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As filed with the Securities and Exchange Commission on June 6, 2000
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(Name of Small Business Issuer as specified in its charter)
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DELAWARE 2836 94-3049219
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or organization) Classification Code Number) identification number)
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3260 BLUME DRIVE SUITE 500, RICHMOND, CALIFORNIA 94806, (510) 262-1730
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
-------------------------------
PAUL E. FREIMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEUROBIOLOGICAL TECHNOLOGIES, INC.
3260 BLUME DRIVE SUITE 500
RICHMOND, CALIFORNIA 94806
(510) 262-1730
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------------
Copies to:
STEPHEN C. FERRUOLO
HELLER EHRMAN WHITE & MCAULIFFE LLP
4250 EXECUTIVE SQUARE, 7TH FLOOR
SAN DIEGO, CA 92037-9103
TELEPHONE: (858) 450-8400
FACSIMILE: (858) 450-8499
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
=======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE AGGREGATE PRICE PER AGGREGATE OFFERING REGISTRATION FEE
BE REGISTERED REGISTERED SECURITY PRICE
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Common Stock, par value $.001 1,200,000 $6.46875(1) $7,762,500(1) $2,049.30
=======================================================================================================================
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based
on the average of the bid and ask price reported of the Registrant's common
stock on the OTC Bulletin Board on June 2, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
PRELIMINARY PROSPECTUS
NEUROBIOLOGICAL TECHNOLOGIES, INC.
1,200,000 SHARES OF COMMON STOCK
-------------
These shares may be offered and sold from time to time by the
stockholders of the Company identified in this prospectus. See "Selling
Stockholders". All of the shares were acquired by the selling stockholders in
the Company's recent financing.
The selling stockholders will receive all of the proceeds from the sale
of the shares and will pay all underwriting discounts and selling commissions,
if any, applicable to the sale of the shares. We will pay the expenses of
registration of the sale of the shares.
On May 31, 2000, Neurobiological Technologies, Inc. had 15,154,636
shares of common stock issued and outstanding. Our common stock trades on the
Over the Counter (OTC) Bulletin Board-Registered Trademark-, an electronic
stock listing service provided by the Nasdaq Stock Market, Inc. under the
symbol "NTII". On May 31, 2000, the last bid price for the common stock on
the OTC Bulletin Board was $6.875 per share.
Our principal offices are located at 3260 Blume Drive Suite 500,
Richmond, California, and our phone number is (510) 262-1730.
------------
Beginning on page 3, we have listed several "Risk Factors" which you
should consider. You should read the entire prospectus carefully before you make
your investment decision.
------------
Neither the Securities and Exchange Commission nor state regulatory
authorities has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
The date of this prospectus is _____________
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Subject to Completion
Dated _______________
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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TABLE OF CONTENTS
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Forward-Looking Information.............................................................................2
Risk Factors............................................................................................3
Use of Proceeds.........................................................................................8
Market Price of NTI Common Stock; Dividends.............................................................8
Management's Discussion and Analysis of Financial Condition and Results of Operations...................9
Business................................................................................................11
Directors and Executive Officers of the Registrant......................................................20
Executive Compensation..................................................................................21
Certain Relationships and Related Transactions..........................................................23
Security Ownership of Certain Beneficial Owners and Management..........................................24
Description of Common Stock.............................................................................25
Description of Preferred Stock..........................................................................25
Selling Stockholders....................................................................................26
Plan of Distribution....................................................................................27
Limitation of Liability and Indemnification Matters.....................................................28
Legal Matters...........................................................................................28
Experts.................................................................................................28
Where You Can Find More Information.....................................................................28
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You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. The selling stockholders are offering to
sell, and seeking offers to buy, shares of Neurobiological Technologies, Inc.
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of the shares.
In this prospectus, the "Company," "Neurobiological Technologies,
Inc.," "NTI," "we," "us," and "our" refer to Neurobiological Technologies, Inc.
FORWARD-LOOKING INFORMATION
Statements made in this prospectus or in the documents incorporated by
reference herein that are not statements of historical fact are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. A number of risks and
uncertainties, including those discussed under the caption "Risk Factors"
beginning on page 3 could affect such forward-looking statements and could cause
actual results to differ materially from the statements made in this prospectus.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, ALONG WITH
THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
IN DECIDING WHETHER TO INVEST IN OUR SECURITIES. THESE FACTORS, AMONG OTHERS,
MAY CAUSE ACTUAL RESULTS, EVENTS OR PERFORMANCE TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS.
NTI 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, we have applied a substantial portion
of our resources to our research and development programs. As part of the
strategic planning process, we have limited expenditures to only two drug
candidates, Memantine and XERECEPT-TM-.
We will need to obtain additional financing to continue operations
beyond June 30, 2001. NTI 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 we may not be able to obtain the additional
financing from any of these sources, or, if financing is available, that it will
not be available on acceptable terms. In addition, we may seek to raise
additional funds whenever market conditions permit. Raising additional funds
through issuing equity securities may result in significant dilution to our
existing stockholders.
If we are not able to raise adequate funds, we may be required to
delay, scale back, or terminate our clinical trials, or to obtain funds through
collaborative partners or others. Such arrangements may require us to give up
additional rights to our technology, product candidates or products.
Our future capital requirement will depend on a number of factors,
including:
- the amount of royalties received from Merz + Co. GmbH & Co. for future
sales of Memantine;
- the amount of front-end and milestone payments received from a
marketing agreement for Memantine;
- the progress of our 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;
- our ability to establish collaborative relationships;
- the development of commercialization activities and arrangements; and
- the purchase of additional capital equipment.
OUR CONTINUING LOSSES RAISED A GOING CONCERN ISSUE IN THE REPORT OF OUR
INDEPENDENT AUDITORS.
The report of our independent auditors with respect to our financial
statements included in our Annual Report on Form 10-KSB for the year ended June
30, 1999 includes a paragraph indicating that, as more fully described in the
financial statements, our recurring losses during the development stage and a
working capital deficit and net capital deficiency at June 30, 1999 raise
substantial doubt about our ability to continue as a going concern.
BECAUSE ALL OUR POTENTIAL PRODUCTS ARE IN CLINICAL DEVELOPMENT, WE MAY NOT
DEVELOP A CANDIDATE PRODUCT THAT WILL RECEIVE REQUIRED REGULATORY APPROVAL OR BE
SUCCESSFULLY COMMERCIALIZED.
We are still in the development stage and have no marketable products.
As a result, we have no revenues from product sales, and most of our resources
are dedicated to the development of selected candidate pharmaceutical products.
The results of our preclinical studies and early stage clinical trials are not
necessarily indicative of those that will be obtained upon further clinical
testing in later stage clinical trials. It is possible that none of our
candidate products will receive regulatory approval or be successfully
commercialized.
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OUR POTENTIAL PRODUCTS ARE SUBJECT TO THE RISKS OF FAILURE INHERENT IN THE
DEVELOPMENT OF PRODUCTS BASED ON NEW TECHNOLOGIES.
Our 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;
- if approved, be difficult to manufacture on a large scale or uneconomical
to market;
- be precluded from marketing by NTI due to the proprietary rights of third
parties; and
- not be successful because third parties market or may market superior or
equivalent products.
Further, our development activities may not result in any commercially
viable products. NTI does not expect to be able to commercialize any products
for a number of years, if at all.
WE HAVE ONLY LIMITED INTERNAL RESOURCES AND THUS HAVE RELIED AND WILL CONTINUE
TO RELY HEAVILY ON OTHERS FOR RESEARCH, DEVELOPMENT, MANUFACTURE AND
COMMERCIALIZATION OF OUR POTENTIAL PRODUCTS.
We have entered into various contractual arrangements (many of which
are non-exclusive) with consultants, academic collaborators, licensors,
licensees and others, and we are 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, our business, financial conditions and results may
be adversely affected.
We have also relied on scientific, mechanical, clinical, commercial and
other data supplied and disclosed by others in entering into these agreements.
We have relied on this data in support of applications for human clinical trials
for our potential products. Although we have 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 to our view of the
future likelihood of FDA approval or commercial viability of these potential
products.
A number of our agreements and licenses with third parties require us
to pay royalties and make other payments to such parties. Failure by NTI to make
such payments could cause us to lose rights to technology or data under these
agreements.
With respect to Memantine, NTI is dependent on Merz for:
- the manufacturing and supply of drug for any future human clinical trials;
and
- the successful commercialization of the product to treat neuropathic pain
and AIDS-related dementia.
The only revenues that we will receive in the future for Memantine are
royalties received on product sales by Merz or its marketing partner or partners
and front-end and milestone payments. Under certain circumstances, Merz can
terminate its agreement with us upon six-months notice. The termination of our
agreement with Merz or any failure by Merz or its partners to successfully
commercialize Memantine after its development would have a material adverse
effect on our business, financial conditions and results of operations.
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.
All of our 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
4
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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, recordkeeping, 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. We cannot yet
accurately predict when we might be able to first submit an application for
approval of any products to the FDA or other regulatory review agency.
OUR SUCCESS WILL DEPEND, IN LARGE PART, ON OUR ABILITY TO OBTAIN OR LICENSE
PATENTS, PROTECT TRADE SECRETS AND OPERATE WITHOUT INFRINGING 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 our
potential products, or design around the claims of any potential patented
products of NTI.
In addition, because of the time delay in patent approval and the
secrecy afforded United States patent applications, we do not know if other
applications, that might have priority over our applications, have been filed.
Further, because we have non-exclusive licenses to patent rights covering
certain uses of XERECEPT, others may develop, manufacture and market products
that could compete with those we develop.
As a result of all of these factors, there can be no assurance that
patent applications relating to our potential products or processes will result
in patents being issued, or that patents, if issued, will provide protection
against competitors who successfully challenge our patents, obtain patents that
may have an adverse effect on our ability to conduct business, or be able to
circumvent our patent position.
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 our business.
Some of these technologies, applications or patents may conflict with NTI's or
any of our licensors' technologies or patent applications. Such conflict could
limit the scope of the patents, if any, that we may be able to obtain or to
which we have a license or result in the denial of our patent applications or
the patent applications for which we have licenses. In addition, if patents that
cover our activities have been or are issued to other companies, there can be no
assurance that we would be able to obtain licenses to these patents at a
reasonable cost, or be able to develop alternative technology.
COMPETITION IN PHARMACEUTICAL PRODUCTS AND DRUG DELIVERY SYSTEMS IS INTENSE.
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 we pursue is highly competitive. There are therapies under
development for each of these therapeutic targets. We may not develop products
that will be as efficacious or as cost-effective as currently-marketed products.
We will face intense competition from pharmaceutical, chemical, and
biotechnology companies both in the United States and abroad in our attempt to
discover, develop and market therapeutic 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, we will face competition from universities and other
nonprofit research institutions, which now conduct significant levels of
research in biotechnology and medicine and are increasingly active in seeking
patent protection and licensing revenues for their research.
5
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We believe that our ability to compete successfully will depend, among
other factors, on our ability to:
- obtain funding;
- create and maintain scientifically advanced technology;
- develop proprietary products that can be protected by patents;
- attract and retain scientific personnel;
- obtain or maintain patent or other protection for our products;
- obtain required regulatory approvals; and
- manufacture and successfully market products either alone or through other
parties.
Most of our competitors have substantially greater financial, marketing
and human resources, and accordingly we will need to continue to attract and
retain qualified scientific personnel, finance pre-clinical and clinical trials,
obtain requisite regulatory approvals and commercialize our products.
BECAUSE WE DO NOT HAVE OUR OWN MANUFACTURING FACILITIES WE FACE RISKS FROM
OUTSOURCING.
We have established arrangements with our corporate collaborator, Merz
+ Co. GmbH & Co., and with contract manufacturers to supply potential products
for preclinical and clinical trials. We intend to establish similar arrangements
for the manufacture, packaging, labeling and distribution of our products if
they are approved for marketing.
We face certain risks by outsourcing manufacturing, including:
- the delay of our preclinical and human clinical testing if our 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
we encounter difficulties in establishing relationships with manufacturers
to produce, package and distribute our products; and
- adverse effects on FDA pre-market approvals of the products of our
collaborators and contract manufacturers if they do not adhere to cGMP
regulations.
Therefore, our dependence on third parties for the manufacture of
products may adversely affect our results of operations and our ability to
develop and deliver products on a timely and competitive basis.
CLINICAL TRIALS OR MARKETING OF ANY OF OUR POTENTIAL PRODUCTS MAY EXPOSE US TO
LIABILITY CLAIMS FROM THE USE OF SUCH PRODUCTS WHICH OUR INSURANCE MAY NOT
COVER.
We have a limited amount of product liability insurance to cover
liabilities arising from clinical trials. It is possible that our current
insurance may not be adequate to cover any liabilities arising from our clinical
trials.
Our current product liability insurance does not cover commercial sales
of products. We can not be sure that we 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 we
develop.
FURTHER REDUCTIONS IN OUR STAFF MIGHT SIGNIFICANTLY DELAY THE ACHIEVEMENT OF
PLANNED DEVELOPMENT OBJECTIVES.
Each person currently employed by NTI serves an essential function.
During fiscal year 1998, we reduced our workforce from 22 to 13 persons, and
during fiscal year 1999 we further reduced our workforce. We currently employ 11
persons. Any further reduction in force could impair our ability to manage
ongoing clinical trials and may have a material adverse effect on our
operations.
6
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IF PREVIOUSLY UNREGISTERED SHARES OF OUR COMMON STOCK ARE SOLD INTO THE MARKET,
IT COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DROP.
Prior to this offering, we had approximately 7,303,819 shares of common
stock freely tradable without restriction or further registration under the
federal securities laws. This prospectus covers an additional 1,200,000 shares
of unregistered common stock. Consequently, the number of shares freely tradable
in the open market may increase significantly. If holders of these shares sell
large numbers of their shares in the open market, the market price of the common
stock could fall sharply. In addition, the perception that such sales could
occur may cause the market price of our common stock to remain relatively low
indefinitely.
THE MARKET PRICE OF THE SHARES OF OUR COMMON STOCK HAS BEEN, AND IS LIKELY TO
CONTINUE TO BE, HIGHLY VOLATILE.
The average daily trading volume of our common stock during fiscal 2000
has been low compared to that of other biopharmaceutical companies. Our common
stock was delisted from The Nasdaq Stock Market in February 1998 because we
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 our stock.
Other factors that may cause volatility in our stock price include:
- the results of preclinical studies and clinical trials by NTI, Merz or our
competitors;
- other evidence of the safety or efficacy of products of NTI, Merz or our
competitors;
- announcements of technological innovations or new therapeutic products by
NTI or our competitors;
- developments in patent or other proprietary rights of NTI or our
competitors, including litigation;
- fluctuations in our operating results;
- government regulation and health care legislation; and
- market conditions for life science companies' stocks in general.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock by the selling stockholders.
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 May 31, 2000, there were approximately 267 holders of record of
the Company's common stock and 15,154,636 shares of common stock outstanding.
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.
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FISCAL 1998 HIGH LOW
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First Quarter*....................... $3.63 $1.56
Second Quarter*...................... $3.56 $0.44
Third Quarter........................ $1.28 $0.47
Fourth Quarter....................... $1.50 $0.69
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FISCAL 1999 HIGH LOW
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First Quarter........................ $1.06 $0.38
Second Quarter....................... $0.69 $0.41
Third Quarter........................ $0.66 $0.47
Fourth Quarter....................... $1.44 $0.50
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FISCAL 2000 HIGH LOW
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First Quarter........................ $1.53 $0.84
Second Quarter....................... $3.75 $0.84
Third Quarter........................ $9.28 $2.81
Fourth Quarter (through May 31,
2000)................................ $7.72 $3.88
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* Prices shown during these quarters reflect the high and low closing
price of the Company's common stock on the Nasdaq SmallCap Market.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operation," and elsewhere in this prospectus 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
Factors."
OVERVIEW
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 revenue from the sale 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Our research and development expenses decreased to approximately
$402,000 in the three months ended March 31, 2000 from approximately $815,000 in
the three months ended March 31, 1999. Expenses were lower in the three months
ended March 31, 2000 primarily due to the completion of the Phase IIB human
clinical trials to evaluate Memantine as a treatment for peripheral diabetic
neuropathy, which were initiated in the quarter ending March 31, 1999. General
and administrative expenses increased to approximately $328,000 in the three
months ended March 31, 2000 from $275,000 in the same period of the prior year.
The increase was primarily due to increased expenditures in activities relating
to seeking financing and corporate partnerships. Interest income increased to
approximately $37,000 in the three months ended March 31, 2000 from $5,000 in
the same period of the prior year due to higher average cash balances as a
result of shares sold in the private placement completed in November 1999.
FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Our 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. 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. In fiscal 1999, our revenues of $99,544 were due to a
Small Business Innovative Research grant awarded from the NIH. Interest income
decreased from $99,000 in fiscal 1998 to $47,000 in fiscal 1999, primarily due
to changes in average cash balances.
We expect to incur substantial ongoing costs primarily for Phase II and
Phase III clinical trials for our development programs and related
administrative support. We expect that our expenditures will continue to
increase as our products move through Phase II and, if the Phase II trials are
successful, Phase III clinical trials.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 2000, we have raised a total of $36.7
million in net proceeds from the sale of common and preferred stock.
We believe our available cash and cash equivalents of $3.1 million as
of March 31, 2000, along with net proceeds of approximately $5.7 million raised
in the April 2000 private placement, will be adequate to fund operations through
the fiscal year ending June 30, 2001. We will need to raise additional capital
to fund subsequent operations beyond the fiscal year ending June 30, 2001. NTI
intends to seek funding through public or private financings, collaborative or
other arrangements with corporate partners, or from other sources. However,
there can
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be no assurance that funding will be available on favorable terms from any of
these sources, if at all. In addition, we may seek to raise additional funds
whenever market conditions permit. Raising additional funds through issuing
equity securities may result in significant dilution to our existing
stockholders.
If we are not able to raise adequate funds, we may be required to
delay, scale back, or terminate our clinical trials, or to obtain funds through
entering into arrangements with collaborative partners or others. Such
arrangements may require us to give up additional rights to our technology,
product candidates or products.
Our future capital requirements will depend on a number of factors,
including:
- the amount of royalties received from Merz for future sales of
Memantine;
- the amount of front-end and milestone payments received from a
marketing agreement for Memantine;
- the progress of our 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;
- our ability to establish collaborative relationships;
- the development of commercialization activities and arrangements; and
- the purchase of additional capital equipment.
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BUSINESS
OVERVIEW
NTI is an emerging drug development company focused on the clinical
development and regulatory approval of neuroscience drugs. We develop
neuroprotective and neuromodulatory agents to treat progressive neurological
impairments characteristic of various nervous system disorders, including
diabetic neuropathy, brain cancer, and AIDS dementia syndrome.
Our strategy is to in-license and develop early stage drug candidates
that target major medical needs and which can be rapidly commercialized. Our
experienced management team oversees the human clinical trials necessary to
establish preliminary evidence of efficacy and seeks partnerships with
pharmaceutical and biotechnology companies for late-stage development and
marketing of our product candidates.
In January 2000, we announced preliminary results of our
placebo-controlled Phase IIB, dose ranging human clinical trial of Memantine, an
orally available compound which appears to restore the function of impaired
neurons by modulation activity of the N-methyl-d-aspartate or NMDA receptor,
integral to the membranes of such cells. Such restoration of function appears to
inhibit 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. Results of the 421 patient Phase IIB
clinical trial of Memantine as a treatment for painful diabetic neuropathy
showed that 44 percent of the patients receiving 40 mg dosages experienced a 50
percent pain reduction, compared to 29 percent in the placebo group at the end
of eight weeks. Although positive trends were seen in the groups treated with 20
mg of Memantine compared to placebo, no statistical significance was observed.
Trial results were presented May 2, 2000 at the 52nd Annual Meeting of the
American Academy of Neurology in San Diego. We expect to begin to work with the
FDA to design a Phase III study for this indication during the second quarter of
fiscal 2001.
In January 2000, NTI also announced completion of patient enrollment in
a double-blind, placebo-controlled Phase II human clinical trial to evaluate
Memantine's ability to reduce symptoms of dementia and neuropathic pain in
patients with AIDS. This trial is funded by the National Institute of Allergy
and Infectious Diseases (NIAID) of the National Institutes of Health and
conducted by the AIDS Clinical Trials Group (ACTG), a clinical trials consortium
funded by the NIAID. We are supplying the Memantine for the trial and will have
the right to use the resulting data for the commercial development of Memantine
for that indication. We expect results of this trial to be reported by the end
of 2000.
In February 2000, we announced that our alliance partner, Merz + Co.
GmbH & Co. of Frankfurt, Germany, has reported significant positive results from
a U.S. Phase III trial of Memantine in patients with advanced Alzheimer's
disease. This randomized, 6-month placebo-controlled, double-blind multicenter
trial aimed at functional improvement of patients with moderate to severe
Alzheimer's disease enrolled 252 patients in the United States and was jointly
managed by Quintiles CNS Therapeutics. These clinical trial results confirm the
findings of the previously conducted Phase III clinical studies Merz conducted
for registration requirements in Europe and the United States.
In April 2000, Merz announced promising results in patients suffering
from mild to moderate vascular dementia. Of a total of 900 patients investigated
in two Phase III clinical trial studies, the Memantine treated patients showed
significant improvements in cognitive abilities compared to the patients who
received a placebo as demonstrated by two independent performance-based
assessments. Patients who had more severe disease showed the most improvement,
according to Gordon Wilcock, M.D., of Frenchay Hospital in Bristol, England,
lead investigator for the U.K. trial.
Memantine has been marketed by Merz in Germany since 1989 with the
labeling "dementia syndrome." NTI and Merz are currently assisting each other to
advance our respective clinical development programs by sharing scientific
information and clinical trial data. We are also seeking a marketing agreement
for Memantine with a large pharmaceutical company.
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<PAGE>
We are also developing XERECEPT-TM-, a synthetic preparation of the
natural human peptide Corticotropin-Releasing Factor, as a treatment for brain
swelling due to brain tumors (peritumoral brain edema). XERECEPT received orphan
drug designation for this indication by the FDA.
Since 1987 when NTI was founded, we have applied a substantial portion
of our resources to our research and development programs. We are a development
stage company, have not received any revenue from the sale of products, and do
not anticipate receiving revenue from the sale of products in the near future.
We have incurred losses since our inception and expects to incur substantial,
increasing losses due to ongoing and planned research and development efforts.
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 completed. Results Analgesia
show statistically significant
improvement of 40 mg of Memantine
over placebo in reducing chronic
nighttime pain at the end of eight
weeks.
AIDS-related Dementia and Neuropathic Phase II trial in progress. Improvement in neurological function
Pain and peripheral neuropathy.
Patient enrollment completed in January
2000.
Mild to Moderate Vascular Dementia* Phase III trial completed. Results Cognitive improvement.
showed significantly improved cognitive
abilities compared to patients who
received placebo as demonstrated by the
ADAS-cog.
* Merz + Co. GmbH & Co. trial in the
United Kingdom and France.
Moderate to Severe Dementia and Phase III trial in progress. Functional and/or cognitive
Alzheimer's Disease** improvement.
** Merz + Co. GmbH & Co. trial in the
United States.
XERECEPT-TM- (CORTICOTROPIN-RELEASING
FACTOR)
Peritumoral Brain Edema Multiple Phase I/II trials completed. Improvement in neurological function.
Phase II trial enrollment closed at Stabilization or improvement of
33 patients. Results confirmatory neurological function.
but not definitive.
</TABLE>
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SCIENTIFIC BACKGROUND
Our therapeutic focus is neuroprotection and neuromodulation: the
prevention and treatment of neurological impairment by preserving or restoring
neurological function of damaged neurons. We are 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. Our 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 by Merz since 1989 with the labeling "dementia syndrome." It
is one of a class of agents referred to as NMDA-receptor 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, 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
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<PAGE>
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 or CNS. This condition, referred to as
peripheral diabetic neuropathy or PDN, is a large, unmet medical need. This
condition most frequently damages nerves in the feet, making walking or standing
painful and difficult. We estimate 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 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, we 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 our 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 our Phase IIA trial of Memantine in patients
with neuropathic pain, we initiated a Phase IIB trial of Memantine in the second
quarter of fiscal 1999, exclusively in patients with PDN. In May 2000, we
presented results of our placebo-controlled Phase IIB, dose ranging human
clinical trial of Memantine at the 52nd Annual Meeting of the American Academy
of Neurology in San Diego. Results of this 421 patient Phase IIB clinical trial
of Memantine as a treatment for painful diabetic neuropathy showed that 44
percent of the patients receiving 40
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<PAGE>
mg dosages experienced a 50 percent pain reduction, compared to 29 percent in
the placebo group at the end of eight weeks. Although positive trends were seen
in the groups treated with 20 mg of Memantine compared to placebo, no
statistical significance was observed. We expect to begin to work with the FDA
to design a Phase III study for this indication during the second quarter of
fiscal 2001.
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 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, we 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 National Institute of Allergy and Infectious
Diseases ("NIAID") of the National Institutes of Health and is being conducted
by the AIDS Clinical Trials Group ("ACTG"), a clinical trials consortium funded
by the NIAID. The trial protocol submitted under our Investigational New Drug
application calls for the enrollment of 140 AIDS patients with symptoms of
dementia. In December 1999, enrollment was completed. The ACTG has also
implemented a protocol extension 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. We are 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, we intend to discuss the additional regulatory
requirements for this indication including future clinical trials with the FDA.
We expect results of this trial to be reported by the end of 2000.
AGREEMENT WITH MERZ AND ADDITIONAL INDICATIONS
In April 1998, we 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 has completed three Phase III clinical trial of Memantine for
moderate to severe dementia in Europe and is currently conducting a Phase III
trial in the U.S. managed by Quintiles CNS Therapeutics.
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<PAGE>
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.
In April 2000, Merz announced the results of two major Phase III
clinical trials in vascular dementia with Memantine in the United Kingdom and
France. The trials were designed to investigate improvements in cognition, a
major focus of drug therapy for dementia. In April 2000, Merz announced the
results of those two trials. Of the total of 900 patients investigated in two
studies, the Memantine treated patients showed significant improvements in
cognitive abilities compared to the patients who received a placebo as
demonstrated by two independent performance-based assessments. Patients who had
more severe disease showed the most improvement, according to Gordon Wilcock,
M.D., of Frenchay Hospital in Bristol, England, lead investigator for the U.K.
trial.
Merz's Phase III program for Memantine as a treatment for Alzheimer's
disease in the United States is continuing. The program consists of a
randomized, 6-months placebo-controlled, double-blind multicenter trial aimed at
functional improvement of patients with moderate to severe Alzheimer's disease.
An ADL-scale is being used as a functional endpoint, combined with a global
endpoint. The trial enrolled 252 patients in the United States and is jointly
managed by Quintiles CNS Therapeutics. In February 2000, Merz reported
significant positive results from the trial. Merz plans to disclose data from
the trial at the 7th Alzheimer's Annual Meeting in Washington, July 9th - 13th,
2000.
Memantine has been marketed by Merz in Germany since 1989 with the
labeling "dementia syndrome." NTI and Merz are currently assisting each other to
advance our respective clinical development programs by sharing scientific
information and clinical trial data. We are also seeking a marketing agreement
for Memantine with a large pharmaceutical company.
XERECEPT-TM- (HUMAN CORTICOTROPIN-RELEASING FACTOR)
XERECEPT-TM- is our synthetic preparation of the human peptide
Corticotropin-Releasing Factor which we are 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 in 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. 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 our 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 us
eligible to receive federal monies for clinical research under the Orphan Drug
Grant Program. During fiscal 1999, we were 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
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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
We have 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 NTI
demonstrated the potential of XERECEPT to reduce swelling of brain tissue and to
be well-tolerated and apparently safe. Based on these results, we 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. We closed enrollment for this
trial at 33 patients (one third of projected enrollment) in order to provide
expedited but abbreviated analysis of the data. All responders, as defined by
the trial protocol, were in the XERECEPT treatment groups. Rigorous statistical
analysis of the data was not meaningful due to the small numbers enrolled. The
clinical study should be regarded as confirmatory but not definitive with regard
to neurologic improvements that may be attained with XERECEPT in symptomatic
brain tumor patients. We are currently evaluating whether to commit further
resources to the clinical development of XERECEPT for this indication or for
other indications.
PATENTS AND PROPRIETARY TECHNOLOGY
MEMANTINE
In April 1998, in connection with our agreement with Merz, our
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.
XERECEPT-TM-
We hold 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. Because of the
non-exclusivity of the four issued U.S. patents, others may develop, manufacture
and market products that could compete with those we develop. However, we also
have exclusive rights to four issued patents and one patent application covering
uses of XERECEPT and analogues. We are 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 we have licensed from
others, we hold U.S. Patent No. 5,870,430 which covers certain liquid
formulations of CRF and CRF-related peptides.
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In addition to patent protection, we rely upon trade secret protection
for our confidential and proprietary information. It is our policy that each
employee enter into a confidentiality agreement which contains provisions
generally prohibiting the disclosure of confidential information to anyone
outside NTI and requiring disclosure to NTI of ideas, developments, discoveries
or inventions conceived during employment and assignment to NTI of proprietary
rights to such matters related to the business and technology of NTI. 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 our trade secrets or disclose such
technology.
REGULATIONS
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.
A company generally must conduct preclinical testing on laboratory
animals of new pharmaceutical products prior to commencement of clinical studies
involving humans. These studies evaluate the potential efficacy and safety of
the product. The company then submits the results of these studies to the FDA as
part of an investigational new drug application or IND, which must become
effective before beginning clinical testing in humans.
Typically, human clinical evaluation involves a time-consuming and
costly three-phase process:
- In Phase I, a company conducts clinical trials with a small number of
subjects to determine a drug's early safety profile and its pharmacokinetic
pattern.
- In Phase II, a company conducts clinical trials with groups of patients
afflicted with a specific disease in order to determine preliminary
effectiveness, optimal dosages and further evidence of safety.
- In Phase III, a company conducts large-scale, multi-center, comparative
trials with patients afflicted with a target disease in order to provide
enough data to demonstrate the effectiveness and safety required by the FDA
prior to commercialization.
The FDA closely monitors the progress of each phase of clinical
testing. The FDA may, at its discretion, re-evaluate, alter, suspend, or
terminate testing based upon the data accumulated to that point and the FDA's
assessment of the risk/benefit ratio to patients.
The results of the preclinical and clinical testing are submitted to
the FDA in the form of a new drug application, or NDA, for approval prior to
commercialization. In responding to an NDA, the FDA may grant marketing
approval, request additional information, or deny the application. Failure to
receive approval for any of our potential products would have a material adverse
effect on NTI. Among the requirements for product approval is the requirement
that each domestic manufacturer of the product conform to the FDA's current Good
Manufacturing Practice 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.
Foreign regulatory approval of a product must also be obtained prior to
marketing the product internationally. Foreign approval procedures vary from
country to country. The time required for approval may delay or prevent
marketing in certain countries. In certain instances, the company or its
collaborative partners may seek approval to market and sell certain products
outside of the United States before submitting an application for United States
approval to the FDA. The clinical testing requirements and the time required to
obtain foreign regulatory approvals may differ from that required for FDA
approval.
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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 we may develop; and/or
- impose costly procedures upon our activities.
Either of these effects of government regulation may provide an advantage to our
competitors.
There can be no assurance that FDA or other regulatory approval for any
products developed by NTI 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 our proposed products and our 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 our potential products. Additional government regulations
that might result from future legislation or administrative action cannot be
predicted.
MANUFACTURING
Memantine currently is being supplied to NTI by our corporate
collaborator, Merz. We have also contracted with external vendors to manufacture
compounds for our other clinical trials. The manufacturers of clinical products
have represented to us that they are qualified to produce drugs under FDA
regulations and that they follow current Good Manufacturing Practice. XERECEPT
has been manufactured by established methods using chemical synthesis to NTI
specifications. We performed audits on our contractors who supplied XERECEPT to
assess compliance with the cGMP regulations. Alternative cGMP suppliers of the
bulk drugs and of finished dosage form products are available to us. We
currently have no plans to build or develop an in-house manufacturing
capability.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
PROPERTIES
Our executive offices are located in Richmond, California. We entered
into a sublease dated May 1, 2000 that decreased our occupied space from
approximately 5,750 square feet to 4,333 square feet. The master lease, which
commenced in July 1997, will expire in July 2002.
We believe that our facilities are adequate for the next two years and
that, if required, we will be able to lease suitable additional space on
commercially acceptable terms to accommodate expansion.
EMPLOYEES
We currently have a total of 11 employees, 6 of whom are full-time
employees.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of NTI are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul E. Freiman 65 President and Chief Executive Officer and Director
Calvert Y. Yee 48 Vice President, Operations and Administration
Lisa U. Carr, M.D., Ph.D. 45 Vice President, Medical Affairs
Abraham E. Cohen 63 Chairman of the Board of Directors
Enoch Callaway, M.D. 75 Director
Theodore L. Eliot, Jr. 72 Director
Abraham D. Sofaer 62 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. 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,
Omware, Inc., 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. In March 2000, the Company entered into an
agreement with Mr. Yee which provides for him to assume part-time status. 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).
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. and from 1977 to
1988 as President of the Merck Sharp & Dohme International Division. Since his
retirement from 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 World Funds, 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
1986. Dr. Callaway was Staff Psychiatrist, SFVAMC, 1996-
20
<PAGE>
1997. He is a member of the IRB for SAM Technologies, Inc. and Abratek, Inc. Dr.
Callaway is a Director of Phytos, 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, after a 30-year career in which he held senior posts in
Washington and was Ambassador to Afghanistan. He was Dean of the Fletcher School
of Law and Diplomacy from 1978 to 1985 and a Director of Raytheon Co., from 1983
to 1998. He is currently a director of Fiberstars, Inc. and of several
non-profit organizations. 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.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for
the fiscal years ended June 30, 1997, 1998 and 1999 received by the individual
who served as the Company's Chief Executive Officer during 1999 and the
Company's two other most highly compensated executive officers whose total
annual salary and bonus for fiscal year 1999 exceeded $100,000 (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- -------------------
NAME AND PRINCIPAL POSITION AS OF JUNE 30, 1999 YEAR SALARY ($) BONUS($) OPTIONS(#)
------------------------------------------------ ------ ------------ ---------- -------------------
<S> <C> <C> <C> <C>
Paul E. Freiman (1) 1999 152,527 0 200,000
President and Chief Executive Officer 1998 92,533 0 250,000
1997 27,280 0 145,000
Lisa U. Carr, M.D., Ph.D.(2) 1999 104,360 0 100,000
Vice President, Medical Affairs 1998 8,333 0 0
Calvert Y. Yee 1999 105,625 0 10,000
Vice President, Operations and Administration 1998 97,985 0 74,763
1997 96,277 0 0
</TABLE>
----------------
(1) 1997 salary shown for Mr. Freiman includes $5,068 for consulting services
earned prior to joining the Company as its President and Chief Executive
Officer on May 8, 1997.
(2) Dr. Carr joined the Company on June 1, 1998.
21
<PAGE>
The following table sets forth further information regarding the grants
of stock options during the fiscal year ended June 30, 1999 to the Named
Officers. Since inception, the Company has not granted any stock appreciation
rights.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
----------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN
OPTIONS FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#)(1) 1999(%)(2) ($/SHARE)(1) DATE
------------------------------------- -------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Paul E. Freiman 50,000(3) 10.2 0.625 3/17/09
150,000(4) 30.7 0.70 9/22/08
Lisa U. Carr, M.D., Ph.D. 100,000(5) 20.5 0.625 1/20/09
Calvert Y. Yee 10,000(6) 2.0 0.625 2/28/09
</TABLE>
-------------
(1) The options were granted under the Company's Amended and Restated 1993
Stock Plan. The exercise price on the date of grant was equal to 100% of
the fair market value on such date.
(2) Based on a total of 488,500 stock options granted to employees during the
fiscal year ended June 30, 1999.
(3) These options were fully exercisable upon the date of grant.
(4) The options become exercisable at a rate of 20% per year over a period of
five years.
(5) 15% of these options were exercisable on the grant date. The remainder of
the options become exercisable at a rate of 2.125% per month until May 30,
2002.
(6) These options become exercisable at a rate of 2.083% per month over a
period of four years.
None of the Named Officers exercised any options during fiscal 1999.
The following table sets forth information regarding the number and value of
unexercised options held by the Named Officers at fiscal year-end.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END
OPTION VALUES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
HELD AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul E. Freiman 245,000 350,000 21,610 63,690
Lisa U. Carr, M.D., Ph.D. 29,875 70,125 7,319 17,181
Calvert Y. Yee 79,763 4,000 22,528 248
</TABLE>
----------------
(1) Based on the amount, if any, by which the last per share quote of the
common stock on the OTC-Bulletin Board-Registered Trademark- at June 30,
1999 ($0.875) exceeds the exercise price.
EMPLOYMENT AGREEMENTS
In March 2000, the Company entered into an agreement with Calvert Y.
Yee, Vice President of Operations and Administration, which provides for him to
assume part-time status at a reduced salary.
In March 1999, the Company entered into a retention agreement with Lisa
U. Carr, M.D., Ph.D. which provides for additional compensation of $100,000,
payable on February 1, 2001, provided Dr. Carr continues to serve as the
Company's Vice President, Medical Affairs through February 1, 2001. In the event
of a change of
22
<PAGE>
control of the Company and subsequent involuntary termination of Dr. Carr prior
to February 1, 2001, Dr. Carr will be entitled to receive the additional
compensation of $100,000.
PENSION AND LONG-TERM INCENTIVE PLANS
The Company has no pension or long-term incentive plans.
DIRECTORS' COMPENSATION
Dr. Callaway was paid $15,000 during fiscal 1999 for consulting
services rendered to the Company pursuant to a consulting agreement. Mr. Stuppin
was paid $13,008 during fiscal 1999 as an employee of the Company. Mr. Cohen is
reimbursed for his expenses for each meeting attended.
Non-employee directors are currently eligible to participate in the
Company's 1993 Stock Plan. Subject to the 1993 Stock Plan, each new non-employee
director of the Company will receive an option to purchase 5,000 shares of
common stock on the date of his or her election to the Board at the fair market
value on the date of grant. In addition, each non-employee director continuing
to serve on the Board will also receive an automatic annual grant of an option
to purchase 1,000 shares of the Company's common stock at the Annual Meeting of
the Company's stockholders. On November 12, 1998, Dr. Callaway, Mr. Eliot, Mr.
Sofaer and Mr. Cohen were each granted an option to purchase 1,000 shares of
common stock at an exercise price of $0.672 per share. The options vested fully
on November 12, 1999. On November 11, 1999, Dr. Callaway, Mr. Eliot, Mr. Sofaer
and Mr. Cohen were each granted an option to purchase 1,000 shares of common
stock at an exercise price of $1.94 per share. The options vested on November
11, 1999.
In March 1999, Dr. Callaway, Mr. Eliot, Mr. Sofaer, and Mr. Stuppin
were each granted an option to purchase 15,000 shares of common stock. In March
1999, Mr. Cohen was granted an option to purchase 25,000 shares of common stock.
These options have an exercise price of $0.625 per share and were fully
exercisable at the grant date.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 1998, Paul Freiman, NTI's Chief
Executive Officer and President, was a member of the board of directors of Life
Science Economics, Inc., or LSE. We had a consulting arrangement with LSE under
which we paid an aggregate of $409,000 in fiscal 1998. We did not pay LSE any
consulting fees in fiscal 1999. Presently, LSE has ceased all operational
activities.
23
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the Company's
outstanding shares of each class of equity securities beneficially owned as of
May 31, 2000 by: (1) each person who is known to the Company to own beneficially
more than five percent of each class of the outstanding equity securities; (2)
each of the Company's directors; (3) all the Named Officers; and (4) all
directors and executive officers as a group. The information relating to share
ownership is based upon information furnished to the Company. The number of
shares of common stock shown includes shares subject to warrants or options
exercisable within 60 days after May 31, 2000 as if such shares were outstanding
on May 31, 2000 and assumes that no other person has exercised any outstanding
warrants or options. Applicable percentages of ownership are based on 15,154,636
shares of common stock outstanding and 2,332,000 shares of Series A Preferred
stock outstanding as of May 31, 2000. The Company believes that the beneficial
owners of each class of equity securities, based on information supplied by such
owners, have sole investment and voting power with respect to the shares of each
class of equity securities shown as being beneficially owned by them, except as
otherwise set forth in the footnotes to the table.
<TABLE>
<CAPTION>
NUMBER SUBJECT
TO OPTIONS AND NUMBER OF PERCENTAGE
WARRANTS SHARES OF OF SERIES A
NUMBER OF SHARES EXERCISABLE PERCENTAGE OF SERIES A PREFERRED
NAME AND ADDRESS OF COMMON STOCK WITHIN 60 DAYS COMMON STOCK PREFERRED STOCK STOCK
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New York Life Insurance Company (1)...
51 Madison Avenue, Room 206 553,750 160,000 3.6% 400,000 17.2%
New York, NY 10010
Arthur Rock (2)....................... 1,185,997 436,071 7.6 500,000 21.4
One Maritime Plaza, #1220
San Francisco, CA 94111
Lindsay A. Rosenwald, M.D. (3)........ 1,746,000 500,000 11.2 -- --
787 Seventh Avenue, 48th Floor
New York, NY 10019
Clipper Bay & Co...................... 900,000 -- 6.0 -- --
55 Water Street, 3rd Floor
New York, NY 10041
Enoch Callaway, M.D. (4).............. 134,323 51,147 * 4,000 *
Abraham E. Cohen...................... 563,724 193,887 3.7 100,000 4.3
Theodore L. Eliot, Jr. (5)............ 83,993 56,449 * -- --
Paul E. Freiman (6)................... 329,125 328,125 2.1 -- --
Lisa U. Carr, M.D., Ph.D ............. 21,360 19,146 * -- --
Abraham D. Sofaer..................... 566,764 288,837 3.7 100,000 4.3
John B. Stuppin (7)................... 671,264 206,511 4.4 100,000 4.3
Calvert Y. Yee ....................... 75,049 69,388 * -- --
All directors and executive officers
(as a group 8 persons)(8)............. 2,445,602 1,213,490 15.0 304,000 13.0
</TABLE>
-----------------------------------------------
*Less than 1%
(1) According to Schedule 13G filed by New York Life Insurance Company.
(2) According to Schedule 13D/A filed by Arthur Rock.
(3) According to Schedule 13G filed by Lindsay A. Rosenwald, M.D.
(4) The number of shares of common stock shown includes 83,176 shares held by
Enoch Callaway and Dorothy C. Callaway, Trustees or Successor Trustees of
the Callaway 1989 Trust, executed May 20, 1989. Dr. Callaway may be deemed
to have a beneficial interest in the shares held by the Callaway Trust.
24
<PAGE>
(5) The number of shares of common stock shown includes 27,544 shares held by
Theodore L. Eliot, Jr. and Patricia P. Eliot, Trustees, the Eliot Trust,
February 27, 1987. Mr. Eliot may be deemed to have a beneficial interest in
the shares held by the Eliot Trust.
(6) The number of shares of common stock shown includes 1,000 shares held in
the estate of Paul E. Freiman and Anna Mazzuchi Freiman.
(7) The number of shares of common stock shown includes 453,253 shares held by
John B. Stuppin and Jane K. Stuppin, Trustees UTD dated March 11, 1991 and
500 shares held by Mrs. Stuppin. Mr. Stuppin may be deemed to have a
beneficial interest in the shares held by the Stuppin Trust and
Mrs. Stuppin.
(8) The number of shares of common stock shown includes shares included
pursuant to notes 4-7.
DESCRIPTION OF COMMON STOCK
NTI is authorized to issue 25,000,000 shares of common stock, par value
$.001 per share. On May 31, 2000, NTI had 15,154,636 shares of common stock
issued and outstanding.
The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders.
Stockholders do not have cumulative voting rights. The holders of common stock
have the right to receive dividends if they are declared by the NTI Board of
Directors and there are sufficient funds to legally pay dividends, subject to
the rights of the holders of any outstanding preferred stock to receive
preferential dividends. Upon the liquidation of NTI, holders of common stock
would share ratably in any assets available for distribution to stockholders
after payment of all obligations of NTI and the aggregate liquidation preference
(including accrued and unpaid dividends) of any outstanding preferred stock.
Shares of common stock currently outstanding are validly issued, fully paid and
nonassessable. ChaseMellon Shareholder Services LLP is the transfer agent and
registrar for the NTI common stock.
DESCRIPTION OF PREFERRED STOCK
NTI is authorized to issue 5,000,000 shares of preferred stock, par
value $.001 per share. On May 31, 2000, NTI had 2,282,000 shares of Series A
Preferred Stock issued and outstanding.
The holders of the Series A Preferred Stock are entitled to receive
annual noncumulative dividends of 8% per share per annum, when and if declared
by the Board. These dividends are in preference to any declaration or payment of
any dividend on the common stock of the Company. As of May 31, 2000, no
dividends had been declared. Each share of Series A Preferred Stock is
convertible, at the holder's option, into one share of common stock, subject to
antidilution provisions. Additionally, each share of Series A 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 Series A Preferred Stock are entitled to the number of votes
equal to the number of shares of common stock into which their Series A
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.
25
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of NTI's common stock by the selling stockholders as of May 31, 2000.
<TABLE>
<CAPTION>
Common Stock Common Stock
Beneficially Owned Beneficially Owned
Prior to Offering(1) After Offering(1)
------------------------------------- -----------------------
Number of
Shares Issuable
Number of within 60
Outstanding Days of May 31, Shares Offered
Holder Shares 2000(2) Percent in Offering Number Percent
------------------------------ ----------- ----------------- ------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Clipperbay & Co............... 900,000 _ _ 6.0 900,000 _ _ _ _
William A. Van Orsdel 1998
Trust......................... 50,000 _ _ * 50,000 _ _ _ _
Martin Markovits.............. 20,000 _ _ * 20,000 _ _ _ _
Hyman Fein.................... 35,000 _ _ * 35,000 _ _ _ _
Apollo Medical Partners....... 62,000 25,000 * 37,000 25,000 *
Michael M. Goldberg........... 15,000 _ _ * 15,000 _ _ _ _
Kenneth Greif................. 100,000 _ _ * 100,000 _ _ _ _
Donald L. Blumenthal 1983
Revocable Trust............... 8,000 _ _ * 8,000 _ _ _ _
Joseph and Bonnie Fein........ 5,000 _ _ * 5,000 _ _ _ _
CAM Co........................ 25,000 _ _ * 25,000 _ _ _ _
Jeffrey R. Parker............. 5,000 _ _ * 5,000 _ _ _ _
</TABLE>
----------------------------------------------------------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 15,154,636 shares of common
stock outstanding as of May 31, 2000.
(2) Includes number of shares issuable upon exercise of common stock purchase
warrants exercisable within 60 days of May 31, 2000 and assumes that no
other person has exercised any outstanding warrants or options nor converted
any Series A Preferred Stock.
26
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders may offer their shares from time to time in
one or more of the following transactions:
- in the over-the-counter market;
- on the Nasdaq National Market or any other exchange on which the shares may
be listed in the future;
- in negotiated transactions; or
- a combination of such methods of sale.
The selling stockholders may sell the shares at the following prices:
- at market prices prevailing at the time of sale;
- at prices related to such prevailing prices; or
- at negotiated prices,
and may use the shares to cover short positions previously established. The
selling stockholders may use broker-dealers to sell the shares. The
broker-dealers will either receive discounts or commissions from the selling
stockholders, or they will receive commissions from purchasers of shares.
Under certain circumstances, the selling stockholders and any
broker-dealers that participate in the distribution may be "underwriters" within
the meaning of the Securities Act of 1933. Any commissions received by these
broker-dealers and any profits realized on the resale of shares by them may be
underwriting discounts and commissions under the Securities Act of 1933. The
selling stockholders may agree to indemnify these broker-dealers against certain
liabilities, including liabilities under the Securities Act of 1933.
Broker-dealers may agree with the selling stockholders to sell a specified
number of shares at a stipulated price per share, and may purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may resell the shares from time
to time in the manner described above, and may pay to, or receive from, the
purchasers' commissions computed as described above.
Under the rules and regulations of the SEC, any person engaged in the
distribution or the resale of shares may not simultaneously engage in market
making activities with respect to NTI common stock for a period of two business
days prior to the commencement of such distribution. The selling stockholders
will also be subject to applicable provisions of the Securities Exchange Act of
1934 and the rules and regulations under that Act which may limit the timing of
purchases and sales of shares of NTI's common stock by the selling stockholders.
The selling stockholders will pay all commissions, transfer taxes, and other
expenses associated with the sale of securities by them. We are registering the
shares offered in this prospectus in accordance with our contractual
obligations, and we have paid the expenses of the preparation of this
prospectus. We have not made any underwriting arrangements with respect to the
sale of shares offered by this prospectus.
27
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
NTI has adopted provisions in its Certificate of Incorporation that
limit the liability of its directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the General Corporation Law of the State of Delaware. Delaware law
provides that directors of a company will not be personally liable for monetary
damages for breach of their fiduciary duty as directors, except for liability
(i) for any breach of their duty of loyalty to the company or its stockholders,
(ii) for acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, (iii) for unlawful payment of a dividend or
unlawful stock repurchase or redemption, as provided in Section 174 of the
Delaware law, or (iv) for any transaction for which the director derived an
improper personal benefit.
NTI's Certificate of Incorporation and Bylaws also provide that NTI
will indemnify its directors and officers to the fullest extent permitted by
Delaware law. NTI has entered into separate indemnification agreements with its
directors and officers that could require the Company, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors and officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. NTI believes that the limitation of liability provision in its
Certificate of Incorporation and the indemnification agreements will facilitate
its ability to continue to attract and retain qualified individuals to serve as
directors and officers of the Company.
To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
person of NTI pursuant to the above provisions, or otherwise, NTI has been
advised that in the opinion of the Securities Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for NTI
by Heller Ehrman White & McAuliffe LLP, San Diego, California, counsel to NTI in
connection with the offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of June 30, 1999 and 1998, and for each of the three years in the
period ending June 30, 1999, and for the period from August 27, 1987 (inception)
through June 30, 1999, as set forth in their report (which contains an
explanatory paragraph describing conditions that raise substantial doubts about
the Company's ability to continue as a going concern as described in Note 1 to
the Financial Statements). We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should
call 1-800-SEC-0330 for more information on the public reference room. The SEC
maintains an internet site at http://www.sec.gov where certain information
regarding issuers (including Neurobiological Technologies, Inc.) may be found.
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Report of Ernst & Young LLP, Independent Auditors............................................................F-2
Balance Sheets as of June 30, 1999 and 1998..................................................................F-3
Statements of Operations for the years ended June 30, 1999, 1998 and 1997....................................F-4
Statements of Stockholder's Equity (Deficit) for the years ended June 30, 1999, 1998 and 1997................F-5
Statements of Cash Flow for the years ended June 30, 1999, 1998 and 1997.....................................F-6
Notes to Financial Statements................................................................................F-7
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Condensed Balance Sheet as of March 31, 2000.................................................................F-13
Condensed Statements of Operations for Three and Nine Months ended March 31, 2000 and 1999...................F-14
Condensed Statements of Cash Flow for Nine Months ended March 31, 2000 and 1999..............................F-15
Notes to Condensed Financial Statements......................................................................F-16
</TABLE>
F-1
<PAGE>
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the 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 auditing standards generally accepted in the United States.
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
San Francisco, California
August 6, 1999
F-2
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<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
========= ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 27, 1987
(INCEPTION)
YEAR ENDED JUNE 30 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
============= ============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
PREFERRED ------------------------ DURING 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)
========== ========= =========== =============== ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 27, 1987
YEAR ENDED JUNE 30, (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 cash equivalents at beginning of
period ...................................... 2,020,886 1,278,402 4,602,815 --
------------- --------------- --------------- ---------------
Cash and cash 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
============= =============== =============== ===============
</TABLE>
See accompanying notes.
F-6
<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 Company'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-7
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
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 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.
F-8
<PAGE>
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.
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):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE
SUBJECT TO OPTIONS PRICE
------------------ ----------------
<S> <C> <C>
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
==================
</TABLE>
F-9
<PAGE>
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 was $0.37, $1.09, and $1.48,
respectively.
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF EXERCISE OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE 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.
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):
<TABLE>
<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.
F-10
<PAGE>
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:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
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 ......................... $ -- $ --
============ ============
</TABLE>
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 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.
F-11
<PAGE>
In November 1999, the Company sold 5,238,750 shares of common stock for
gross proceeds of approximately $4.2 million in a private financing.
Approximately $1.2 million of the proceeds were used to repay the outstanding
principal and interest on loans from Merz.
In April 2000, the Company sold 1,200,000 shares of common stock for
gross proceeds of approximately $6.4 million in a private financing.
F-12
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
2000
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 3,146,702
Prepaid expenses and other .................................... 56,651
-----------
Total current assets ........................................ 3,203,353
Property and equipment, net ................................... 2,811
-----------
$ 3,206,164
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................... $ 880,563
Note payable to shareholder ................................... --
-----------
Total current liabilities ................................... 880,563
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value, 5,000,000
shares authorized, 2,332,000 outstanding at March
31, 2000 ................................................... 1,166,000
Common stock, $.001 par value, 25,000,000 shares
authorized, 13,899,027 outstanding at March 31,
2000 ....................................................... 35,520,195
Deficit accumulated during development stage .................. (34,360,594)
-----------
Total stockholders' equity (deficit) ....................... 2,325,601
-----------
$ 3,206,164
===========
</TABLE>
See accompanying notes.
F-13
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended Period from
March 31, March 31, August 27, 1987
----------------------------------- ---------------------------------- (inception)
through
2000 1999 2000 1999 March 31, 2000
---------------- ---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
License ........................ $ -- $ -- $ -- $ -- $ 2,100,000
Grant .......................... -- 99,544 -- 99,544 149,444
---------------- ---------------- ----------------- --------------- ---------------
Total revenue ................ -- 99,544 2,249,444
EXPENSES
Research and development ....... 401,975 815,197 1,563,382 1,874,874 26,632,068
General and administrative ..... 328,318 274,786 820,052 829,992 12,216,624
---------------- ---------------- ----------------- --------------- ---------------
Total expenses ............... 730,293 1,089,983 2,383,434 2,704,866 38,848,692
Operating loss .................... (730,293) (990,439) (2,383,434) (2,605,322) (36,599,248)
Interest income ................... 36,984 5,041 60,200 39,763 2,238,654
---------------- ---------------- ----------------- --------------- ---------------
NET LOSS .......................... $ (693,309) $ (985,398) $ (2,323,234) $ (2,565,559) $ (34,360,594)
================ ================ ================= =============== ===============
BASIC AND DILUTED
NET LOSS PER SHARE ............. $ (0.05) $ (0.12) $ (0.21) $ (0.33)
================ ================ ================= ===============
Shares used in basic and diluted
net loss per share calculation.. 13,563,345 8,133,032 10,917,995 7,746,810
================ ================ ================= ===============
</TABLE>
See accompanying notes.
F-14
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED AUGUST 27, 1987
MARCH 31, 2000 (INCEPTION)
--------------------------------- THROUGH
2000 1999 MARCH 31, 2000
------------- ------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................ $ (2,323,234) $ (2,565,559) $ (34,360,594)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization .................... 985 45,176 639,191
Issuance of common stock and warrants
for license rights and services ................ -- -- 139,775
Changes in assets and liabilities:
Prepaid expenses and other ....................... (12,818) (8,637) (56,651)
Accounts payable and accrued expenses ............ (54,276) 109,971 880,563
------------- ------------- -----------------
Net cash used in operating activities ............... (2,389,343) (2,419,049) (32,757,716)
------------- ------------- -----------------
INVESTING ACTIVITIES:
Purchase of investments ............................. -- -- (33,839,678)
Sale of investments ................................. -- -- 33,839,678
Purchases of property and equipment, net ............ -- -- (358,940)
Additions to patents and licenses ................... -- -- (283,062)
------------- ------------- -----------------
Net cash used in investing activities ............... -- -- (642,002)
FINANCING ACTIVITIES:
Proceeds from note payable (200,000) 200,000
Proceeds of short-term borrowings ................... -- -- 235,000
Advances from stockholders........................... 869,000
Issuance of common stock, net........................ 5,534,843 -- 28,153,338
Issuance of preferred stock, net .................... -- -- 8,158,082
------------- ------------- -----------------
Net cash provided by financing activities ........... 5,334,843 1,069,000 36,546,420
------------- ------------- -----------------
Increase (decrease) in cash and
cash equivalents ................................. 2,945,500 (1,350,049) 3,146,702
Cash and equivalents at beginning of period ......... 201,202 2,020,886 --
------------- ------------- -----------------
Cash and equivalents at end of period ............... $ 3,146,702 $ 670,837 $ 3,146,702
============= ============= =================
</TABLE>
See accompanying notes.
F-15
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
NOTE 1-BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended June 30, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-KSB for the
fiscal year ended June 30, 1999.
The Company believes its available cash and cash equivalents of $3.1
million as of March 31, 2000, along with net proceeds of approximately $5.7
million raised in a private placement subsequent to the quarter ending, will be
adequate to fund operations through the next fiscal year ending June 30, 2001.
The Company will need to raise additional capital to fund subsequent operations
beyond the fiscal year ending June 30, 2001. NTI intends to seek funding through
public or private financings, collaborative or other arrangements with corporate
partners, or from other sources. However, there can be no assurance that funding
will be available on favorable terms from any of these sources, if at all. If
such funding is unavailable, the Company may be required to delay, scale back,
or eliminate one or more of its research, discovery, or development projects,
including clinical trials, and to make future reductions in workforce. NTI will
also need to consider obtaining funds through entering into arrangements with
collaborative partners or others which may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company would not otherwise relinquish, and other restructuring alternatives,
including the license or sale of certain of its assets and technology,
discontinuing operations or liquidation.
BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is presented under the requirements of Financial
Accounting Standards Board ("FAS") No. 128, "Earnings per Share." Basic loss per
share is computed based on the average shares of common stock outstanding and
excludes any 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.
NOTE 2-SUBSEQUENT EVENTS
In April 2000, we raised approximately $6.4 million in gross proceeds
from a private placement to accredited investors of 1.2 million shares of common
stock at $5.30 per share. The proceeds will be used to continue clinical
development of our two neuroprotective drug candidates.
Subsequent to the quarter end, we entered into a new lease for our
corporate offices effective May 1, 2000 through July 31, 2002. Our new offices
are located at 3260 Blume Drive, Suite 500, Richmond, California, 94806, (510)
262-1730 telephone, (510) 262-0204 facsimile.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
F-16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has the power to indemnify its officers and directors
against liability for certain acts pursuant to Section 145 of the General
Corporation Law of the State of Delaware. Article VIII, Sections A, B and C of
the registrant's Restated Certificate of Incorporation provide as follows:
"A. NO PERSONAL LIABILITY. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as director, except for liability (a) for any
breach of the director's duty to loyalty to the Corporation and its
stockholders; (b) for act or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (c) under Section 174 of
the Delaware General Corporation Law; or (d) for any transaction from which the
director derived an improper personal benefit.
B. INDEMNIFICATION. Each person who is or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative , is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as provided in the second paragraph hereof, the Corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this section shall be a contract right and shall
include the right to be paid by the Corporation any expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
If a claim under the first paragraph of this section is not paid in
full by the Corporation within thirty (30) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel,
II-1
<PAGE>
or its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant had
not met the applicable standard of conduct.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
section shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Restated Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested directors
or otherwise.
C. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law."
In addition, Article V of the registrant's Bylaws provides as follows:
"Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.
Subject to Section 4 of this Article V, the corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 2. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.
Subject to Section 4 of this Article V, the corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of Delaware
or such other court shall deem proper.
Section 3. SUCCESS ON THE MERITS. To the extent that any person
described in Section 1 or 2 of this Article V has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in said
Sections, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
II-2
<PAGE>
Section 4. SPECIFIC AUTHORIZATION. Any indemnification under Section 1
or 2 of this Article V (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 1 or 2, as the case may be, of this Article V. Such determination shall
be made (1) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders of the corporation.
Section 5. ADVANCE PAYMENT. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding as authorized by the
board of directors in the manner provided for in Section 4 of this Article V
upon receipt of an undertaking by or on behalf of any person described in said
Section to repay such amount unless it shall ultimately be determined that he is
entitled to indemnification by the corporation as authorized in this Article V.
Section 6. NON-EXCLUSIVITY. The indemnification and advancement of
expenses provided by this Article V shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be director, officer, employee or agent of the
corporation and shall inure to the benefit of the heirs, executors and
administrators of such a person; provided, however, that any repeal or amendment
of any of the provisions of this Article V shall not adversely affect any right
or protection of any indemnitee existing at the time of such repeal or
amendment.
Section 7. INSURANCE. The board of directors may authorize, by a vote
of the majority of the full board, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article V.
Section 8. SEVERABILITY. If any word, clause or provision of this
Article V or any award made hereunder shall for any reason be determined to be
invalid, the provisions hereof shall not otherwise be affected thereby but shall
remain in full force and effect.
Section 9. INTENT OF ARTICLE. The intent of this Article V is to
provide for indemnification to the fullest extent not prohibited by section 145
of the General Corporation Law of Delaware. To the extent that such Section or
any successor section may be amended or supplemented from time to time, this
Article V shall be amended automatically and construed so as to permit
indemnification to the fullest extent from time to time not prohibited by law."
II-3
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission registration
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission
Registration Fee................................ $ 2,049
Legal fees and expenses............................ $ 20,000
Printing and engraving expenses.................... $ 3,381
Accounting fees and expenses....................... $ 13,500
Miscellaneous ..................................... $ 921
TOTAL: ................................... $ 40,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In April 2000, NTI raised approximately $6.4 million in gross proceeds
through the sale of 1,200,000 shares of the Company's common stock in a private
placement. The purchase price was $5.30 per share. The Company sold common stock
to 11 accredited investors and 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.
From September through November 1999, NTI raised approximately $4.3
million through the sale of 1,086,940 units of the Company's securities in a
private placement. The purchase price was $4.00 per unit. Each unit consisted of
5 shares of common stock and one warrant to purchase 2 shares of common stock at
an exercise price of $1.75 per share (exercisable for 5 years). The Company sold
units to accredited investors and relied on Rule 506 of Regulation D to exempt
the sale from registration under the Securities Act.
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 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.
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
II-4
<PAGE>
(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 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------------- ------------------------------------------------------------------
<S> <C>
5 Opinion of Heller, Ehrman, White & McAuliffe LLP
10 Form of Subscription Agreement
23.1 Consent of Heller, Ehrman, White & McAuliffe LLP (filed as part of
Exhibit 5)
23.2 Consent of Ernst & Young LLP, Independent Auditors
-------------------
</TABLE>
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement, and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs A(1)(i) and A(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a
II-5
<PAGE>
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of
Richmond, State of California, on this 6th day of June, 2000.
NEUROBIOLOGICAL TECHNOLOGIES, INC.
By: /s/ Paul E. Freiman
-------------------------------------
Paul E. Freiman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul E. Freiman, as his attorney in fact,
to sign any supplements or amendments to this Registration Statement (including
post-effective amendments), and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Paul E. Freiman President, Chief Executive Officer (Principal June 6, 2000
----------------------------------------- Executive and Principal Financial Officer and
Paul E. Freiman Principal Accounting Officer) and Director
/s/ Abraham E. Cohen Chairman of the Board June 6, 2000
-----------------------------------------
Abraham E. Cohen
/s/ Enoch Callaway Director June 6, 2000
-----------------------------------------
Enoch Callaway
/s/ Theodore L. Eliot, Jr. Director June 6, 2000
-----------------------------------------
Theodore L. Eliot, Jr.
/s/ Abraham D. Sofaer Director June 6, 2000
-----------------------------------------
Abraham D. Sofaer
/s/ John B. Stuppin Director June 6, 2000
-----------------------------------------
John B. Stuppin
</TABLE>
II-7
<PAGE>
NEUROBIOLOGICAL TECHNOLOGIES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation*
3.2 By-Laws*
5 Opinion of Heller, Ehrman, White & McAuliffe LLP
10 Form of Subscription Agreement
23.1 Consent of Heller, Ehrman, White & McAuliffe LLP (filed as
part of Exhibit 5)
23.2 Consent of Ernst & Young LLP, Independent Auditors
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* Incorporated by reference.
