UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1999
Commission file number: 0-23280
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3049219
(State of incorporation) (IRS Employer Identification No.)
1387 Marina Way South, Richmond, California 94804
(Address of principal executive offices)
(510) 215-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 Par Value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation SB contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-K. [ ]
Registrant's revenues for its most recent fiscal year were $99,544.
As of August 26, 1999, the Registrant had 7,563,575 shares of Common Stock,
$.001 par value, outstanding, and the aggregate market value of the shares held
by non-affiliates on that date was $5,537,011 based upon the bid price of the
Issuer's Common Stock reported on the Over the Counter Bulletin Board, an
electronic stock listing service provided by The Nasdaq Stock Market, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Item 9 and Items 10 through 12 of Part III incorporate by
reference information from the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on November 11, 1999.
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ITEM 1. BUSINESS
Statements in this Business section and other parts of this Annual Report
on Form 10-KSB that are not historical are forward-looking statements and are
subject to a number of risks and uncertainties which could cause actual results
to differ materially from those discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those set forth under "Risks Associated with Product Development," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Form 10-KSB.
OVERVIEW
Neurobiological Technologies, Inc. or NTI- ("NTI" or the "Company") is an
emerging drug development company focused on the clinical development and
regulatory approval of neuroscience drugs. NTI is developing neuroprotective and
neuromodulatory agents to treat progressive neurological impairments
characteristic of various nervous system disorders, including diabetic
neuropathy, brain cancer and AIDS dementia syndrome.
The Company's strategy is to in-license and develop early-stage drug
candidates that target major medical needs and that may be rapidly
commercialized. The Company's experienced management team oversees the human
clinical trials necessary to establish preliminary evidence of efficacy and
seeks partnerships with pharmaceutical and biotechnology companies to complete
development of and market its product candidates.
NTI currently has two product candidates in Phase II human clinical
testing. One of these, the orally-available compound Memantine, appears to
restore the function of impaired neurons by modulating the N-methyl-D-aspartate
("NMDA") receptor, integral to the membranes of such cells. Such restoration of
function inhibits injured or damaged neurons from firing abnormally, a
pathological process associated with many neurological conditions, including
dementia, Alzheimer's disease, neuropathic pain (persistent pain resulting from
abnormal signals to the brain) and AIDS dementia. Memantine may be an effective
and marketable treatment for such conditions due to its favorable side effect
profile and oral dosage formulation. There are currently no approved
neuroprotective treatments for any of the pathologies associated with abnormal
NMDA-receptor activity.
Memantine has been marketed by Merz + Co. GmbH & Co. of Frankfurt, Germany
("Merz") in Germany since 1989 with the labeling "dementia syndrome." In April
1998, NTI entered into a strategic research and marketing cooperation agreement
with Merz and a revenue sharing partnership with Children's Medical Center
Corporation of Boston, Massachusetts, to further the development and
commercialization of Memantine. Pursuant to this agreement, Children's Medical
Center Corporation terminated NTI's existing license for AIDS-related dementia
and neuropathic pain and granted exclusive rights to Merz. In exchange, NTI
received an up-front payment of $2.1 million from Merz. NTI and Children's
Medical Center Corporation will share in future revenue from sales of Memantine
by Merz or its marketing partners. NTI and Merz are currently assisting each
other to advance their respective clinical development programs by sharing their
scientific information and clinical trial data. They are also seeking a
marketing agreement for Memantine with a large pharmaceutical company.
The Company's Memantine clinical program is being supported in part through
loans from Merz. In January 1999, the Company received a loan of $200,000 from
Merz. Subsequent to fiscal 1999 year end, the Company entered into an agreement
with Merz pursuant to which the Company can borrow up to $1.5 million to support
the Phase IIB trial of Memantine for neuropathic pain. As of September 15, 1999,
the Company has borrowed $500,000 pursuant to this agreement. The principal and
interest of the Merz loans are convertible into common stock of the Company at
Merz' option.
In April 1999, the Company announced completion of a private placement
resulting in net proceeds in excess of $1.1 million to fund the Company's
continued operations and clinical programs. Subsequent to fiscal year end, the
Company has raised over $90,000 as of September 1, 1999 in an ongoing private
placement of common stock and warrants to purchase common stock.
In the second quarter of fiscal 1999, the Company initiated a 375-patient
Phase IIB human clinical to evaluate the ability of Memantine to relieve chronic
pain due to diabetic peripheral neuropathy or nerve
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damage, particularly nocturnal pain that frequently interferes with sleep.
Quintiles CNS Therapeutics, a leading contract research organization with
experience in neurology, is jointly managing the trial with the Company.
Subsequent to fiscal year end, the Company expanded and completed enrollment in
this trial at 421 patients. The Company expects to report results from this
trial by the end of calendar year 1999.
Merz is currently conducting a series of Phase III clinical trials of
Memantine for the treatment of moderate to severe dementia and Alzheimer's
disease. In March 1999, the Company announced positive results from one Phase
III human clinical trial of Memantine sponsored by Merz. In this Merz trial,
severely demented subjects treated with Memantine had statistically significant
improvement compared to placebo in internationally accepted measures of
functional independence, including bathing, dressing and self-care. The results
of this trial were published in the March 1999 issue of the peer-review
International Journal of Geriatric Psychiatry. Merz has completed patient
enrollment in two additional pivotal Phase III trials of Memantine for the
treatment of dementia in Europe. In addition, Merz is conducting a Phase III
trial in the United States.
Memantine is also currently being evaluated as a treatment for AIDS-related
dementia in a Phase II human clinical trial funded by the National Institutes of
Health ("NIH"). The trial is being conducted by AIDS Clinical Trials Group
("ACTG"), and is designed to evaluate Memantine's ability to reduce symptoms of
dementia and neuropathic pain in patients with AIDS. The ACTG has also
implemented a protocol permitting open-label dosing for up to 60 weeks following
the double blinded phase of the trial. This open-label phase will provide data
on the long-term safety of Memantine. NTI is supplying Memantine for the trial
and will have the right to use the resulting data for the commercial development
of Memantine for that indication.
The Company is also developing XERECEPT-, its synthetic preparation of the
natural human peptide Corticotropin-Releasing Factor ("CRF"), as a treatment for
brain swelling due to brain tumors (peritumoral brain edema). The Company is
currently analyzing data from a randomized, double-blind, positive-controlled
Phase II human clinical trial to evaluate the ability of XERECEPT to stabilize
or improve neurological symptoms resulting from brain swelling. Subsequent to
fiscal year end 1999, enrollment in this trial was closed at 30 patients (one
third of projected enrollment) in order to provide expedited but abbreviated
analysis of the data.
During fiscal 1999, the Company was awarded a Small Business Innovative
Research (SBIR) grant of approximately $100,000 from the NIH for clinical
development of XERECEPT for peritumoral brain edema. In April 1998, XERECEPT
received orphan drug designation for this indication. Orphan drug designation
provides NTI with seven years market exclusivity and makes the Company eligible
to receive Orphan Drug Grants to fund clinical research.
Previously the Company sought to out-license Dynorphin A, a human peptide
previously tested as an analgesic agent. During the fourth quarter of fiscal
1999, the Company abandoned its rights to Dynorphin A.
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PRODUCT CANDIDATES
<TABLE>
<CAPTION>
Product/Indication Development Status Primary Benefit Sought
- --------------------------- ------------------------------------ --------------------------------------
<S> <C> <C>
MEMANTINE
Diabetic Neuropathic Pain Phase IIA trial completed. Analgesia
Phase IIB trial initiated Analgesia
November 1998. Patient
enrollment completed
September 1999. Data expected
by end of calendar year 1999.
AIDS-related Dementia Phase II trial in progress. Improvement in neurological function
and Neuropathic Pain Enrollment expected to be and peripheral neuropathy
completed in second quarter of
fiscal 2000.
Moderate to Severe Phase III trial initiated in 1998. Improvement in functional and
Dementia and Alzheimer's Alzheimer's Disease* independence
Disease* and reduction in required level of
care
*Merz + Co. GmbH & Co. trial in the United States.
XERECEPT(TM) (CORTICOTROPIN-RELEASING FACTOR)
Peritumoral Brain Edema Multiple Phase I/II trials Improvement in neurological function
completed.
Phase II trial enrollment closed Stabilization or improvement of
at 30 patients. Data being neurological function
analyzed.
</TABLE>
SCIENTIFIC BACKGROUND
The Company's therapeutic focus is neuroprotection and neuromodulation: the
prevention and treatment of neurological impairment by preserving or restoring
neurological function of damaged neurons. The Company is developing
neuroprotective and neuromodulatory agents which may slow or reverse the
progressive neurological impairment associated with multiple nervous system
disorders, including diabetic neuropathy, brain cancer, and AIDS-dementia
complex.
Because neuronal injury contributes significantly to functional impairment
in many nervous system disorders, scientists believe that neuroprotective
compounds are potentially powerful and flexible therapeutic agents.
Neuroprotective compounds are currently being tested in human clinical trials
conducted by multiple third parties for their ability to slow or halt
progressive functional neurologic impairment.
Mechanisms common to progressive neuronal injury in various medical
conditions are thought to result in multiple neurologic symptoms such as chronic
pain, motor difficulties, memory loss and other cognitive deficits. By
modulating such mechanisms, neuroprotective agents may prevent or restore loss
of neurological function. The Company's current scientific focus is on two
mechanisms contributing to progressive neuronal injury: excitotoxicity and
edema. There is evidence that Memantine prevents or reduces excitotoxicity, a
cascade of neuronal cell injury and death associated with the release of
abnormal levels of excitatory neurotransmitters. XERECEPT has the potential to
prevent the progressive neuronal injury resulting directly from cerebral edema
(swelling of the brain), damage that more frequently results in clinical
impairment than the damage resulting from the presence of a tumor.
PRODUCTS IN DEVELOPMENT
Memantine
Memantine is an orally-available neuromodulatory agent that has been
marketed in Germany since 1989 with the labeling "dementia syndrome." It is one
of a class of agents referred to as NMDA-receptor
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antagonists. Scientific research has indicated that modulating the NMDA receptor
may protect against the neuronal injury and death associated with a number of
medical conditions. Accumulating evidence from various studies indicates that
overstimulation of NMDA receptors contributes to the injury and death of
neurons. This occurs in a variety of chronic neurodegenerative diseases
including neuropathic pain, dementia, Alzheimer's disease, and Huntington's
disease. There are currently no approved neuroprotective treatments for any of
the pathologies associated with NMDA-receptor overstimulation.
NTI is currently developing Memantine both as a treatment for neuropathic
pain as well as for neurological deficits associated with AIDS. Estimates are
that approximately 1,000,000 patients in the United States suffer from
intractable neuropathic pain. In addition, as many as one-third of AIDS patients
eventually develop neurological problems, such as loss of cognition and
coordination.
Nerve cells in the brain communicate by sending signals to excite or
inhibit each other. These signals are initiated by compounds known as
neurotransmitters. The principal excitatory neurotransmitter, glutamate, binds
to the NMDA receptor embedded in the cell membrane of the neuron. When glutamate
binds to the receptor, a channel in the neuron opens which enables charged
calcium molecules to flow freely into the neuron. Normally, the influx of
calcium triggers chemical reactions that cause the neuron to change its
electrical charge and fire a message to neighboring neurons. This basic function
of the NMDA receptor is essential for normal movement, sensation, memory, and
cognition. In certain medical conditions, glutamate levels surrounding neurons
are elevated, which results in overstimulation of the NMDA receptor. In these
situations, excessive amounts of calcium enter the neuron, causing it to swell
and burst, releasing internally stored glutamate into the surrounding area. This
glutamate further stimulates NMDA receptors on neighboring neurons, causing a
cascade of neuronal cell injury and/or death throughout the area, referred to as
excitotoxicity.
Neuroscientists have been developing ways to prevent the damaging influx of
excess calcium into neurons. One approach is to prevent glutamate from binding
to the receptor. This can be accomplished by using either a competitive
NMDA-receptor antagonist which prevents glutamate from binding to the receptor,
or a closed NMDA-receptor channel blocker, which binds to the entrance of the
closed channel. However, if such compounds prevent the channel from opening for
too long, they may impede the normal functioning of the NMDA receptor, causing
side effects including hallucinations, paranoia, delirium, and amnesia.
Scientists affiliated with Children's Hospital of Boston, Massachusetts
working on understanding the function of the NMDA receptor found Memantine to
modulate the NMDA receptor's calcium ion channel. Memantine binds
uncompetitively to the NMDA receptor and appears to interfere relatively little
with normal functioning, while reducing abnormal signals associated with
excessive calcium influx. Rather than blocking the NMDA receptor for long
periods of time, Memantine appears to restore regulation of the channel to near
normal activity, while permitting routine neurotransmission.
The profound psychotic side effects associated with other NMDA receptor
antagonists previously evaluated by third parties in human clinical trials have
very rarely been reported with Memantine. Merz has carefully documented
Memantine's history of safe clinical use in Germany over years of post-launch
clinical experience and active surveillance. In a post-marketing surveillance
study sponsored by Merz with 1,420 dementia outpatients treated for up to more
than one year, Memantine was rated as having very good to good tolerability in
93.8% of the cases at the end of the observation period.
Product Development Status
The Neuropathic Pain of Diabetes
Diabetes mellitus is a chronic disorder that affects an estimated 16
million Americans. One of its most common complications is nerve damage,
particularly damage to peripheral nerves that send sensory signals from the
extremities to the central nervous system ("CNS"). This condition, referred to
as peripheral diabetic neuropathy ("PDN"), is a large, unmet medical need. This
condition most frequently damages nerves in the feet, making walking or standing
painful and difficult. The Company estimates that approximately 800,000 patients
in the United States currently receive treatments for the symptoms of PDN,
including severe, chronic pain known as neuropathic pain (persistent pain in the
absence of an
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obvious stimulus). As the neuropathy progresses, the sensation of pain may
become more intense, encompass more areas, and become increasingly difficult to
treat with available therapeutic agents.
Peripheral nerve damage disrupts pain pathways in the nervous system,
causing nerves to send abnormal signals that the brain interprets as pain. In
effect, neurons in the CNS are bombarded with abnormal signals until their
ability to process pain signals is compromised. This leads to
hyper-sensitization of neurons to pain impulses and results in progressive
neuronal injury in the CNS. Although the precise mechanisms of these events are
not completely understood, there is evidence that overactivation of NMDA
receptors in the CNS plays an important role.
Memantine has been shown to inhibit abnormal pain signals by modulating the
NMDA receptor in several animal models of neuropathic pain. Based on the results
of these studies, the Company sponsored and completed a 122-patient
placebo-controlled Phase IIA human clinical trial of Memantine in patients with
neuropathic pain due to diabetes or post-herpetic neuralgia (a complication of
shingles). No treatment benefit was observed in patients with post-herpetic
neuralgia. Trends indicating efficacy of Memantine were observed in patients
with PDN, however. The strongest efficacy trend was the reduction of nocturnal
pain associated with PDN. Nocturnal pain is a major problem for these patients,
frequently leading to insomnia and other associated health and psychological
problems. After eight weeks of treatment in the Company's clinical trial,
subjects dosing with Memantine reported a mean nocturnal pain rating of 31.2
millimeters (on a visual analogue scale of 1-100 millimeters) compared to a mean
of 44.4 millimeters for those who received placebo. The difference between these
means indicates that the Memantine-treated subjects had 42% less nocturnal pain
than those treated with placebo. The results for the other primary variables of
daytime pain and pain relief, although not statistically significant, exhibited
consistent trends representative of analgesic benefit with Memantine compared to
placebo.
Based on the results from the Company's Phase IIA trial of Memantine in
patients with neuropathic pain, the Company initiated a Phase IIB trial of
Memantine in the second quarter of fiscal 1999, exclusively in patients with
PDN. This randomized, double-blind, placebo-controlled dose-ranging trial is
evaluating the ability of Memantine to relieve chronic pain due to nerve damage
in patients with PDN (particularly nocturnal pain). The trial protocol specifies
that Memantine subjects will receive a 10 mg daily dose, escalating by 10 mg at
weekly intervals to either 20 mg or 40 mg daily. Quintiles CNS Therapeutics, a
leading contract research organization with experience in neurology, is jointly
managing the trial with the Company. In September 1999, the Company completed
patient enrollment in this trial. Enrollment was closed at 421 patients. The
Company expects to report results from this trial by the end of calendar year
1999. Results will determine whether the Company will initiate a pivotal Phase
III trial for this indication in collaboration with a corporate partner.
AIDS: Dementia and Neuropathic Pain
Recent research indicates that infection of the CNS with HIV, the virus
associated with AIDS, also leads to neuronal damage. Such damage may result in
neurological complications, including loss of cognition, movement, and
sensation, referred to as AIDS dementia complex. Approximately one-half of
children and one-third of adults with AIDS are expected to develop these
symptoms. There are currently no therapies specifically directed towards
HIV-associated neuronal damage. Current AIDS therapies, even if effective at
reducing the circulating virus level, do not appear to be effective at
eliminating AIDS-induced damage to the CNS.
Besides the AIDS-related cognitive impairments, many AIDS patients
experience painful peripheral neuropathies due to overstimulation of NMDA
receptors. This often occurs in the later stages of AIDS and results in a
burning pain of the feet as well as pain from anything that touches the skin.
Walking in particular may become extremely difficult. Effective treatments are
still unavailable for this incapacitating condition and certain AIDS therapies
may aggravate this type of neuropathic pain.
Memantine has been shown to reduce NMDA receptor-mediated neuronal damage
in both in vitro (outside the body) experiments and in in vivo animal models.
Neuronal dysfunction due to HIV infection has been shown to be mitigated by
antagonists of the NMDA receptor, including Memantine.
In December 1996, the Company announced the initiation of a Phase II
clinical trial of Memantine as a treatment for AIDS-related dementia and
neuropathic pain. This study is funded by the NIH and is
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being conducted by the ACTG, a clinical trials consortium associated with the
Division of AIDS of the NIH. The trial protocol submitted under the Company's
Investigational New Drug ("IND") application calls for the enrollment of 140
AIDS patients with symptoms of dementia, all of whom will have been treated with
an FDA-approved anti-retroviral drug for at least six weeks prior to study
entry. The ACTG has also implemented a protocol permitting open-label dosing for
up to 60 weeks following the blinded phase of the trial. This open-label phase
will provide data on the long-term safety of Memantine. The Company is supplying
Memantine for the trial and will have the right to use the resulting data to
further the commercial development of Memantine for that indication. If positive
trial results are reported, the Company intends to discuss the additional
regulatory requirements for this indication including future clinical trials
with the Food and Drug Administration ("FDA").
Agreement with Merz and Additional Indications
In April 1998, the Company entered into a strategic research and marketing
cooperation agreement with Merz and a new revenue sharing partnership with
Children's Medical Center Corporation to further the clinical development and
commercialization of Memantine. Pursuant to this agreement, Children's Medical
Center Corporation terminated its existing license to NTI for AIDS-related
dementia and neuropathic pain and granted exclusive rights to Merz. NTI and Merz
will share scientific, clinical and regulatory information about Memantine,
particularly safety data, to facilitate regulatory review and marketing approval
by the FDA and foreign regulatory authorities.
Pursuant to the agreement with Merz, NTI will share in future revenues from
sales of Memantine for treatment of moderate to severe dementia and Alzheimer's
disease, indications which Merz is developing. Severe dementia is characterized
by progressive decline in motor and cognitive skills associated with multiple
central nervous system disorders, chiefly neurodegenerative conditions such as
Alzheimer's disease. According to the NIH, approximately 4 million people are
affected by Alzheimer's disease in the U.S. There are currently no approved
treatments indicating clinical benefits in patients with severe dementia.
Merz is currently conducting a series of advanced clinical trials for
moderate to severe dementia and Alzheimer's disease. Merz has completed a
positive pivotal Phase III trial of Memantine for dementia in Europe; has
completed patient enrollment in two additional European Phase III trials; and is
currently conducting a Phase III trial in the U.S. managed by Quintiles CNS
Therapeutics.
In the March 1999 issue of the peer-review International Journal of
Geriatric Psychiatry, positive results were reported from the first Phase III
human clinical trial of Memantine sponsored by Merz. In this double-blind
placebo-controlled trial, 166 elderly, care-dependent and severely demented
patients were randomized to receive a 10 mg oral dose of Memantine or placebo
for 12 weeks. All patients were diagnosed with primary dementia: 49% with
Alzheimer's disease and 51% with vascular or mixed-type dementia. Subjects'
motor performance and functional independence were assessed after 4 and 12 weeks
of treatment using two standard scales. The effect of Memantine, as evaluated on
both scales, resulted in statistically significant improvement compared to
placebo. Functional evaluations performed by physicians and nursing staff
included ability to move, wash, bathe and dress, as well as the ability to
recognize persons and participate in group activities. Memantine was well
tolerated and no significant side effects were reported.
XERECEPT(TM) (Human Corticotropin-Releasing Factor)
XERECEPT(TM) is the Company's synthetic preparation of the human peptide
Corticotropin-Releasing Factor which the Company is developing as a treatment
for brain swelling due to brain tumors (peritumoral brain edema). There is
clinical evidence that XERECEPT may be demonstrated to be a safer treatment than
synthetic corticosteroids, which are associated with serious adverse side
effects including muscle wasting, osteoporosis, hyperglycemia, vision problems,
and psychosis. Results from preclinical studies and pilot human clinical trials
previously sponsored by the Company have demonstrated the compound's potential
to reduce swelling of brain tissue and to be well-tolerated and apparently safe.
Thus, XERECEPT has the potential to significantly improve the quality of life
for brain cancer patients with dysfunction due to brain swelling.
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In the United States, approximately 30,000 patients are diagnosed every
year with brain tumors. Patients with this condition are in need of a safe
alternative to corticosteroids, which have serious adverse effects at the high,
chronic doses required for efficacy. The FDA has approved the Company's
application for orphan drug designation for XERECEPT to treat this unmet medical
need. Orphan drug designation provides NTI with seven years market exclusivity
and makes the Company eligible to receive federal monies for clinical research
under the Orphan Drug Grant Program. During fiscal 1999, the Company was awarded
a Small Business Innovative Research grant of approximately $100,000 from the
NIH for clinical development of XERECEPT for peritumoral brain edema.
CRF is a natural neuroendocrine peptide hormone found in humans both
centrally (within the brain) and peripherally (outside the brain). Researchers
discovered anti-edema affects of CRF through systemic administration. Research
by scientific collaborators of NTI has revealed that XERECEPT significantly
reduces edema or swelling of damaged tissue in animal models. Edema is a
condition characterized by swelling after tissue injury when fluid, plasma
proteins, and white blood cells flow from small blood vessels into the
surrounding tissues, further contributing to the destruction of these tissues.
Preclinical studies sponsored by the Company have shown that XERECEPT reduces
the flow of fluid through blood vessels at sites of traumatic tissue injury.
Specifically, these studies have shown that XERECEPT injected systemically into
animals can reduce brain edema after injury, brain edema associated with cancer
tumors, and swelling in muscle tissue following surgical trauma.
Product Development Status
Peritumoral Brain Edema
The Company has been initially evaluating XERECEPT for the treatment of
cerebral edema caused by brain tumors. In these patients, the tumor promotes
increased permeability of the small blood vessels in the brain resulting in the
excess flow of fluids into the brain, swelling of brain tissue, and a consequent
impairment of neurological function. Current treatment of peritumoral brain
edema, primarily corticosteroids, results in serious adverse side effects at the
high, chronic doses required for efficacy. Reactions can include muscle wasting,
immunosuppression, osteoporosis, hyperglycemia, glaucoma, and other potentially
dose-limiting side effects.
Although endogenous CRF is involved in stimulating the release of natural
corticosteroids, studies sponsored by the Company have shown that XERECEPT
exerts its anti-edema action independent of cortisol release when administered
systemically.
Based on the pharmacologic profile of XERECEPT, there is evidence that the
compound may be efficacious without the adverse side effects associated with
current therapies. XERECEPT has been safely administered to several hundred
healthy volunteers and patients according to numerous studies published by third
parties. In human clinical trials sponsored by the Company, XERECEPT was well
tolerated and appeared to be safe in more than 230 courses of treatment.
Results from pilot human clinical trials previously sponsored by the
Company demonstrated the potential of XERECEPT to reduce swelling of brain
tissue and to be well-tolerated and apparently safe. Based on these results, the
Company initiated a Phase II human clinical trial in 1997 to evaluate the
efficacy of XERECEPT to stabilize or improve neurological symptoms caused by
peritumoral brain edema. Patients enrolled in this randomized, double-blind,
positive-controlled trial must have neurological symptoms requiring stable
dosing of synthetic corticosteroids, the current standard treatment. The Company
is currently analyzing data from this trial. Subsequent to year end 1999,
enrollment in this trial was closed at 30 patients (one-third of projected
enrollment) in order to provide expedited but abbreviated analysis of the data.
PATENTS AND PROPRIETARY TECHNOLOGY
Memantine
In April 1998, in connection with the Company's agreement with Merz, the
Company's exclusive license from Children's Medical Center Corporation to a
series of patents and patent applications relating to certain non-ophthalmic
uses of Memantine was terminated.
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XERECEPT(TM)
The Company holds non-exclusive worldwide licenses to four issued U.S.
patents covering the composition of matter of XERECEPT and various analogues,
together with certain foreign patents and patent applications. The Company also
has exclusive rights to four issued patents and one patent application covering
uses of XERECEPT and analogues. The Company is responsible for the costs of
prosecuting the patent applications related to XERECEPT for which it has
exclusive rights. In addition to the patents and pending applications the
Company has licensed from others, the Company holds U.S. Patent No. 5,870,430
which covers certain liquid formulations of CRF and CRF-related peptides.
In addition to patent protection, the Company relies upon trade secret
protection for its confidential and proprietary information. It is the Company's
policy that each employee enter into a confidentiality agreement which contains
provisions generally prohibiting the disclosure of confidential information to
anyone outside the Company and requiring disclosure to the Company of ideas,
developments, discoveries or inventions conceived during employment and
assignment to the Company of proprietary rights to such matters related to the
business and technology of the Company. However, it is possible that these
agreements could be breached. In addition, others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology.
MANUFACTURING
Memantine currently is being supplied to NTI by its corporate collaborator,
Merz. NTI also contracts with external vendors to manufacture compounds for the
Company's other clinical trials. The manufacturers of clinical products have
represented to the Company that they are qualified to produce drugs under FDA
regulations and that they follow current Good Manufacturing Practice ("cGMP").
The Company performs audits on its contractors who supply XERECEPT from time to
time to assess compliance with the cGMP regulations. XERECEPT is manufactured by
established methods using chemical synthesis and are manufactured to NTI
specifications. Alternative cGMP suppliers of the bulk drugs and of finished
dosage form products are available to the Company. The Company currently has no
plans to build or develop an in-house manufacturing capability.
GOVERNMENT REGULATION
Regulatory review by governmental authorities in the United States and
other countries will be a significant factor in the approval and marketing of
any potential products that may be developed by the Company. The nature and the
extent of regulatory requirements applicable to the development and approval of
the Company's product candidates may be variable. All of the Company's products
will require regulatory approval prior to commercialization in any country. In
particular, human therapeutic products are subject to rigorous preclinical and
clinical testing and other FDA requirements in the United States and similar
health authorities in foreign countries. Various federal and, in some cases,
state statutes and regulations also govern or influence the manufacturing,
safety, labeling, storage, recordkeeping, clinical trials and marketing of such
products, including the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. The process of obtaining these
approvals and the subsequent compliance with appropriate federal, state and
foreign statutes and regulations require the expenditure of substantial
resources. The Company cannot yet accurately predict when it might be able to
first submit an application for approval of any products to the FDA or other
regulatory re-view agency.
In order to clinically test, produce and market products for therapeutic
use, a company must comply with mandatory procedures and safety standards
established by the FDA and comparable agencies in foreign countries. Before
beginning human clinical testing of an investigational new drug in the United
States, a company must file an IND and receive no objection from the FDA. This
application includes a summary of the preclinical studies which were carried out
to characterize the drug, including toxicity and safety, and an in-depth
discussion of the human clinical studies which are being proposed.
The human clinical testing program required for approval by the FDA of an
investigational new drug typically involves a time-consuming and costly
three-phase process. In Phase I, clinical trials are conducted with a small
number of patients or healthy volunteers to determine the early safety profile
and the
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pattern of drug distribution and metabolism. Phase II clinical trials are
conducted with groups of patients afflicted with a target disease in order to
determine preliminary efficacy, optimal dosage and expanded evidence of safety.
In Phase III, large-scale, multi-center, comparative clinical trials are
conducted with patients afflicted with the specific disease in order to provide
enough data to establish statistical and clinical verification of efficacy and
safety required by the FDA and non-U.S. regulatory agencies.
The FDA closely monitors the progress of each of the three phases of
clinical testing and may reevaluate, alter, suspend or terminate the testing
based on the data which have been accumulated to that point and its assessment
of the risk/benefit ratio to the patient. Estimates of the total time required
for carrying out clinical testing vary between two and ten years. The rate of
completion of the Company's clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of
many factors, including the size of the patient population, the nature of the
protocol, the proximity of patients to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment in clinical trials
may result in increased costs and delays, which could have a material adverse
effect on the Company.
Upon completion of clinical testing, a company typically submits a New Drug
Application ("NDA") to the FDA. This document includes the analyses of and
describes the results and observations of the clinical trials. The NDA also
provides detailed manufacturing and preclinical information. Based on its review
of the NDA, the FDA will decide whether or not to approve the drug for
marketing. This review process can be quite lengthy, and approval may be denied.
Thus, the process of seeking and obtaining approval for the marketing of a new
pharmaceutical product can require a number of years and substantial funding.
There can be no assurance that any approvals will be granted on a timely basis,
if at all. Among the requirements for product approval is the requirement that
each domestic manufacturer of the product conform to the FDA's cGMP regulations,
which must be followed at all times. Compliance with the cGMP regulations
requires that manufacturers continue to expend time, money and effort in the
area of production and quality control to ensure full technical compliance.
Once the sale of a product is approved, FDA regulations continue to govern
the manufacturing process and marketing activities. A post-marketing testing and
surveillance program may be required to continuously monitor a product's usage
and effects in patients. Product approvals may be suspended or withdrawn if
compliance with regulatory standards is not maintained. Other countries impose a
similar regulatory process on any products marketed by the Company in that
country. For marketing outside the United States, the Company also is subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country.
COMPETITION
Competition in the biopharmaceutical industry is intense and is expected to
increase. The development and sale of drugs for the treatment of the therapeutic
targets being pursued by the Company is highly competitive. There are therapies
under development for each of these therapeutic targets. There can be no
assurance that the Company will develop products that will be as efficacious or
as cost-effective as currently-marketed products. The Company has both exclusive
and non-exclusive licenses to patent rights covering certain uses of XERECEPT.
Consequently, others may develop, manufacture and market products that could
compete with those being developed by the Company.
The Company will be faced with intense competition from pharmaceutical,
chemical and biotechnology companies both in the United States and abroad in its
attempt to discover, develop and market competing drugs. Companies that complete
clinical trials, obtain required regulatory approvals and commence commercial
sales of their products before their competitors may achieve a significant
competitive advantage. In addition, significant levels of research in
biotechnology and medicine occur in universities and other nonprofit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results.
The Company believes that its ability to compete successfully will depend
on its ability to obtain funding, create and maintain scientifically advanced
technology, develop proprietary products, attract and
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retain scientific personnel, obtain patent or other protection for its products,
obtain required regulatory approvals and manufacture and successfully market
products either alone or through other parties. Most of the Company's
competitors have substantially greater financial, marketing and human resources
than those of the Company. Therefore, the Company expects to encounter
significant competition.
HUMAN RESOURCES
As of June 30, 1999, the Company had reduced its workforce to 11 people,
several of whom are employed part time, compared to 13 employees as of June 30,
1998. Three salaried managers left the Company, while one part-time manager and
one administrative employee were retained. The Company believes that this
reduction in the workforce has not impaired its ability to manage ongoing human
clinical trials.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT
The Company will require substantial additional funds to conduct the research
and development and preclinical and clinical testing of its potential products
and to market any products that may be developed.
Since 1987 when NTI was founded, the Company has applied a majority of its
resources to its research and development programs. As part of the strategic
planning process, the Company has limited expenditures to only two drug
candidates, Memantine and XERECEPT.
The Company will need to obtain additional financing to continue operations
beyond October 31, 1999. The Company intends to seek such funding through public
or private financings, collaborative or other arrangements with corporate
partners, or from other sources. There is a risk that the Company may not be
able to obtain the additional financing from any of these sources, or, if
financing is available, that it will be available on acceptable terms. In
addition, the Company may seek to raise additional funds whenever market
conditions permit. Raising additional funds through issuing equity securities
may result in significant dilution to the Company's existing stockholders.
Although Merz has agreed to lend the Company up to $1.5 million to support
its Phase IIB clinical trials of Memantine for neuropathic pain, the funds
received from Merz cannot be used to fund the Company's continuing operations or
for any other purpose. In addition, covenants and other terms of the Merz loan
agreement, including adjustment of the conversion price, could make it more
difficult for the Company to raise funds and cause additional dilution to the
Company's existing stockholders. The terms of the Merz loan agreement also
require that future license fees, royalties and other consideration received by
the Company from the licensing of its products and technologies be used to repay
the loan, which will have an adverse effect on the ability of the Company to
fund its continuing operations.
If the Company is not able to raise adequate funds, it may be required to
delay, scale back, or terminate its clinical trials, or to obtain funds through
entering into arrangements with collaborative partners or others. Such
arrangements may require the Company to give up additional rights to its
technology, product candidates or products.
The Company's future capital requirements will depend on a number of
factors, including:
* obtaining the remainder of the funds from Merz;
* the amount of royalties received from Merz for future sales of
Memantine;
* the progress of the Company's clinical development programs;
* the time and cost involved in obtaining regulatory approvals;
* the cost of filing, prosecuting, defending, and enforcing patent
claims and other intellectual property rights;
* competing technological and market developments;
* the ability of the Company to establish collaborative relationships;
* the development of commercialization activities and arrangements; and
* the purchase of additional capital equipment.
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The Company's continuing losses raise a going concern issue in the auditor's
report.
The report of the Company's independent auditors with respect to the
Company's financial statements included in this Form 10-KSB includes a paragraph
indicating that, as more fully described in the financial statements, the
Company's recurring losses during the development stage and a working capital
deficit and net capital deficiency at June 30, 1999 raise substantial doubt
about the Company's ability to continue as a going concern.
Because all of the Company's potential products are in clinical development,
there can be no assurance that the Company will be able to develop a candidate
product that will receive required regulatory approvals or be successfully
commercialized.
NTI is still in a development stage and currently has no marketed products.
As a result, NTI has no revenues from product sales, and most of the Company's
resources are dedicated to the development of selected candidate pharmaceutical
products.
The Company is currently evaluating two potential products in Phase II
clinical trials. The results of the Company's preclinical studies and early
stage clinical trials are not necessarily indicative of those that will be
obtained upon further human clinical testing later stage clinical trials.
Although a trial of Memantine completed in January 1998 indicated potential
effectiveness in treating PDN, a larger clinical trial is currently underway.
This clinical trial may not be successful in confirming Memantine's efficacy for
this indication.
The Company's potential products are subject to the risks of failure
inherent in the development of products based on new technologies. These risks
include the possibility that the potential products may:
* be found to be unsafe, ineffective or toxic;
* fail to receive necessary regulatory clearances; and
* if approved, be difficult to manufacture on a large scale or
uneconomical to market;
* be precluded from marketing by the Company due to the proprietary
rights of third parties; and
* not be successful because third parties market or may market superior
or equivalent products.
The Company's development activities may not result in any commercially
viable products. The Company does not expect to be able to commercialize any
products for a number of years, if at all.
The Company has only limited internal resources and thus the Company has relied
and will continue to rely heavily on others for research, development,
manufacture and commercialization of its potential products.
With respect to Memantine, the Company is dependent on Merz for:
* the funding of its Phase IIB clinical trials;
* the manufacturing and supply of drug for these and any future human
clinical trials; and
* the successful commercialization of the product to treat neuropathic
pain and AIDS-related dementia.
The only revenues that the Company will receive in the future for Memantine
are royalties received on product sales by Merz or its marketing partner or
partners. Any failure by Merz or its partners to successfully commercialize
Memantine after its development will have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has also entered into various contractual arrangements (many of
which are non-exclusive) with consultants, academic collaborators, licensors,
licensees and others, and it is dependent upon the level of commitment and
subsequent success of these outside parties in performing their
responsibilities. Certain of these agreements place significant responsibility
for preclinical testing and human clinical trials and for preparing and
submitting submissions for regulatory approval for potential products on the
collaborator, licensor or contractor. If the collaborator, licensor or
contractor fails to perform, the Company's business may be adversely affected.
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The Company has also relied on scientific, technical, clinical, commercial
and other data supplied and disclosed by others in entering into these
agreements. The Company has relied on this data in support of applications to
enter human clinical trials for its potential products. Although the Company has
no reason to believe that this information contains errors or omissions of fact,
it is possible that there are errors or omissions of fact that would change
materially the Company's view of the future likelihood of FDA approval or
commercial viability of these potential products.
A number of the Company's agreements and licenses with third parties
require the Company to pay royalties and make other payments to such parties.
Failure by the Company to make such payments could cause the Company to lose
rights to technology or data under these agreements.
The FDA and state and local agencies, and comparable agencies and entities in
foreign countries impose substantial requirements on the manufacturing and
marketing of human therapeutics through lengthy and detailed laboratory and
clinical testing procedures, sampling activities and other costly and time
consuming procedures.
Fulfillment of regulatory requirements for marketing human therapeutics
typically takes many years and varies substantially based on the type,
complexity, and novelty of the drug for which approval is sought. Government
regulation may:
* delay for a considerable period of time or prevent marketing of any
product that the Company may develop; and/or
* impose costly procedures upon the Company's activities.
Either of these effects of government regulation may provide an advantage
to the Company's competitors.
There can be no assurance that FDA or other regulatory approval for any
products developed by the Company will be granted on a timely basis or at all.
Any delay in obtaining, or failure to obtain, required approvals would adversely
affect the marketing of the Company's proposed products and its ability to earn
product revenues or royalties.
In addition, success in preclinical or early stage clinical trials does not
assure success in later stage clinical trials. As with any regulated product,
additional government regulations may be instituted which could delay regulatory
approval of the Company's potential products. Additional government regulations
that might result from future legislation or administrative action cannot be
predicted.
The Company's success will depend, in large part, on its ability to obtain or
license patents, protect trade secrets and operate without infringing upon the
proprietary rights of others.
The patent position of biotechnology firms generally is highly uncertain
because:
* patents involve complex legal and factual issues that have recently
been the subject of much litigation;
* no consistent policy has emerged from the United States Patent and
Trademark Office regarding the breadth of claims allowed or the degree
of protection afforded under biotechnology patents; and
* others may independently develop similar products, duplicate any of
the Company's potential products, or design around the claims of any
potential patented products of the Company.
In addition, because of the time delay in patent approval and the secrecy
afforded United States patent applications, the Company does not know if other
applications, that might have priority over the Company's applications, have
been filed.
As a result of all of these factors, there can be no assurance that patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that patents, if issued, will provide
protection against competitors who successfully challenge the Company's patents,
obtain patents that may have an adverse effect on the Company's ability to
conduct business, or be able to circumvent the Company's patent position.
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A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's or any of its licensors' technologies or patent applications. Such
conflict could limit the scope of the patents, if any, that the Company may be
able to obtain or to which it has a license or result in the denial of the
Company's patent applications or the patent applications which the Company has
licenses. In addition, if patents that cover the Company's activities have been
or are issued to other companies, there can be no assurance that the Company
would be able to obtain licenses to these patents, or at a reasonable cost, or
be able to develop alternative technology.
The Company's potential products will need to be manufactured under the current
Good Manufacturing Practices requirements prescribed by the FDA and the Company
does not have its own manufacturing facilities.
The Company has established arrangements with its corporate collaborator,
Merz, and with contract manufacturers to supply potential products for
preclinical and clinical trials. The Company intends to establish similar
arrangements for the manufacture, packaging, labeling and distribution of its
products if they are approved for marketing.
The Company faces certain risks by outsourcing manufacturing, including:
* the delay of the Company's preclinical and human clinical testing if
the Company's contractors are unable to supply sufficient quantities
of product candidates manufactured in accordance with cGMP on
acceptable terms;
* the delay of market introduction and subsequent sales of such products
if the Company should encounter difficulties in establishing
relationships with manufacturers to produce, package and distribute
its products;
* adverse effects on the FDA pre-market approval of the products if the
Company's collaborators and contract manufacturers do not adhere to
cGMP regulations enforced by the FDA through its facilities inspection
program and if these facilities cannot pass a pre-approval plant
inspection.
Therefore, the Company's dependence on third parties for the manufacture of
products may adversely affect the Company's results of operations and its
ability to develop and deliver products on a timely and competitive basis.
Clinical trials or marketing of any of the Company's potential products may
expose the Company to liability claims from the use of such products which the
Company's insurance may not cover.
The Company has a limited amount of product liability insurance to cover
liabilities arising from clinical trials. It is possible that the Company's
current insurance may not be adequate to cover any liabilities arising from the
Company's clinical trials.
The Company's current product liability insurance does not cover commercial
sales of products. The Company can not be sure that it will be able to obtain
product liability insurance covering commercial sales or, if such insurance is
obtained, that sufficient coverage can be acquired at a reasonable cost. An
inability to obtain insurance at acceptable cost or otherwise protect against
potential product liability claims could prevent or inhibit commercialization of
any products developed by the Company.
Further reductions in the Company's staff might significantly delay the
achievement of planned development objectives.
Each person currently employed by the Company serves an essential function.
During fiscal year 1998, the Company reduced its workforce from 22 to 13 persons
and, during fiscal year 1999, the Company further reduced its workforce from 13
to 11 persons. Three salaried managers left the Company, while one part-time
manager and one administrative employee were retained. The Company believes that
this reduction in the workforce has not impaired its ability to manage ongoing
human clinical trials. Further reductions may be required because of the
financial situation confronted by the Company. Any further reduction in force
could impair the Company's ability to manage ongoing human clinical trials and
have a material adverse effect on the Company's operations.
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The market price of the shares of the Company's common stock, like that of the
common stock of many other biopharmaceutical companies, has been and is likely
to continue to be, highly volatile.
The average daily trading volume of the Company's common stock during
fiscal 1999 has been low compared to that of other biopharmaceutical companies.
The Company's common stock was delisted from The Nasdaq Stock Market in February
1998 because the Company failed to meet the financial conditions necessary to
remain listed. The delisting has adversely affected, and is expected to continue
to adversely affect, the trading volume and price volatility of the Company's
stock. The Company's common stock is now quoted on the OTC-Bulletin Board- under
the symbol NTII.
Other factors causing volatility in the Company's stock price include:
* the results of preclinical studies and clinical trials by the Company
or its competitors;
* other evidence of the safety or efficacy of products of the Company or
its competitors,
* announcements of technological innovations or new therapeutic products
by the Company or its competitors;
* developments in patent or other proprietary rights of the Company or
its competitors including litigation;
* fluctuations in the Company's operating results;
* government regulation, health care legislation; and
* market conditions for life sciences' stocks in general.
ITEM 2. PROPERTIES
The Company's executive offices are located in Richmond, California. The
Company entered into a sublease dated March 31, 1999 that decreased its occupied
space from approximately 6,900 square feet to 5,750 square feet. The master
lease, which commenced in April 1995, will expire in April 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1999.
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PART II.
ITEM 5. MARKET PRICE OF NTI COMMON STOCK; DIVIDENDS
Since February 1998, the Company's common stock has been quoted on the
Over-the-Counter ("OTC") Bulletin Board-, an electronic stock listing service
provided by The Nasdaq Stock Market, Inc., under the symbol NTII.
As of June 30, 1999 there were approximately 235 holders of record of the
Company's common stock and 7,563,575 shares of common stock outstanding. No
dividends have been paid on the common stock since the Company's inception, and
the Company does not anticipate paying any dividends in the foreseeable future.
The price range of the Company's common stock during the past two fiscal
years is shown below. Except as otherwise noted, high and low prices given here
refer to the high and low bid quoted on the OTC Bulletin Board-. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Fiscal 1998 High Low
----------- ---- ---
First Quarter* ............. $3.63 $1.56
Second Quarter* ............ $3.56 $0.44
Third Quarter .............. $1.28 $0.47
Fourth Quarter ............. $1.50 $0.69
Fiscal 1999 High Low
----------- ---- ---
First Quarter .............. $1.06 $0.38
Second Quarter ............. $0.69 $0.41
Third Quarter............... $0.66 $0.47
Fourth Quarter.............. $1.44 $0.50
- ------------
* Prices shown during these quarters reflect the high and low closing price of
the Company's Common Stock on the Nasdaq SmallCap Market.
Recent Sales of Unregistered Securities
In August 1999, the Company entered into a convertible loan agreement with
Merz pursuant to which the Company can borrow up to $1,500,000. As of September
15, 1999, the Company has borrowed $500,000 under this agreement. At its option,
Merz may convert any amounts borrowed under the loan agreement, plus interest
into common stock of NTI. If Merz converted all outstanding principal and
interest under the loan, NTI would be obligated to issue Merz approximately
482,540 shares of common stock. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") to exempt the sale
from registration under the Securities Act.
In April 1999, NTI raised $1,166,000 through the sale of 466,400 units of
the Company's securities in a private placement. The purchase price was $2.50
per unit. Each unit consisted of 5 shares of Series A preferred stock and one
warrant to purchase 2 shares of common stock at an exercise price of $1.00 per
share (exercisable for 5 years). The Series A preferred stock is convertible
into common stock on a one-for-one basis, subject to antidilution adjustment,
votes together with the common stock on an as-converted basis and has
preferences with respect to dividends and liquidation. The Company sold the
units to 31 accredited investors and relied on Rule 506 of Regulation D to
exempt the sale from registration under the Securities Act.
In January 1999, the Company entered into a $200,000 convertible loan
agreement with Merz. At its option, Merz may convert outstanding principal and
interest into shares of NTI common stock at a price of $1.20 per share. As of
June 30, 1999, if Merz exercises this option to convert, NTI would be obligated
to issue Merz approximately 173,333 shares of common stock. The Company relied
on Section 4(2) of the Securities Act to exempt the sale from registration under
the Securities Act.
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In March 1998, NTI raised $555,725 through the sale of 1,010,410 units of
the Company's securities in a private placement. The purchase price was $0.55
per unit. Each unit consisted of one share of the Company's common stock, one
Class A warrant to purchase common stock at an exercise price of $0.75 per share
(exercisable for 18 months) and one Class B warrant to purchase common stock at
an exercisable price of $1.50 per share (exercisable for 3 years). The Company
sold the units to 16 accredited investors and relied on Rule 506 of Regulation D
to exempt the sale from registration under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
NTI is an emerging drug development company focused on the clinical
development and regulatory approval of neuroscience drugs. NTI is developing
neuroprotective and neuromodulatory agents to treat progressive neurological
impairments characteristic of various nervous system disorders, including
diabetic neuropathy, brain cancer and AIDS dementia syndrome. The Company's
strategy is to in-license and develop early-stage drug candidates that target
major medical needs and that may be rapidly commercialized.
NTI currently has two product candidates in Phase II human clinical
testing. One of these, the orally-dosed compound Memantine, appears to restore
the function of impaired neurons by modulating the NMDA receptor, integral to
the membranes of such cells. In the second quarter of fiscal 1999, the Company
initiated a 375-patient placebo-controlled Phase IIB human clinical to evaluate
the ability of Memantine to relieve chronic pain due to diabetic peripheral
neuropathy or nerve damage, particularly nocturnal pain that frequently
interferes with sleep. Additionally, in March 1999, the Company announced
positive results of a Phase III human clinical trial of Memantine for dementia
sponsored by Merz. In this trial, severely demented subjects treated with
Memantine had statistically significant improvement compared to placebo in
internationally accepted measures of functional independence, including bathing,
dressing and self-care. The ability of Memantine to reduce symptoms of dementia
and neuropathic pain in AIDS patients is currently being evaluated in a Phase II
human clinical trial sponsored by the AIDS Clinical Trials Group of the NIH. NTI
is supplying Memantine for the trial and will have the right to use the
resulting data for the commercial development of Memantine for that indication.
In January 1999, the Company received a loan of $200,000 from Merz. The
loan, which bears interest at a rate of 8% per year, will be repaid upon Merz
signing an agreement with a third party regarding the development and marketing
of Memantine. If no such agreement is completed, the loan is due and payable on
December 31, 2000. In lieu of NTI's repayment of the principal and interest on
the loan, Merz has the right to exercise an option at its own discretion to
receive shares of NTI common stock at the stock price of $1.20 per share. As of
June 30, 1999, if Merz exercises this option, NTI would be obligated to issue
Merz 173,333 shares of common stock.
Subsequent to fiscal 1999 year end, the Company entered into an agreement
with Merz pursuant to which the Company can borrow up to $1.5 million to support
the Phase IIB trial of Memantine for neuropathic pain. As of September 15, 1999,
the Company had borrowed $500,000 pursuant to this agreement.
In April 1999, the Company announced completion of a private financing
resulting in net proceeds in excess of $1.1 million to fund the Company's
continued operations and clinical programs. Subsequent to fiscal year end, the
Company has raised over $90,000 as of September 1, 1999 in an ongoing private
placement of common stock and warrants to purchase common stock.
NTI is also developing a second product, XERECEPT, a synthetic preparation
of the natural human peptide CRF. The Company is currently analyzing data from a
randomized, double-blind, positive-controlled Phase II human clinical trial of
XERECEPT for peritumoral brain edema ("PBE"). During fiscal 1999, the Company
was awarded a SBIR grant of approximately $100,000 from the NIH for clinical
development of XERECEPT for PBE.
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Significant additional preclinical testing and clinical testing will be
required prior to submission of any regulatory application for the commercial
use of the Company's products. There can be no assurance that the Company will
have the financial resources necessary to conduct future clinical trials or that
such trials, if conducted, will demonstrate an adequate level of safety or
efficacy for commercialization of these products.
Since 1987 when NTI was founded, the Company has applied a majority of its
resources to its research and development programs. The Company is a development
stage company, has not received any revenue from the sale of products, and does
not anticipate receiving any revenue from the sales of products in the near
future. The Company has incurred losses since its inception and expects to incur
substantial, increasing losses due to ongoing and planned research and
development efforts. As part of the strategic planning process, the Company has
limited expenditures to only two drug candidates. The Company will need to
obtain additional financing to continue operations.
RESULTS OF OPERATIONS
The Company's research and development expenses increased to $2,780,000 in
fiscal 1999 from $2,026,000 in fiscal 1998. The increase in fiscal 1999 was
primarily due to the initiation of a Phase IIB human clinical trial to evaluate
Memantine as a treatment for peripheral diabetic neuropathy.
Research and development expenses decreased from $5,478,000 in fiscal 1997
to $2,026,000 in fiscal 1998. This decrease in fiscal 1998 was primarily due to
the Company's narrowing its clinical focus to the development of its two product
candidates in clinical trials.
General and administrative expenses decreased to $1,058,000 in fiscal 1999
from $2,347,000 in fiscal 1998. The decrease in fiscal 1999 was primarily due to
lower salaries, facility costs and professional fees.
General and administrative expenses increased slightly from $2,298,000 in
fiscal 1997 to $2,347,000 in fiscal 1998. The increase was primarily due to
expenditures relating to seeking financing and corporate partnerships in fiscal
1998.
In fiscal 1999 the Company's revenues of $99,544 were due to a Small
Business Innovative Research grant awarded from the NIH.
In fiscal 1998, the Company received $2,100,000 due to a one-time payment
from Merz pursuant to a strategic research and marketing cooperation agreement
between NTI and Merz.
Interest income decreased from $407,000 in fiscal 1997 to $99,000 in fiscal
1998 and to $47,000 in fiscal 1999, primarily due to changes in average cash
balances.
The Company expects to incur substantial costs in fiscal 2000 primarily for
Phase II clinical trials for its development programs and related administrative
support. The Company expects that its expenditures will continue to increase as
its products move through Phase II and, if the Phase II trials are successful,
Phase III clinical trials.
LIQUIDITY AND CAPITAL RESOURCES
Since 1987 when NTI was founded, the Company has applied a majority of its
resources to its research and development programs. The Company is a development
stage company and has not received any revenue from the sale of products. The
Company has incurred losses since its inception and expects to incur
substantial, increasing losses due to ongoing and planned research and
development efforts.
The Company's available cash and cash equivalents as of June 30, 1999 were
$201,000. In the course of its development activities, the Company has incurred
significant losses and expects additional losses in the year ending June 30,
2000. At June 30, 1999, the Company has a working capital deficit and a net
capital deficiency. In order to continue operations through the year ending June
30, 2000 and beyond, additional financing will be required. The Company believes
that its available cash and cash equivalents as of June 30, 1999 combined with
funds from the Merz loan agreement and a private placement, subsequent to fiscal
year end, are adequate to fund its operations through October 31, 1999. NTI will
need to raise substantial additional capital to fund subsequent operations. The
Company intends to seek such funding through public or private financings,
collaborative or other arrangements with corporate partners,
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or from other sources. The Company may seek to raise additional funds whenever
market conditions permit. However, there can be no assurance that funding will
be available from any of these sources, or, if available, that it will be
available on acceptable terms. If the Company is not able to raise adequate
funds, it may be required to delay, scale back, or terminate its clinical trials
or to obtain funds through entering into arrangements with collaborative
partners or others that may require the Company to give up additional rights to
its technology, product candidates or products. The accompanying financial
statements have been prepared assuming the Company will continue as a going
concern, and do not include any adjustments that might result from the outcome
of this uncertainty.
Further, the Company will require substantial additional funds to conduct
clinical testing of its potential products. The Company's future capital
requirements will depend on a number of factors, including: the amount of
royalties received from Merz for future sales of Memantine; the progress of the
Company's clinical development programs; the time and cost involved in obtaining
regulatory approvals; the cost of filing, prosecuting, defending, and enforcing
patent claims and other intellectual property rights; competing technological
and market developments; the ability of the Company to establish collaborative
relationships; the development of commercialization activities and arrangements;
and the purchase of additional capital equipment.
From inception through June 30, 1999, the Company has raised a total of
$31.2 million in net proceeds from the sale of common and preferred stock.
Subsequent to the fiscal year end, the Company has raised over $90,000 as of
September 1, 1999 in an ongoing private placement of common stock and warrants
to purchase common stock. In addition, subsequent to fiscal year end, the
Company entered into a loan agreement with Merz pursuant to which the Company
can borrow up to $1.5 million to support its Phase IIB clinical trials of
Memantine for neuropathic pain.
IMPACT OF YEAR 2000 ISSUE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
century dates prior to January 1, 2000 from dates on and after January 1, 2000
("Y2K"). These date code fields will need to distinguish dates prior to January
1, 2000 from dates on and after January 1, 2000 ("Year 2000 Compliance") and, as
a result, many companies' software and computer systems may need to be upgraded
or replaced in order to reach Year 2000 Compliance.
The Company's internal business systems and workstation applications will
be a primary area of focus. The Company replaced such computers prior to 1999
with Y2K compliant units. The Company utilizes only commercially produced
software applications and these have been upgraded to versions that the vendors
advertise to be Y2K compliant. The Company has contacted selected NTI vendors
and is in the process of speaking to additional vendors with regards to their
Y2K status. Based upon vendors' representations to date, the Company understands
that they will be able to supply NTI with its needs in the year 2000.
Certain single function systems at NTI have not been upgraded as yet. These
upgrades will be performed by the Company's internal staff and outside
specialized vendors and contractors as needed. The Company believes that NTI
will be Y2K compliant by December 1999. The cost of effecting the remaining Y2K
upgrades is estimated to be less than $5,000.
The worst-case scenario for Y2K problems for NTI would be to cease using
the affected systems for an indefinite period of time while the Company attempts
to correct the problems. In the event that Y2K issues are not resolved in a
timely manner, the Company will implement alternative methods to carry out these
tasks and services until the affected systems are upgraded. However, this would
not be expected to have a material effect on NTI's operations, liquidity and
financial condition.
NTI has made forward-looking statements regarding its Y2K compliance. These
statements include the expected completion schedule for system upgrades, and the
costs to the company of such upgrades. There are many factors that could cause
actual events or results to differ materially from those stated in the
forward-looking statements. These factors include difficulties in identifying or
upgrading software or hardware systems that are not currently Y2K compliant and
in coordinating these efforts through NTI's internal staff and specialized
contractors. The Company expects to be able to complete these upgrades
18
<PAGE>
before any Y2K problem could arise. Unanticipated problems such as material
costs caused by undetected errors or defects in the technology used in the
Company's internal systems could delay the Company's completion of the upgrades.
ITEM 7. FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Neurobiological Technologies, Inc.
We have audited the accompanying balance sheets of Neurobiological
Technologies, Inc. (a development stage company) as of June 30, 1999, and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended June 30, 1999, and
for the period from August 27, 1987 (inception) through June 30, 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 generally accepted auditing
standards. 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 financial position of Neurobiological
Technologies, Inc. at June 30, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
1999, and for the period from August 27, 1987 (inception) through June 30, 1999,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
Neurobiological Technologies, Inc. will continue as a going concern. As more
fully described in Note 1 to the financial statements, the Company has
experienced recurring losses during the development stage and at June 30, 1999
has a working capital deficit and a net capital deficiency. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Francisco, California
August 6, 1999
19
<PAGE>
<TABLE>
Neurobiological Technologies, Inc. (A development stage company)
BALANCE SHEETS
<CAPTION>
June 30,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 201,202 $ 2,020,886
Prepaid expenses and other current assets ........................ 43,833 59,016
------------- -------------
Total current assets .......................................... 245,035 2,079,902
Property and equipment, net .................................... 3,796 53,447
------------- -------------
$ 248,831 $ 2,133,349
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................ $ 447,124 $ 44,998
Accrued expenses ................................................ 487,715 452,580
Note payable to shareholder .................................... 200,000 --
------------- -------------
Total current liabilities .................................... 1,134,839 497,578
Commitments:
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value, 5,000,000 shares
authorized, 2,332,000 issued and outstanding at June 30, 1999 ... 1,166,000 --
Common stock, $.001 par value, 25,000,000 shares authorized,
7,563,575 outstanding at June 30, 1999 and 7,553,699 at June
30, 1998 ...................................................... 29,985,352 29,980,898
Deficit accumulated during development stage ..................... (32,037,360) (28,345,127)
------------- -------------
Total stockholders' equity (deficit) .............................. (886,008) 1,635,771
------------- -------------
$ 248,831 $ 2,133,349
============= =============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-1
<PAGE>
<TABLE>
Neurobiological Technologies, Inc. (A development stage company)
STATEMENTS OF OPERATIONS
<CAPTION>
Period from
Year ended June 30, August 27, 1987
----------------------------------------------------- (inception) through
1999 1998 1997 June 30, 1999
--------------- ----------------- --------------- ---------------------
<S> <C> <C> <C> <C>
REVENUES
License ........................... $ -- $ 2,100,000 $ -- $ 2,100,000
Grant ........................... 99,544 -- -- 149,444
------------- ------------- ------------- --------------
Total revenue .................. 99,544 2,100,000 -- 2,249,444
EXPENSES
Research and development ......... 2,780,305 2,025,646 5,477,504 25,068,686
General and administrative ...... 1,058,421 2,346,893 2,298,391 11,396,572
------------- ------------- ------------- --------------
Total expenses .................. 3,838,726 4,372,539 7,775,895 36,465,258
------------- ------------- ------------- --------------
Operating loss ..................... (3,739,182) (2,272,539) (7,775,895) (34,215,814)
Interest income .................. 46,949 99,335 407,307 2,178,454
------------- ------------- ------------- --------------
NET LOSS ........................... $ (3,692,233) $ (2,173,204) $ (7,368,588) $ (32,037,360)
============= ============= ============= ==============
BASIC AND DILUTED NET LOSS
PER SHARE ........................ $ (0.49) $ (0.32) $ (1.13)
============= ============= =============
Shares used in basic and diluted net
loss per share calculation ...... 7,554,522 6,862,186 6,527,392
============= ============= =============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-2
<PAGE>
<TABLE>
Neurobiological Technologies, Inc. (A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Deficit Total
Preferred -------------------------- Accumulated in Stockholders'
Stock Shares Amount Development Stage Equity (Deficit)
--------------- ----------- -------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Period from August 27, 1987
(inception) through June 30, 1996 ......
Issuance of common stock ............... $ -- 740,863 $ 1,616,706 $ -- $ 1,616,706
Issuance of common stock for services -- 72,428 84,500 -- 84,500
Issuance of common stock for license
rights ................................. -- 10,820 12,625 -- 12,625
Issuance of warrants to purchase
179,786 shares of common stock ......... -- -- 2,790 -- 2,790
Exercise of warrants .................. -- 142,500 70,252 -- 70,252
Exercise of options ..................... -- 86,620 215,838 -- 215,838
Issuance of common stock under
employee stock purchase plan ......... -- 42,342 112,474 -- 112,474
Issuance of 5,691,000 shares of Series
A preferred stock, net of issuance
costs ................................. 5,573,194 -- -- -- 5,573,194
Issuance of 2,657,881 shares of Series
B preferred stock, net of issuance
costs ................................. 1,653,888 -- -- -- 1,653,888
Conversion of preferred stock in
connection with the initial public
offering .............................. (7,227,082) 1,046,912 7,227,082 -- --
Issuance of common stock at $8.00
per share in connection with initial
public offering, net of issuance
costs ................................. -- 1,840,000 12,817,000 -- 12,817,000
Issuance of common stock at $3.25
per share in connection with public
offering, net of issuance costs ...... -- 2,530,000 7,143,279 -- 7,143,279
Net loss and comprehensive loss ......... -- -- -- (18,803,335) (18,803,335)
------------ ---------- ------------- -------------- -------------
Balances at June 30, 1996 ............... -- 6,512,485 29,302,546 (18,803,335) 10,499,211
Issuance of common stock for services -- 5,000 23,750 -- 23,750
Exercise of options ..................... -- 2,999 10,331 -- 10,331
Issuance of common stock under
employee stock purchase plan ......... -- 19,830 45,844 -- 45,844
Net loss and comprehensive loss ......... -- -- -- (7,368,588) (7,368,588)
------------ ---------- ------------- -------------- -------------
Balances at June 30, 1997 ............... -- 6,540,314 29,382,471 (26,171,923) 3,210,548
Issuance of warrants to purchase
125,000 shares of common stock ......... -- -- 40,500 -- 40,500
Issuance of common stock and
warrants at $0.55 per unit ............ -- 1,010,410 555,725 -- 555,725
Issuance of common stock under
employee stock purchase plan ......... -- 2,975 2,202 -- 2,202
Net loss and comprehensive loss ......... -- -- -- (2,173,204) (2,173,204)
------------ ---------- ------------- -------------- -------------
Balances at June 30, 1998 ............... -- 7,553,699 29,980,898 (28,345,127) 1,635,771
Issuance of common stock under
employee stock purchase plan ......... -- 9,876 4,454 -- 4,454
Issuance of 2,332,000 shares of Series
A preferred stock and warrants at
$2.50 per unit, net of issuance costs 1,166,000 -- -- -- 1,166,000
Net loss and comprehensive loss ......... -- -- -- (3,692,233) (3,692,233)
------------ ---------- ------------- -------------- -------------
Balances at June 30, 1999 ............... $ 1,166,000 7,563,575 $ 29,985,352 $ (32,037,360) $ (886,008)
============ ========== ============= ============== =============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
Neurobiological Technologies, Inc. (A development stage company)
STATEMENTS OF CASH FLOWS
<CAPTION>
Period from
Year ended June 30, August 27, 1987
--------------------------------------------------------- (inception) through
1999 1998 1997 June 30, 1999
----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .................................... $ (3,692,233) $ (2,173,204) $ (7,368,588) $ (32,037,360)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 41,792 128,402 122,773 638,206
Issuance of common stock and
warrants for license rights and
services ................................. -- 40,500 -- 139,775
Changes in assets and liabilities:
Prepaid expenses and other ............... 15,183 112,420 165,986 (43,833)
Accounts payable and accrued
expenses .............................. 437,261 (498,978) 103,404 934,839
------------- ------------- ------------- --------------
Net cash used in operating activities ...... (3,197,997) (2,390,860) (6,976,425) (30,368,373)
INVESTING ACTIVITIES
Purchase of investments .................. -- -- (1,462,723) (33,839,678)
Sale of investments ........................ -- 2,559,911 5,060,455 33,839,678
Purchases of property and equipment,
net .................................... 7,859 15,506 (25,645) (358,940)
Additions to patents and licenses ......... -- -- -- (283,062)
------------- ------------- ------------- --------------
Net cash provided by (used in) investing
activities ................................. 7,859 2,575,417 3,572,087 (642,002)
FINANCING ACTIVITIES
Proceeds of short-term borrowings ......... 200,000 -- -- 435,000
Issuance of common stock, net ............ 4,454 557,927 79,925 22,618,495
Issuance of preferred stock, net ......... 1,166,000 -- -- 8,158,082
------------- ------------- ------------- --------------
Net cash provided by financing activities 1,370,454 557,927 79,925 31,211,577
Increase (decrease) in cash and cash
equivalents ................................. (1,819,684) 742,484 (3,324,413) 201,202
Cash and equivalents at beginning of
period .................................... 2,020,886 1,278,402 4,602,815 --
------------- ------------- ------------- --------------
Cash and equivalents at end of period ...... $ 201,202 $ 2,020,886 $ 1,278,402 $ 201,202
============= ============= ============= ==============
SUPPLEMENTAL DISCLOSURES
Conversion of short-term-borrowings to
Series A preferred stock .................. $ -- $ -- $ -- $ 235,000
============= ============= ============= ==============
Conversion of preferred stock to
common stock .............................. $ -- $ -- $ -- $ 7,227,082
============= ============= ============= ==============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company)
Note 1. Organization And Significant Accounting Policies
Organization
Neurobiological Technologies, Inc. ("NTI" or the "Company") is an emerging
drug development company focused on the clinical evaluation and regulatory
approval of neuroscience drugs. The Com-pany's strategy is to in-license and
develop early-stage drug candidates that target major medical needs and which
can be rapidly commercialized. The Company's experienced management team
oversees the human clinical trials necessary to establish preliminary evidence
of efficacy and seeks partnerships with pharmaceutical and biotechnology
companies to complete development and marketing of its product candidates.
Basis of Presentation
In the course of its development activities, the Company has incurred
significant losses and expects additional losses in the year ending June 30,
2000. At June 30, 1999, the Company has a working capital deficit and a net
capital deficiency. In order to continue operations through the year ending June
30, 2000 and beyond, additional financing will be required. The Company believes
that its available cash and cash equivalents of $201,000 as of June 30, 1999
combined with funds from Merz loan agreement and a private placement, subsequent
to fiscal year end, are adequate to fund its operations through October 31,
1999. NTI will need to raise substantial additional capital to fund subsequent
operations. The Company intends to seek such funding through public or private
financings, collaborative or other arrangements with corporate partners, or from
other sources. The Company may seek to raise additional funds whenever market
conditions permit. However, there can be no assurance that funding will be
available from any of these sources, or, if available, that it will be available
on acceptable terms. If the Company is not able to raise adequate funds, it may
be required to delay, scale back, or terminate its clinical trials or to obtain
funds through entering into arrangements with collaborative partners or others
that may require the Company to give up additional rights to its technology,
product candidates or products. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern, and do not
include any adjustments that might result from the outcome of this uncertainty.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Key Supplier
The Company is dependent on one party for the manufacturing and supply of
one of its drugs for the Company's human clinical trials and for the successful
commercialization of the related product. Any failure on the part of this
company in this regard could adversely affect the Company's business and results
of operations.
Cash and Cash Equivalents
Cash and cash equivalents, which consist of cash and highly liquid
short-term investments with insignificant interest rate risk and original
maturities of three months or less at date of purchase, are stated at cost,
which approximates fair value.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method based on estimated useful lives of 2 to 7 years. The
balances at June 30, 1999 and 1998 consisted of the following:
1999 1998
---------- ----------
Machinery and equipment ............ $ 176,756 $ 185,820
Furniture and fixtures ............ 115,426 114,221
---------- ----------
292,182 300,041
Less accumulated depreciation ...... (288,386) (246,594)
---------- ----------
$ 3,796 $ 53,447
========== ==========
Net Loss per Share
Net loss per share is presented under the requirements of FAS No. 128,
"Earnings per Share" ("FAS 128"). Basic earnings per share computed is based on
the average shares of common stock outstanding and excludes any dilutive effects
of options, warrants, and convertible securities. Potentially dilutive
securities such as options, warrants, and convertible preferred stock, have also
been excluded from the computation of diluted net loss per share as their effect
is antidilutive.
Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" which establishes the fair value method of accounting for stock
based compensation plans. The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and has adopted the "disclosure only"
alternative described in SFAS 123.
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income (loss) and its components in the financial
statements. The Company has no items of other comprehensive income, and,
accordingly, its net loss is equal to its comprehensive loss.
Enterprise Segments
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information," which establishes standards for the way public business
enterprises report information in annual statements and interim financial
reports regarding operating segments, products and services, geographic areas,
and major customers. The Company operates in one business segment.
Note 2. Operating Lease Commitments
The Company's lease for its premises in Richmond, California expires in
April 2000. Rent expense for the years ending June 30, 1999, 1998, and 1997 was
$39,000, $147,000, and $157,000, respectively. The future minimum payment has
been prepaid through the end of the lease period and is included in prepaid
expenses and other current assets.
Note 3. Stockholders' Equity
Preferred Stock
At June 30, 1999, the Company has 2,332,000 shares of Series A convertible
preferred stock issued and outstanding. The holders of the Series A convertible
preferred stock are entitled to receive annual
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
noncumulative dividends of 8% per share per annum, when and if declared by the
Board of Directors. These dividends are in preference to any declaration or
payment of any dividend on the common stock of the Company. As of June 30, 1999,
no dividends had been declared.
Each share of Series A preferred stock is convertible, at the holder's
option, subject to antidilution provisions, into one share of common stock.
Additionally, each share of the preferred stock will be automatically converted
into one share of common stock upon the election of more than 50% of the Series
A preferred stock to convert into common stock. The holders of preferred stock
are entitled to the number of votes equal to the number of shares of common
stock into which their preferred stock is convertible.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the Series A preferred stock have a liquidation preference of
$0.50 per share, over holders of common stock plus any declared but unpaid
dividends. After payment has been made to the holders of Series A preferred
stock, the entire remaining assets and funds of the Company legally available
for distribution, if any, would be distributed ratably among the holders of
common stock.
Warrants to Purchase Common Stock
At June 30, 1999, warrants to purchase an aggregate of 3,335,906 shares of
common stock are outstanding at a weighted average exercise price of $1.34 per
share. Warrants to purchase 932,800 shares of common stock were issued at a
price of $1.00 in connection with a private equity financing completed in April
1999 and expire in April 2004. Warrants to purchase 2,020,820 shares of common
stock were issued in connection with a private financing completed in March
1998: 1,010,410 of these shares at a price of $0.75 expired in September and
October 1999; and 1,010,410 of these shares at a price of $1.50 will expire in
March 2001. Warrants to purchase 100,000 and 25,000 shares of common stock were
issued in April 1998 at a price per share of $1.25 and $3.00, respectively, in
connection with the termination of a licensing agreement and expire in April
2001. Warrants to purchase 37,286 shares of common stock were issued between
April 1990 and July 1991 at a price of $5.60 for licensing rights and consulting
services and have expiration dates through June 30, 2001. Warrants to purchase
220,000 shares were issued to the underwriters of the 1996 public offering at a
price of $3.90 and expire on February 15, 2001. The weighted average fair value
of warrants issued during fiscal 1999 was $0.38 per share.
Stock Option Plan
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock option awards because, as discussed below, the
alternative fair value accounting provided under SFAS 123 requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
option equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Board of Directors adopted the Company's first stock option plans in
1989. In November 1993, the Board combined the plans and adopted the 1993 Stock
Plan. The 1993 Stock Plan was subject to amendment and/or restatement in
February 1994, November 1994, October 1996, and November 1997. Two million
shares of common stock have been reserved for issuance under the 1993 Stock
Plan. In general, options are granted at fair market value on the date of the
grant, have a term of 10 years and become exercisable over a period of up to 48
months.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
A summary of the Company's stock option activity, and related information
for the three years ended June 30, 1999 follows (all repricing activity is
reflected as cancellations and subsequent grants):
Weighted Average
Number of Shares Exercise
Subject to Options Price
-------------------- ------------------
Balance at June 30, 1996 ...... 925,545 $ 4.19
Options granted ............... 338,304 2.58
Options canceled ............ (28,591) 5.61
Options exercised ............ (2,999) 3.44
---------
Balance at June 30, 1997 ...... 1,232,259 3.72
Options granted ............... 844,454 1.66
Options canceled ............ (501,632) 4.11
---------
Balance at June 30, 1998 ...... 1,575,081 2.42
Options granted ............... 488,500 0.65
Options canceled ............ (259,783) 2.51
---------
Balance at June 30, 1999 ...... 1,803,798 1.93
=========
At June 30, 1999, options to purchase 140,392 shares of common stock
remained available for grant, and options to purchase 1,203,430 shares of common
stock were exercisable. The weighted average exercise price of options
exercisable at June 30, 1999 was $2.21. The weighted average fair value of
options granted during 1999, 1998 and 1997 were $0.37, $1.09, and $1.48,
respectively.
<TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ----------------- ------------- -------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.01 - 1.99 964,721 8.85 $ 0.78 527,097 $ 0.90
2.00 - 3.99 826,559 5.62 3.22 665,828 3.20
4.00 - 5.99 7,768 4.79 4.21 7,755 4.21
6.00 - 8.00 4,750 5.62 7.42 2,750 8.00
---------- ----------
1,803,798 1,203,430
========== ==========
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which requires that the information be determined as if the Company
had accounted for its employee stock options granted subsequent to June 30, 1995
under the fair value method. The fair value of each option grant has been
estimated as of the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for 1997, 1998 and
1999: Expected volatility calculations based on historical data (.846), risk
free interest rates based on U.S. government bonds with maturities equal to the
expected option lives of 6.5 percent, expected option lives of five years, and
no dividend yield.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the input
of highly subjective assumptions including the expected stock price volatility
and expected life of the option. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of employee's
options.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
<TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands, except per share amounts):
<CAPTION>
Year ended June 30,
----------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net loss--as reported ................................. $ (3,692) $ (2,173) $ (7,369)
Net loss--pro forma .................................... (3,940) (2,695) (7,845)
Basic and diluted net loss per share--as reported ...... (0.49) (0.32) (1.13)
Basic and diluted net loss per share--pro forma ......... (0.52) (0.39) (1.20)
</TABLE>
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures in future years.
Stock Purchase Plan
Effective February 1994, the Company established an employee stock purchase
plan under which the employees may purchase common stock at 85% of the lower of
the share price at the beginning or end of a designated period. In November
1996, the amount of shares reserved for issuance under the plan was increased by
50,000 to 100,000. Under the plan, 24,977 shares remain available for issuance
at June 30, 1999.
Note 4. Income Taxes
The Company uses the liability method to account for income taxes as
required by FASB Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rules and laws that will be in effect when
the differences are expected to reverse.
Significant components of the Company's deferred tax assets (in thousands)
are as follows:
June 30,
---------------------------
1999 1998
----------- -------------
Net operating loss carryforward ............ $ 11,500 $ 10,000
Research and development carryforward ...... 1,130 1,100
Capitalized research and development ...... 290 500
--------- ---------
Gross deferred tax assets .................. 12,920 11,600
Valuation allowance ........................ (12,920) (11,600)
--------- ---------
Net deferred tax assets ..................... $ -- $ --
--------- ---------
The valuation allowance increased by $1,320,000 and $790,000 in fiscal
years 1999 and 1998, respectively.
At June 30, 1999, and 1998, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$32,000,000 and $12,000,000 respectively, which expire in tax years 1999 through
2018. The Company has federal tax credit carryforwards of approximately $800,000
which expire in tax years 2006 through 2018.
During the years ended June 30, 1991 and 1994, the Company experienced a
"change in ownership" as defined by Section 382 of the Internal Revenue Code. As
a result, utilization of the Company's net operating loss and credit
carryforwards incurred prior to the "change in ownership" may be subject to an
annual limitation. If additional "changes in ownership" should occur, the
availability of the Company's net
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
operating loss and credit carryforwards incurred subsequent to the 1994 "change
in ownership" may also be subject to an annual limitation and may expire before
ultimately becoming available to reduce future income tax liabilities.
Note 5. Notes Payable
In January 1999, the Company received a loan of $200,000 from Merz. The
loan, which bears interest at a rate of 8% per year, is required to be repaid
from any funds received by NTI upon Merz signing an agreement with a third party
regarding the development and marketing of Memantine. If no such agreement is
completed, the loan is due and payable on December 31, 2000. In lieu of NTI's
repayment of the principal and interest on the loan, Merz has the right to
exercise an option at its sole discretion to receive shares of NTI common stock
at the stock price of $1.20 per share. As of June 30, 1999, if Merz exercises
this option, NTI would be obligated to issue Merz 173,333 shares of common
stock.
Note 6. Related Party Transaction
The President and Chief Executive Officer of the Company is a member of the
board of directors of a company that provided the Company with consulting
services. Amounts paid to this company for such services totaled $409,000 and
$90,000 in the years ended June 30, 1998 and 1997, respectively (none in 1999).
Note 7. Subsequent Events (unaudited)
In August 1999, the Company entered into another agreement with Merz
pursuant to which the Company can borrow up to $1.5 million to support the Phase
IIB trial of Memantine for neuropathic pain. As of September 15, 1999, the
Company has borrowed $500,000 pursuant to this agreement. The principal and
interest of the Merz loans are convertible into common stock of the Company at
Merz' option. The terms of the Merz loan agreement also require that future
license fees, royalties, and other consideration received by the Company for the
licensing of its products and technologies be used to repay the loan.
Subsequent to year end, the Company has raised over $90,000 as of September
1, 1999 in an ongoing private placement of common stock and warrants to purchase
common stock.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
The directors and executive officers of the Company are as follows:
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul E. Freiman ............... 65 President and Chief Executive Officer and Director
Calvert Y. Yee .................. 47 Vice President, Operations and Administration
Lisa U. Carr, M.D., Ph.D. ...... 44 Vice President, Medical Affairs
Abraham E. Cohen ............... 63 Chairman of the Board of Directors
Enoch Callaway, M.D. ............ 75 Director
Theodore L. Eliot, Jr. ......... 71 Director
Abraham D. Sofaer ............... 61 Director
John B. Stuppin ............... 66 Director
</TABLE>
Paul E. Freiman joined the Company as a director in April 1997 and was
elected President and Chief Executive Officer in May 1997. He is the former
chairman and chief executive officer of Syntex Corporation ("Syntex"), where he
had a long and successful career and was instrumental in the sale of Syntex to
Roche Holdings for $5.3 billion. He is credited with much of the marketing
success of Syntex's lead product Naprosyn- and was responsible for moving the
product to over-the-counter status, marketed by Proctor & Gamble as Aleve-. Mr.
Freiman currently serves as chairman of the boards of Digital GeneTechnologies,
Inc., a private genomics company and SciGen Pte. Ltd. Mr. Freiman currently
serves on the boards of Penwest Pharmaceutical Co., Calypte Biomedical
Corporation and Otsuka America Pharmaceuticals, Inc. He has been chairman of the
Pharmaceutical Manufacturers Association of America (PhARMA) and has also
chaired a number of key PhARMA committees. Mr. Freiman is also an advisor to
Burrill & Co., a San Francisco merchant bank. Mr. Freiman holds a B.S. degree
from Fordham University and an honorary doctorate from the Arnold & Marie
Schwartz College of Pharmacy.
Calvert Y. Yee has been Vice President, Operations and Administration of
the Company since February 1991. Prior to joining NTI, Mr. Yee was employed for
15 years with Cetus Corporation, where he held both research and management
positions, serving as Senior Director, Research and Development Administration
and Operations from 1987 until September 1990. Mr. Yee holds an A.B. degree in
bacteriology and an M.B.A. degree from the University of California, Berkeley.
Lisa U. Carr M.D., Ph.D. was appointed Vice President of Medical Affairs in
September 1998. Prior to joining the company in June 1998 as Director of Medical
Affairs, Dr. Carr was Associate Medical Director at the Institute of Clinical
Immunology and Infectious Diseases at Syntex Development Research in Palo Alto,
California. Dr. Carr has more than 8 years of international industry experience
in conducting clinical drug trials in immunosuppression, nephrology, neurology,
gastroenterology and cardiovascular disorders. She was Lead Clinical Research
Physician at Syntex, directing a pivotal clinical trial of mycophenolate mofetil
(IND and NDA approved for solid organ transplantation). As a member of the
Clinical Dossier Filing Team, Dr. Carr was instrumental in obtaining an
accelerated drug approval from the FDA in 1995; Europe-wide approval was granted
in 1996. Dr. Carr holds a medical degree and a Ph.D. magna cum laude degree from
the University of Munich in Germany.
Abraham E. Cohen has been a director of the Company since March 1993 and
has been Chairman of the Board of Directors since August 1993. From 1982 to
1992, Mr. Cohen served as Senior Vice President of Merck & Co. ("Merck") and
from 1977 to 1988 as President of the Merck Sharp & Dohme International Division
("MSDI"). While at Merck, he played a key role in the development of Merck's
international business, initially in Asia, then in Europe and, subsequently, as
President of MSDI, which manufactures and markets human health products outside
the United States. Since his retirement from
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
Merck and MSDI in January 1992, Mr. Cohen has been active as an international
business consultant. He was a director of Agouron Pharmaceuticals, Inc. until
its merger with Warner-Lambert Company. He is presently a director of six
public companies: Akzo Nobel N.V., Chugai Pharmaceutical Co., Pharmaceutical
Product Development, Smith Barney, Teva Pharmaceutical Industries, Ltd. and
Vasomedical, Inc.
Enoch Callaway, M.D. is a founder and former employee of the Company and
has served as a director of the Company since September 1987. Dr. Callaway
previously served as Chairman of the Board of Directors of the Company from
September 1987 to November 1990, as Co-Chairman of the Board of the Company from
November 1990 until August 1993, as Vice President of the Company from September
1988 until August 1993 and as Secretary of the Company from September 1988 until
September 1991. Dr. Callaway has been Emeritus Professor of Psychiatry at the
University of California, San Francisco since 1986, where he also served as
Director of Research at the Langley Porter Psychiatric Institute from 1959 to
1988. Dr. Callaway is a director of Candide, Inc. He holds A.B. and M.D. degrees
from Columbia University.
Theodore L. Eliot, Jr. has served as a director of the Company since August
1992. Previously, he served as a director of the Company from September 1988
until April 1992, and as a Vice President of the Company from September 1988
until September 1991. Mr. Eliot retired from the United States Department of
State in 1978 with the rank of Ambassador. He served as Dean of the Fletcher
School of Law and Diplomacy from 1979 to 1985 and as Secretary General for the
United States of the Bilderberg Meetings from 1981 to October 1993. Mr. Eliot is
a director of Fiberstars, Inc., a publicly held company. Mr. Eliot holds B.A.
and M.P.A. degrees from Harvard University.
Abraham D. Sofaer has served as a director of the Company since April 1997.
Mr. Sofaer is the first George P. Shultz Distinguished Scholar & Senior Fellow
at the Hoover Institution, Stanford University, appointed in 1994. From 1990 to
1994, Mr. Sofaer was a partner at the legal firm of Hughes, Hubbard and Reed in
Washington, D.C., where he represented several major U.S. public companies. From
1985 to 1990, he served as the Legal Adviser to the United States Department of
State, where he was principal negotiator on several key international disputes.
From 1979 to 1985, he served as a federal judge in the Southern District of New
York. Mr. Sofaer is registered as a qualified arbitrator with the American
Arbitration Association and is a member of the National Panel of the Center for
Public Resolution of Disputes (CPR), a leading organization in the area of
resolution of disputes outside litigation. He has mediated or is now mediating
merger-acquisition arbitrations, commercial cases involving valuation of
commercial technology, and major securities class action suits. Mr. Sofaer is on
the International Advisory Board of Chugai Biopharmaceuticals, Inc. Mr. Sofaer
holds a B.A. degree from Yeshiva College and a L.L.B. from New York University.
John B. Stuppin is a founder and employee of the Company and has served as
a director of the Company since September 1988. From September 1987 until
October 1990, Mr. Stuppin served as President of the Company, from November 1990
to August 1993 as Co-Chairman of the Board of Directors, from October 1990 until
September 1991 as Executive Vice President, and from April 1991 until July 1994
as Treasurer. He also served as acting Chief Financial Officer of the Company
from the Company's inception through December 1993. Mr. Stuppin is an investment
banker and a venture capitalist. He has over 25 years experience in the start up
and management of companies active in emerging technologies and has been the
president of a manufacturing company. He is a director of Fiberstars, Inc. Mr.
Stuppin holds an A.B. degree from Columbia College.
The information required by Item 405 of Regulation S-B is hereby
incorporated by reference to the Section entitled "Compliance with Section 16(a)
of the Securities and Exchange Act of 1934" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement").
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
to the section entitled "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
to the section entitled "Certain Transactions" in the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements
The following are included in Item 7 under Part II:
Report of Ernst & Young, LLP Independent Auditors
Balance Sheets at June 30, 1999 and 1998
Statements of Operations for each of the three years in the period
ended June 30, 1999 and for the period from August 27, 1987 (inception)
through June 30, 1999
Statements of Stockholders' Equity (Deficit) for each of the three
years in the period ended June 30, 1999 and for the period from August
27, 1987 (inception) through June 30, 1999
Statements of Cash Flows for each of the three years in the period
ended June 30, 1999 and for the period for August 27, 1987 (inception)
through June 30, 1999
Notes to Financial Statements
(b) Reports on Form 8-K None.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
(c) Exhibits
<TABLE>
The following exhibits are incorporated by reference or filed as part of
this report.
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Registrant. (1)
3.2 Bylaws of Registrant. (1)
3.3 Certificate of Designations, Preferences and Rights of Series A Preferred Stock of
Registrant.
4.1 Form of Common Stock Certificate. (1)
4.2 Form of Warrant issued to Van Kasper & Co. (1)
4.3 Form of Warrant issued to Van Kasper & Co. and Gerard Klauer Mattison & Co.,
LLC. (1)
4.4 Form of Class A Warrant to Purchase Common Stock. (6)
4.5 Form of Class B Warrant to Purchase Common Stock. (6)
4.6 Form of Warrant to Purchase 25,000 Shares of Common Stock. (6)
4.7 Form of Warrant to Purchase 100,000 Shares of Common Stock. (6)
4.8 Form of Warrant to Purchase Common Stock.
10.2 1993 Stock Plan of Neurobiological Technologies, Inc. (5)*
10.4 Form of Indemnity Agreement between the Registrant and its directors and officers. (1)*
10.5 Series B Preferred Stock Purchase and Exchange Agreement dated as of December 6,
1993. (1)
10.6 License Agreement between the Registrant and Research Corporation Technologies, Inc.
dated May 30, 1990. (1)+
10.7 License Agreement among the Registrant, Dynorphin Partnership, Nancy M. Lee and
Horace C. Loh dated April 1, 1989, as amended. (1)+
10.8 License Agreement between the Registrant and Immuno-Dynorphin Partnership dated
October 1, 1990. (1)+
10.9 License Agreement between the Registrant and des-Tyr Dynorphin Partnership dated
December 20, 1992. (1)+
10.10 License Agreement between the Registrant and DUZ Partnership dated December 20,
1992. (1)+
10.11 License Agreement between the Registrant and The Salk Institute for Biological Studies
dated March 31, 1989, as amended. (1)+
10.12 License Agreement between the Registrant and the Regents of the University of California
dated June 13, 1990, as amended. (1)+
10.13 Option Agreement between the Registrant and the Regents of the University of California
dated December 1, 1992. (1)+
10.14 Lease dated August 22, 1994 between Registrant and Marina Westshore Partners, a Calif.
limited partnership. (2)
10.15 License Agreement between the Registrant and Children's Hospital effective September 11,
1995, as amended on March 11, 1996. (3)+
10.16 Amended and Restated Neurobiological Technologies, Inc. Employee Stock Purchase
Plan. (4)+
10.17 Second Amendment to Lease between Registrant and Marina Westshore Partners, dated
May 15, 1998. (6)
10.18 Cooperative Agreement among Registrant, Merz + Co. GmbH & Co. and Children's
Medical Center Corp., effective as of April 16, 1998. (6)++
10.19 Payment Agreement between the Registrant and Children's Medical Center Corp., effective
as of April 16, 1998. (6)++
10.20 Convertible Loan Agreement between the Registrant and Merz dated August 3, 1999.
10.21 Retention Agreement between the Registrant & Dr. Lisa Carr dated February 1, 1999.*
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
Exhibit
Number Description
------ -----------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (See page F-16)
27 Financial Data Schedule.
- ------------
(1) Previously filed as an exhibit to Issuer's Registration Statement on Form
SB-2 (Registration No. 33-74118-LA) and is incorporated herein by
reference.
(2) This exhibit is filed as an exhibit to the Registrant's Annual Report on
Form 10-KSB for the year ended June 30, 1995 and is incorporated herein by
reference.
(3) This exhibit is filed as an exhibit to the Registrant's Annual Report on
Form 10-KSB for the year ended June 30, 1996 and is incorporated herein by
reference.
(4) This exhibit is filed as an exhibit to Registrant's Registration Statement
on Form S-8 (Registration Number 333-18519) filed December 20, 1996 and is
incorporated herein by reference.
(5) This exhibit filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (Registration Number 333-44097) filed January 1, 1998 and is
incorporated herein by reference.
(6) This exhibit is filed as an exhibit to the Registrant's Annual Report on
Form 10-KSB for the year ended June 30, 1998 and is incorporated herein by
reference.
+ Confidential treatment has been granted with respect to certain portions of
these agreements.
++ Confidential treatment has been requested with respect to certain portions
of these agreements.
* This exhibit is a management contract or compensatory plan or arrangement.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Neurobiological Technologies, Inc. (a development stage company) -- (Continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Dated: September 28, 1999 /s/ Paul E. Freiman
Neurobiological Technologies, Inc. -----------------------------------
President, Chief Executive Officer
POWER OF ATTORNEY
(Exhibit 24.1)
<TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul E. Freiman and Stephen C. Ferruolo his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, granting unto said attorneys-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorney-in-fact and agent or his substitute may lawfully do or cause to be
done by virtue hereof.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul E. Freiman President, Chief Executive Officer September 28, 1999
- --------------------------- (Principal Executive Officer and
Paul E. Freiman Principal Financial Officer and
Principal Accounting Officer) and
Director
/s/ Abraham E. Cohen Chairman of the Board September 28, 1999
- ---------------------------
Abraham E. Cohen
/s/ Enoch Callaway Director September 28, 1999
- ---------------------------
Enoch Callaway
/s/ Theodore L. Eliot, Jr. Director September 28, 1999
- ---------------------------
Theodore L. Eliot, Jr.
/s/ Abraham D. Sofaer Director September 28, 1999
- ---------------------------
Abraham D. Sofaer
/s/ John B. Stuppin Director September 28, 1999
- ---------------------------
John B. Stuppin
</TABLE>
F-16
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES A PREFERRED STOCK
OF
NEUROBIOLOGICAL TECHNOLOGIES, INC.
Neurobiological Technologies, Inc., a Delaware corporation (the
"Corporation"), organized and existing under the laws of the State of Delaware,
the Restated Certificate of Incorporation of which was filed in the office of
the Secretary of State of Delaware on February 24, 1994, does by its President
and under its corporate seal hereby certify as follows:
FIRST: That by the Restated Certificate of Incorporation duly filed in
the above state, the total number of shares which this corporation may issue is
stated by Article IV to be as follows:
"The total number of shares of stock which the Corporation is
authorized to issue is Thirty Million (30,000,000) shares. Twenty-Five
Million (25,000,000) shares shall be common stock of the par value of
one tenth of one cent ($.001) per share (the "Common Stock") and Five
Million (5,000,000) shares shall be preferred stock of the par value of
one tenth of one cent ($.001) per share (the "Preferred Stock")";
and, by said Restated Certificate of Incorporation, the shares of the Preferred
Stock are authorized to be issued in one or more series as may be determined
from time to time by the board of directors, each of such series to be
distinctly designated.
SECOND: That pursuant to the authority so vested in the board of
directors by the Restated Certificate of Incorporation, the board of directors
by unanimous written consent adopted the following resolutions:
RESOLVED, that a series of the class of Preferred Stock of the
Corporation be hereby created, and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions are as follows:
A. SERIES A PREFERRED STOCK
1. Designation of Series.
3,000,000 shares of the Preferred Stock of the Corporation
shall constitute a series of Preferred Stock designated as Series A Preferred
Stock ("Series A Preferred"), the powers, preferences and relative and other
rights and the qualifications, limitations and restrictions of which are fixed
and determined in this Section A.
<PAGE>
2. Dividend Preference.
The holders of Series A Preferred shall be entitled to
receive, out of funds legally available therefor, dividends at an annual rate
equal to $0.036 (as adjusted for combinations, consolidations, subdivisions, or
stock splits with respect to such shares) for each outstanding share of Series A
Preferred held by them, payable when and if declared by the Board of Directors,
in preference and priority to the payment of dividends on any shares of Common
Stock (other than those payable solely in Common Stock or involving the
repurchase of shares of Common Stock from terminated employees, officers,
directors, or consultants pursuant to contractual arrangements). In the event
dividends are paid to the holders of Series A Preferred that are less than the
full amounts to which such holders are entitled pursuant to this Section 2, such
holders shall share ratably in the total amount of dividends paid according to
the respective amounts due each such holder if such dividends were paid in full.
After payment of dividends to the holders of Series A Preferred, dividends may
be declared and distributed among all holders of Common Stock; provided,
however, that no dividend may be declared and distributed among holders of
Common Stock at a rate greater than the rate at which dividends are paid to the
holders of Series A Preferred based on the number of shares of Common Stock into
which such shares of Series A Preferred are convertible (as adjusted for stock
splits and the like) on the date such dividend is declared. The dividends
payable to the holders of the Series A Preferred shall not be cumulative, and no
right shall accrue to the holders of the Series A Preferred by reason of the
fact that dividends on the Series A Preferred are not declared or paid in any
previous fiscal year of the Corporation, whether or not the earnings of the
Corporation in that previous fiscal year were sufficient to pay such dividends
in whole or in part. In the event that the Corporation shall have declared but
unpaid dividends outstanding immediately prior to, and in the event of, a
conversion of the Series A Preferred (as provided in Section 5 hereof), the
Corporation shall, at the option of the Corporation, pay in cash to the
holder(s) of Preferred Stock subject to conversion the full amount of any such
dividends or allow such dividends to be converted into Common Stock in
accordance with, and pursuant to the terms specified in, Section 5 hereof.
3. Liquidation Preference.
(a) In the event of any liquidation, dissolution, or winding
up of the Corporation, whether voluntary or not, or the sale, lease, assignment,
transfer, conveyance or disposal of all or substantially all of the assets of
the Corporation, or the acquisition of this Corporation by another entity by
means of consolidation, corporate reorganizations or merger, or other
transaction or series of related transactions in which more than 50% of the
outstanding voting power of this Corporation is disposed of (each a "Liquidation
Event"), distributions to the stockholders of the Corporation shall be made in
the following manner:
(i) Each holder of Series A Preferred shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of Common Stock, by
reason of their ownership of such stock, the amount of $0.50 per share (as
adjusted for combinations, consolidations, subdivisions, or stock splits with
respect to such shares) for each share of Series A Preferred then held by such
holder, plus an amount equal to all declared but unpaid dividends on such shares
of Series A Preferred (collectively, the
2
<PAGE>
"Series A Preference"). If, upon the occurrence of a Liquidation Event, the
assets and funds available to be distributed among the holders of Series A
Preferred shall be insufficient to permit the payment to such holders of the
full Series A Preference, then the entire assets and funds of the Corporation
legally available for distribution to the holders of Series A Preferred shall be
distributed ratably based on the total Series A Preference due each such holder
under this Section 3(a).
(ii) After payment has been made to the holders of
the Series A Preferred of the full amounts to which they are entitled pursuant
to paragraph (i) based on the number of shares of Common Stock held by each such
holder.
(b) Each holder of Series A Preferred shall be deemed to have
consented to distributions made by the Corporation in connection with the
repurchase of shares of Common Stock issued to or held by officers, directors,
or employees of, or consultants to, the Corporation or its subsidiaries upon
termination of their employment or services pursuant to agreements (whether now
existing or hereafter entered into) providing for the right of said repurchase
between the Corporation and such persons.
(c) The value of securities and property paid or distributed
pursuant to this Section 3 shall be computed at fair market value at the time of
payment to the Corporation or at the time made available to stockholders, all as
determined by the Board of Directors in the good faith exercise of its
reasonable business judgment, provided that (i) if such securities are listed on
any established stock exchange or a national market system, their fair market
value shall be the closing sales price for such securities as quoted on such
system or exchange (or the largest such exchange) for the date the value is to
be determined (or if there are no sales for such date, then for the last
preceding business day on which there were sales), as reported in the Wall
Street Journal or similar publication, and (ii) if such securities are regularly
quoted by a recognized securities dealer but selling prices are not reported,
their fair market value shall be the mean between the high bid and low asked
prices for such securities on the date the value is to be determined (or if
there are no quoted prices for such date, then for the last preceding business
day on which there were quoted prices).
(d) Nothing hereinabove set forth shall affect in any way the
right of each holder of Series A Preferred to convert such shares at any time
and from time to time into Common Stock in accordance with Section 5 hereof.
4. Voting Rights.
Except as otherwise required by law or hereunder, the holders
of each share of Series A Preferred shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Series A
Preferred could be converted at the record date for determination of the
stockholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken. Except to the extent class or
series voting is required by law, the holders of shares of Series A Preferred
and Common Stock shall vote together as a single class on all matters.
Fractional votes by the holders of Series A Preferred shall not,
3
<PAGE>
however, be permitted and any fractional voting rights shall (after aggregating
all shares into which shares of Series A Preferred held by each holder could be
converted) be rounded to the nearest whole number (with one-half being rounded
upward). Holders of Common Stock and Series A Preferred shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation.
5. Conversion Rights.
The holders of Series A Preferred shall have conversion rights
as follows:
(a) Right to Convert. Each share of Series A Preferred shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share at the office of the Corporation or any transfer agent
for such Series A Preferred as follows into such number of fully-paid and
non-assessable shares of Common Stock as is determined by dividing $.45 (the
"Original Series A Issue Price") by the then applicable conversion price for
such Series A Preferred, determined as hereinafter provided, in effect at the
time of conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of the Series A Preferred (the "Conversion Price")
shall initially be the Original Series A Issue Price. The initial Conversion
Price shall be subject to adjustment as provided in accordance with Section 5(d)
of this Section 5.
(b) Automatic Conversion. Each share of Series A Preferred
shall automatically be converted into shares of Common Stock at the then
effective Conversion Price upon the affirmative vote or written consent of a
majority of the outstanding shares of Series A Preferred (an "Automatic
Conversion").
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of the Series A Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Series A Preferred shall be
entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A Preferred, and shall give written notice to the
Corporation at such office that he or she elects to convert the same; provided,
however, that in the event of an Automatic Conversion pursuant to Section 5(b),
the outstanding shares of Series A Preferred shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent, and provided further that the Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
Automatic Conversion unless the certificates evidencing such shares of Series A
Preferred are either delivered to the Corporation or its transfer agent as
provided above, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen, or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates. The Corporation shall,
as soon as practicable after such delivery, or such agreement and
indemnification in the
4
<PAGE>
case of a lost certificate, issue and deliver at such office to such holder of
Series A Preferred, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series A Preferred to be converted, or in the
case of Automatic Conversion, on the date of the affirmative vote or written
consent of a majority of the then outstanding shares of Series A Preferred, as
applicable, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(d) Adjustments to Conversion Price.
(i) Adjustments for Dividends, Splits, Subdivisions,
Combinations, or Consolidation of Common Stock. In the event the outstanding
shares of Common Stock shall be increased by stock dividend payable in Common
Stock, stock split, subdivision, or other similar transaction occurring after
the filing of this Certificate of Designations into a greater number of shares
of Common Stock, the Conversion Price then in effect shall, concurrently with
the effectiveness of such event, be decreased in proportion to the percentage
increase in the outstanding number of shares of Common Stock. In the event the
outstanding shares of Common Stock shall be decreased by reverse stock split,
combination, consolidation, or other similar transaction occurring after the
filing of this Certificate of Designations into a lesser number of shares of
Common Stock, the Conversion Price then in effect shall, concurrently with the
effectiveness of such event, be increased in proportion to the percentage
decrease in the outstanding number of shares of Common Stock.
(ii) Adjustments for Other Distributions. In the
event the Corporation at any time or from time to time makes, or fixes a record
date for the determination of holders of Common Stock entitled to receive, any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 5, then and in
each such event provision shall be made so that the holders of Series A
Preferred shall receive upon conversion thereof, in addition to the number of
shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Preferred been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 5 with respect to the rights of the holders of the Series A
Preferred.
(iii) Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
shares provided for above), the Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the Series A
5
<PAGE>
Preferred shall be convertible into, in lieu of the number of shares of Common
Stock which the holders would otherwise have been entitled to receive, a number
of shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of such Series A Preferred immediately before that change.
(e) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment.
(f) Notices of Record Date. In the event that this Corporation
shall propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock, or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease, or convey all or substantially all its property or
business, or to liquidate, dissolve, or wind up; then, in connection with each
such event, this Corporation shall send to the holders of the Preferred Stock:
(1) at least 20 days' prior written notice
of the date on which a record shall be taken for such dividend, distribution, or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (iii) and (iv) above; and
(2) in the case of the matters referred to
in (iii) and (iv) above, at least 20 days' prior written notice of the date when
the same shall take place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event or the record date
for the determination of such holders if such record date is earlier).
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<PAGE>
Each such written notice shall be delivered
personally or given by first class mail, postage prepaid, addressed to the
holders of the Series A Preferred at the address for each such holder as shown
on the books of this Corporation.
(g) Issue Taxes. The Corporation shall pay any and all issue
and other taxes (other than income taxes) that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of shares of Series A
Preferred pursuant hereto; provided, however, that the Corporation shall not be
obligated to pay any transfer taxes resulting from any transfer requested by any
holder in connection with any such conversion.
(h) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Series A Preferred; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of Series A Preferred, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to its Certificate of
Incorporation.
(i) Status of Converted Stock. In case the Series A Preferred
shall be converted pursuant to this Section 5, the shares so converted shall
resume the status of authorized but unissued shares of Series A Preferred
undesignated as to series.
6. Redemption Rights.
The Series A Preferred shall be nonredeemable.
RESOLVED FURTHER, that the said resolutions of the board of directors,
and creation and authorization of issuance thereby of said series of Series A
Preferred Stock, was duly made by the board of directors pursuant to authority
as aforesaid and in accordance with section 151 of the General Corporation Law
of the State of Delaware.
[Signature page follows]
7
<PAGE>
IN WITNESS WHEREOF, Neurobiological Technologies, Inc. has caused this
Certificate of Designations, Preferences and Rights to be signed by the
undersigned this 14th day of April, 1999.
NEUROBIOLOGICAL TECHNOLOGIES, INC.
By: /s/ Paul Freiman
---------------------------
Paul Freiman, President
8
Warrant No. __
WARRANT TO PURCHASE A MAXIMUM OF
_________ SHARES OF COMMON STOCK OF
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(Void after April 14, 2004)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
THIS WARRANT AND THE SHARES PURCHASABLE HEREUNDER ARE SUBJECT TO RESTRICTIONS ON
TRANSFER AS SET FORTH HEREIN.
This certifies that _____________ (the "Holder"), or assigns, for value
received, is entitled to purchase from Neurobiological Technologies, Inc., a
Delaware corporation (the "Company"), subject to the terms set forth below, a
maximum of __________ fully paid and nonassessable shares (subject to adjustment
as provided herein) of the Company's Common Stock (the "Warrant Shares") for
cash at a price of $1.00 per share (the "Exercise Price") (subject to adjustment
as provided herein) at any time or from time to time up to and including 5:00
p.m. (California Time) on April 14, 2004, (the "Expiration Date") upon surrender
to the Company at its principal office (or at such other location as the Company
may advise the Holder in writing) of this Warrant properly endorsed with the
Form of Subscription attached hereto duly filled in and signed and upon payment
in cash or by check of the aggregate Exercise Price for the number of shares for
which this Warrant is being exercised determined in accordance with the
provisions hereof. The Exercise Price is subject to adjustment as provided in
Section 3 of this Warrant. This Warrant is issued subject to the following terms
and conditions:
1. Exercise, Issuance of Certificates, Reduction in Number of Warrant
Shares.
1.1 General. This Warrant is exercisable at the option of the
Holder of record hereof on or prior to the Expiration Date, at any time or from
time to time following its issuance, for all or any part of the Warrant Shares
(but not for a fraction of a share) which may be purchased hereunder, as that
number may be adjusted pursuant to Section 3 of this Warrant. The Company agrees
that the Warrant Shares purchased under this Warrant shall be and are deemed to
be issued to the Holder hereof as the record owner of such Warrant Shares as of
the close of business on the date on which this
<PAGE>
Warrant shall have been surrendered, properly endorsed, the completed and
executed Form of Subscription delivered, and payment made for such Warrant
Shares. Certificates for the Warrant Shares so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense not later than 10 days after the rights represented by this
Warrant have been so exercised. In case of a purchase of less than all the
Warrant Shares which may be purchased under this Warrant, the Company shall
cancel this Warrant and execute and deliver to the Holder hereof within a
reasonable time a new Warrant or Warrants of like tenor for the balance of the
Warrant Shares purchasable under the Warrant surrendered upon such purchase.
Each stock certificate so delivered shall be registered in the name of such
Holder.
1.2 Net Issue Exercise of Warrant. Notwithstanding any
provisions herein to the contrary, if the fair market value of one share of
Common Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, Holder may elect
to receive shares of Common Stock equal to the value (as determined below) of
this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Form of Subscription in which event the Company shall issue to the
Holder a number of shares of Common Stock computed using the following formula:
X= Y (A-B)
A
Where X= the number of shares of Common Stock to be
issued to Holder;
Y= the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being canceled
(at the date of such calculation);
A= the fair market value of one share of the
Company's Common Stock (at the date of such
calculation); and
B= Exercise Price (as adjusted to the date of
such calculation).
For purposes of the above calculation, the fair market value of one share of
Common Stock shall be the average of the closing bid and asked prices of the
Common Stock quoted in the over-the-counter market summary or the last reported
sale price of the Common Stock or the closing price quoted on the Nasdaq
National Market System or on any exchange on which the Common Stock is listed,
whichever is applicable, as
2
<PAGE>
published in The Wall Street Journal for the five trading days prior to the date
of determination of fair market value.
2. Shares to be Fully Paid. The Company covenants and agrees that all
Warrant Shares, will, upon issuance and, if applicable, payment of the
applicable Exercise Price, be duly authorized, validly issued, fully paid and
nonassessable, and free of all liens and encumbrances, except for restrictions
on transfer provided for herein or under applicable federal and state securities
laws.
3. Adjustment of Exercise Price and Number of Shares. The Exercise
Price and the total number of Warrant Shares shall be subject to adjustment from
time to time upon the occurrence of certain events described in this Section 3.
Upon each adjustment of the Exercise Price, the Holder of this Warrant shall
thereafter be entitled to purchase, at the Exercise Price resulting from such
adjustment, the number of shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment, and dividing the product
thereof by the Exercise Price resulting from such adjustment.
3.1 Subdivision or Combination of Stock. In case the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Warrant Shares
issuable hereunder proportionately increased, and conversely, in case the
outstanding shares of the Common Stock of the Company shall be combined into a
smaller number of shares, the Exercise Price in effect immediately prior to such
combination shall be proportionately increased and the number of Warrant Shares
issuable hereunder proportionately decreased.
3.2 Reclassification. If any reclassification of the capital
stock of the Company or any reorganization, consolidation, merger, or any sale,
lease, license, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all, of the business and/or assets
of the Company (the "Reclassification Events") shall be effected in such a way
that holders of Common Stock shall be entitled to receive stock, securities, or
other assets or property, then, as a condition of such Reclassification Event
lawful and adequate provisions shall be made whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities, or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In any
Reclassification Event, appropriate provision shall be
3
<PAGE>
made with respect to the rights and interests of the Holder of this Warrant to
the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Exercise Price and of the number of Warrant Shares),
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities, or assets thereafter deliverable upon the exercise hereof.
3.3 Notice of Adjustment. Upon any adjustment of the Exercise
Price or any increase or decrease in the number of Warrant Shares, the Company
shall give written notice thereof, by first class mail postage, prepaid,
addressed to the registered Holder of this Warrant at the address of such Holder
as shown on the books of the Company. The notice shall be prepared and signed by
the Company's Chief Financial Officer and shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
4. No Voting or Dividend Rights. Nothing contained in this Warrant
shall be construed as conferring upon the holder hereof the right to vote or to
consent to receive notice as a shareholder of the Company on any other matters
or any rights whatsoever as a shareholder of the Company. No dividends or
interest shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised.
5. Compliance with Securities Act; Transferability of Warrant;
Disposition of Shares of Stock.
5.1 Compliance with Securities Act. The Holder of this
Warrant, by acceptance hereof, agrees that this Warrant and the Warrant Shares
to be issued upon exercise hereof are being acquired for investment and that it
will not offer, sell, or otherwise dispose of this Warrant or any Warrant Shares
except under circumstances which will not result in a violation of the
Securities Act of 1933, as amended (the "Act") or any applicable state
securities laws. The Holder agrees that the Company is under no obligation to
register the Warrants and the Warrant Shares, and Holder acknowledges that the
Company does not intend to cause such a registration. This Warrant and all
Warrant Shares shall be stamped or imprinted with a legend in substantially the
following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED OR THE SECURITIES OR BLUE SKY LAWS OF
ANY STATE. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
4
<PAGE>
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED, OR UNLESS SOLD
PURSUANT TO RULE 144 OF SUCH ACT.
5.2 Access to Information; Pre Existing Relationship. Holder
has had the opportunity to ask questions of, and to receive answers from,
appropriate executive officers of the Company with respect to the terms and
conditions of the transactions contemplated hereby and with respect to the
business, affairs, financial condition and results of operations of the Company.
Holder has had access to such financial and other information as is necessary in
order for Holder to make a fully informed decision as to investment in the
Company, and has had the opportunity to obtain any additional information
necessary to verify any of such information to which Holder has had access.
Holder further represents and warrants that he has either (i) a pre-existing
relationship with the Company or one or more of its officers or directors
consisting of personal or business contacts of a nature and duration which
enable him to be aware of the character, business acumen and general business
and financial circumstances of the Company or the officer or director with whom
such relationship exists or (ii) such business or financial expertise as to be
able to protect his own interests in connection with the purchase of the Shares.
5.3 Warrant Transferable. Subject to compliance with
applicable federal and state securities laws under which this Warrant was
purchased, this Warrant and all rights hereunder are transferable, in whole or
in part, without charge to the Holder (except for transfer taxes), upon
surrender of this Warrant properly endorsed; provided, however, that the Holder
shall notify the Company in writing in advance of any proposed transfer and
shall not transfer this Warrant or any rights hereunder to any person or entity
which is then engaged in a business that in the reasonable judgment of the
Company is in direct competition with the Company.
5.4 Disposition of Warrant Shares and Common Stock. With
respect to any offer, sale, or other disposition of the Warrant or any Warrant
Shares, the Holder hereof and each subsequent Holder of this Warrant agrees to
give written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such Holder's counsel, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect or any federal or state law then in effect) of such Warrant or
Warrant Shares, as the case may be, and indicating whether or not under the Act
certificates for such Warrant or Warrant Shares to be sold or otherwise disposed
of require any restrictive legend as to applicable restrictions on
transferability in order to insure compliance with the Act. Promptly upon
receiving such written notice and opinion, the Company, as promptly as
practicable, shall notify such Holder that such Holder may sell or otherwise
dispose of such Warrant or Warrant Shares, all in accordance with the terms of
the notice delivered to the Company. If a determination has
5
<PAGE>
been made pursuant to this Section 5.4 that the opinion of the counsel for the
Holder is not reasonably satisfactory to the Company, the Company shall so
notify the Holder promptly after such determination has been made.
Notwithstanding the foregoing, such Warrant or Warrant Shares may be offered,
sold or otherwise disposed of in accordance with Rule 144 under the Act,
provided that the Company shall have been furnished with such information as the
Company may request to provide reasonable assurance that the provisions of Rule
144 have been satisfied. Each certificate representing the Warrant or Warrant
Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a
legend as to the applicable restrictions on transferability in order to ensure
compliance with the Act, unless in the aforesaid opinion of counsel for the
Holder, such legend is not required in order to ensure compliance with the Act.
The Company may issue stop transfer instructions to its transfer agent in
connection with such restrictions.
6. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged, or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
7. Notices. Any notice, request, or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to each such
Holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant or such
other address as either may from time to time provide to the other.
8. Other Notices. If at any time:
(1) the Company shall declare any cash dividend upon its
Common Stock;
(2) the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other distribution to the
holders of its Common Stock;
(3) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(4) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all of its assets to,
another corporation; or
(5) there shall be a voluntary or involuntary dissolution,
liquidation, or winding-up of the Company;
6
<PAGE>
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the Holder of this Warrant at the address of
such Holder as shown on the books of the Company, (a) at least 10 days prior
written notice of the date on which the books of the Company shall close or a
record shall be taken for such dividend, distribution, or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, at least 10
days' prior written notice of the date when the same shall take place; provided,
however, that the Holder shall make a best efforts attempt to respond to such
notice as early as possible after the receipt thereof. Any notice given in
accordance with the foregoing clause (a) shall also specify, in the case of any
such dividend, distribution, or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto. Any notice given in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up or conversion, as the case may be.
9. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California.
10. Lost Warrants. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company (without the requirement to post bond), or in the
case of any such mutilation upon surrender and cancellation of such Warrant, the
Company, at its expense, will make and deliver a new Warrant, of like tenor, in
lieu of the lost, stolen, destroyed or mutilated Warrant.
11. Fractional Shares. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the Holder entitled to such fraction a sum in cash equal to such
fraction (calculated to the nearest 1/100th of a share) multiplied by the then
effective Exercise Price on the date the Form of Subscription is received by the
Company.
12. No Impairment. The Company will not, by charter amendment or by
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or
7
<PAGE>
performance of any terms of this Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder against impairment. Upon the request of the Holder, the Company will at
any time during the period this Warrant is outstanding acknowledge in writing,
in form satisfactory to Holder, the continued validity of this Warrant and the
Company's obligations hereunder.
13. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors of the
Company and the Holder. The provisions of this Warrant are intended to be for
the benefit of all Holders from time to time of this Warrant, and shall be
enforceable by any such Holder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officer, thereunto duly authorized as of this 14th day of April,
1999.
NEUROBIOLOGICAL TECHNOLOGIES, INC.
a Delaware corporation
By: _________________________________
Name: _________________________________
Title: _________________________________
8
<PAGE>
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: Neurobiological Technologies, Inc.
[Please mark one box]
[ ] The undersigned, the holder of the attached Common Stock Warrant, hereby
irrevocably elects to exercise the purchase right represented by such
Warrant for, and to purchase thereunder, (1) shares of Common Stock of
Neurobiological Technologies, Inc. (the "Company") and herewith makes
payment of $_________ therefor, and requests certificates for such shares
be issued in the name of, and delivered to,
_______________________________ whose address is ________________________
________________________________________________________________________.
[ ] The undersigned, the holder of the attach Common Stock Warrant, hereby
irrevocably elects to exercise the purchase right represented by such
Warrant for, and to purchase thereunder, (1) shares of Common Stock of
the Company and herewith elects to pay for such shares by reducing the
number of shares issuable thereunder in accordance with Section 1.2
thereof. The undersigned hereby authorizes the Company to make the
required calculation under Section 1.2 of the Warrant.
The undersigned represents that it is acquiring such Common Stock for its
own account for investment and not with a view to or for sale in connection with
any distribution thereof.
DATED: ___________, _____
___________________________________________
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
Name: _________________________________
Title: _________________________________
<PAGE>
(1) Insert here the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any adjustment
for any stock or other securities or property or cash which, pursuant to
the adjustment provisions of the Warrant, may be deliverable upon exercise.
2
CONVERTIBLE LOAN AGREEMENT
This Convertible Loan Agreement is entered into as of August 3, 1999
(the "Effective Date"), by and between Merz + Co. GmbH & Co., a company
organized under the laws of Germany, with its principal place of business at
Eckenheimer Landstrasse 100-104, 60318 Frankfurt a.M., Germany ("Merz"), and
Neurobiological Technologies Inc., a Delaware corporation, with its principal
place of business at 1387 Marina Way South, Richmond, California, 94804, U.S.A.
("Borrower").
W I T N E S S E T H:
WHEREAS, Merz and Borrower are parties to that certain License and
Cooperation Agreement dated April 16, 1998 (the "License Agreement") pursuant to
which, among other things, Borrower has granted an exclusive license relating to
certain confidential information to Merz in consideration for, among other
things, a share of certain future royalties; and
WHEREAS, Borrower wishes to borrow certain funds from Merz for use
solely in connection with the research, development and clinical trials of
Memantine for the indication neuropathic pain, in accordance with the License
Agreement; and
WHEREAS, Merz is willing to loan certain funds to Borrower in
accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions set forth herein, the parties hereto agree as follows:
Article 1: Definitions
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 All terms specifically defined in the License Agreement shall have
the same meaning as provided in the License Agreement.
1.2 The "Loan" means all monies loaned by Merz to Borrower, in an
amount not to exceed One Million, Five Hundred Thousand United States Dollars
(US$1,500,000.00).
1.3 "Future Royalties" means and includes any license fees, royalties
or other consideration which (i) may become payable by Merz to Borrower deriving
from the licensing or distribution of Products for the indications of dementia
and/or neuropathic pain pursuant to the License Agreement; or (ii) are payable
to Borrower by any other person, firm, corporation or other entity in
consideration for the sale or licensing of rights in or to any of the other
products or technologies of Borrower.
1
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Article 2: Grant of Loan
2.1 Subject to the terms and conditions of this Agreement, Merz shall
extend the Loan to Borrower in accordance with the following provisions,
conditions, limitations and requirements:
a. Immediately upon execution of this Agreement, Merz shall
disburse the sum of Five Hundred Thousand United States Dollars (US$500,000.00)
in immediately available funds to Borrower.
b. No earlier than September 30, 1999, Borrower may apply to
Merz for the disbursement of an additional Five Hundred Thousand United States
Dollars (US$500,000.00). Any application by Borrower for the disbursement of
such additional Five Hundred Thousand United States Dollars (US$500,000.00)
shall be accompanied by (i) Borrower's progress report with respect to the
research, development and clinical trials for Memantine for the indication
neuropathic pain; (ii) Borrower's most recent unaudited monthly financial
statements; and (iii) Borrower's certificate, signed by an officer of Borrower,
confirming that all funds disbursed by Merz to Borrower pursuant to Article
2.1(a) hereof have been used by Borrower solely in accordance with Article 2.3
hereof, and Borrower is otherwise in compliance with its obligations under this
Agreement.
c. In the event that Merz shall have disbursed the sum of Five
Hundred Thousand United States Dollars (US$500,000.00) to Borrower pursuant to
Article 2.1(b) of this Agreement, no earlier than December 15, 1999, Borrower
may apply to Merz for the disbursement of an additional Five Hundred Thousand
United States Dollars (US$500,000.00). Any application by Borrower for the
disbursement of an additional Five Hundred Thousand United States Dollars
(US$500,000.00) shall be accompanied by (i) Borrower's progress report with
respect to the research, development and clinical trials for Memantine for the
indication neuropathic pain; (ii) Borrower's most recent unaudited monthly
financial statements; and (iii) Borrower's certificate, signed by an officer of
Borrower, confirming that all funds disbursed by Merz to Borrower pursuant to
Articles 2.1(a) and 2.1(b) hereof have been used by Borrower solely in
accordance with Article 2.3 hereof, and Borrower is otherwise in compliance with
its obligations under this Agreement.
2.2(a) Any application by Borrower under Article 2.1(a) and/or
Article 2.1(b) hereof for the disbursement of additional funds of the Loan by
Merz shall be subject to acceptance or rejection by Merz, at Merz' sole
discretion; provided, however, that Merz shall accept an application by Borrower
under Article 2.1(b) or Article 2.1(c) hereof, as the case may be, provided that
(i) Borrower is in compliance with all of its obligations under this Agreement;
and (ii) Merz is satisfied with the results of Borrower's research, development
and clinical trials of Memantine as of the date of such application.
2.2(b) Merz shall provide Borrower with written notice of its
acceptance or rejection of any application by Borrower under Article 2.1(b) or
Article 2.1(c) hereof within 10 days after the date of such application. In the
event that Merz accepts any such application by Borrower, Merz shall disburse
the funds covered by that application to Borrower within 5 days
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after the date of Merz' written notice of acceptance of such application
pursuant to this Article 2.2(b).
2.2(c) Borrower's obligations to Merz with respect to the Loan
shall be evidenced by one or more Promissory Notes substantially in the form of
Exhibit A hereto (the "Promissory Notes").
2.3 Borrower shall use all of the proceeds of the Loan solely to
finance Borrower's research, development and clinical trials of Memantine for
the indication neuropathic pain, in accordance with Borrower's plan for clinical
trials attached hereto as Schedule 2.3, and for no other purpose whatsoever,
except as authorized in writing by Merz.
2.4 Borrower shall repay the outstanding principal amount of the Loan,
together with all interest accrued thereon as provided in Article 3 hereof, on
or before December 31, 2000, provided, however, that partial repayment of the
Loan shall be due beginning on the date on which any Future Royalties become due
up to the amount of any such Future Royalties accruing from time to time.
Borrower hereby assigns to Merz any Future Royalties in partial repayment of the
Loan, subject to the following terms and conditions:
(a) the Future Royalties assigned by Borrower to Merz hereunder
will be those accruing in favor of Borrower under the License
for as long as any sums due to Merz hereunder, including all
accrued interest, are outstanding;
(b) the Future Royalties are assigned by Borrower hereunder up to
the aggregate amount outstanding under the Loan from time to
time, including all accrued interest; and
(c) this assignment of the Future Royalties shall terminate upon
the exercise in full of the conversion rights provided for in
Article 4 hereof or upon repayment by the Borrower of the full
amount of the Loan and all interest accrued thereon, whichever
comes first.
2.5 Borrower may prepay the Loan, in whole or in part, at any time,
without penalty or premium, upon fifteen (15) days prior written notice to Merz,
during which period Merz may elect to convert the Loan into Borrower's Common
Stock as provided in Article 4 hereof. In the event that Borrower makes any such
prepayment hereunder, as well as in the event of the application by Merz of any
Future Royalties in payment of the Loan pursuant to Article 2.4 hereof, the
amount of such prepayment or application of Future Royalties, as the case may
be, shall be applied: (i) first, against all interest accrued as of the date of
such prepayment or application of Future Royalties, as determined in accordance
with Article 3 hereof; and (ii) second, against the principal amount of the Loan
outstanding as of the date of such prepayment or application of Future
Royalties.
2.6 All disbursements of the Loan by Merz to Borrower, and all payments
of principal and interest by Borrower to Merz hereunder shall be made solely in
United States Dollars.
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Article 3: Interest
3.1 Simple interest shall accrue on the outstanding principal balance
of, and any accrued but unpaid interest on, the Loan at the rate of Eight
Percent (8%) per annum. Except in the event of a prepayment by the Borrower in
whole or in part of the outstanding principal balance of the Loan, as provided
in Article 2.5 hereof, all accrued interest shall be paid in full no later than
December 31, 2000.
3.2 Interest shall be computed hereunder on the basis of a year of
three hundred and sixty-five (365) days, and shall be based on the principal
amount of the Loan and any accrued but unpaid interest outstanding as of each
such day.
3.3 In the event that the interest payable by Borrower to Merz
hereunder, as determined in accordance with Articles 3.1 and 3.2 hereof, exceeds
the maximum interest rate permitted under applicable law, Borrower shall not be
obligated to pay, and Merz shall not be entitled to collect or receive, any
interest in excess of the amount of interest computed on the basis of the
maximum rate permitted under applicable law.
Article 4: Conversion Rights
4.1 Merz Conversion Right. At any time while any sums due under this
Agreement are outstanding, Merz may (but is not obligated to) convert the entire
outstanding principal balance of the Loan, together with all accrued interest
thereon, into shares of Borrower's Common Stock by delivering the Note to
Borrower together with a written notice of intent (the "Conversion Notice") to
convert the Loan on the date specified in such notice, which date shall be the
fifteenth (15th) day after Merz sends Borrower the Conversion Notice.
4.2 Amounts to be converted. Borrower shall issue to Merz upon Merz'
exercise of its conversion rights under Article 4.1 the number of fully paid and
nonassessable shares of Common Stock of Borrower, equal to the amount of the
outstanding principal balance of the Loan, together with all accrued interest
thereon, divided by the Conversion Price, as defined in Article 4.3 hereof,
rounded down to the nearest whole share, with the value of any fractional share
to be paid to Merz in cash.
4.3 Conversion Price.
The "Conversion Price" of the Loan shall be equal to One
United States Dollar and Five Cents ($1.05) per share; provided, however, that,
in the event that, at any time prior to Merz' exercise of its conversion rights
under this Article 4, Borrower shall issue (i) any additional shares of stock,
whether through a secondary offering of such shares, a stock split, stock bonus,
stock dividend or otherwise, or (ii) any securities convertible into or
exchangeable for shares of stock of Borrower (including warrants, options, or
conversion rights), the number of shares of Borrower's Common Stock to be issued
to Merz upon the exercise of Merz' conversion rights under this Article 4 shall
be increased in accordance with the formula set forth in Exhibit B hereto;
provided that no increase of the shares so issuable to Merz shall occur upon the
grant
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to employees, directors or consultants of options to purchase Borrower's stock
pursuant to a stock option plan approved by the Board of Directors of the
Borrower prior to the Effective Date.
4.4 Disposition of Shares. Borrower shall take all actions reasonably
requested by Merz, in order to permit Merz to sell, transfer or otherwise
dispose of the shares of Borrower's Common Stock acquired by Merz pursuant to
its exercise of its conversion rights under this Article 4: (i) in accordance
with Rule 144 issued under the Securities Act of 1933, as amended; or (ii)
pursuant to a registration statement submitted by Borrower to the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
4.5 Legends. The certificate or certificates representing the shares of
Common Stock issuable upon conversion of the Loan shall bear the following
legends, in addition to any legend required by law:
"The shares represented by this certificate have been acquired
for investment and not FOR distribution. theSE Shares HAVE NOT BEEN REGISTERED
UNDER the securities act of 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN effective registration
statement with respect to the shares under such act or unless sold in compliance
with such act."
Article 5: Representations and Warranties of Borrower
Borrower hereby represents and warrants to Merz that the following
statements are true, correct and complete as of the date of this Agreement and
as of each date on which Merz disburses any portion of the Loan pursuant to
Article 2.1 hereof.
5.1 Organization and Corporate Power. Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Borrower has full corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. The Borrower is duly qualified and in good
standing to do business as a foreign corporation in each jurisdiction where the
failure to be so qualified would have a materially adverse effect upon the
Borrower. The Certificate of Incorporation, as amended to date, certified by the
Secretary of State of Delaware, and the Bylaws of the Borrower, as amended to
date, which have previously been provided to Merz by Borrower, are true and
complete copies thereof as currently in effect.
5.2 Authorizations. This Agreement, and each and every Promissory Note
to be executed by Borrower in connection herewith, has been duly authorized by
all necessary corporate action on the part of Borrower, has been duly and
validly executed and delivered by Borrower and constitutes a legal, valid and
binding obligation of Borrower enforceable against Borrower in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
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reorganization and other laws of general application relating to or affecting
creditors' rights and to general equity principles. The resolutions of
Borrower's Board of Directors authorizing the execution and delivery of this
Agreement by Borrower, which have previously been provided to Merz by Borrower,
are true and complete copies thereof as currently in effect.
5.3 Capitalization of the Borrower. The authorized capital stock of the
Borrower consists of 25,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock, of which 3,000,000 shares are designated as Series A Preferred
Stock. As of March 31, 1999, there were 9,291,699 shares of Common Stock and
2,232,000 Shares of Series A Preferred Stock issued and outstanding. Except as
provided in the Disclosure Schedule attached hereto as Exhibit C, Borrower has
no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interest therein or to pay any dividend or
make any other distribution in respect thereof or to register any of its
currently outstanding or future issuances of securities under the Securities Act
of 1933, as amended. To Borrower's knowledge, there are no voting trusts or
agreements, stockholders' agreements, pledge agreements, buy-sell agreements,
rights of first refusal, preemptive rights or proxies relating to any securities
of Borrower (whether or not Borrower is a party thereto). All of the outstanding
securities of Borrower were issued in compliance with applicable Federal and
state securities laws in all material respects.
5.4 No Conflicts. Neither the execution and delivery of this Agreement,
nor the consummation by Borrower of the transactions contemplated hereby, or
compliance with any of the provisions hereof, will (i) conflict with or result
in a breach of, violation of, or default under, any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, license, lease,
credit agreement or other material agreement, document, instrument or obligation
to which Borrower is a party or by which any of its assets or properties may be
bound, or (ii) violate any judgment, order, injunction, decree, statute, rule or
regulation applicable to Borrower, or any of its material assets or properties.
No authorization, consent or approval of any governmental authority or any third
party is necessary for the consummation by Borrower of the transactions
contemplated by this Agreement.
5.5 Litigation; Compliance with Laws. There are no actions or
proceedings pending by or against Borrower before any court or administrative
agency in which an adverse decision could have a material adverse effect on
Borrower. Borrower does not have knowledge of any such pending or threatened
actions or proceedings. Borrower will promptly notify Merz in writing if any
action, proceeding or governmental investigation, involving Borrower is
commenced that may result in damages or costs to Borrower of $50,000.00 or more.
Borrower has met, and at all times will meet, the minimum funding requirements
of ERISA with respect to any employee benefit plans subject to ERISA. None of
Borrower's properties or assets has ever been used by Borrower or, to the best
of Borrower's knowledge, by previous owners or operators in the disposal of, or
to produce, store, handle, treat, release, or transport, any hazardous waste or
hazardous substance other than in accordance with applicable law. Borrower is in
material compliance with all Federal, state and local environmental laws and
ordinances with respect to the conduct of its business.
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5.6 Financial Statements. No Material Adverse Change. Borrower has
furnished to Merz its audited financial statements for the year ended June 30,
1998 and unaudited financial statements for the quarters ended September 30,
1998, December 31, 1998 and March 31, 1999. All such financial statements fairly
present, in all material respects, the financial position of Borrower for the
periods then ended, and have been prepared in conformity with generally accepted
accounting principles, consistently applied, except, as to the unaudited
financial statements, for the omission of notes thereto and normal year-end
audit adjustments. There has not been a material adverse change in the financial
condition of Borrower since the date of the most recent of such financial
statements submitted to Merz.
5.7 Absence of Undisclosed Liabilities. Except as reflected or reserved
against in the most recent financial statements or set forth in the Disclosure
Schedule, the Borrower has no liability or obligation (whether accrued, to
become due, contingent or otherwise) which individually or in the aggregate
could reasonably be expected to have a materially adverse effect on the
business, assets, or financial condition of Borrower.
5.8 Proprietary Information of Third Parties. No third party has
claimed, nor to Borrower's knowledge is there any valid basis to claim, that any
person employed by or serving as a director or consultant to, Borrower has
violated or may be violating any of the terms or conditions of any employment,
non-competition or non-disclosure agreement with such third party. To Borrower's
knowledge, Borrower's Intellectual Property Rights do not infringe on the
intellectual property rights of any third party.
5.9 Taxes. Borrower has filed (or has received appropriate extensions
for) all tax returns, federal, state, county and local, required to be filed by
it, and Borrower has paid all taxes shown to be due by such returns, as well as
all other taxes, assessments and governmental charges which have become due or
payable, including without limitation, taxes which Borrower is obligated to
withhold from amounts owing to employees, creditors and third parties. To
Borrower's knowledge, there is no tax lien on any of Borrower's assets,
properties or business.
5.10 Loans and Advances; Assumptions and Guaranties of Indebtedness of
Other Persons. Borrower does not have any outstanding loans or advances to any
person and is not obligated to make any such loans or advances, except, in each
case, advances to employees in respect of reimbursable business expenses
anticipated to be incurred by them in connection with their performance of
services for Borrower. Borrower has not assumed, guaranteed, endorsed or
otherwise become directly or contingently liable on any indebtedness of any
other person, other than guaranties by endorsement of negotiable instruments or
items of payment for deposit or collection in the ordinary course of business.
5.11 Disclosure. Neither this Agreement, nor any certificate furnished
to Merz by or on behalf of Borrower pursuant to the provisions hereof, contains
any untrue statement of a material fact or omits to state a material fact
necessary to be stated in order to make the statements contained herein or
therein not misleading. Borrower has no knowledge of any fact which has not been
disclosed in writing to Merz which may reasonably be expected to materially and
adversely affect the business, properties, or operations of Borrower or the
ability of Borrower to
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perform all of the obligations to be performed by Borrower under this Agreement
and/or any other agreement between Merz and Borrower to be entered into pursuant
to any provision of this Agreement.
Article 6: Conditions Precedent
In addition to the provisions of Articles 2.1 and 2.2 hereof, Merz'
obligation to make any disbursement of the Loan is subject to satisfaction of
each of the following conditions:
6.1 Borrower shall have delivered to Merz the following documents, all
in form and substance satisfactory to Merz:
(a) an appropriate Promissory Note, duly executed on
behalf of Borrower;
(b) a copy of the resolutions of the Board of Directors
of Borrower authorizing the actions and transactions
contemplated by this Agreement and the execution and
delivery of the documents to be executed on behalf of
Borrower pursuant to the provisions hereof, including
a secretary's certificate as to the authority of the
signatories thereof; and
(c) a certificate by an officer of Borrower certifying
that all of Borrower's representations and
warranties, as set forth in Article 5 hereof, shall
be true and correct as of the date hereof and as of
the date of disbursement of such funds.
Article 7: Covenants of Borrower
A. During the continuance of this Agreement, Borrower shall:
(1) Remain qualified to do business and in good standing in
each state and other jurisdiction where the failure to be so qualified would
have a material adverse effect on Borrower, and maintain in full force and
effect all governmental licenses, permits, authorizations, registrations and
approvals necessary or appropriate for the conduct of Borrower's business.
(2) Maintain all books and records of account, in accordance
with generally accepted accounting principles, consistently applied, of all
assets, operations and finances of Borrower.
(3) Maintain insurance with reputable insurers in covering
such risks, and with such coverage limits as are carried by companies engaged in
similar businesses and owning similar assets as the Borrower.
(4) Comply in all material respects with all applicable laws,
regulations and governmental orders, including, but not limited to, the filing
of all tax returns and the payment of all taxes, fees, assessments or other
governmental charges.
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(5) Execute and deliver such other documents, and take such
other actions, as Merz shall reasonably request from time to time to protect
Merz' rights hereunder, or to further the transactions contemplated herein.
B. During the continuance of this Agreement, Borrower shall not,
without the prior written authorization of Merz:
(1) Sell, transfer, assign or convey any material assets of
Borrower, other than in the ordinary course of Borrower's business, or create,
incur, assume or suffer the imposition of any lien, encumbrance, mortgage or
security interest on any of Borrower's material assets.
(2) Create, incur or assume any indebtedness, other than (i)
Borrower's indebtedness to Merz under this Agreement, (ii) such other
indebtedness, in the form of trade accounts payable, incurred in the ordinary
course of Borrower's business, without the prior written authorization of Merz;
provided, that Borrower may incur indebtedness with third party lenders if such
lenders, Merz and the Borrower execute a Subordination Agreement, in form
acceptable to Merz, pursuant to which Borrower shall not make any payments,
directly or indirectly, by set-off, purchase or otherwise, for such indebtedness
of whatever kind or nature, whether in cash, property, securities or otherwise
with priority over, or prior to, the repayment of the Loan.
(3) Declare or make, or agree to declare or make, any dividend
or distributions of any assets of any kind whatsoever to any shareholders, or
purchase or redeem, or agree to purchase or redeem, any of its stock or other
securities.
Article 8: Events of Default
Each of the following events shall constitute an "Event of Default"
under this Agreement:
8.1 Borrower fails to repay the entire outstanding principal amount of
the Loan hereunder and/or any and all interest accrued thereon when due, in
accordance with the provisions of Article 2.4 hereof.
8.2 Borrower breaches, or commits any default under, any material
obligation (including without limitation the covenants set forth in Article 7
hereof) under this Agreement or under the License Agreement.
8.3 Any representation or warranty by Borrower, as set forth in Article
5 hereof, shall prove to be incorrect so as to have, or be likely to have, a
material adverse effect on the Borrower, or its business, properties, operations
or financial condition.
8.4 Borrower shall file a voluntary petition, or shall have filed
against it any involuntary petition under any applicable bankruptcy law, be
declared insolvent, admit in writing its inability to pay its debts as they
become due, makes an assignment for the benefit of creditors, or suffers the
appointment of a receiver or trustee over all or substantially all of its
assets.
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Article 9: Consequences of Default
In the event of the occurrence of any Event of Default hereunder, as
provided in Article 8 hereof, Merz may give written notice of such Event of
Default, and demand that such Event of Default be cured immediately. In the
event that Borrower fails to cure such Event of Default within ten (10) days
after the date of Merz' written notice thereof, pursuant to this Article 9, Merz
may exercise all, or any, of the following rights and remedies:
9.1 The entire outstanding principal amount of the Loan, together with
all interest accrued thereon, shall immediately become due and payable on the
expiration of such ten (10) day period, without further notice, presentment,
demand or protest by Merz, all of which are hereby irrevocably waived by
Borrower, and Borrower shall pay to Merz the full amount of such outstanding
principal amount of the Loan, together with all interest accrued thereon, within
ten (10) days after the expiration of such ten (10) day period.
9.2 In addition to, and not in lieu of, the rights and remedies
provided for in Article 9.1 hereof, Merz may exercise all other rights and
remedies provided under applicable law.
9.3 The occurrence of an Event of Default shall not impair or
invalidate Merz' conversion rights under Article 4 hereof, which Merz, in its
sole discretion, may exercise, provided, however, that Merz' exercise of its
conversion rights under Article 4 shall not limit or impair Merz' right to seek
any other remedies available to Merz under applicable law, including, but not
limited to, the right to recover damages from Borrower for any and all harm
suffered or incurred by Merz as a result of such Event of Default.
Article 10: Term
This Agreement shall enter into effect on the date of execution hereof,
and shall remain in full force and effect until the entire principal amount of
the Loan, together with all interest accrued thereon, shall have been paid in
full by Borrower to Merz, or until Merz exercises its conversion rights under
Article 4 hereof, as the case may be.
Article 11: General Provisions
11.1 Assignment: Borrower shall not have the right or the power to
assign any of its rights, or delegate the performance of any of its obligations,
under this Agreement, without the prior written consent of Merz, which Merz may
grant or withhold in its sole discretion. Subject to the provisions of this
Article 11.1, this Agreement shall inure to the benefit of, and be binding upon,
the parties' respective successors and assigns.
11.2 Notices: All notices and other communications hereunder shall be
sent: (i) by registered mail, postage prepaid and return receipt requested; (ii)
by international air courier; or (iii) by facsimile, with a confirmation copy
sent by registered mail or international air courier, addressed as follows:
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To: Merz Merz + Co. GmbH & Co.
Eckenheimer Landstrasse 100-104
60318 Frankfurt a.M.
Germany
Attention: Head of Corporate Development
Facsimile: (011-49-69) 150-3400
To: Borrower Neurobiological Technologies Inc.
1387 Marina Way South
Richmond, CA 94804
U.S.A.
Attention: President
Facsimile: (510) 215-8100
All notices and other communications given in accordance with this Article 11.2
shall be deemed received: (i) if sent by registered mail, five (5) days after
the date of mailing; (ii) if sent by international air courier, two (2) days
after the time and date of dispatch; and (iii) if sent by facsimile, twenty-four
(24) hours after the time and date of transmission.
11.3 Governing Law: This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of California, excluding
conflicts of laws rules.
11.4 Dispute Resolution: Any dispute relating to the validity,
performance, interpretation or construction of this Agreement that cannot be
amicably resolved between the parties shall be submitted to the exclusive
jurisdiction of the courts, including the United States District Courts, in
Contra Costa County, California. Each party hereto irrevocably consents to the
personal jurisdiction of the courts in Contra Costa County, California for the
resolution of all disputes hereunder.
11.5 Attorneys' Fees: In the event that Merz initiates any legal action
to collect any monies owed to Merz by Borrower hereunder, or otherwise to
enforce any of Merz' rights hereunder, provided that Merz is the prevailing
party in such legal action, Borrower shall reimburse Merz for all costs and
expenses incurred by Merz in connection with such legal action, including, but
not limited to, Merz' reasonable attorneys' fees.
11.6 Waivers: Any failure by Merz to enforce, or any delay by Merz in
enforcing, any of its rights under this Agreement shall not be deemed to
constitute a waiver by Merz of its right thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
11.7 Headings: The headings in this Agreement are for convenience only,
and shall not affect the interpretation or construction of this Agreement.
11.8 Counterparts: This Agreement may be executed in more than one
counterpart, each of which when so executed shall be deemed an original, but all
which together shall constitute a single instrument.
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11.9 Entire Agreement and Amendments: This Agreement, together with the
Exhibits attached hereto and other agreements incorporated herein by reference,
constitutes the entire agreement between the parties with respect to the subject
matter hereof, and supersedes all prior agreements, understandings and other
communications between the parties with respect to such subject matter. No
modification or amendment to this Agreement shall be binding upon the parties
unless in writing and executed by the duly authorized representatives of each of
the parties.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed this 3th day of August, 1999.
Merz + Co. GmbH & Co. Neurobiological Technologies Inc.
/s/ Peter Mauritz /s/ Paul E. Freiman
- --------------------------------- --------------------------------
Name: Peter Mauritz Name: Paul E. Freiman
Title: Vice President Finance Title: President & CEO
/s/ Friedhelm Klingenburg
- ---------------------------------
Name: Friedhelm Klingenburg
Title: Executive Director
[Signature page of the Convertible Loan Agreement]
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EXHIBIT A
PROMISSORY NOTE
$500,000.00
8.0% Richmond, California, July 26, 1999
FOR VALUE RECEIVED, Neurobiological Technologies Inc., a Delaware corporation
("Borrower") promises to pay to the order of Merz + Co. GmbH & Co., a company
organized under the laws of Germany ("Lender"), at the Lender's office at
Eckenheimer Landstrasse 100-104, 60318 Frankfurt a.M., Germany, in lawful money
of the United States of America and in immediately available funds, at the
Maturity Date (as defined below) the principal sum of Five Hundred Thousand &
00/100 Dollars (US$500,000.00) together with interest on the unpaid principal
balance from the Issue Date.
Simple interest shall accrue on the outstanding principal balance of,
and any accrued but unpaid interest on, this Note at the rate of Eight Percent
(8%) per annum. The entire principal balance and any and all other sums payable
hereunder, including all accrued interest hereunder, shall be due and payable on
December 31, 2000.
Borrower may prepay the Loan, in whole but not in part, at any time,
without penalty or premium, upon fifteen (15) days prior written notice to Merz.
This Promissory Note is one of the Promissory Notes referred to in that
certain Convertible Loan Agreement between Borrower and Lender of even date
herewith (together with all related schedules, as the same may be amended,
modified or supplemented from time to time, the "Agreement") and is secured
thereby. Capitalized terms not defined herein shall have the meanings set forth
in the Agreement.
Upon the occurrence of any Event of Default under the Agreement, at
Merz' option, all of Borrower's obligations to Merz hereunder shall become
immediately due and payable, without notice, demand, presentment, protest, or
other formalities of any kind, all of which are hereby expressly waived by
Borrower.
If any action at law or in equity is necessary to enforce or interpret
the terms of this Note, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and disbursements in addition to any other relief to
which such party may be entitled.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE
LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW. THE PARTIES SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE SUPERIOR COURT OF
THE STATE OF CALIFORNIA IN CONTRA COSTA COUNTY, OR THE MUNICIPAL COURT OF THE
STATE OF CALIFORNIA, CONTRA
<PAGE>
COSTA COUNTY , OR THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
CALIFORNIA, IN ANY LITIGATION ARISING OUT OF THIS NOTE.
BORROWER:
Neurobiological Technologies, Inc.
By: __________________________________
Name: ________________________________
Title: _______________________________
Attest:
________________________
_____________, Secretary
<PAGE>
EXHIBIT B
Conversion Formula
<TABLE>
<CAPTION>
<S> <C>
N Merz Shares
_______________________________ X N NewStock X (MktPrice - NewStockPrice)
N Outst Shares + N Merz Shares
Q= ____________________________________________________________________
1.05
</TABLE>
Q = Additional number of shares to be issued to Merz upon
conversion of the Loan
N. Merz Shares = Number of shares Merz is entitled to convert into
prior to adjustment
N. Outst Shares = Number of outstanding shares at the time new shares
are issued or warrants or conversion rights are
granted
N NewStock = Number of new equity securities issued (i.e., stock,
warrants, conversion rights or options, excluding
options granted pursuant to stock option plans as
provided in Section 4.3)
MktPrice = Current market price of Borrower's stock calculated
as arithmetic average price of the previous 5
business days
NewStockPrice = New stock/new options/new conversion price agreed
between NTI and a third party
Adjustment in case of Stock Split. Should the Borrower effectuate a split or
subdivision of the outstanding shares of Common Stock or for the determination
of holders of Common Stock entitled to receive a distribution of additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock for no consideration, then, as of the date of such
distribution, split or subdivision, the Conversion Price shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
the Loan shall be increased in proportion to such increase of outstanding
shares.
<PAGE>
EXHIBIT C
DISCLOSURE SCHEDULE
1. Section 5.3: Capitalization
Outstanding Options:
o 2,000,000 shares are reserved for issuance under the Company's stock option
plan;
o 100,000 shares are reserved for issuance under the Company's stock purchase
plan.
Outstanding Warrants:
o 892,800 warrants at $1.00 per share expiring in April 2004;
o 1,010,410 warrants at $0.75 per share expiring in September 1999;
o 1,010,410 warrants at $1.50 per share expiring in March 2001;
o 100,000 warrants at $1.25 per share and 25,000 at $3.00 per share expiring
in April 2001;
o 220,000 warrants at $3.90 per share expiring in February 2001; and
o 37,286 warrants at $5.60 per share expiring no later than June 2001.
Total Warrants: 3,295,906
2. Section 5.3: Undisclosed Liabilities
None.
<PAGE>
[Signature page of the Promissory Note]
EXHIBIT 10.21
NEUROBIOLOGICAL TECHNOLOGIES, INC.
[NTI LOGO GOES HERE]
RETENTION AGREEMENT
WHEREAS, Neurobiological Technologies, Inc. ("NTI"), wishes to
encourage Lisa Carr, M.D. ("Dr. Carr"), to continue her employment with NTI for
at least the next two (2) years, through and including February 1, 2001,
IT IS HEREBY AGREED, EFFECTIVE February 1, 1999 AS FOLLOWS:
Dr. Carr's Employment Agreement, as reflected in the counter-signed
offer letter and amendment letter attached hereto as Exhibits A and B, is hereby
further modified to provide the following additional incentive to Dr. Carr:
1. In addition to her salary, NTI agrees to pay Dr. Carr a retention bonus
in the amount of $100,000, less deductions required by law, on February 1, 2001,
provided Dr. Carr has continued to serve as NTI's Vice-President, Medical
Affairs.
2. In the event that a change in control of the company results in Dr.
Carr's involuntary termination prior to February 1, 2001, Dr. Carr will be
entitled to the full $100,000 retention bonus, less deductions required by law.
For purposes of this agreement, involuntary termination will be construed to
include the following occurrences;
a) Dr. Carr's work site is moved to another location which would add more
than thirty (30) miles to the distance she currently commutes from her
present home to NTI's headquarters in Richmond; and
b) Dr. Carr's terms of employment are changed to require her to be present
at NTI's headquarters in excess of three (3) days per week.
3. Nothing in this agreement or in any prior letters/agreements is meant to
imply that Dr. Carr or NTI has agreed that Dr. Carr's employment is for a
specified term.
AGREED AND ACCEPTED BY
/s/ Lisa Carr July 12, 1999
----------------------------------------------- --------------------------
Lisa Carr, M.D. Date
/s/ Paul E. Freiman July 8, 1999
----------------------------------------------- --------------------------
For Neurobiological Technologies, Inc. Date
Paul E. Freiman
President and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM BALANCE
SHEET AND INCOME STATEMENTS DATED
6/30/99 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 201,202
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 245,035
<PP&E> 292,182
<DEPRECIATION> 288,386
<TOTAL-ASSETS> 248,831
<CURRENT-LIABILITIES> 1,134,839
<BONDS> 0
0
1,166,000
<COMMON> 29,985,352
<OTHER-SE> (32,037,360)
<TOTAL-LIABILITY-AND-EQUITY> 248,831
<SALES> 0
<TOTAL-REVENUES> 99,544
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,838,726
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (46,949)
<INCOME-PRETAX> (3,692,233)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,692,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,692,233)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
