per unit, subject to adjustment. Upon
exercise, each holder of a Right will have the right to receive value equal to
two times the exercise price of the Right. A total of 100,000 shares of Series
C preferred stock are reserved for issuance upon exercise of the Rights.
On March 26, 1997 the Company completed an initial public offering (the
"IPO") of 3 million shares of its common stock at an offering price of $10.00
per share, resulting in net proceeds of $26.8 million. Concurrent with the
closing of the IPO, the Company sold 300,000 shares of common stock to Johnson &
Johnson at a price of $10.00 per share, resulting in net proceeds of $3.0
million. All outstanding shares of Series A and B were converted into common
stock at the closing of the IPO. On October 27, 1997 the Company completed a
follow-on public offering of 2.3 million shares of its common stock at an
offering price of $16 per share, resulting in net proceeds of $34.3 million.
In November 1999, the Company completed a $10,000,000 private placement of
10,000 shares of Series D convertible preferred stock (Series D) and warrants to
acquire 1,523,810 shares of common stock, resulting in net proceeds of
$9,344,960. Each share of Series D is convertible into shares of common stock,
subject to adjustment as provided in the Articles of Amendment to Restated
Articles of Incorporation. Each share of Series D is currently convertible into
462.427 shares of common stock. The warrants were valued at $3,017,000, have
exercise prices of $2.625 per share of common stock and expire in November,
2004. The Company also issued warrants to purchase 50,000 shares of common
stock to the placement agent of the Series D. These warrants expire in 2004,
and have exercise prices of $2.38. The value of the warrants of approximately
$100,000 was accounted for as a cost of the offering. All warrants were valued
using the Black-Scholes pricing model with input assumptions for volatility,
risk-free interest rate, dividends, and life of 1.01, 5.5%, none, and five,
respectively.
Holders of the Series D are entitled to receive cumulative dividends at a
rate per share of 5% per annum payable on each September 30, commencing
September 30, 2000. At the Company's option, subject to certain restrictions
and penalties, dividends may be paid in cash or in shares of the Company's
common stock. The Company is to pay each Series D investor four annual dividend
payments notwithstanding any conversion, redemption or sale of the preferred
stock held by such investor. The Company has accrued a Series D stock
dividend of $44,000 at December 31, 1999.
The Company's obligation to issue dividends after the fourth annual
dividend payment will terminate for any shares of the Series D that have not
been converted into shares of common stock if on the earlier of the fourth
anniversary or any subsequent annual anniversary of the original issue date, as
defined, the average share closing price of the common stock is greater than 20%
of the fixed conversion price of $2.1625, compounded annually.
11
<PAGE>
Notwithstanding the above, the Company's obligation to pay dividends terminates
on the seven-year anniversary of the original issue date, as defined.
The Series D is convertible at the option of the holder or may
automatically convert if the per share market value of the Company's shares of
common stock exceeds specified returns when compared to the conversion price.
The holders of the Series D have a liquidation preference of $1,000 per
share. The Series D holders have the right to vote with the common stock on an
as-converted basis. The Company is also precluded from carrying out certain
actions without the approval of at least 51% of the Series D holders.
The shares of common stock issuable upon the conversion and exercise of the
Series D preferred stock and warrants, respectively, have certain registration
rights.
On the date of the preferred stock issuance, the effective conversion price
of the preferred stock (after allocating the portion of the proceeds to the
common stock warrants based on the relative fair values) was at a discount to
the price of the common stock into which the preferred stock is convertible. In
accordance with EITF 98-5 "Convertible Securities with Beneficial Conversion
Features," the discount was recorded as a preferred stock dividend valued at
$5,156,069.
Common Stock Reserved
A summary of common stock reserved for issuance is as follows as of
December 31:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Series D preferred stock 4,624,277
Equity incentive plan 3,766,465
Common stock warrants 2,073,810
Employee stock purchase plan 133,934
Restricted share rights 103,665
----------
10,702,151
==========
</TABLE>
5. Consulting and Employment Agreements
Corporate Officers
In 1998, the Company extended loans totaling $380,000 to executive officers
on a full-recourse basis. Each of the notes has a term of four years and bears
interest at approximately 5%. The full balance of principal and accumulated
interest is due at maturity. The executives used the funds to purchase shares
of the Company's common stock on the open market.
In 1999, an executive officer's employment with the Company was terminated.
Contemporaneously upon termination of employment, the Company entered into a
consulting agreement with the former executive to act as an independent expert
in manufacturing and to assist the Company in its development of therapeutic
products for clinical testing and commercial sale. In exchange for such
services, the Company extended the exercisability of the executive's vested
options for three years and will apply the value of services against an
outstanding loan balance. The $50,000 remaining loan balance due from this
former officer was reclassified to a current asset. The Company recognized
stock based compensation expense of $29,000 during 1999 in connection with the
consulting agreement.
The Company has severance agreements with certain of its officers having a
term of one year.
Advisory Boards
The Company has entered into consulting agreements with the members of its
Scientific and Clinical Advisory Boards ("Advisory Boards") providing for the
periodic issuance of common stock and options to purchase common stock, and
consulting fees. One agreement has an annual retainer of $10,000. The
remaining advisory
12
<PAGE>
board members are paid consulting fees on a per diem basis. The consulting
agreements with members of the Advisory Boards are cancelable upon 30 days
notice. The Company has issued stock options to members of its Advisory Boards.
In July 1998 the Board of Directors approved the repricing of outstanding
options. All options held by advisory board members are accounted for at fair
market value in accordance with EITF 96-18. Compensation related expense
recognized in 1999 and 1998 was $156,000 and $157,000, respectively.
Consultants
The Company has issued stock options to other consultants for various
services. In July 1998 the Board of Directors approved the repricing of
outstanding options. All options held by consultants are accounted for at fair
market value in accordance with EITF 96-18. Compensation related expense
recognized in 1999 and 1998 was $256,000 and $266,000.
Related Party Disclosure
In 1999, the Company entered into an agreement with a clinical medical
consultant who is the spouse of an executive officer of the Company. During
1999 the Company paid the clinical medical consultant approximately $107,000 in
fees for services rendered.
6. Contractual Arrangements and Commitments
Licensed Technology
In March 1992, the Company entered into agreements with the Fred Hutchinson
Cancer Research Center ("FHCRC") under the terms of which the Company has
received worldwide licenses and options to technology, or technology claimed,
for five U.S. patent applications. The Company paid initial license fees
totaling $100,000 and issued 76,572 shares of common stock valued at $3,200 to
the FHCRC for such technology. The Company is obligated to pay royalties on
revenues resulting from future sales of products employing the technology and on
revenues received from sublicenses for the technology, with minimum annual
royalties of $50,000 prior to, and $100,000 after, the first commercial sale of
such products. The agreements are for a term equal to the later of 15 years or
the expiration of the last issued patent included within the licensed
technology, unless terminated earlier for certain specified events, including
the failure of the Company to take reasonable efforts to engage in research and
development with respect to the licensed technology. The Company recognized
expense of $50,000 in 1999, 1998 and 1997 related to this agreement.
Facilities Lease
The Company has executed noncancelable operating leases for office and
laboratory space that expire in 2003, with two five-year renewal options at the
then-current market rates. The lessor provided approximately $575,000 for
leasehold improvements and rent concessions, which is being amortized over the
initial lease term. In 1998 the Company executed an operating lease for
additional office space that expires in August, 2001, with one three-year
renewal option at the then-current market rate. In November 1999, the Company
cancelled and terminated this lease. Rent expense amounted to $1,396,289,
$1,152,340, and $1,144,290 for the years ended December 31, 1999, 1998, and
1997, respectively. Future minimum annual rental payments under the leases
approximate the following for the years ended December 31:
2000 $1,164,942
2001 1,164,942
2002 1,164,942
2003 97,079
----------
$3,591,905
==========
13
<PAGE>
7. Long-term Obligations
Long-term obligations consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Master financing agreements:
Due December 2001, monthly payments of $44,196,
including interest at 12.5% 1,040,699 1,415,150
Due September 2002, monthly payments of $59,811
including interest at 12.4% 1,796,650 2,259,775
Due December 2002, monthly payments of $18,290
including interest at 12.4% 586,649 713,251
Repaid in August 1999 - 154,718
Deferred rent 354,324 525,411
---------- ----------
3,778,322 5,068,305
Less current portion 1,125,211 1,180,702
---------- ----------
$2,653,111 $3,887,603
========== ==========
</TABLE>
For each borrowing, the Company granted the lessor a security interest in
specified fixed assets.
Annual maturities of the master financing agreements for 2000 through 2002,
respectively, are $1,117,274, $1,387,110 and $919,614.
8. Stock Options and Warrants
Stock Options
In 1994, shareholders approved the 1994 Equity Incentive Plan (the "1994
Plan") in replacement of the 1992 Stock Option Plan. The 1994 Plan provides for
(a) the grant of incentive stock options (with terms not to exceed ten years),
nonstatutory stock options and stock appreciation rights, (b) the award of stock
bonuses, (c) the sale of stock, and (d) any other equity-based or equity-related
awards which the Plan Administrator determines to be consistent with the purpose
of the 1994 Plan and the interests of the Company. Option-vesting schedules are
specified by the Plan Administrator. The 1994 Plan also provides for the
automatic grant of nonstatutory options to non-employee directors.
In 1998, the Board of Directors approved the exchange of all outstanding
options with exercise prices ranging from $3.03 to $16.06 per share for options
with an exercise price of $2.906 per share, the fair value of the underlying
common stock at that time. Accordingly, 1,612,934 shares were exchanged for new
options with 10-year terms commencing July 31, 1998. These amounts have been
included as granted and canceled options during 1998 in the summary activity
table shown below.
14
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise
Under Price
Option Per Share
------ ---------
<S> <C> <C>
Balance January 1, 1997 1,294,945 $ 11.77
Granted 575,874 13.90
Canceled (52,331) 11.78
Exercised (50,045) 11.15
----------
Balance December 31, 1997 (791,265 exercisable) 1,768,443 12.48
Granted 2,510,999 2.93
Canceled (1,762,045) 12.29
Exercised (8,570) 9.82
----------
Balance December 31, 1998 (57,477 exercisable) 2,508,827 3.07
Granted 1,198,459 2.96
Canceled (517,718) 3.03
Exercised (4,932) 2.84
----------
Balance December 31, 1999 (1,666,822 exercisable) 3,184,636 $ 3.04
==========
</TABLE>
<TABLE>
<CAPTION>
Exercisable
Options Outstanding
Options Outstanding (without restriction)
----------------------------------------------------------------------------
Weighted Weighted
Range of Number Average Weighted Average
Exercise Outstanding Remaining Average Exercise Number Exercise
Prices 12/31/99 Contractual Life Price Exercisable Price
- ------------ -------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C>
$2.000-$2.703 823,015 9.28 Years $2.665 133,969 $2.657
$2.906-$2.906 1,479,748 8.33 Years $2.906 1,318,632 $2.906
$2.969-$3.688 782,555 9.41 Years $3.124 142,907 $3.001
$3.813-$16.063 99,318 7.70 Years $7.372 71,314 $8.534
--------- ---------
$2.000-$16.063 3,184,636 8.82 Years $3.037 1,666,822 $3.135
========= =========
</TABLE>
The weighted average fair value of options granted during 1999, 1998, and
1997 was $1.94, $1.85, and $5.53, respectively. As of December 31, 1999,
581,829 shares of common stock were available for future grants.
SFAS 123 encourages, but does not require, entities to adopt the fair value
method of accounting for their stock-based compensation plans. Under this
method, compensation cost for stock-based compensation plans is measured at the
grant date based on the fair value of the award and is recognized over the
vesting period. Fair value is determined using a Black-Scholes option pricing
model that takes into account (1) the stock price at the grant date, (2) the
exercise price, (3) a two-year expected life in 1999 and a four-year expected
life in 1998 and 1997, (4) no expected dividends, (5) risk-free interest rate of
5.5% in both 1999 and 1998 and rates ranging from 5.4% to 6.7% during 1997,
respectively, and (6) volatility factor of 1.006, .91 and .48 in 1999, 1998 and
1997, respectively. In accordance with the provisions of SFAS 123, the Company
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its stock option plans and, accordingly, does not recognize
compensation cost for options granted with exercise prices equal to or greater
than fair value. Although not reflective of the effects of reported net loss in
future years until the rules of SFAS 123 are applied to all outstanding non-
vested options, if the Company elected to recognize compensation cost based on
the fair value of the options
15
<PAGE>
granted at grant date as prescribed by SFAS 123, basic and diluted net loss and
basic and diluted net loss per share would have been adjusted (increased) as
follows for the years ended December 31:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported $ (41,480,663) $(24,971,911) $(23,026,294)
As adjusted (43,530,183) (27,553,633) (23,800,008)
Basic and diluted net loss per share:
As reported $ (2.67) $ (1.62) $ (1.98)
As adjusted (2.80) (1.79) (2.05)
</TABLE>
In accordance with EITF 96-18, the Company considers all equity instruments
issued to non-employees to be accounted for as fair value equity instruments.
The value of the instrument is amortized to expense over the vesting period with
final valuation measured on the latter of the vesting date or date on which they
become exercisable. At December 31, 1999, options to acquire 247,708 shares of
common stock are considered fair value options. During 1999 and 1998, the
Company recognized total EITF 96-18 non-employee equity based compensation
related expense of $569,000 and $423,000, respectively.
In December 1999, the Compensation Committee of the Board of Directors
authorized the issuance of 243,903 restricted shares to executive officers and
certain employees. The shares which will be issued in early 2000, fully vest in
December 2002. The shares were valued at $746,953, are recorded as deferred
compensation expense at December 31, 1999, and will be amortized over the three
year vesting period.
As discussed in Note 11, the Company has issued 103,665 restricted
share rights to non-employees in 1998 for which ownership vests upon the
achievement of a future event. Compensation related to these rights will be
measured as the event becomes probable with final valuation on the vesting date.
Warrants
In 1998, the Company issued warrants to purchase 350,000 shares of common
stock of the Company in connection with a license agreement. The warrants
expire November 12, 2008 and become exercisable only upon the occurrence of
certain exercise events, including a license or sale by the Company of any
licensed patent rights subject to the agreement to a third party or a change of
control of the Company, as defined. The exercise price per share is the lesser
of $20.00 or the average closing stock price for the 30 consecutive trading days
ending on the date of the exercise event. Compensation related to these
warrants will be measured as any of the exercise events become probable with the
final valuation on the exercisable date.
In 1999, the Company entered into an agreement with two consulting
companies to develop and execute a communication plan for the Company. In
connection with this agreement, the Company granted warrants to purchase 150,000
shares of common stock to the consultants, whereby each warrant entitles the
holder to purchase one share of the Company's common stock at strike prices
ranging from $3.00 to $18.00 per share. Except for those warrants with a strike
price of $3.00 per share which vested immediately (valued at $37,500, in
accordance with EITF 96-18), the warrants vest individually if and when the
closing price for the Company's common stock equals or exceeds its strike price
for a specified period of time. All unvested warrants expire 30 days after the
expiration of the one-year consulting agreement which may be terminated by
either party upon 30 days written notice for any reason whatsoever.
Compensation related to these warrants will be measured as any of the exercise
events become probable with the final valuation on the exercisable date.
16
<PAGE>
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (the "Purchase
Plan"), under which eligible employees may purchase a limited number of shares
of the Company's common stock at 85% of the lower of the subscription date fair
market value and the purchase date fair market value. There are two six-month
offerings per year. Under the Purchase Plan, the Company issued 56,245 shares
to employees in 1999. There is a balance of 133,934 shares reserved for future
purchases at December 31, 1999.
9. Net Loss Per Share
Basic and diluted loss per share is calculated using the average number of
common shares outstanding.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common $(41,480,663) $(24,971,911) $(23,026,294)
shareholders (A) ============ ============ ============
Weighted average common stock 15,551,526 15,409,848 11,634,032
outstanding (B) ------------ ------------ ------------
Loss per share:
Basic and diluted (A/B) $ (2.67) $ (1.62) $ (1.98)
============ ============ ============
</TABLE>
As of December 31, 1999, 1998 and 1997, options, warrants and convertible
preferred stock were not included in the calculation of net loss per share as
they are anti-dilutive.
10. Income Taxes
As of December 31, 1999, the Company had net operating tax loss
carryforwards of approximately $152 million and research and development credit
carryforwards of approximately $5.6 million. The carryforwards begin to expire
in the year 2007. Due to prior rounds of equity financing (see Note 4) and the
Company's initial public offering of common stock in March 1997, the Company has
incurred "ownership changes" pursuant to applicable regulations in effect under
the Internal Revenue Code of 1986, as amended. Accordingly, the Company's use
of losses incurred through the date of these ownership changes will be limited
to approximately $5.6 million per year during the carryforward period. To the
extent that any single-year loss is not utilized to the full amount of the
limitation, such unused loss is carried over to subsequent years until the
earlier of its utilization or the expiration of the relevant carryforward
period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. The Company's valuation
allowance increased $13,609,000, $9,905,000, and $8,772,000 during 1999, 1998
and 1997, respectively.
17
<PAGE>
Significant components of the Company's deferred tax liabilities and assets
as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 51,688,000 $ 39,646,000
Research and development tax credit carryforwards 5,555,000 4,248,000
Accruals on financial statements
in excess of tax returns 649,000 573,000
Charitable contributions carryforward 73,000 42,000
Depreciation in financial statements
in excess of tax 831,000 684,000
------------ ------------
Gross deferred tax assets 58,796,000 45,193,000
Less valuation allowance (58,746,000) (45,137,000)
------------ ------------
Gross deferred tax liability: 50,000 56,000
Accruals on tax returns in excess
of financial statements (50,000) (56,000)
------------ ------------
Net deferred tax $ - $ -
============ ============
</TABLE>
11. Significant Agreements
BioChem Therapeutic Inc.: On March 7, 1995, the Company and BioChem Therapeutic
- ------------------------
Inc. ("BioChem"), a wholly owned subsidiary of BioChem Pharma, Inc., signed
collaboration and supply agreements (the "BioChem Collaboration Agreement" and
the "BioChem Supply Agreement," respectively). The BioChem Collaboration
Agreement grants an exclusive license to enable BioChem to seek Canadian
regulatory approval for, and to use and sell, the Company's lisofylline and/or
Apra compounds (and compositions thereof) (collectively, the "cti Compounds")
in Canada. Under the BioChem Collaboration Agreement, the Company is entitled
to receive payments upon the satisfaction of specified product development
milestones and royalties on all sales, if any. The BioChem Collaboration
Agreement terminates upon the expiration of the last to expire patents covering
the cti Compounds or, absent a patent, upon the tenth anniversary of the first
commercial sale of such cti Compound. The Company recorded milestone payments
of $100,000, $250,000 and $100,000 under the BioChem Collaboration Agreement in
1998, 1996 and 1995, respectively. Under the BioChem Supply Agreement, the
Company is to supply BioChem the cti Compounds at a percentage mark-up above
cost. The BioChem Supply Agreement terminates 20 years from the date of
termination of the BioChem Collaboration Agreement with respect to each of the
cti Compounds.
Johnson & Johnson: In November 1996, the Company entered into a collaboration
- -----------------
and license agreement with Ortho Biotech Inc. and the R.W. Johnson
Pharmaceutical Research Institute (a division of Ortho Pharmaceutical
Corporation) each of which are wholly owned subsidiaries of Johnson & Johnson
(collectively, "Johnson & Johnson") for the joint development and
commercialization of LSF, to prevent or reduce the toxic side effects among
cancer patients receiving high-dose radiation and/or chemotherapy followed by
BMT. Upon execution of the collaboration agreement, Johnson & Johnson paid the
Company a $5.0 million license fee. In addition, Johnson & Johnson Development
Corporation ("JJDC"), a wholly owned subsidiary of Johnson & Johnson, purchased
14,925.373 shares of the Company's newly issued Series B convertible preferred
stock at $335 per share for an aggregate purchase price of $5.0 million. In
September 1997, Johnson & Johnson made a $1.0 million payment to the Company to
expand its participation in development of LSF to include the treatment of
patients with acute myeloid leukemia ("AML") undergoing high-dose chemotherapy.
Under the terms of the Collaboration Agreement, Johnson & Johnson funded $10.8
million of the Company's development costs for 1997. In July 1998, after
reviewing the results of the Company's Phase III clinical trial for LSF among
patients receiving BMT from related donors, in which the primary endpoints were
not met, Johnson & Johnson reached an agreement in principle with the Company to
revise the Collaboration Agreement. On November 16, 1998, the Company and
Johnson & Johnson formally amended the Collaboration Agreement. Under the terms
of the amended Collaboration Agreement, Johnson & Johnson agreed to pay the
Company $13.1 million for development cost reimbursements for BMT and AML for
the year ended December 31, 1998. After reviewing both the interim data from
the Company's pivotal Phase II/III trial for LSF in patients with acute lung
injury and acute respiratory distress syndrome and the results of the Company's
Phase III trial for LSF following induction chemotherapy for AML, Johnson &
Johnson may elect to
18
<PAGE>
resume responsibility for the development and commercialization of LSF subject
to certain additional payments upon resumption of its obligations. If Johnson &
Johnson does not elect to resume development activities, then the Company will
be free to license LSF to other third parties. In accordance with the amended
Collaboration Agreement, the Company is preparing the data from each of these
trials for Johnson and Johnson's review. The Company does not anticipate that
Johnson and Johnson will elect to resume responsibility for development and
commercialization of LSF. As of December 31, 1998, the Company had recorded
approximately $40.8 million in equity payments, license and milestone fees, and
development cost reimbursements with Johnson & Johnson.
On May 28, 1999, the Company announced it had received a recommendation
from a National Heart, Lung and Blood Institute ("NHLBI") appointed Data Safety
and Monitoring Board to discontinue enrollment in the Phase II/III trial of LSF
for ALI and ARDS. The decision was based on predetermined criteria, which
required a positive trend toward improvement in day 28 survival among the LSF
recipients for the trial to continue as a Phase III trial. On May 28, 1999, the
NHLBI discontinued enrollment in this trial in accordance with this
recommendation.
On October 11, 1999, the Company announced the results of its Phase III
trial for LSF in treating patients with AML. The Phase III trial studied LSF in
preventing serious infections among patients undergoing high dose induction
chemotherapy for AML. The preliminary endpoint of reduction in the incidence of
serious neutropenia-associated infections was not met. The Company announced
that it has completed enrollment in its LSF bone marrow transplant trial among
unrelated donors and will wind down all other LSF related expenditures and
maintain a cash neutral position with respect to further expenditures on this
compound.
Supply Agreement
ChiRex, Ltd.: In January 1997, the Company entered into a supply agreement with
- ------------
ChiRex, Ltd. ("ChiRex"), a British manufacturer of pharmaceutical intermediates
and active ingredients, for the manufacture and supply of LSF and corresponding
intermediate compounds. Under the terms of the agreement, ChiRex will
manufacture and supply LSF bulk drug product and a key intermediate compound in
sufficient quantities to meet the Company's requirements for ongoing and future
clinical trials and commercial requirements during launch and commercialization.
The agreement will expire on December 31, 2001, but may be terminated by the
Company upon 12 months' written notice prior to such date. In October 1998, the
Company entered into an additional agreement with ChiRex for additional
manufacturing services for pre-validation lots of LSF.
Other Agreements
Lipomed: In October 1995, the Company purchased all of the intellectual
- -------
property of Lipomed Corporation ("Lipomed") for $1,155,750 consisting of 98,574
shares of common stock. In accordance with this agreement, in 1999, upon
issuance of a patent, $100,000 was paid to Lipomed.
PG-TXL Company, L.P.: In 1998, the Company entered into an agreement with PG-
- --------------------
TXL Company, L.P. granting the Company an exclusive worldwide license for the
rights to polyglutamic acid paclitaxel ("PG-TXL"), a water soluble form of the
cancer drug, Taxol(R) and to all potential uses of PG-TXL Company, L.P.'s
polymer technology. Under the terms of the agreement, the Company acquired the
rights to fund the research, development, manufacture, marketing and sale of
anti-cancer drugs developed using this polymer technology. The Company will be
obligated to make milestone payments upon the attainment of significant
achievements, as defined in the agreement. The Company also granted warrants to
purchase 350,000 shares of the Company's common stock (see Note 8) to PG-TXL
Company, L.P. The Company is obligated to meet certain development requirements
by June 30, 2002 to maintain exclusive license rights.
The Company also entered into Signing Bonus and Restricted Stock and Share
Grant Agreements and Consulting Agreements with certain individuals affiliated
with PG-TXL Company, L.P. (the "PG-TXL Affiliates"). Under the terms of these
agreements, the Company has issued 51,835 restricted shares of common stock.
These shares vested in November 1999 upon the issuance of a patent, whereupon
the Company recorded an expense of $90,711 in accordance with EITF 96-18. The
Company also granted 103,665 restricted share rights to the PG-TXL Affiliates,
which also vest upon certain performance conditions. The Company will begin to
record compensation expense at the time the vesting of the share rights become
probable. The Company will pay approximately $300,000 in consulting fees to
the PG-TXL Affiliates over three years.
12. Subsequent Events
19
<PAGE>
Acquisition of PolaRx Biopharmaceuticals, Inc.: In January 2000, the Company
- ----------------------------------------------
completed the acquisition of PolaRx Biopharmaceuticals, Inc. (PolaRx), a
biopharmaceutical company that owns the rights to Arsenic Trioxide (ATO), an
anti-cancer compound for which the Company intends to file a New Drug
Application with the FDA. Under the terms of the Agreement and Plan of Merger
and Reorganization, dated January 7, 2000, (the Agreement), the Company assumed
PolaRx's liabilities and commitments which are estimated to be $5,000,000, of
which approximately $3,500,000 represents notes payable due between March and
November, 2000. In addition, PolaRx's shareholders received 2,000,000 shares of
the Company's common stock at signing and will earn 3,000,000 additional shares
upon the earlier of the approval of a New Drug Application by the FDA of
PolaRx's anti-cancer compound, Arsenic TriOxide (ATO), or five years from the
acquisition date. Two additional payments tied to annualized sales thresholds
of $10 million and $20 million are to be payable in tranches of $4 million and
$5 million, respectively, at the then fair market value of the Company's stock.
For annual sales in excess of $40 million, the Company will pay a 2% royalty on
net sales payable at the then fair market value of the Company's common stock or
in certain circumstances, cash.
The Agreement requires shareholder approval for the issuance of the
Company's common stock for all but the initial 2,000,000 shares of common stock
distributed at signing and 1,000,000 of the additional shares of common stock to
be earned upon the earlier of the approval of an NDA or five years from the
acquisition date. Shareholder approval is to occur on or before the earlier of
the Company's next Annual Meeting of shareholders and September 30, 2000. To the
extent that the Company's shareholders do not approve the issuance of such
common stock on or before the time such shares of common stock would otherwise
be required to be issued, then within 120 days of the relevant delivery date as
defined, the Company will pay to the PolaRx shareholders an amount of cash equal
to the fair market value of the Company's common stock at the time of such
delivery date.
Upon the closing of the Agreement, the Company incurred and subsequently
paid $750,000 to an advisor, pursuant to an advisory agreement with PolaRx,
dated June 30, 1998. The Chief Executive Officer and other certain employees of
the advisor owned shares of common stock of PolaRx which were exchanged for
shares of common stock of the Company. In addition, the advisor also acted as
placement agent for two private placements of the Company and in connection
therewith received placement agent fees and warrants to purchase shares of
common stock of the Company.
Sale of Common Stock: In February, 2000, the Company completed a $40,000,000
- --------------------
private placement of 3,333,335 shares of common stock at an offering price of
$12.00 per share, resulting in net proceeds of approximately $37,080,000. In
connection with the offering the Company issued 170,000 warrants to purchase
shares of common stock to a placement agent and finder. The warrants are
exercisable for a period of five years at a price equal to 110% of the price per
share of common stock sold in the offering. The shares of common stock issued
and issuable upon the exercise of the warrants have certain registration rights.
