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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 000-28782
NEOTHERAPEUTICS, INC.
(Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (949) 788-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, $.001 par value
Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 30, 2001 was $78,389,809.
As of March 30, 2001, there were 17,255,319 shares of the registrant's common
stock outstanding.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 19
Item 3. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 20
Item 6. Selected Financial Data........................................ 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 26
Item 8. Financial Statements........................................... 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant............. 50
Item 11. Executive Compensation......................................... 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 50
Item 13. Certain Relationships and Related Transactions................. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................ 50
SIGNATURES ............................................................... 58
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This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or
quantified. The Company's actual results may differ materially from the results
projected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "ITEM 1 -
Business," including the section therein entitled "Risk Factors," and in "ITEM 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations." Forward-looking statements generally can be identified by the use
of forward-looking terminology such as "believes," "may," "will," "expects,"
"intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the
negative thereof or variations thereon or similar terminology.
PART I
ITEM 1. BUSINESS
GENERAL
NeoTherapeutics, Inc. is a development stage biopharmaceutical company
engaged in the discovery and development of novel therapeutic drugs intended to
treat neurological diseases such as memory deficits associated with Alzheimer's
disease and aging, spinal cord injuries, Parkinson's disease, and other
neurodegenerative and psychiatric diseases. We have also recently become engaged
in research involving functional genomics and the development of oncology drugs.
Our lead product candidate, Neotrofin(TM) (AIT-082, leteprinim potassium), and
other compounds under development, are based on our patented technology. This
technology uses small synthetic molecules to create non-toxic compounds,
intended to be administered orally or by injection, that are capable of passing
through the blood-brain barrier to rapidly act upon specific target cells in
specific locations in the central nervous system, including the brain. Animal
and laboratory tests have shown that Neotrofin(TM) appears to selectively
increase the production of certain neurotrophic factors, a type of large
protein, in selected areas of the brain and in the spinal cord. These
neurotrophic factors regulate nerve cell growth and function. Our technology has
been developed to capitalize on the beneficial effects of these proteins, which
have been widely acknowledged to be closely involved in the early formation and
differentiation of the central nervous system. We believe that Neotrofin(TM)
could have therapeutic and regenerative effects.
Our developmental activities to date have benefited from a close
association with the National Institutes of Health ("NIH"). The NIH's National
Institute on Aging ("NIA") contracted for, and funded a portion of, the
pre-clinical studies on our Neotrofin(TM) compound, including toxicity studies.
The NIA also funded and conducted two Phase 1 clinical trials under the auspices
of its Alzheimer's Disease Cooperative Study ("ADCS"), a consortium of
approximately 35 highly regarded clinical centers throughout the United States.
The NIH's National Institute for Mental Health ("NIMH") also supported our
development efforts by contracting and providing funds, along with the NIA, for
the production of sufficient quantities of the Neotrofin(TM) compound to conduct
some pre-clinical toxicity testing and the two Phase 1 human clinical trials
conducted by the ADCS.
In June 1997, an Investigational New Drug Application ("IND") for
Neotrofin(TM) was approved by the U.S. Food and Drug Administration ("FDA") and
Phase 1 human clinical testing in the United States for the treatment of
Alzheimer's disease began. We have since received regulatory approval to conduct
human clinical trials in additional countries. We believe that Neotrofin(TM) is
the first orally active drug to enter human clinical trials that is specifically
designed to address the issue of nerve regeneration. In pre-clinical studies in
animals, Neotrofin(TM) has been shown to induce the production of multiple
neurotrophic factors in the brain and spinal cord. These factors have been
reported to induce the multiplication and functional maturation, in the brain,
of cholinergic neurons, those neurons known to die in patients with Alzheimer's
disease. We believe that Neotrofin(TM) was the first compound in human clinical
trials that has activated, in animals, multiple genes to produce multiple
neurotrophic factors in the specific areas of the brain associated with memory
loss or other deficits.
In September 1999, we entered into a collaborative research agreement
with the University of California, Irvine. This agreement grants us the
exclusive right to all technology developed by Dr. Olivier Civelli through his
research into functional genomics and orphan receptors, in exchange for royalty
payments for the use of such technology. Dr. Civelli's research and technology
complement our own research and development efforts and may enable us to offer a
greater number of drugs that more effectively address a broad array of
neurological diseases and conditions.
In November 2000, we formed a subsidiary, NeoOncoRx, Inc., under the
direction of a leader in oncology drug development, Luigi Lenaz, M.D., for the
purpose of in-licensing late-stage oncology products. We intend to use Dr.
Lenaz's experience to complete development and to commercialize these products.
We were incorporated in Colorado in December 1987. On August 7, 1996, we
changed our name from Americus
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Funding Corporation to NeoTherapeutics, Inc. In June 1997, our stockholders
approved the reincorporation of NeoTherapeutics, Inc. as a Delaware corporation.
Our wholly-owned subsidiary, Advanced ImmunoTherapeutics, Inc. ("AIT"), was
incorporated as a California corporation in June 1987. In July 1989, in a
transaction accounted for as a reverse acquisition, all of the stockholders of
AIT exchanged all of their shares of AIT common stock for shares of our common
stock, and AIT became our wholly-owned subsidiary. In April 1997, we established
NeoTherapeutics GmbH ("NEOT GmbH"), as our wholly-owned subsidiary in
Switzerland, for the purpose of conducting future licensing and other related
activities in the international market. Our third subsidiary, NeoGene
Technologies, Inc. ("NeoGene") was incorporated in California in October, 1999,
for the purpose of commercializing functional genomics technologies being
developed with the University of California, Irvine. Our fourth subsidiary,
NeoOncoRx, Inc. ("NeoOncoRx") was incorporated in California in November, 2000
for the purpose of commercializing drugs for the treatment of cancer. At March
30, 2001, NeoGene and NeoOncoRx were 76% and 90% owned by NeoTherapeutics, Inc.,
respectively. Unless the context otherwise requires, all references to the
"Company", "We", "Our", "Us" and "NeoTherapeutics" refer to NeoTherapeutics,
Inc., a Delaware corporation, AIT, NEOT GmbH, NeoGene, and NeoOncoRx as a
consolidated entity.
INTRODUCTION TO THE CENTRAL NERVOUS SYSTEM
The human brain contains some 10 billion nerve cells, or neurons, each
of which has connections with many other neurons. Sensory, motor and cognitive
activities are all governed by this complex network of neurons, each member of
which communicates with other neurons across junctions known as "synapses."
Communication between neurons involves chemical "messengers" known as
neurotransmitters, which are released by the sending neuron, diffuse across a
small gap, and bind to corresponding receptors on the receiving neuron. Abnormal
neuronal communication has been implicated in a range of psychiatric and
neurological disorders, including memory deficits, schizophrenia, depression,
anxiety, Parkinson's disease and eating disorders.
The treatment of many diseases is facilitated by cell regeneration, a
natural component of human healing. However, in the highly complex realm of
neurological diseases, treatment is more difficult because neurons may not
naturally regenerate efficiently after maturity. Currently available drugs for
the treatment of such significant neurological disorders as Alzheimer's and
Parkinson's diseases act by increasing or replacing supplies of critical
neurotransmitters, but provide time-limited benefits at best. These benefits are
limited because the eventual loss of neuronal cells without regeneration means
there are eventually few nerve cells for those neurotransmitters to activate.
Much of neuroscience-oriented biotechnology research centers on the
investigation of certain proteins, known as neurotrophic factors, which are
necessary to the early development of neurons, as well as their long-term
maintenance and survival. These substances are involved in the fundamental
formation and shaping of the nervous system. Given their role in the early
neuron development and maintenance, it has been hypothesized that these
neurotrophic factors could be used in the treatment of neurodegenerative
diseases.
Since neurons do not naturally regenerate completely following damage or
disease, substantial research has been conducted by academic researchers and by
the pharmaceutical industry in developing these factors as possible treatments
for a variety of neurological disorders. To date, the usefulness of these
factors has been limited by their inability to pass the blood-brain barrier,
which serves as a "filter" to keep molecules larger than a certain size from
leaving the bloodstream and entering the brain and spinal cord. Therefore,
neurotrophic factors, which are large protein molecules, cannot be administered
orally or through injection into the bloodstream for the treatment of diseases
of the central nervous system.
The approach NeoTherapeutics has taken is to find small molecules which
can pass through the blood-brain barrier and which can be administered orally or
through injection. Our small-molecule approach, if successful, could lead to the
development of compounds which can either mimic the actions of the larger
molecule neurotrophic factors or stimulate the production of such factors within
the brain, after administration either orally or through injection. We believe
that such a development could represent a major advance in the treatment of
neurological disorders.
OUR DRUG DEVELOPMENT STRATEGY
We are engaged in research that has primarily focused on the development
of new drugs that act on the nervous system to treat neurological and
psychiatric diseases and conditions, such as memory deficits associated with
Alzheimer's disease and aging, spinal cord injuries and Parkinson's disease, and
other neurodegenerative and psychiatric conditions.
Our scientific strategy is the synthesis of proprietary chemical
molecules that modify specific biological processes in the body. The methods by
which the molecules are synthesized are proprietary and we have patented
specific molecules and their methods of use. Our first drug discovery platform
was based upon the use of hypoxanthine, a natural non-toxic purine compound
which is contained in the genetic material of all living matter. Hypoxanthine is
chemically linked to a variety of other molecules in order to produce our
proprietary series of compounds. The various molecules that are linked to
hypoxanthine are selected from known drugs or naturally-occurring molecules that
have established therapeutic activity, producing a potentially bi-functional
compound. These compounds exhibit certain functional features of both
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hypoxanthine and the linked therapeutic compounds. Chemical and behavioral
studies have given us reason to believe that this compound synthesis and
selection process increases the probability that our new compounds will retain
the actions exhibited by their "parent" molecules. We have also initiated
additional platforms of new drugs based on other purine compounds.
We synthesize new compounds and conduct the early testing to establish
therapeutic potential necessary to obtain patents on new compounds. We have
conducted pre-clinical testing of the safety and efficacy of certain of our
compounds and intend to file an IND for each such compound which shows
therapeutic potential. With respect to our Neotrofin compound, some clinical
trials have been completed, others are in progress, and we intend to conduct
additional clinical trials. We intend to seek out established pharmaceutical
companies as partners for the development, manufacture and marketing of certain
of our compounds.
PRODUCTS IN DEVELOPMENT
The table below summarizes the primary or possible indications and
development status for some of our current research and development programs.
====================================================================================================
PRODUCT POSSIBLE INDICATIONS DEVELOPMENT STATUS
- ----------------- --------------------- ------------------------------------------------------------
Neotrofin(TM) Alzheimer's Disease Phase 1: Nine clinical trials completed and additional
(AIT-082) Phase 1 studies to be conducted in 2001
Phase 2: Four Phase 2 clinical trials completed
and one in progress
Spinal Cord Injury Phase 2: Phase 2 study initiated March 2001
Parkinson's disease Phase 2: Phase 2 study initiated March 2001
Peripheral
Neuropathy Pre-clinical
Other
neurodegenerative
diseases Pre-clinical
- ----------------- --------------------- ------------------------------------------------------------
AIT-034 Dementia Pre-clinical: IND to be filed in 2001
- ----------------- --------------------- ------------------------------------------------------------
Neoquin(TM) Bladder cancer Phase 2: Clinical trial to be conducted in 2001
pending completion of license agreement
- ----------------- --------------------- ------------------------------------------------------------
We cannot guarantee that any of our compounds will effectively treat the
indicated diseases or conditions, or that any such compounds will receive FDA
approval.
Neotrofin(TM)
Neotrofin is our most extensively studied compound and has been the
primary focus of our research efforts. Neotrofin has been shown in animal
studies to enhance working (or recent) memory, the type of memory which is
deficient in patients suffering from Alzheimer's disease. In addition, we
believe that Neotrofin may help treat memory impairments in the aged, in stroke
patients and in patients with traumatic brain injuries. Neotrofin may also help
treat patients with nerve damage such as stroke, spinal cord injury and
peripheral neuropathy and in neurodegenerative diseases such as Parkinson's
disease and Huntington's disease.
Pre-clinical testing involving laboratory animals has indicated that
Neotrofin exhibits the following properties and/or effects:
- Shown to reduce, delay and prevent memory deficits in aged
animals; shown to enhance memory function in young and aged
animals.
- Shown to protect brain cells against neurotoxic injury.
- Induces production of numerous neurotrophic growth factors.
- Induces sprouting of nerve cells in culture and in animals.
- Induces proliferation of neural stem cells.
- Reduces the level of the toxic protein beta-amyloid in cell
culture.
- Shown to be non-toxic at high oral dosage levels in dogs and
rats after up to nine months of administration.
- Effective over a wide range of doses in animals.
- Active both orally and through injection.
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Until completion of the entire human clinical trial process, there can
be no assurance that these properties and/or effects can be replicated in
humans.
We have shown that when administered to neurons in tissue culture,
Neotrofin can induce the same neurite outgrowth effects as NGF (nerve growth
factor). We have also shown that Neotrofin causes the production of mRNA
(messenger ribonucleic acid) for multiple neurotrophic factors in tissue
culture. In addition, we have demonstrated that oral administration of Neotrofin
increases the levels of mRNA and protein for multiple neurotrophic factors in
the central nervous systems of rats and mice. Other researchers have shown, in
animals, that administration of multiple neurotrophic factors may be more
effective as a treatment method for neurodegenerative diseases than the
administration of a single factor. We believe that Neotrofin's mechanism of
action involves activating the genes that lead to the production of a number of
different neurotrophic factors. Neurotrophic factors themselves are not orally
active and do not pass the blood-brain barrier. Therefore, should Neotrofin
prove to be an effective treatment for neurological disorders, it could have two
distinct practical advantages over neurotrophic factors administered alone
directly into the brain as a treatment for such disorders: (i) it can be
administered orally; and (ii) it induces the production of multiple neurotrophic
factors in those areas of the brain associated with a variety of deficits.
An IND was allowed for Neotrofin by the U.S. FDA in June 1997. The first
clinical trial of Neotrofin(TM) in the United States began in July 1997 and was
completed in 1998. Additional Phase 1 clinical trials evaluating safety and
pharmacokinetic parameters have been conducted with Neotrofin. The results from
the Phase 1 clinical trials indicate that Neotrofin is rapidly absorbed after
oral administration and produces no serious side effects at high doses.
The first Phase 2 clinical trial of Neotrofin (28 days of dosing) was
initiated in July 1998 and completed in the first quarter of 1999. The results
from this study confirmed the observations seen in the Phase 1 trials and also
indicated improved memory performance. In the first quarter of 1999, we
initiated a larger Phase 2 clinical trial (90 days of dosing) in Canada,
Australia and the Republic of South Africa. The results from this study
indicated that, at the highest tested dose of Neotrofin(TM), 500 mg/day,
statistically significant improvements in the behavioral aspects of Alzheimer's
disease were seen and there was a trend toward improvement in cognitive
improvement in the ADAS-cog test, a standardized test that measures cognitive
function. These effects were more pronounced in patients with more moderate
Alzheimer's disease. Another Phase 2 clinical trial was initiated in the United
States in the third quarter of 1999 to study the effects of oral Neotrofin in
the brain using PET (Positron Emission Tomography) imaging technology. The
results of this study indicated that higher doses of Neotrofin(TM) (500 and 1000
mg/day) demonstrated positive effects on cognition in psychometric tests and
positive effects on PET and EEG (electroencephalogram) parameters. In the third
quarter of 1999 we initiated a Phase 2 clinical trial in the United States to
study the effects of a single dose level of Neotrofin compared to placebo when
administered for 90 days. This study did not demonstrate any statistically
significant effects of 150 mg of Neotrofin(TM) versus placebo. We also
initiated, in the first quarter of 2000 and discontinued in the fourth quarter
of 2000, a large multinational (excluding the United States) low dose-ranging
Phase 2/3 study of Neotrofin. We initiated additional studies of Neotrofin(TM),
for Alzheimer's disease, spinal cord injury and Parkinson's disease, in the
first half of 2001.
We expect that we will have to conduct and fund additional animal and
human studies that may possibly include Phase 3 human clinical studies prior to
submitting Neotrofin to the FDA, or regulatory agencies in other countries, for
marketing approval. We cannot guarantee, however, that ongoing or future
clinical trials of Neotrofin will be successful, that the marketing of Neotrofin
will be approved by regulatory agencies, or that Neotrofin can be marketed
successfully to its targeted population. See "Drug Approval Process and
Government Regulation."
Other Compounds in Development
Due to the historically limited resources available to us and our
decision to focus those resources on the development of Neotrofin, our other
compounds are in earlier stages of development. These compounds include:
AIT-034: AIT-034 is a distinct chemical analog of hypoxanthine and
pyrollidone that has been demonstrated in animal studies to enhance memory and
to reverse memory deficits in severely impaired animals that do not respond to
Neotrofin. AIT-034 does not induce the production of NGF, and its mechanism of
action is therefore believed to be different than Neotrofin. We believe that
AIT-034 could complement Neotrofin as a treatment for Alzheimer's disease and
dementia.
NeoTherapeutics drug discovery program has accelerated its process of
synthesizing and testing new compounds. Currently all compounds from this
program are still in the discovery phase and have not yet become development
candidates. We anticipate that several compounds from this endeavor may become
development candidates during 2001.
Until extensive further development and testing is completed, which will
take many years, if undertaken at all, the therapeutic and other effects of
these compounds cannot be established.
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PRIMARY THERAPEUTIC TARGETS
Alzheimer's Disease. Alzheimer's disease is a neurodegenerative brain
disorder that leads to progressive memory loss and dementia. Alzheimer's disease
generally follows a course of deterioration over eight years or more, with the
earliest symptom being impairment of short-term memory. Alzheimer's disease is
now recognized as the most common cause of severe intellectual impairment in
persons over the age of 65 in the United States, with approximately four million
Americans diagnosed as suffering from Alzheimer's disease. The number of
patients with Alzheimer's disease is expected to reach 14 million by 2050.
Alzheimer's disease is the fourth leading cause of death in the United States
with approximately 100,000 deaths per year. The Alzheimer's Association has
estimated that the overall care costs required for the treatment and care of the
estimated four million U.S. patients with Alzheimer's disease are $100 billion
per year. There are currently four drugs approved for the treatment of
Alzheimer's disease in the United States: Cognex(R) (Warner Lambert), Aricept(R)
(Pfizer and Eisai), Exelon(R) (Novartis) and Reminyl(R) (Janssen and Shire).
Cognex(R) is no longer actively marketed in the United States and Reminyl(R) was
just approved in the first quarter of 2001 and therefore there are no sales from
these two drugs at this time. We have two compounds in development, Neotrofin
and AIT-034, which have shown potential to treat Alzheimer's disease.
Dementia and Memory Impairment Associated with Aging. Because the
populations of developed countries are aging, the costs and social burden of
medical care and housing of aged persons suffering from mentally deteriorative
diseases are increasing. The availability of a drug to reduce the memory
impairments associated with aging would not only have a significant economic
impact but would also greatly improve the quality of life for the elderly
population. Both Neotrofin and AIT-034 have shown to be effective in
improving memory loss associated with aging in mice. Clinical trials indicate
that Neotrofin also improves memory performance in patients with Alzheimer's
disease.
Spinal Cord Injury. There are an estimated 200,000 severely disabled
survivors of spinal cord trauma in the United States with approximately 10,000
new injuries each year. The cost of care and services for these individuals is
estimated to exceed $10 billion per year. Significant research efforts are
currently being focused on the neurotrophic factors that can initiate and
support new cell development, guide new or damaged nerves to appropriate targets
and maintain neuronal function. Animal studies have shown that functional
restorations are possible with appropriate neurotrophic factors. A major
obstacle to the effective use of these neurotrophic factors is the delivery of
the appropriate neurotrophic factors to the site of damage. Neotrofin has been
shown in mice to cause the production of several neurotrophic factors in the
spinal cord after oral administration, demonstrating that it can effectively
penetrate the blood-brain barrier. We believe that Neotrofin potentially could
be used to stimulate the regeneration of nerves damaged by spinal cord injury.
We have paid $50,000 and have committed an additional $50,000 to establish a
NeoTherapeutics Fellowship as part of the Reeve-Irvine Research Center for
spinal cord injury at the University of California, Irvine. We initiated a
clinical trial in March 2001 to study the effects of Neotrofin(TM) on spinal
cord injury.
Parkinson's disease. An estimated 1-1.5 million Americans suffer from
Parkinson's disease. Parkinson's disease is a neurodegenerative disease that
results as a consequence of the death of dopaminergic neurons in the substantia
nigra of the brain. These cells are responsible for producing and responding to
the neurotransmitter dopamine which is deficient in patients with Parkinson's
disease. This dopamine deficiency leads to a variety of movement disorders
including rigidity, tremor, slowness of movement, poor balance and walking
problems. Dementia is also common in the later stages of the disease. Current
therapy consists primarily of dopamine analogs to increase dopamine levels and
drugs to alleviate the various movement symptoms. We initiated a clinical trial
in March 2001 to study the effects of Neotrofin(TM) on this disease.
Peripheral Neuropathy. An estimated 60% of the 13 million diabetic
patients in the United States suffer from some damage to their peripheral nerves
leading to numbness and tingling of fingers, hands, toes and feet; weakness in
hands and feet; and pain and/or burning sensation in the hands and feet.
Peripheral neuropathy is also a major problem in patients undergoing cancer
chemotherapy. Many chemotherapeutic agents are neurotoxic leading to the same
symptoms described for peripheral diabetic neuropathy. The current market for
drugs for the diabetic peripheral neuropathy alone is more than $16 billion per
year.
Stroke. Among older Americans, stroke ranks as the third leading cause
of death. An estimated 500,000 people in the United States suffer strokes each
year. The costs associated with the treatment and care of stroke patients are
estimated to be approximately $25 billion per year. Most therapeutic approaches
to treating strokes are directed towards correcting the circulatory deficit or
to blocking the toxic effects of chemicals released in the brain at the time of
the stroke. Since Neotrofin has the potential to be neuroprotective in addition
to enhancing nerve regeneration, we believe that it may prove useful in treating
stroke.
Functional Genomics. In 2000, under the auspices of the Human Genome
Project of the National Institutes of Health, the entire sequence of the human
genetic blueprint was deciphered. Knowledge of the sequence of a gene does not
tell what the function and purpose of that gene is in the body. Understanding
the function and purpose of each of the
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human genes in the body is a process called "functional genomics." Of the
approximately 35,000 human genes which control all of the body's functionality,
approximately 1,000 are in a class called G-protein-coupled receptors ("GPCRs"),
which regulate key cell functions. The purpose and function of approximately 140
GPCRs remains unknown today. They are called the "orphan receptor" genes.
Using genetic engineering techniques, it has been possible to deduce the
function of certain orphan receptor genes, but the process is difficult, labor
intensive and expensive. Of the 20 orphan receptor genes whose functions have
been established, six have been discovered as a result of research conducted by
Dr. Olivier Civelli, the most discovered by a single group. Among them is the
MCH receptor, which is associated with obesity control, and Urotensin II, a
potent controller of blood pressure.
In September 1999, we entered into a collaborative research agreement
with the University of California, Irvine which grants us the exclusive right to
all technology and products developed by Dr. Civelli and his colleagues in
exchange for research funding support in the amount of $2.0 million over three
years. While it may be several years before therapeutic product candidates are
identified, this technology platform complements our current technology base and
product pipeline and should provide us with the next generation of potential
products.
Oncology. In 1999, an estimated 552,200 Americans were expected to die
of cancer, more than 1,500 people a day. Cancer is the second leading cause of
death in the U.S., exceeded only by heart disease. In the U.S., 1 of 4 deaths is
from cancer. In 2000, approximately 1,220,100 new cancer cases were expected to
be diagnosed. The cost of treating and caring for patients with cancer in 1999
was estimated at $107 billion; $37 billion for direct medical costs (total of
all health expenditures), $11 billion for indirect morbidity costs (cost of lost
productivity due to illness), and $59 billion for indirect mortality costs (cost
of lost productivity due to premature death).
In early 2000, we signed a Letter of Intent with the Netherlands-based
NDDO Research Foundation to in-license Neoquin(TM) ("EO9") and 80 related
anti-cancer compounds. Pending completion of a licensing agreement, Neoquin(TM)
will enter Phase 2 clinical trials in bladder cancer.
BUSINESS STRATEGY
Marketing and Sales
We do not currently sell any products and therefore have no marketing,
sales, or distribution organization. We intend to complete a series of strategic
alliances with multinational or large regional pharmaceutical companies having
substantial financial capacity, marketing capability and clinical development
expertise, who can assist us in the development, marketing and sale of Neotrofin
and our potential other products. However, we may seek to retain rights to
co-market our products in the United States.
We believe the support of the NIA and the NIMH, along with the
Alzheimer's Disease Cooperative Study, the clinical arm of the NIA's research on
Alzheimer's disease, could contribute significantly to the future marketing and
educational efforts directed to physicians who treat Alzheimer's disease
patients. We believe that this exposure to the leaders in the field of
neurodegenerative diseases may reduce the time and marketing costs required to
introduce our potential products when and if they are approved by the FDA.
Strategic Alliances
We believe that our patented technology platforms provide a major
commercial opportunity for developing strategic alliances with larger
pharmaceutical companies. We believe that any such alliance would enable us to
focus on our inherent strength; namely exploitation of the technology platform
to develop additional novel therapies.
The most common phase in which industry collaborations are completed is
the discovery stage, since a license for early stage discoveries generally cost
a large pharmaceutical company much less than licensing later stage products. We
chose to postpone the structuring of a corporate sponsored licensing agreement
for Neotrofin in favor of an early stage, government-assisted development
program. By completing strategic alliances later in the development cycle, we
hope to increase value for our stockholders that may be reflected in the
enhanced terms of any licensing agreement.
From time to time we engage in licensing discussions with one or more
multinational or regional pharmaceutical companies. We anticipate that the terms
of any strategic alliance that we enter into for our lead compound, Neotrofin,
will include an up-front payment, milestone payments, royalties on product
sales, and agreements requiring the licensee to purchase drug compounds from us.
We cannot guarantee that any such discussions will result in a commercial
transaction on favorable terms.
In March 2001, NeoGene entered into a licensing agreement with Pfizer,
Inc. Under the terms of the agreement, NeoGene has received an initial payment
of $100,000 and can receive milestone payments on potential products arising
from research on one of NeoGene's proprietary orphan G-protein-coupled
receptors. The initial payment and milestone payments have a
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potential to reach $12.0 million. However, there can be no assurance that the
development project will be successful and result in our receiving any further
milestone payments.
Research Collaborations
We currently have several proprietary compounds in various stages of
pre-clinical development. From time to time, we evaluate these compounds for
efficacy in specialized assays or test models. We locate expert academic
researchers to perform the desired tests and provide them, through their
respective academic institutions, with grants and/or contracts to perform the
designated tests while we maintain proprietary rights to the compounds. We
monitor these studies to ensure that these studies are performed to the highest
research standards.
Production
We currently have our compounds manufactured in large scale by third
party vendors and have no plans to establish our own manufacturing facilities.
In connection with any licensing arrangements we may enter into, we intend to
retain the rights to control the manufacturing and sale of our compounds to our
licensees. Preliminary estimates indicate that Neotrofin can be manufactured
cost effectively.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of our products and our research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation. The
Federal Food, Drug and Cosmetics Act, as amended, and the regulations
promulgated thereunder, as well as other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of our proposed products. Product development and approval within this
regulatory framework take a number of years and involve the expenditure of
substantial resources. In addition to obtaining FDA approval for each product,
each drug manufacturing establishment must be registered with, and approved by,
the FDA. Domestic manufacturing establishments are subject to regular
inspections by the FDA and must comply with Good Manufacturing Practices
("GMP"). To supply products for use in the United States, foreign manufacturing
establishments must also comply with GMP and are subject to periodic inspection
by the FDA or by regulatory authorities in certain of such countries under
reciprocal agreements with the FDA. Drug product and drug substance
manufacturing establishments located in California also must be licensed by the
State of California in compliance with local regulatory requirements.
New Drug Development and Approval
The United States system of new drug approval is one of the most
rigorous in the world. According to a June 2000 report by the Pharmaceutical
Research and Manufacturers of America, it costs an average of $500 million and
takes an average of 12 to 15 years from discovery of a compound to bring a
single new pharmaceutical product to market. Approximately one in 1,000
compounds that enter the pre-clinical testing stage eventually makes it to human
testing and only one-fifth of those are ultimately approved for
commercialization. In recent years, societal and governmental pressures have
created the expectation that drug discovery and development costs can be reduced
without sacrificing safety, efficacy and innovation. The need to significantly
improve or provide alternative strategies for successful pharmaceutical
discovery, research and development remains a major health care industry
challenge.
Drug Discovery
In the initial stages of drug discovery before a compound reaches the
laboratory, typically thousands of potential compounds are randomly screened for
activity in an assay assumed to be predictive of a particular disease process.
This drug discovery process can take several years. Once a "screening lead" or
starting point for drug development is found, isolation and structural
determination is initiated. Numerous chemical modifications are made to the
screening lead in an attempt to improve the drug properties of the lead. After a
compound emerges from the above process, it is subjected to further studies on
the mechanism of action, further in vitro screening against particular disease
targets and finally, in vivo animal screening. If the compound passes these
evaluation points, animal toxicology is performed to begin to analyze the
potential toxic effects of the compound, and if the results indicate acceptable
toxicity findings, the compound emerges from the basic research mode and moves
into the pre-clinical phase.
Pre-clinical Testing
During the pre-clinical testing stage, laboratory and animal studies are
conducted to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety. These tests can take up to
three years or more to complete.
Investigational New Drug Application (IND)
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After pre-clinical testing, an IND is submitted to the FDA to begin
human testing of the drug. The IND becomes effective if the FDA does not reject
it within 30 days. The IND must indicate the results of previous experiments,
how, where and by whom the studies were conducted, how the chemical compound is
manufactured, the method by which it is believed to work in the human body, and
any toxic effects of the compound found in the animal studies. In addition, the
IND clinical protocol must be reviewed and approved by an Institutional Review
Board comprised of physicians and lay people at the hospital or clinic where the
proposed studies will be conducted. Progress reports detailing the results of
both animal studies and human clinical trials must be submitted at least
annually to the FDA.
Phase 1 Clinical Trials
After an IND becomes effective, Phase 1 human clinical trials can begin.
These studies, involving small numbers of healthy volunteers or patients, can
take up to one year or more to complete. The studies determine a drug's safety
profile, including the safe dosage range. The Phase 1 clinical studies also
determine how a drug is absorbed, distributed, metabolized and excreted by the
body. Additional Phase 1 clinical trials, which may be conducted at any time
during the clinical development of a new drug, evaluate interactions between the
test drug and drugs commonly used in the target population and safety in
patients with compromised organ systems.
Phase 2 Clinical Trials
In Phase 2 clinical trials, controlled studies of volunteer patients
with the targeted disease assess the drug's effectiveness. These studies are
designed primarily to determine the appropriate dose levels and to evaluate the
effectiveness of the drug on the volunteer patients, as well as to determine if
there are any side effects on these patients. These studies can take up to two
years or more.
Phase 3 Clinical Trials
This phase can last up to three years or more and usually involves large
numbers of patients with the targeted disease. During the Phase 3 clinical
trials, physicians monitor the patients to determine efficacy and to observe and
report any adverse reactions that may result from long-term and more widespread
use of the drug.
New Drug Application (NDA)
After completion of all three clinical trial phases, the data is
analyzed and, if the data indicates that the drug is safe and effective, an NDA
is filed with the FDA. The NDA must contain all of the information on the drug
that has been gathered to date, including data from the clinical trials. NDAs
are often over 100,000 pages in length. After passage of the Prescription Drug
User Fee Act, average review times for new medicine applications dropped from
nearly 30 months in 1992 to less than 12 months at this time.
Fast Track Review
In September 1998, the FDA clarified procedures for accelerating the
approval of drugs to be marketed for serious diseases for which the manufacturer
can demonstrate the potential to address unmet medical needs. We do not know
whether Neotrofin will fulfill this requirement for the treatment of Alzheimer's
disease as there are drugs currently approved and available for such treatment.
However, Neotrofin might qualify for "fast track" classification in a different
disease indication. At this time, we have not requested fast track designation
for Neotrofin.
The FDA has also made provisions for priority review of drugs. A drug
will qualify for priority review if it provides a significant improvement
compared to marketed products in the treatment, diagnosis or prevention of a
disease regardless if the indication is serious or life-threatening. We believe
that Neotrofin may qualify for priority review.
Approval
If the FDA approves the NDA, the drug becomes available for physicians
to prescribe. We must continue to submit periodic reports to the FDA, including
descriptions of any adverse reactions reported. For certain drugs which are
administered on a long-term basis, the FDA may request additional clinical
studies (Phase 4) after the drug has begun to be marketed to evaluate long-term
effects. The marketing of a drug after FDA approval is subject to substantial
continuing regulation by the FDA, including regulation of manufacturing
practices and the advertising and promotion of the drug.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
Our research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and various radioactive compounds.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result, and any such
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liability could exceed our resources.
For marketing outside the United States, we, or our prospective
licensees, are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices in the respective
countries. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
RESEARCH AND DEVELOPMENT
Since our inception, we have devoted substantially all of our efforts to
research and development. Research and development expenditures were $8,542,034
in 1998, $20,057,687 in 1999 and $38,766,884 in 2000.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are vital to our business. Our
policy is to seek patent protection for our proprietary compounds and
technology, and we intend to protect our technology, inventions and improvements
to inventions that are commercially important to the development of our
business. We also intend to rely on trade secrets, know-how, continuing
technology innovations and licensing arrangements to develop and maintain our
competitive position. In addition, we have applied for registration of several
trademarks, including the name of the Company, NeoTherapeutics, and our
potential products.
We are the assignee of the following four patents issued to Alvin J.
Glasky, our Chairman, Chief Executive Officer and Chief Scientific Officer.
(1) On February 25, 1992, Dr. Alvin Glasky, our Chairman, Chief
Executive Office and Chief Scientific Officer, was issued a United States patent
(No. 5,091,432) which establishes proprietary rights for a series of compounds
whose chemistry is based upon a purine, hypoxanthine, and for the use of these
compounds in the treatment of neuroimmunologic disorders. This patent expires on
February 25, 2009. These compounds are bi-functional drugs that combine the
ability of hypoxanthine to be absorbed rapidly into the body with the
pharmacological activity of a second molecular component. These second
components were selected to provide a wide variety of potential therapeutic
applications that act on the central nervous system to treat neurological or
psychiatric diseases or conditions associated with Alzheimer's disease,
impairment associated with aging, Parkinson's disease, stroke, spinal cord
injuries, migraine and depression.
(2) On September 5, 1995, a second United States patent (No. 5,447,939)
was issued to Dr. Glasky which covers the treatment of neurological and
neurodegenerative diseases through modification of certain biochemical processes
in cells. This patent expires on July 25, 2014. This second patent also
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
(3) On September 1, 1998, Dr. Glasky was issued a third United States
patent (No. 5,801,184) which relates to the control of neural activity and the
treatment of neurological disorders by controllably inducing the in vivo genetic
expression of naturally occurring protein molecules including neurotrophic
factors. This patent expires on September 1, 2015. This third patent also
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
(4) On February 22, 2000, a fourth United States patent (No. 6,027,936)
was issued to Dr. Glasky which covers the use of certain purine-containing
compounds to induce the production of naturally occurring neural growth factors
for the purpose of stimulating neuritogenesis, or sprouting of nerve cells. This
patent expires on July 25, 2014.
All four patents have been assigned to NeoTherapeutics by Dr. Glasky. In
connection with these assignments, Dr. Glasky has been granted a royalty of two
percent of all revenues derived by NeoTherapeutics from the use and sale by us
of any products which are covered by any of the aforementioned patents or any
subsequent derivative patents, in each case for the life of the patent. However,
Dr. Glasky will not receive any royalties with respect to sales of products
which utilize patent rights licensed to us by McMaster University. In the event
NeoTherapeutics terminates Dr. Glasky's employment without cause, the royalty
rate shall be increased to five percent, and in the event Dr. Glasky dies, his
estate or family shall be entitled to continue to receive royalties at the rate
of two percent.
With respect to the second United States patent described above, we have
entered into a license agreement whereby McMaster University has licensed to
NeoTherapeutics all patent rights belonging to McMaster University contained in
such patent. This agreement calls for annual minimum royalty payments of $25,000
per year to McMaster University, with the first payment due in July of 1997
until expiration of the related patent rights, and for us to pay to McMaster
University a royalty of five percent of the net sales of all products sold by
NeoTherapeutics which incorporate the patent rights licensed to us by McMaster
University. The third and fourth U.S. patents are covered under this agreement.
On February 16, 2001, a United States patent application issued to Dr.
Glasky which covers the use of certain
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compounds containing both purine and serotonin moieties for treatment of
anxiety, has been allowed. Dr. Glasky has assigned his rights in this patent to
the Company.
In addition to a number of foreign patents, which have been granted
corresponding to the first and third United States patents described above, we
also currently have thirteen additional United States patent applications and a
number of corresponding foreign patent applications on file. There can be no
assurance, however, that the scope of the coverage claimed in our patent
applications will not be significantly reduced prior to a patent being issued.
NeoGene also maintains a patent portfolio with five applications
currently on file in the United States and corresponding applications in foreign
countries. The same issues pertaining to NeoTherapeutics patent portfolio also
apply to the NeoGene portfolio.
The patent positions of pharmaceutical and drug development companies
are generally uncertain and involve complex legal and factual issues. There can
be no assurance that third parties will not assert patent or other intellectual
property infringement claims against us with respect to our products or
technology or other matters. There may be third-party patents and other
intellectual property relevant to our products and technology of which we are
not aware.
Patent litigation is becoming more common in the biopharmaceutical
industry. Litigation may be necessary to defend against or assert claims of
infringement, to enforce our patents, to protect trade secrets we own or to
determine the scope and validity of proprietary rights of third parties.
Although no third party has asserted that we are infringing upon their patent
rights or other intellectual property, there can be no assurance that litigation
asserting such claims will not be initiated, that we would prevail in any such
litigation or that we would be able to obtain any necessary licenses on
reasonable terms, if at all. Any such claims against us, whether meritorious or
not, as well as claims initiated by us against third parties, can be time
consuming and expensive to defend or prosecute and to resolve. If our
competitors prepare and file patent applications in the United States that claim
technology we also claim, we may have to participate in interference proceedings
declared by the Patent and Trademark Office to determine priority of invention,
which could result in substantial costs, even if we ultimately prevailed. The
results of such proceedings are highly unpredictable and, as a result of such
proceedings, we may have to obtain licenses in order to continue to conduct
clinical trials, manufacture or market certain of our products. No assurance can
be made that we will be able to obtain any such licenses on favorable terms, if
at all.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We protect such information with confidentiality
agreements with our employees and consultants and with corporate partners and/or
collaborators as such relationships are formed. The agreements provide that all
confidential information developed or made known to an individual during the
course of the employment or consulting relationship shall be kept confidential
and not disclosed to third parties except in specified circumstances. Agreements
with employees provide that all inventions conceived by the individual while
employed by NeoTherapeutics are our exclusive property. We cannot guarantee that
these agreements will be honored, that we will have adequate remedies for
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are engaged in activities similar to that of
NeoTherapeutics. Our competitors that have a product on the market within our
clinical focus include Amgen, Inc., Bayer AG, Eli Lilly and Co., Novartis,
Bristol-Myers Squibb Company, Glaxo SmithKline, Regeneron Pharmaceuticals, Inc.,
Vertex Pharmaceuticals, Inc., Guilford Pharmaceuticals, Inc., Cephalon, Inc.,
Aventis, Elan Corporation, Pfizer, Inc. and Janssen and Shire, among others.
Competitors that have a similar strategic and clinical focus as us include
Axonyx, Cortex, Curis, Diacrin, Genset, Interneuron, Neurobiological
Technologies, Neurocrine Biosciences, Neurogen, NPS Pharmaceuticals Inc.,
StemCells, Inc., Synaptic and Titan Pharmaceuticals. In addition, colleges,
universities, governmental agencies and other public and private research
institutions will continue to conduct research and are becoming more active in
seeking patent protection and licensing arrangements to collect license fees,
milestone payments and royalties in exchange for license rights to technologies
that they have developed, some of which may directly compete with our
technologies. These companies and institutions also compete with us in
recruiting highly qualified scientific personnel. Many of our competitors have
substantially greater financial, research and development, human and other
resources than we do. Furthermore, large pharmaceutical companies have
significantly more experience than we do in pre-clinical testing, human clinical
trials and regulatory approval procedures.
Although we have begun to conduct clinical trials with respect to
Neotrofin, we have not conducted clinical trials with respect to any of our
other compounds under development nor have we sought the approval of the FDA for
any product based on such compounds. Furthermore, if we are permitted to
commence commercial sales of products based on compounds we develop, including
Neotrofin, and decide to manufacture and sell such products ourselves, then we
will
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also be competing with respect to manufacturing efficiency and marketing
capabilities, which are areas in which we have no prior experience.
Any product for which we obtain FDA approval must also compete for
market acceptance and market share. A number of drugs intended for the treatment
of Alzheimer's disease, memory loss associated with aging, stroke and other
neurodegenerative diseases and disorders are on the market or in the later
stages of clinical testing. Four drugs are currently approved for the treatment
of Alzheimer's disease in the United States and both are cholinesterase
inhibitors: Cognex(R) (tacrine), formerly marketed by Warner-Lambert Co.,
Aricept(R) (donepezil), marketed by Pfizer, Inc. and Eisai Co., Ltd., Exelon(R)
(rivastigmine), marketed by Novartis, and Reminyl(R) (galantamine), marketed by
Janssen and Shire.
Certain technologies under development by other pharmaceutical companies
could result in treatments for Alzheimer's disease and other diseases and
disorders for which we are developing our own treatments. Several other
companies are engaged in research and development of compounds which use
neurotrophic factors in a manner similar to that of our compounds. In the event
that one or more of these programs are successful, the market for our products
could be reduced or eliminated.
We expect technological developments in the field of
neuropsychopharmacology to continue to occur at a rapid rate and expect
competition will remain intense as advances continue to be made. Although we
believe, based on the preliminary pre-clinical test results involving certain of
our compounds, that we will be able to continue to compete in the discovery and
early clinical development of compounds for neurological and psychiatric
disorders, we cannot guarantee that we will be able to do so. At present, we do
not have sufficient resources to compete with major pharmaceutical companies in
the areas of later-stage clinical testing, manufacturing and marketing.
EMPLOYEES
As of December 31, 2000, we had fifty-three full-time employees, of
which ten hold Ph.D. degrees, four hold M.D. degrees and eight part-time
employees. There can be no assurance that we will be able to attract and retain
qualified personnel in sufficient numbers to meet its needs. Our employees are
not subject to any collective bargaining agreements, and we regard our relations
with our employees to be good.
RISK FACTORS
Your investment in our common stock involves a high degree of risk. You
should consider the risks described below and the other information contained in
this prospectus carefully before deciding to invest in our common stock. If any
of the following risks actually occur, our business, financial condition and
operating results would be harmed. As a result, the trading price of our common
stock could decline, and you could lose a part or all of your investment.
OUR LOSSES WILL CONTINUE TO INCREASE AS WE EXPAND OUR DEVELOPMENT EFFORTS, AND
OUR EFFORTS MAY NEVER RESULT IN PROFITABILITY.
Our cumulative losses during the period from our inception in 1987
through December 31, 2000 were approximately $96.2 million, almost all of which
consisted of research and development and general and administrative expenses.
We lost approximately $11.6 million in 1998, $26.0 million in 1999 and
approximately $46.4 million in 2000. We expect our losses to decrease in the
year 2001, but to increase in the future as we expand our clinical trials and
increase our research and development activities. We currently do not sell any
products and we may never achieve significant revenues or become profitable.
Even if we eventually generate revenues from sales, we nevertheless expect to
incur significant operating losses over the next several years.
OUR POTENTIAL DRUG PRODUCTS ARE IN AN EARLY STAGE OF CLINICAL AND PRECLINICAL
DEVELOPMENT AND MAY NOT PROVE SAFE OR EFFECTIVE ENOUGH TO OBTAIN REGULATORY
APPROVAL TO SELL ANY OF THEM.
We currently are testing our first potential drug product in human
clinical trials. Our other proposed products are in preclinical development. We
cannot be certain that any of our potential or proposed products will prove to
be safe or effective in treating disorders of the central nervous system or any
other diseases. All of our potential drugs will require additional research and
development, testing and regulatory clearance before we can sell them. We cannot
be certain that we will receive regulatory approval to sell any of our potential
drugs. We do not expect to have any products commercially available for at least
two years, if at all.
IF WE ARE UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FUNDING ON ACCEPTABLE TERMS,
WE MAY HAVE TO DELAY OR ELIMINATE ONE OR MORE OF OUR DEVELOPMENT PROGRAMS.
We currently are spending cash at a rate in excess of approximately $2.3
million per month, and we expect this rate of spending to continue for at least
the following 12 months. We believe that, together with periodic sales of common
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stock such as the $3.5 million and the $5.0 million sales in February and March
2001, respectively, the ability to draw down a $25 million credit line entered
into with a major investment bank in April 2001, and, assuming that the holders
of our Class B Warrants continue to exercise our Class B Warrants in response to
our call notices, our existing cash and capital resources will satisfy our
current funding requirements for at least the next twelve months. Should we not
be able to continue periodic sales of our common stock or to utilize our credit
line, and if the market price of our common stock is less than $5.00 per share,
we may not be able to use our Class B Warrants as a financing source, and we may
have to seek additional funding. We may not be able to obtain additional funds
on acceptable terms or at all. If adequate funds are not available, we will have
to delay or eliminate one or more of our development programs.
We expect that we will need substantial additional funds to complete
development and clinical trials of Neotrofin(TM), our lead drug candidate,
before we will be able to submit it to the FDA for approval for commercial sale,
and to support the continued development of Neoquin(TM), our lead anti-cancer
drug candidate. Our capital requirements will depend on many factors, including:
- continued scientific progress in research and development;
- the progress of preclinical and clinical testing;
- the cost involved in filing, prosecuting and enforcing patent
claims;
- the effect of competing technological developments;
- the cost of manufacturing scale-up;
- the cost of commercialization activities;
- the time and cost involved in obtaining regulatory approvals;
and
- our ability to establish collaborative and other arrangements
with third parties, such as licensing and manufacturing
agreements.
We expect to seek additional funding through public or private
financings or collaborative or other arrangements with third parties. We may not
obtain additional funds on acceptable terms, if at all. If adequate funds are
not available, we will have to delay or eliminate one or more of our development
programs.
COMPETITION FOR PATIENTS IN CONDUCTING CLINICAL TRIALS AND EXTENSIVE REGULATIONS
GOVERNING THE CONDUCT OF CLINICAL TRIALS MAY PREVENT OR DELAY APPROVAL OF A DRUG
CANDIDATE AND STRAIN OUR LIMITED FINANCIAL RESOURCES.
Many pharmaceutical companies are conducting clinical trials in patients
with Alzheimer's disease. As a result, we must compete with them for clinical
sites, physicians and the limited number of patients with Alzheimer's disease
who fulfill the stringent requirements for participation in clinical trials.
This competition may increase costs of our clinical trials and delay the
introduction of our potential products.
ANY FAILURE TO COMPLY WITH EXTENSIVE GOVERNMENTAL REGULATION COULD PREVENT OR
DELAY PRODUCT APPROVAL OR CAUSE GOVERNMENTAL AUTHORITIES TO DISALLOW OUR
PRODUCTS AFTER APPROVAL AND SUBJECT US TO CRIMINAL OR CIVIL LIABILITIES.
The U.S. Food and Drug Administration, or FDA, and comparable agencies
in foreign countries impose many requirements on the introduction of new drugs
through lengthy and detailed clinical testing procedures, and other costly and
time consuming compliance procedures. These requirements make it difficult to
estimate when Neotrofin(TM) or any other potential product will be available
commercially, if at all.
Our proprietary compounds will require substantial clinical trials and
FDA review as new drugs. Even if we successfully enroll patients in our clinical
trials, patients may not respond to our potential drug products. We think it is
prudent to expect setbacks. Failure to comply with the regulations applicable to
such testing may delay, suspend or cancel our clinical trials, or the FDA might
not accept the test results. The FDA, or any comparable regulatory agency in
another country, may suspend clinical trials at any time if it concludes that
the trials expose subjects participating in such trials to unacceptable health
risks. Further, human clinical testing may not show any current or future
product candidate to be safe and effective to the satisfaction of the FDA or
comparable regulatory agencies or the data derived therefrom may be unsuitable
for submission to the FDA or other regulatory agencies.
We cannot predict with certainty when we might submit any of our
proposed products currently under development for regulatory review. Once we
submit a proposed product for review, the FDA or other regulatory agencies may
not issue their approvals on a timely basis, if at all. If we are delayed or
fail to obtain such approvals, our business
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may be damaged. If we fail to comply with regulatory requirements, either prior
to approval or in marketing our products after approval, we could be subject to
regulatory or judicial enforcement actions. These actions could result in:
- product recalls or seizures;
- injunctions;
- civil penalties;
- criminal prosecution;
- refusals to approve new products and withdrawal of existing
approvals; and
- enhanced exposure to product liabilities.
THE LOSS OF KEY RESEARCHERS OR MANAGERS COULD HINDER OUR DRUG DEVELOPMENT
PROCESS SIGNIFICANTLY AND MIGHT CAUSE OUR BUSINESS TO FAIL.
Our success depends upon the contributions of our key management and
scientific personnel, especially Dr. Alvin Glasky, our Chief Executive Officer
and Chief Scientific Officer. Our loss of the services of Dr. Glasky or any
other key personnel could delay or preclude us from achieving our business
objectives. Although we currently have key-man life insurance on Dr. Alvin
Glasky in the face amount of $2 million, the loss of Dr. Glasky's services would
damage our research and development efforts substantially.
We also will need substantial additional expertise in finance and
marketing and other areas in order to achieve our business objectives.
Competition for qualified personnel among pharmaceutical companies is intense,
and the loss of key personnel, or the inability to attract and retain the
additional skilled personnel required for the expansion of our business, could
damage our business.
IF WE CANNOT PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, THE
VALUE OF OUR RESEARCH COULD DECLINE AS OUR COMPETITORS APPROPRIATE PORTIONS OF
OUR RESEARCH.
We actively pursue patent protection for our proprietary products and
technologies. We hold four U.S. patents and currently have thirteen U.S. patent
applications pending. In addition, we have numerous foreign patents issued and
patent applications pending corresponding to our U.S. patents. However, our
patents may not protect us against our competitors. We may have to file suit to
protect our patents or to defend our use of our patents against infringement
claims brought by others. Because we have limited cash resources, we may not be
able to afford to pursue or defend against litigation in order to protect our
patent rights.
We also rely on trade secret protection for our unpatented proprietary
technology. However, trade secrets are difficult to protect. While we enter into
proprietary information agreements with our employees and consultants, these
agreements may not successfully protect our trade secrets or other proprietary
information.
WE ARE A SMALL COMPANY RELATIVE TO OUR PRINCIPAL COMPETITORS AND OUR LIMITED
FINANCIAL AND RESEARCH RESOURCES MAY LIMIT OUR ABILITY TO DEVELOP AND MARKET NEW
PRODUCTS.
Many companies, both public and private, including well-known
pharmaceutical companies, are developing products to treat Alzheimer's disease
and certain of the other applications we are pursuing. Most of these companies
have substantially greater financial, research and development, manufacturing
and marketing experience and resources than we do. As a result, our competitors
may develop additional drugs that are more effective or less costly than any
drug which we may develop.
OUR LACK OF EXPERIENCE AT CONDUCTING CLINICAL TRIALS OURSELVES MAY DELAY THE
TRIALS AND INCREASE OUR COSTS
We intend to conduct some future clinical trials ourselves rather than
hiring outside contractors. We believe this conversion may reduce the costs
associated with the trials and give us more control over the trials. However,
while some of our management has had experience at conducting clinical trials,
we have never done so as a company. Our lack of experience may delay the trials
and increase our costs. We think it is prudent to expect setbacks as we make
this transition.
OUR MANAGEMENT HAS LIMITED MANUFACTURING AND MARKETING EXPERIENCE AND MAY BE
UNABLE TO MANAGE OUR GROWTH OR MANUFACTURE AND MARKET OUR PRODUCTS SUCCESSFULLY.
To date, we have engaged exclusively in the development of
pharmaceutical technology and products. Our management has substantial
experience in pharmaceutical company operations, but has limited experience in
manufacturing or procuring products in commercial quantities or in marketing
pharmaceutical products. Our management has only limited experience in
negotiating, establishing and maintaining strategic relationships, conducting
clinical trials and other later-stage phases of the regulatory approval process.
If we receive FDA approval of any of our potential products, we may
decide to establish a commercial-scale manufacturing facility for our products.
The establishment of such a facility will require substantial additional funds
and personnel, and we will need to comply with extensive regulations applicable
to such a facility. These requirements and the associated growth would strain
our existing management and operations. Our ability to manage such growth
depends upon
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the ability of our officers and key employees to:
- broaden our management team;
- develop additional expertise among existing management
personnel;
- attract, hire and retain skilled employees; and
- implement and improve our operational, management information
and financial control systems.
FAILURE TO OBTAIN ADEQUATE REIMBURSEMENT FROM GOVERNMENT HEALTH ADMINISTRATION
AUTHORITIES, PRIVATE HEALTH INSURERS AND OTHER ORGANIZATIONS COULD MATERIALLY
ADVERSELY AFFECT OUR FUTURE BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
Our ability to market and sell our products will depend in part on the
extent to which reimbursement for the cost of our products and related
treatments will be available from government health administration authorities,
private health insurers and other organizations. Third party payers are
increasingly challenging the price of medical products and services.
Significant uncertainty exists as to the reimbursement statements of
newly approved health care products. We cannot be certain that any products
approved for marketing will be considered cost effective or that reimbursement
will be available or that allowed reimbursement will be adequate. In addition,
payers' reimbursement policies could adversely affect our ability to sell our
products on a profitable basis.
HOLDERS OF OUR CONVERTIBLE PREFERRED STOCK AND WARRANTS COULD ENGAGE IN SHORT
SELLING TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF THE SECURITIES AND DECREASE THE EXERCISE PRICE OF THE
WARRANTS. IF THIS OCCURS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE.
The holders of shares of preferred stock issued by our subsidiary,
NeoGene Technologies, Inc., have rights to exchange those shares for shares of
our convertible preferred stock or for NeoGene's Series A Preferred Stock. If
we hold less than $5 million in cash and cash equivalents at the time of the
exchanges, the holders have the right to exchange those shares into our
convertible debentures. If those exchange rights are exercised, the number of
shares of common stock issuable upon conversion of the convertible preferred
stock or debentures will vary with the market price of our common stock. The
shares of our convertible preferred stock or debentures will generally be
convertible into common stock at a conversion price equal to 101% or 100% of the
average of either the lowest ten or the lowest seven, respectively, closing bid
prices of our common stock in the previous 30 trading days, and subject to caps
of either 120% or 150% of the market price of our common stock at the time of
the exchange, in each case depending upon the series of NeoGene preferred stock
exchanged. Consequently, the number of shares of common stock issuable upon
conversion of the convertible preferred stock or debentures will vary with the
market price of our stock. A greater number of shares of our common stock are
issuable the lower the price of our common stock. Increased sales volume of our
common stock could put downward pressure on the market price of the shares. This
fact could encourage holders of the securities to sell short our common stock
prior to conversion of the securities, thereby potentially causing the market
price to decline and a greater number of shares to become issuable upon
conversion of the preferred stock or debentures. The holders of the securities
could then convert their securities and use the shares of common stock received
upon conversion to cover their short positions. The holders of the securities
could thereby profit by the decline in the market price of the common stock
caused by their short selling.
Similarly, the exercise price of our outstanding Class B Warrants, if we
deliver a redemption notice, is equal to the lesser of $33.75 per share (subject
to adjustment for stock splits, reverse splits and combinations) and 97% of the
closing bid price of our common stock on the trading day after the redemption
notice is delivered. This fact could give the holders of our Class B Warrants
incentive to sell short our common stock after receipt of a redemption notice,
which could cause the market price to decline. The holders of the Class B
Warrants could then exercise their Class B Warrants and use the shares of common
stock received upon exercise to cover their short positions and thereby profit
by the decline in the market price of the common stock caused by their short
selling.
Additionally, it is important to note that a significant amount of the
NeoGene preferred stock and our warrants are owned by three investors. This fact
gives these investors greater influence over the market price of our stock.
THE TRADING PRICE OF OUR COMMON STOCK AND THE TERMS OF OUR CONVERTIBLE
SECURITIES AND WARRANTS MUST COMPLY WITH THE LISTING REQUIREMENTS OF THE NASDAQ
NATIONAL MARKET OR WE COULD BE DELISTED AND THE LIQUIDITY OF OUR COMMON STOCK
WOULD DECLINE.
Our common stock is listed on the Nasdaq National Market. To remain
listed on this market, we must meet Nasdaq's listing maintenance standards and
abide by Nasdaq's rules governing listed companies. If the price of our
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common stock falls below $1.00 per share for an extended period, or if we fail
to meet other Nasdaq standards or violate Nasdaq rules, our common stock could
be delisted from the Nasdaq National Market.
Nasdaq has established certain rules regarding the issuance of "future
priced securities." These rules may apply to the preferred stock or debentures
we may issue in exchange for NeoGene preferred stock because the number of
shares of our common stock issuable upon conversion of these securities is based
upon a future price of our common stock. Nasdaq's concerns regarding these
securities include the following:
Stockholders must approve significant issuances of listed securities at
a discount to market or book value. Nasdaq rules prohibit an issuer of listed
securities from issuing 20% or more of its outstanding capital stock at less
than the greater of book value or then current market value without obtaining
prior stockholder consent. We did not obtain stockholder consent prior to
issuing the NeoGene preferred stock and granting the exchange right to the
holders of the NeoGene preferred stock. We anticipate, but are not assured of,
obtaining this approval at our Annual Meeting of Stockholders to be held on June
11, 2001. Should the stockholders not approve this financing, we would be
required to refund the sale proceeds and pay significant penalties.
Public interest concerns. Nasdaq may terminate the listing of a security
if necessary to prevent fraudulent and manipulative acts and practices or to
protect investors and the public interest. With respect to future priced
securities, Nasdaq has indicated that it may delist a security if the returns
with respect to the future priced security become excessive compared to the
returns being earned by public investors in the issuer's securities.
Furthermore, certain requirements for continued listing, such as the
$1.00 minimum bid price requirement, are outside of our control. Accordingly,
there is a risk that Nasdaq may delist our common stock.
If our common stock is delisted, we likely would seek to list our common
stock on the Nasdaq SmallCap Market or for quotation on the American Stock
Exchange or a regional stock exchange. However, listing or quotation on such
market or exchange could reduce the market liquidity for our common stock. If
our common stock were not listed or quoted on another market or exchange,
trading of our common stock would be conducted in the over-the-counter market on
an electronic bulletin board established for unlisted securities or in what are
commonly referred to as the "pink sheets." As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations for the price
of, our common stock. In addition, delisting from the Nasdaq National Market and
failure to obtain listing or quotation on such other market or exchange would
subject our common stock to so-called "penny stock" rules. These rules impose
additional sales practice and market-making requirements on broker-dealers who
sell and/or make a market in such securities. Consequently, if our common stock
is delisted from the Nasdaq National Market and we fail to obtain listing or
quotation on another market or exchange, broker-dealers may be less willing or
able to sell and/or make a market in our common stock and purchasers of our
common stock may have more difficulty selling such common stock in the secondary
market. In either case, the market liquidity of our common stock would decline.
THERE ARE A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE
SALE IN THE PUBLIC MARKET. THE SALE OF THESE SHARES COULD CAUSE THE MARKET PRICE
OF OUR COMMON STOCK TO FALL.
There were 17,255,319 shares of our common stock outstanding as of March
30, 2001. In addition, security holders held options and warrants as of March
30, 2001 which, if exercised, would obligate us to issue up to an additional
11,905,617 shares of common stock. A substantial number of those shares, when we
issue them upon exercise, will be available for immediate resale in the public
market. In addition, we have the ability to sell up to approximately $41 million
of our common stock pursuant to a shelf registration that will be eligible for
immediate resale in the market. Furthermore, these numbers do not include the
number of shares of common stock that may become issuable upon conversion of the
securities that we may be required to issue in exchange for shares of NeoGene
preferred stock. While this number of shares cannot be accurately determined at
this time, assuming an average conversion price of $5.00 per share, 1,790,000
shares would be issuable and available for resale upon conversion of these
securities. The market price of our common stock could fall as a result of such
resales.
ANY FUTURE EQUITY ISSUANCES BY US MAY HAVE DILUTIVE AND OTHER EFFECTS ON OUR
EXISTING STOCKHOLDERS.
We have financed our operations, and we expect to continue to finance
our operations, by issuing and selling equity securities. Any issuances by us of
equity securities may have a dilutive impact on our other stockholders.
Additionally, such issuances would cause our net income or loss per share to
decrease in future periods. As a result, the market price of our common stock
could drop. In addition, if we issue common stock upon the exercise or
conversion of our warrants and other convertible securities, it may be issued at
a discount to its then-prevailing market price. These discounted sales could
cause the market price of our common stock to drop.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS, AND MAY NOT HAVE SUFFICIENT
PRODUCT LIABILITY INSURANCE.
Although we currently carry product liability insurance, it is possible
that the amounts of such coverage will be
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insufficient to protect us from future claims. Further, we cannot be certain
that we will be able to obtain or maintain additional insurance on acceptable
terms for our clinical and commercial activities or that such additional
insurance would be sufficient to cover any potential product liability claim or
recall. Failure to maintain sufficient insurance coverage could have a material
adverse effect on our business and results of operations.
THE USE OF HAZARDOUS MATERIALS IN OUR RESEARCH AND DEVELOPMENT EFFORTS IMPOSES
CERTAIN COMPLIANCE COSTS ON US AND MAY SUBJECT US TO LIABILITY FOR CLAIMS
ARISING FROM THE USE OR MISUSE OF THESE MATERIALS.
Our research and development efforts involve the use of hazardous
materials. We are subject to federal, state and local laws and regulations
governing the storage, use and disposal of such materials and certain waste
products. We believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by federal, state and local
regulations. However, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. If there was an accident, we could
be held liable for any damages that result. Such liability could exceed our
resources. We may incur substantially increased costs to comply with
environmental regulations if we develop our own commercial manufacturing
facility.
THE MARKET PRICE AND VOLUME OF OUR COMMON STOCK FLUCTUATE SIGNIFICANTLY AND
COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL INVESTORS.
The stock market from time to time experiences significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may cause the market price
of our common stock to drop. In addition, the market price of our common stock
is highly volatile. Factors that may cause the market price of our common stock
to drop include fluctuations in our results of operations, timing and
announcements of our technological innovations or new products or those of our
competitors, FDA and foreign regulatory actions, developments with respect to
patents and proprietary rights, public concern as to the safety of products
developed by us or others, changes in health care policy in the United States
and in foreign countries, changes in stock market analyst recommendations
regarding our common stock, the pharmaceutical industry generally and general
market conditions. In addition, the market price of our common stock may drop if
our results of operations fail to meet the expectations of stock market analysts
and investors.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF OUR COMMON
STOCK. THEIR OWNERSHIP COULD ALLOW THEM TO EXERCISE SIGNIFICANT CONTROL OVER
CORPORATE DECISIONS AND TO IMPLEMENT CORPORATE ACTS THAT ARE NOT IN THE BEST
INTERESTS OF OUR STOCKHOLDERS AS A GROUP.
Our directors and executive officers beneficially own approximately
12.6% of our outstanding common stock as of March 30, 2001. In addition, several
of our stockholders, including Montrose Investments Ltd. and Strong River
Investments, Inc. and Societe Generale have agreed that they will vote any and
all shares of our common stock that they own as recommended by our board of
directors in any meeting of our stockholders. Therefore, our directors and
executive officers, if they acted together, could exert substantial influence
over matters requiring approval by our stockholders. These matters would include
the election of directors and the approval of mergers or other business
combination transactions. This concentration of ownership and voting power may
discourage or prevent someone from acquiring our business.
EFFECT OF CERTAIN CHARTER AND BYLAWS PROVISIONS AND STOCKHOLDER RIGHTS PLAN.
Certain provisions of our Certificate of Incorporation and Bylaws may
make it more difficult for someone to acquire control of us. These provisions
may make it more difficult for stockholders to take certain corporate actions
and could delay or discourage prevent someone from acquiring our business. These
provisions could limit the price that certain investors might be willing to pay
for shares of our common stock.
On December 13, 2000, we adopted a Stockholder Rights Plan pursuant to
which we have distributed rights to purchase units of our capital Series B
Junior Participating Preferred Stock. The rights become exercisable upon the
earlier of ten days after a person or group of affiliated or associated persons
has acquired 20% or more of the outstanding shares of our common stock or ten
days after a tender offer has commenced that would result in a person or group
beneficially owning 20% or more of our outstanding common stock. These rights
could delay or discourage someone from acquiring our business.
ITEM 2. PROPERTIES
During June 1997, we relocated our research and development and
corporate administrative offices to a new 34,000 square foot facility
constructed for us in Irvine, California. The facility is suitable and adequate
to undertake our current research effort. However, we anticipate leasing
additional space for our clinical and administrative support staff in 2001. The
facility is occupied under a non-cancelable lease for seven years and contains
two five-year options to renew.
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The base monthly rent for the Irvine facility is currently $41,710 which amount
is subject to minimum cost of living increases each July, plus taxes, insurance
and common area maintenance. We also maintain a small administrative office in
Zurich, Switzerland on an expense-sharing basis. We recently entered into a
five-year sub-lease with the University of California, Irvine for a 10,000
square foot laboratory and administrative facility for our genomics subsidiary,
NeoGene Technologies, Inc. Under its terms, sublease payments are at the rate of
50% of the basic rent charge, subject to certain conditions, and will commence
upon completion of the facility which is expected during June 2001. The lease
requires a basic monthly rate of $13,032 during the initial year, plus taxes,
insurance, common area maintenance and scheduled rent increases for succeeding
years over the five year term of the sublease.
ITEM 3. LEGAL PROCEEDINGS
We are involved in several matters of litigation and threatened
litigation that we consider normal to our business. It is our policy to accrue
for amounts related to these legal matters if it is probable that a liability
has been incurred and an amount is reasonably determinable. Although it is
impossible to predict with any certainty the ultimate outcome of any such
litigation, in the opinion of management, such litigation and threatened
litigation currently pending will not materially affect our consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of March 30, 2001, there were 17,255,319 shares of common stock
outstanding held of record by 320 stockholders.
MARKET FOR SECURITIES
Our common stock is currently listed on the Nasdaq National Market and
trades under the symbol "NEOT." For each of the calendar quarters indicated, the
high and low trades of our common stock, as reported by NASDAQ, were as follows:
Year Ended December 31, 1999:
Quarter Ended High Low
- ------------- ------- -------
March 31, 1999 $13-3/4 $ 7-3/8
June 30, 1999 $14-1/2 $ 8
September 30, 1999 $16-1/4 $ 9-1/8
December 31, 1999 $14-1/2 $10-3/8
Year Ended December 31, 2000:
Quarter Ended
- -------------
March 31, 2000 $17-12/16 $16-13/16
June 30, 2000 $10-14/16 $10-11/16
September 29, 2000 $8-13/16 $7-6/16
December 29, 2000 $4-7/16 $3-14/16
The foregoing bid quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
DIVIDENDS
We have never paid cash dividends on our common stock and we do not
intend to pay dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions between December 31, 2000,
and March 30, 2001, involving sales of our securities that were not registered
under the Securities Act of 1933 (the "Securities Act"). Exemption from
registration was relied upon under Section 4(2) of the Securities Act for all
transactions listed.
1. On October 27, 2000 and October 31, 2000 we sold to two private
investors 80,000 shares of common stock for cash proceeds of approximately
$636,562 as a result of the exercise of an equal number of warrants by the
investors under a callable warrant agreement entered into on April 6, 2000. On
November 1, 2000 and November 2, 2000 the Company sold to two private investors
80,000 shares of common stock for cash proceeds of approximately $705,675 as a
result of the exercise of an equal number of warrants by the investors under a
callable warrant agreement entered into on April 6, 2000.
2. Brighton Capital, Ltd, ("Brighton") acted as a finder with respect to
the negotiation and execution of the agreement described above. As consideration
for the services provided by Brighton in connection with the agreement, we paid
Brighton a cash commission of $46,978, representing 3 1/2% of the gross sale
proceeds realized from sale of the common stock plus five year warrants to
purchase 8,053 shares of common stock at $15.00 per share.
3. On December 18, 2000, our subsidiary NeoGene sold 44,445 shares
Series B preferred stock for $2 million in cash. The preferred stock is
convertible into an equal number of shares of common stock, representing
approximately 4% ownership of NeoGene, and is also convertible into our
convertible preferred stock. The investors also received five year warrants to
purchase up to 9,387 shares of NeoGene common stock at
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$45.00 per share and five-year warrants to purchase 30,000 shares of
NeoTherapeutics common stock at an exercise price of $6.10 per share.
4. Brighton Capital, Ltd. ("Brighton") acted as a finder with respect to
the negotiation and execution of the agreement described in number 3. above. As
consideration for services provided by Brighton in connection with the
agreement, we paid Brighton a cash commission of $105,000 representing 5.25% of
the principal plus five year warrants to purchase 10,000 shares of NeoGene at
$45.00 per share.
5. On January 30, 2001, we issued to two investors 1,070,336 shares of
common stock under the reset agreement pursuant to the September 29, 2000, sale
of $8.0 million common stock. The second and final reset expired March 14, 2001,
and we are obligated to issue an additional 840,974 shares of common stock to
the two investors. We received no consideration as a result of issuing shares
pursuant to these reset provisions.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data. Certain of
this financial data has been derived from our audited financial statements
included in this Annual Report on Form 10-K and should be read in conjunction
with those financial statements and accompanying notes and in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
Years Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues, from grants $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and development 38,767 20,058 8,542 4,508 615
General and administrative 5,107 3,465 3,123 2,342 660
Settlement of litigation -- 2,458 -- -- --
-------- -------- -------- -------- --------
Loss from operations (43,874) (25,981) (11,665) (6,850) (1,275)
Other income (expense) (1,090) (9) 60 688 236
Minority interest in consolidated
subsidiaries' net loss (1,463) -- -- -- --
-------- -------- -------- -------- --------
Net loss $(46,427) $(25,990) $(11,605) $ (6,162) $ (1,039)
======== ======== ======== ======== ========
Basic and diluted loss per share $ (4.37) $ (3.68) $ (2.07) $ (1.14) $ (0.32)
======== ======== ======== ======== ========
BALANCE SHEET DATA AT DECEMBER 31:
Cash, cash equivalents and
marketable securities $ 11,470 $ 9,681 $ 2,867 $ 9,132 $ 17,444
Property and equipment, net 3,416 3,161 3,252 3,475 133
Total assets 15,781 13,174 6,826 13,198 17,979
Current liabilities 5,110 4,757 2,364 2,478 1,357
Long-term debt, less current portion 474 637 1,126 177 --
Minority interest in consolidated 7,280 -- -- -- --
subsidiaries
Total stockholders' equity 2,830 7,705 3,290 10,543 16,622
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with the financial statements and the notes to
financial statements included elsewhere in this report. This discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those anticipated in these
forward-looking statements.
Overview
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From our inception in June 1987 through December 31, 2000, we have
devoted our resources primarily to fund research and development, and incurred a
cumulative net loss of approximately $96.2 million. During this period, we had
only limited revenues from grants, and had no revenues from the sale of products
or other sources. We expect our operating expenses to decrease in the immediate
future, but to increase over the next several years as we expand our research
and development and commercialization activities and operations. We expect to
incur significant additional operating losses for at least the next several
years unless such operating losses are offset, if at all, by licensing revenues
under strategic alliances with larger pharmaceutical companies, which we are
currently seeking. Through December 31, 2000, the operations of our NeoGene and
NeoOncoRx subsidiary corporations were not material and, accordingly, no segment
information is presented herein.
Year ended December 31, 2000 compared to Year ended December 31, 1999
We had no revenues for the twelve-month periods ended December 31, 2000
or 1999.
Research and development expenses for the twelve months ended December
31, 2000 increased by approximately $18.7 million or 93% over the previous year.
This increase was due primarily to the costs and the expenses associated with
the conduct of clinical and preclinical trials as we accelerated our program to
commercialize our lead product candidate, Neotrofin TM. These costs and expenses
were due primarily to the increased number and length of our clinical trials and
manufacturing and formulation of drug compound, all of which were conducted by
outside organizations. Internally, research and development expenses increased
in the categories of salaries due to additional personnel, salary increases
and related benefits. In November 2000, we terminated our contract with an
outside clinical research organization and cancelled a major international
clinical trial for Alzheimer's disease involving over 1,500 patients. The
decision to cancel this trial was based on indeterminate efficacy at the same
and lower doses in patients who participated in several other trials which were
completed during 2000, and the positive results shown in a higher dose trial
with a limited group of Alzheimer's patients. In March and April 2001, we began
new Phase 2 clinical trials of Neotrofin(TM) in Alzheimer's disease and other
indications at higher dose levels than administered in the previous trials.
These new trials will be managed internally and we have increased the number of
our employees and consultants for that purpose. In the immediate future we
expect our research and development costs to decrease due to the net savings
expected from internally managing our clinical trial program, as compared to the
higher cost of using an outside clinical research organization. Thereafter, we
expect that such expenses will again increase as we expand our clinical trials
on Neotrofin(TM) and other drug candidates, as well as our research activities
at our NeoGene subsidiary. Depending on the results of our planned clinical
trials for Neotrofin(TM) and the outcome of the regulatory approval process, we
will expand our manufacturing capabilities as we approach commercialization of
our lead product, Neotrofin(TM).
General and administrative expenses increased approximately $1.6
million, or 47% over the previous year. This increase is due primarily to
increases in personnel, salary increases and related benefits, recruiting,
relocation, travel, and depreciation and amortization.
Interest income increased by $0.6 million, or 290% in 2000 over 1999 as
a result of the full year utilization of invested funds. We expect interest
earnings to decrease over the next year due to our use of the funds in current
operations. Interest expense increased by $1.6 million, or 663% in 2000 over
1999, due principally to a non-cash interest charge related to amortization of
discount and debt issuance costs of our convertible debentures. These securities
were issued and converted into common stock during 2000.
We expect the above-mentioned general and administrative expenses to
increase in the immediate future due to expected increases in administrative
support and sales and marketing activities associated with our change in
strategy and continued focus on bringing one or more of our products to market.
Year ended December 31, 1999 compared to Year ended December 31, 1998
We had no revenues for the twelve-month periods ended December 31, 1999
or 1998.
Research and development expenses for the twelve months ended December
31, 1999 increased by approximately $11.5 million, or 135% over the previous
year. This increase was due primarily to the costs and expenses associated with
the conduct of clinical and preclinical trials as we accelerated our program to
commercialize our lead compound, Neotrofin(TM). These costs and expenses were
due primarily to the increased number and length of our clinical trials and
manufacturing and formulation of drug compound, all of which were conducted by
outside organizations. Internally, research and development expenses increased
in the categories of salaries due to additional personnel and salary increases,
research grants, professional fees due to increased patent activity, rent (due
principally to the re-allocation from general and administrative expense as a
result of research and development utilizing a higher proportion of our
facility) and depreciation of property and equipment.
General and administrative expenses increased approximately $0.3
million, or 11%, for the year ended December 31, 1999, over the year ended
December 31, 1998. General and administrative expenses for 1999 reflect
increased
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expenses related to increases in salaries due principally to added personnel,
investor relations, regulatory agency fees and licenses and printing, offset by
the re-allocation of rent to research and development.
In 1999 the Company entered into a non-recurring, non-cash settlement of
a matter of litigation and recorded a charge to general and administrative
expense of $2,458,359.
Year ended December 31, 1998, compared to Year ended December 31, 1997
We had no revenues for the twelve-month periods ended December 31, 1998
or 1997.
Research and development expenses for the twelve months ended December
31, 1998, increased by approximately $4.0 million, or 90% over the previous
year. This increase was due primarily to the costs and expenses associated with
the conduct of clinical and preclinical trials as we accelerated our program to
commercialize our lead compound, Neotrofin(TM). These costs and expenses were
primarily in the categories of salaries due to additional personnel, rent,
contract manufacturing and formulation of drug compounds, outside preclinical
testing and the increased number and length of clinical trials.
General and administrative expenses increased approximately $0.8
million, or 33%, for the year ended December 31, 1998, over the year ended
December 31, 1997. General and administrative expenses for 1998 reflect
increased expenses related to additional personnel, insurance, professional and
consulting fees, commissions, facilities rent and travel. We expect general and
administrative expenses to continue to increase in future periods due to
expected increases in both research and development support and sales and
marketing activities associated with attempting to bring one or more of our
products to market.
Interest income decreased by approximately $0.5 million, or 68%, in 1998
over 1997 due to increased use of cash to fund current operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 2000, we financed our operations
primarily through sales of securities, borrowings, grants and deferred payment
of salaries and other expenses from related parties. During September and
October 1996, we sold a total of 2,700,000 units of our common stock and
attached warrants to the public. Each unit consisted of one share of common
stock and one warrant to purchase one share of common stock. We realized net
cash proceeds of approximately $18.2 million from the sale. On March 27, 1998,
we executed an agreement with a private investor (the "Equity Line Agreement")
which provides for us, at our sole discretion, subject to certain restrictions,
to sell ("put") to the investor up to $15 million of our common stock. In
addition, we issued to the investor five-year warrants to purchase 25,000 shares
of common stock at $11.62 per share. Under the Equity Line Agreement, we
received proceeds of approximately $3.55 million from sales of 506,049 shares of
common stock in 1998, $1.95 million from sales of 211,393 shares of common stock
in 1999 and an additional $2.0 million in January 2000 from the sale of 186,961
shares of common stock. On February 13, 2001, the Equity Line Agreement expired.
On May 31, 1999 we sold to a group of private investors 400,000 shares of common
stock for approximately $4.0 million. The investors also received five year
warrants to purchase 80,000 shares of common stock at an exercise price of $15
per share. On July 29, 1999 we completed a secondary public offering and sold
1,150,000 shares of common stock, realizing approximately $8.7 million in net
cash proceeds from the sale. On November 19, 1999 we sold to two private
investors 845,594 shares of common stock for approximately $10.0 million and
five year warrants to purchase 126,839 shares of common stock at $14.24 per
share. On March 22, 2000 we issued to the investors an additional 43,383 shares
of common stock for no further consideration, pursuant to a reset formula
contained in the agreement.
We also entered into the following financing transactions from
January 1, 2000 through April 17, 2001.
(1) On February 25, 2000 we sold to two private investors 520,324
shares of common stock for $8.0 million. The investors also
received five-year warrants to purchase 104,000 shares of common
stock at an exercise price of $21.00 per share.
(2) On April 6, 2000, we entered into a financing transaction with
two private investor groups. The transaction consists of (a) $10
million in 5% subordinated convertible debentures due April 6,
2005, (b) redeemable warrants to purchase up to 4 million shares
of common stock over a two-year period (the "B" warrants) and
(c) five-year warrants to purchase from 115,000 shares up to
265,000 shares of our common stock (the "A" warrants) at an
exercise price of $19.67 per share. The B warrants can be
redeemed in part by us as frequently as several times per week
and when called for redemption can be exercised by the investors
at 97% of the per share closing market price (i.e. a discount of
3%) and are exercisable at the sole option of the investors at
the price of $33.75 per share. The number of B warrants that are
exercisable at each redemption are subject to average daily
volume restrictions and are callable only if the market price of
our common stock is above $5.00 per share. At various times
during 2000 we called and the investors exercised
23
24
586,400 of our class B Warrants, resulting in the issuance of
586,400 shares of common stock for net proceeds of $5,120,654.
The debentures were convertible into common stock at the lesser
of $20.25 per share or 101% of the market price of the common
stock as determined under the agreement. At various times
through December 31, 2000, all $10,000,000 of the debentures
plus $248,625 of accrued interest were converted into an
aggregate of 1,594,177 shares of common stock.
(3) On May 1, 2000, we completed a private placement of 500,000
shares of common stock for $7.0 million cash with an
institutional investor. The investor also received five year
warrants to purchase 125,000 shares of common stock at $17.50
per share.
(4) On September 21, 2000, our subsidiary, NeoGene, sold 111,110
shares of Series A preferred stock for $5 million in cash to two
private investors. The preferred stock is initially convertible
into an equal number of shares of common stock, representing
approximately 10% ownership of NeoGene. The investors also
received five year warrants to purchase up to (i) 80,000 shares
of NeoTherapeutics common stock at an exercise price of $10.47
per share and (ii) 22,676 shares of NeoGene common stock at an
exercise price of $45.00 per share. 5% dividends on the
preferred stock are cumulative and payable in NeoGene common
stock or cash at our option. The preferred stock is
automatically convertible into NeoGene common stock upon the
closing of an initial public offering meeting certain criteria.
As a result of our common stock price per share recently being
less than $5.00 for five consecutive days, the investors have
the right to exchange their NeoGene preferred shares for our
similar securities, which are convertible into our common stock,
within five years at a conversion price equal to the lesser of
(i) 120% of the average closing bid price of our common stock
for the five trading days immediately preceding the first date
of issuance of our shares of preferred stock and (ii) 101% of
the average of the lowest ten closing bid prices of our common
stock, during the thirty trading days immediately preceding the
conversion.
(5) On September 29, 2000, we sold 968,524 shares of common stock to
two private investors for $8 million cash. The investors also
received five year warrants to purchase 193,706 shares of common
stock at $10.13 per share. The agreement contained a reset
formula which provided for the investor to obtain at nominal
cost, additional shares of common stock based on the market
price of the common stock determined thirty and sixty days after
the effective date of the registration statement to be filed for
this transaction. On January 30, 2001, the first vested period
ended which resulted under the reset formula in the issuance of
1,070,336 shares of our common stock to the investors. On March
14, 2001, an additional 840,974 shares of our common stock was
owed to the investors under the second and final reset under the
agreement. We received no consideration as a result of issuing
shares pursuant to these reset provisions.
25
(6) On December 18, 2000, our subsidiary, NeoGene, entered into an
agreement with an institutional investor for the issuance and
sale of preferred stock and warrants for aggregate consideration
of $2.0 million. Under the provisions of the agreement, NeoGene
issued and sold to the investor a total of 44,445 shares of its
Series B Convertible Preferred Stock, at a purchase price of $45
per share, and issued a five-year warrant to purchase a total of
9,387 shares of NeoGene common stock, at an exercise price of
$45 per share. The Series B Preferred is convertible into shares
of NeoGene common stock on a one-to-one basis, subject to
certain antidilution adjustments, and automatically converts
upon the earlier to occur of December 18, 2005 or the closing of
an initial public offering of NeoGene common stock meeting
certain criteria. The investor also received a five year warrant
to purchase an aggregate of 30,000 shares of our common stock,
at an exercise price of $6.10 per share. We also granted an
exchange right to the investor which will allow the investor to
exchange its shares of NeoGene Series B Preferred for our
convertible preferred stock. The exchange right grants the
investor the right, at its option, at any time and from time to
time after June 18, 2001, to exchange all or a portion of the
Series B Preferred shares then held by the investor for a number
of shares of our designated convertible preferred stock, equal
to (i) the aggregate liquidation preference of the Series B
Preferred shares surrendered for exchange plus any accrued but
unpaid dividends thereon, divided by (ii) the stated value per
share of our preferred stock. Our preferred stock will be
convertible into shares of common stock at a conversion price
equal to the lesser of (i) 150% of the average of the closing
bid prices of our common stock for the five trading days
immediately preceding the first date of issuance of any shares
of our preferred stock and (ii) 100% of the average of the
lowest seven closing bid prices of the common stock during the
thirty trading days immediately preceding the conversion.
(7) On February 2, 2001, we sold 1,627,756 shares of common stock to
a private investor for $3.5 million in cash.
(8) On March 8, 2001, we sold 1,250,000 shares of common stock to a
private investor for $5.0 million in cash.
The investor also received five year warrants to purchase up to
125,000 shares of common stock at the exercise price of $5.00
purchase price per share.
24
26
(9) On April 17, 2001, we entered into a financing transaction with
two private investor groups which provide, among other things,
for (a) the sale of approximately 1,176,000 shares of our common
stock for $6.0 million cash, (b) an option to place with the
investor groups two tranches of convertible debenture notes of
$10 and $8 million within approximately 30 days and seven
months, of the initial closing, respectively, and (c) five year
warrants exercisable at 125% of the market price on the date of
the respective closing for 20% of the gross proceeds of each of
the aforementioned common stock and debenture issuances.
At December 31, 2000, we had working capital of approximately $7.2
million which included cash and equivalents of approximately $6.2 million and
short-term investments of approximately $5.3 million. In comparison, at December
31, 1999, we had working capital of approximately $5.2 million which included
cash and cash equivalents of approximately $6.7 million and short-term
investments of approximately $3.0 million. The $2.0 million increase in working
capital is attributable primarily to the net proceeds of equity transactions
entered into during 2000, aggregating approximately $47.1 million, less the
funding of the $43.9 million operating loss for the year ended December 31,
2000, equipment purchases of $0.8 million and repayment of debt principal of
$0.6 million. In 2001, we intend to spend approximately $2.5 million for
additional equipment, including equipment for our new genomics-based subsidiary,
as we further expand our research and development laboratories. We expect to
partially finance these capital equipment acquisitions by utilizing our existing
capital lease.
25
27
During March 2001 we entered into a number of agreements, which are
cancelable at any time with written notice, with approximately 50 different
clinical sites in the United States to conduct a 500 patient Alzheimer's
clinical trial which began in April 2001. We expect to spend approximately $8.2
million towards this clinical trial over the course of approximately one year.
In addition, in March 2001, we began smaller scale clinical trials in spinal
cord injury and Parkinson's disease. The cost of these trials will aggregate
approximately $1.5 million over a one year period from their commencement date.
The above trials will be managed internally and are estimated to cost an
aggregate of approximately $9.7 million over an eighteen-month period.
Since our inception, we have been in the development stage and therefore
devote substantially all of our efforts to research and development. We have
incurred cumulative losses of approximately $96.2 million through December 31,
2000, and expect to incur substantial losses over the next several years. We
received $8.5 million in new funding in February and March 2001. In April 2001,
we entered into an agreement with two private investor groups to provide equity
and financing, aggregating approximately $24.0 million over approximately a one
year period. Our future capital requirements and availability of capital will
depend upon many factors, including continued scientific progress in research
and development programs, the scope and results of preclinical studies and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the cost involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing scale-up, the cost of
commercialization activities and other factors which may not be within our
control. Assuming that the aforementioned additional funding is available, we
believe that our existing capital resources will be adequate to fund our capital
needs for at least 12 months of operations. We also believe that, if these funds
are not available, we may be required to scale-back or possibly cancel certain
clinical trial activities or obtain additional financing elsewhere. Ultimately,
we will require substantial additional funds in order to complete the research
and development activities currently contemplated and to commercialize our
proposed products. If we are successful in obtaining additional equity funding,
our existing stockholders could experience substantial dilution to their shares
of stock.
Without additional funding, we may be required to delay, reduce the
scope of or eliminate one or more of our research and development projects, or
obtain funds through arrangements with collaborative partners or others which
may require us to relinquish rights to certain technologies, product candidates
or products that we otherwise would seek to develop or commercialize on our own,
and which could be on terms unfavorable to us.
Our principal research and administrative facilities are located in the
State of California which is currently experiencing an energy crisis. The
continuation of this crisis could seriously disrupt or impair our ability to
operate due to shortages of heat and power and/or the escalation of our
operating costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to certain market risks associated with interest rate
fluctuations on our marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. We are not subject to material risks from
currency rate fluctuations, nor do we utilize hedging contracts or similar
instruments.
Our exposure to interest rate risk arises from financial instruments
entered into in the normal course of business. Certain of our financial
instruments are fixed rate, short-term investments in government and corporate
notes and bonds, which are available for sale (and have been marked to market in
the accompanying financial statements). Changes in interest rates generally
affect the fair value of these investments, however, because these financial
instruments are considered "available for sale," all such changes are reflected
in the financial statements in the period affected.
Our borrowings bear interest at fixed annual rates. Changes in interest
rates generally affect the fair value of such debt, but do not have an impact on
earnings or cash flows. Because of the relatively short-term nature of our
borrowings, fluctuations in fair value are not deemed to be material.
26
28
QUALITATIVE DISCLOSURES
Our primary exposures relate to (1) interest rate risk on borrowings,
(2) our ability to pay or refinance our borrowings at maturity at market rates,
(3) interest rate risk on the value of our investment portfolio and rate of
return, (4) the impact of interest rate movements on our ability to obtain
adequate financing to fund future cash requirements. We manage interest rate
risk on our investment portfolio by matching scheduled investment maturities
with our cash requirements. We manage interest rate risk on our outstanding
borrowings by using fixed rate debt. While we cannot predict or manage our
ability to refinance existing borrowings and investment portfolio, we evaluate
our financial position on an ongoing basis.
27
29
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants........................................ 29
Consolidated Balance Sheets..................................................... 30
Consolidated Statements of Operations........................................... 31
Consolidated Statements of Stockholders' Equity (Deficit)....................... 32
Consolidated Statements of Cash Flows........................................... 36
Notes to Consolidated Financial Statements...................................... 38
28
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of NeoTherapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of
NeoTherapeutics, Inc. (a Delaware corporation in the development stage)
and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December
31, 2000 and for the period from inception (June 15, 1987) to December
31, 2000. 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
NeoTherapeutics, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 and for the period
from inception (June 15, 1987) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/ S / ARTHUR ANDERSEN LLP
Orange County, California
April 17, 2001
29
31
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
ASSETS 1999 2000
------------- -------------
CURRENT ASSETS:
Cash and equivalents ................................... $ 6,726,220 $ 6,158,375
Marketable securities and short-term investments ....... 2,955,212 5,311,215
Other receivables ...................................... 148,034 424,059
Prepaid expenses and refundable deposits ............... 130,202 418,010
------------- -------------
Total current assets ............................... 9,959,668 12,311,659
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Equipment .............................................. 2,607,741 3,412,932
Leasehold improvements ................................. 1,814,167 1,853,227
Accumulated depreciation and amortization .............. (1,261,220) (1,850,076)
------------- -------------
Property and equipment, net ........................ 3,160,688 3,416,083
------------- -------------
OTHER ASSETS - Prepaid expenses and deposits ............... 53,641 53,242
------------- -------------
Total assets ....................................... $ 13,173,997 $ 15,780,984
============= =============
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses .................. $ 3,613,680 $ 3,708,244
Accrued payroll and related taxes ...................... 111,822 265,383
Note payable to related party .......................... 558,304 285,574
Current portion of long-term debt ...................... 472,938 850,871
------------- -------------
Total current liabilities .......................... 4,756,744 5,110,072
LONG-TERM DEBT, net of current portion ..................... 637,308 474,004
DEFERRED RENT .............................................. 75,121 86,532
------------- -------------
Total liabilities .................................. 5,469,173 5,670,608
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ............. -- 7,280,111
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.001 per share,
5,000,000 shares authorized:
Issued and outstanding, none at
December 31, 1999 and 2000 ...................... -- --
Common Stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 8,778,370 and
13,307,227 shares, respectively ................. 58,139,327 100,612,570
Deferred compensation expense .......................... -- (959,850)
Unrealized (losses) gains on available-for-sale
securities .......................................... (38,572) 763
Deficit accumulated during the development stage ....... (50,395,931) (96,823,218)
------------- -------------
Total stockholders' equity ......................... 7,704,824 2,830,265
------------- -------------
Total liabilities, minority interest and
stockholders' equity ............................... $ 13,173,997 $ 15,780,984
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
30
32
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------------- DECEMBER 31,
1998 1999 2000 2000
------------ ------------ ------------ ------------
REVENUES, from grants ..................... $ -- $ -- $ -- $ 497,128
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development ............. 8,542,034 20,057,687 38,766,884 74,841,672
General and administrative ........... 3,122,506 3,465,443 5,106,812 17,465,143
Settlement of litigation ............. -- 2,458,359 -- 2,458,359
------------ ------------ ------------ ------------
11,664,540 25,981,489 43,873,696 94,765,174
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ...................... (11,664,540) (25,981,489) (43,873,696) (94,268,046)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ...................... 235,265 199,267 776,348 2,232,832
Interest expense ..................... (156,016) (243,410) (1,857,640) (2,793,621)
Other income (expense) ............... (19,265) 35,727 (8,702) 54,460
------------ ------------ ------------ ------------
Total other income (expense) ...... 59,984 (8,416) (1,089,994) (506,329)
------------ ------------ ------------ ------------
NET LOSS BEFORE MINORITY
INTEREST IN CONSOLIDATED
SUBSIDIARIES ........................... (11,604,556) (25,989,905) (44,963,690) (94,774,375)
MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES'
NET LOSS ................................ -- -- (1,463,597) (1,463,597)
------------ ------------ ------------ ------------
NET LOSS ........................... $(11,604,556) $(25,989,905) $(46,427,287) $(96,237,972)
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE ............................... $ (2.07) $ (3.68) $ (4.37)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING ............................. 5,615,449 7,105,041 10,629,408
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
31
33
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
UNREALIZED DEFICIT
REVENUE GAINS ACCUMULATED
COMMON STOCK PARTICIPATION (LOSSES) DURING THE
-------------------------- UNITS AND FROM DEVELOPMENT
SHARES AMOUNT OTHER SECURITIES STAGE TOTAL
----------- ----------- ------------- ---------- ----------- -----------
BALANCE, Inception (June 15, 1987) ..... -- $ -- $ -- $ -- $ -- $ --
Common stock issued ................ 465,902 2,100 -- -- -- 2,100
Net loss ........................... -- -- -- -- (31,875) (31,875)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1987 ............. 465,902 2,100 -- -- (31,875) (29,775)
Common stock issued ................ 499,173 2,250 -- -- -- 2,250
Revenue Participation Units issuance -- -- 594,000 -- -- 594,000
Net loss ........................... -- -- -- -- (556,484) (556,484)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1988 ............. 965,075 4,350 594,000 -- (588,359) 9,991
Revenue Participation Units issuance -- -- 82,000 -- -- 82,000
Net effect of acquisition .......... 145,000 354,316 -- -- -- 354,316
Net loss ........................... -- -- -- -- (934,563) (934,563)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1989 ............. 1,110,075 358,666 676,000 -- (1,522,922) (488,256)
Exercise of warrants ............... 31,108 136,402 -- -- -- 136,402
Common stock issued in exchange for
accrued salaries ................ 402,518 503,144 -- -- -- 503,144
Net loss ........................... -- -- -- -- (859,172) (859,172)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1990 ............. 1,543,701 998,212 676,000 -- (2,382,094) (707,882)
Net Loss ........................... -- -- -- -- (764,488) (764,488)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1991 ............. 1,543,701 998,212 676,000 -- (3,146,582) (1,472,370)
Net loss ........................... -- -- -- -- (423,691) (423,691)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1992 ............. 1,543,701 998,212 676,000 -- (3,570,273) (1,896,061)
Common stock issued in exchange for
investment banking services ...... 40,000 54,000 -- -- -- 54,000
Common stock issued in exchange for
accrued salaries ................. 255,476 638,694 -- -- -- 638,694
Common stock issued in exchange for
note payable to President ........ 200,000 500,000 -- -- -- 500,000
Common stock issued in exchange for
accrued expenses ................. 20,842 52,104 -- -- -- 52,104
Stock options issued in exchange for
accrued professional fees ........ -- 108,000 -- -- -- 108,000
Stock options issued in exchange for
future services .................. -- 39,750 -- -- -- 39,750
Stock options issued for services .. -- -- (93,749) -- --
(93,749)
Net loss ........................... -- -- -- -- (237,815) (237,815)
----------- ----------- ----------- --------- ----------- -----------
BALANCE, December 31, 1993 ............. 2,060,019 2,390,760 582,251 -- (3,808,088) (835,077)
Common stock issued for cash ....... 13,000 32,500 -- -- -- 32,500
Amortization of deferred
compensation ..................... -- -- 93,749 -- -- 93,749
Net loss ........................... -- -- -- -- (312,342) (312,342)
----------- ----------- ----------- --------- ----------- -----------
32
34
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
UNREALIZED DEFICIT
REVENUE GAINS ACCUMULATED
COMMON STOCK PARTICIPATION (LOSSES) DURING THE
----------------------------- UNITS AND FROM DEVELOPMENT
SHARES AMOUNT OTHER SECURITIES STAGE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994 ....... 2,073,019 $ 2,423,260 $ 676,000 $ -- $ (4,120,430) $ (1,021,170)
Common stock issued for cash . 22,000 55,000 -- -- -- 55,000
Common stock forfeiture ...... (678,836) (1,193,943) -- -- -- (1,193,943)
Common stock reissued ........ 678,836 1,697,090 -- -- -- 1,697,090
Stock options issued for
services ................... -- 105,000 -- -- -- 105,000
Net loss ..................... -- -- -- -- (895,378) (895,378)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 ....... 2,095,019 3,086,407 676,000 -- (5,015,808) (1,253,401)
Common stock issued for cash . 266,800 633,650 -- -- -- 633,650
Stock options issued for
services ................... -- 103,950 -- -- -- 103,950
Cash paid out for fractional
shares ..................... (12) (25) -- -- -- (25)
Conversion of revenue
participation units into
common stock ............... 300,000 1,125,000 (676,000) -- (449,000) --
Common stock and warrants
issued for cash, net of
costs of public offering ... 2,700,000 18,176,781 -- -- -- 18,176,781
Net loss ..................... -- -- -- -- (1,038,875) (1,038,875)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 ....... 5,361,807 23,125,763 -- -- (6,503,683) 16,622,080
Stock options exercise ....... 104,000 2,600 -- -- -- 2,600
Stock options issued for
services ..................... -- 60,000 -- -- -- 60,000
Unrealized gains on
available-for-sale
securities ................. -- -- -- 20,256 -- 20,256
Net loss ..................... -- -- -- -- (6,161,541) (6,161,541)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 ....... 5,465,807 23,188,363 -- 20,256 (12,665,224) 10,543,395
Common stock and warrants
issued for cash under
Line of Equity Agreement,
net of issuance costs ...... 506,049 3,451,782 -- -- -- 3,451,782
Stock options exercised by
employees, directors and
consultants ................ 134,000 340,560 -- -- -- 340,560
Exercise of underwriters' warrant 41,000 373,920 -- -- -- 373,920
Notes receivable for exercise
of stock options ........... -- (286,560) -- -- -- (286,560)
Stock options issued for
services ................... -- 422,264 -- -- -- 422,264
Warrant to purchase common
stock issued in connection
with equipment financing ... -- 45,000 -- -- -- 45,000
Fractional shares adjustment
upon conversion of pre-split
shares ..................... (2) -- -- -- -- --
Unrealized gains on
available-for-sale
securities ............ -- -- -- 3,951 -- 3,951
Net loss ..................... -- -- -- -- (11,604,556) (11,604,556)
------------ ------------ ------------ ------------ ------------ ------------
33
35
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
UNREALIZED DEFICIT
REVENUE GAINS
COMMON STOCK PARTICIPATION (LOSSES)
-------------------------- UNITS AND FROM
SHARES AMOUNT OTHER SECURITIES
--------- ------------ ------------- ------------
BALANCE, December 31, 1998 ........................ 6,146,854 $ 27,535,329 $ -- $ 24,207
Sale of common stock to Private Equity Line
investor, net of costs of issuance .......... 211,393 1,918,152 -- --
Sale of shares of 5% Series A Preferred
Stock, net of offering costs and allocated
warrants .................................... -- -- 3,608,788 --
Conversion of preferred stock into common
stock ...................................... 347,334 3,608,788 (3,608,788) --
Common stock and warrants issued for cash
under an exempt private sale agreement,
net of offering costs ...................... 400,000 3,982,716 -- --
Sale of common stock pursuant to a secondary
public offering, net of offering costs .... 1,150,000 8,706,660 -- --
Common stock issued to legal counsel for
services ................................... 12,500 70,000 -- --
Fair value of warrants issued as compensation
to investment advisor ...................... -- 204,280 -- --
Exercise of underwriters' warrants ............ 9,000 82,080 -- --
Stock options exercised by employees .......... 1,900 12,489 -- --
Stock options and warrants issued for legal and
consulting services ........................ -- 119,471 -- --
Sale of common stock to private investors ..... 845,594 9,441,003 -- --
Common stock forfeiture in settlement of
litigation ................................. (678,836) (1,697,090) -- --
Common stock and warrants issued in
settlement of litigation ................... 332,630 4,155,449 -- --
Fractional share adjustment upon conversion of
pre-split shares ........................... 1 -- -- --
Unrealized losses on available-for-sale
securities ................................. -- -- -- (62,779)
Dividends paid on preferred stock ............. -- -- -- --
Net loss ...................................... -- -- -- --
--------- ------------ ------------- ------------
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ ------------
BALANCE, December 31, 1998 ........................ $(24,269,780) $ 3,289,756
Sale of common stock to Private Equity Line
investor, net of costs of issuance .......... -- 1,918,152
Sale of shares of 5% Series A Preferred
Stock, net of offering costs and allocated
warrants .................................... -- 3,608,788
Conversion of preferred stock into common
stock ...................................... -- --
Common stock and warrants issued for cash
under an exempt private sale agreement,
net of offering costs ...................... -- 3,982,716
Sale of common stock pursuant to a secondary
public offering, net of offering costs .... -- 8,706,660
Common stock issued to legal counsel for
services ................................... -- 70,000
Fair value of warrants issued as compensation
to investment advisor ...................... -- 204,280
Exercise of underwriters' warrants ............ -- 82,080
Stock options exercised by employees .......... -- 12,489
Stock options and warrants issued for legal and
consulting services ........................ -- 119,471
Sale of common stock to private investors ..... -- 9,441,003
Common stock forfeiture in settlement of
litigation ................................. -- (1,697,090)
Common stock and warrants issued in
settlement of litigation ................... -- 4,155,449
Fractional share adjustment upon conversion of
pre-split shares ........................... -- --
Unrealized losses on available-for-sale
securities ................................. -- (62,779)
Dividends paid on preferred stock ............. (136,246) (136,246)
Net loss ...................................... (25,989,905) (25,989,905)
------------ ------------
34
36
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
UNREALIZED
REVENUE GAINS
COMMON STOCK PARTICIPATION (LOSSES)
-------------------------- UNITS AND FROM
SHARES AMOUNT OTHER SECURITIES
---------- ------------ ------------ ------------
BALANCE, December 31, 1999 ........................ 8,778,370 $ 58,139,327 $ -- $ (38,572)
Sale of common stock to Private Equity Line
investor, net of costs of issuance ......... 2,805,592 29,025,377 -- --
Sale of common stock and warrants sold with
5% convertible debentures .................. 1,594,177 9,387,321 -- --
Allocation of discounts on convertible
securities including beneficial conversion
feature .................................... -- 1,675,463 -- --
Fair value of warrants sold in subsidiary
offerings .................................. -- 512,740 -- --
Common stock to be issued to vendor
for services ............................... -- 105,000 -- --
Fair value of warrants to be issued to vendor
for services ............................... -- 131,250 -- --
Common stock issued to consultants for
services ................................... 2,000 23,500 -- --
Public warrant exercise ....................... 4,490 51,186 -- --
Stock options exercised by employees .......... 92,598 539,246 -- --
Stock options exercised by consultants ........ 30,000 750 -- --
Equity increase from compensation arising
from employee stock options ................ -- 959,850 -- --
Deferred compensation from employee stock
options .................................... -- -- (959,850) --
Repayment of notes to officers and directors
for exercise of stock options .............. -- 61,560 -- --
Unrealized gains on available-for-sale
securities ................................. -- -- -- 39,335
Net loss ...................................... -- -- -- --
---------- ------------ ------------ ------------
BALANCE, December 31, 2000 ........................ 13,307,227 $100,612,570 $ (959,850) $ 763
========== ============ ============ ============
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ ------------
BALANCE, December 31, 1999 ........................ $(50,395,931) $ 7,704,824
Sale of common stock to Private Equity Line
investor, net of costs of issuance ......... -- 29,025,377
Sale of common stock and warrants sold with
5% convertible debentures .................. -- 9,387,321
Allocation of discounts on convertible
securities including beneficial conversion
feature .................................... -- 1,675,463
Fair value of warrants sold in subsidiary
offerings .................................. -- 512,740
Common stock to be issued to vendor
for services ............................... -- 105,000
Fair value of warrants to be issued to vendor
for services ............................... -- 131,250
Common stock issued to consultants for
services ................................... -- 23,500
Public warrant exercise ....................... -- 51,186
Stock options exercised by employees .......... -- 539,246
Stock options exercised by consultants ........ -- 750
Equity increase from compensation arising
from employee stock options ................ -- 959,850
Deferred compensation from employee stock
options .................................... -- (959,850)
Repayment of notes to officers and directors for
exercise of stock options .................. -- 61,560
Unrealized gains on available-for-sale
securities ................................. -- 39,335
Net loss ...................................... (46,427,287) (46,427,287)
------------ ------------
BALANCE, December 31, 2000 ........................ $(96,823,218) $ 2,830,265
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
35
37
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------------------------- DECEMBER 31,
1998 1999 2000 2000
------------ ------------ ------------ -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ................................... $(11,604,556) $(25,989,905) $(46,427,287) $(96,237,972)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 460,500 519,875 588,856 1,974,633
Issuance of common stock options
and warrants for compensation ......... 422,264 393,751 775,496 1,860,461
Issuance of common stock in settlement
of litigation ......................... -- 2,458,359 -- 2,458,359
Amortization of deferred compensation .... -- -- -- 93,749
Amortization of discount on convertible
debentures including beneficial
conversion feature ..................... -- -- 539,277 539,277
Compensation expense for extension of
Debt Conversion Agreements, net ....... -- -- -- 503,147
Gain on sale of assets ................... -- -- -- (5,299)
Minority interest in consolidated
subsidiaries' beneficial conversion
feature and net loss .................. -- -- 1,463,597 1,463,597
Changes in assets and liabilities:
(Increase) decrease in other receivables . 109,277 (35,482) (276,025) (423,813)
(Increase) decrease in prepaid expenses
and refundable deposits ............... (180,715) 412,376 (287,808) (375,717)
Increase in accounts payable
and accrued expenses .................. 303,615 2,334,726 94,564 3,868,344
Increase in accrued payroll
and related taxes ..................... 81,370 30,452 153,561 904,077
Increase in deferred rent ................ 46,308 28,812 11,411 86,531
Increase in accrued interest to
related parties ........................ -- -- -- 300,404
------------ ------------ ------------ ------------
Net cash used in operating
activities ........................ (10,361,937) (19,847,036) (43,364,358) (82,990,222)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ........ (236,785) (429,861) (844,251) (5,346,462)
Redemptions (purchases) of marketable
securities and short-term investments ... 364,027 (1,185,864) (2,356,003) (5,311,215)
Unrealized gain (loss) on available-for-sale
securities .............................. 3,951 (62,779) 39,335 763
Payment of organization costs .............. -- -- -- (66,093)
Proceeds from sale of equipment ............ -- -- -- 29,665
Issuance of notes receivable ............... -- -- -- 100,000
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities ................ 131,193 (1,678,504) (3,160,919) (10,593,342)
------------ ------------ ------------ ------------
36
38
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------------------------- DECEMBER 31,
1998 1999 2000 2000
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt ................. 1,500,000 36,333 797,490 2,660,448
Repayment of long-term debt .................. (114,964) (497,557) (582,861) (1,335,571)
Proceeds from preferred stock issuance, net
of offering costs ......................... -- 3,608,788 -- 3,608,788
Proceeds from issuance of common stock
and warrants, net of related offering
costs and expenses ........................ 3,451,782 24,048,532 30,002,724 77,720,841
Proceeds from sale of convertible debentures,
net of issuance cost ...................... -- -- 9,387,321 9,387,321
Proceeds from sales of preferred stock of
consolidated subsidiary net of issuance
costs ..................................... -- -- 6,488,493 6,488,493
Proceeds from exercise of stock options and
warrants .................................. 714,480 94,569 75,436 887,085
Proceeds from (issuance of) notes receivables
from officers and directors for exercise of
stock options ............................. (286,560) -- 61,560 (225,000)
(Repayment of) proceeds from notes payable to
related parties, net ...................... -- -- (272,731) 485,168
Dividends paid to preferred stockholders ..... -- (136,246) -- (136,246)
Cash at acquisition .......................... -- -- -- 200,612
------------ ------------ ------------ ------------
Net cash provided by financing
activities ....................... 5,264,738 27,154,419 45,957,432 99,741,939
------------ ------------ ------------ ------------
Net (decrease) increase in cash and
equivalents .................................. (4,966,006) 5,628,879 (567,845) 6,158,375
Cash and equivalents, beginning of period ...... 6,063,347 1,097,341 6,726,220 --
------------ ------------ ------------ ------------
Cash and equivalents, end of period ............ $ 1,097,341 $ 6,726,220 $ 6,158,375 $ 6,158,375
============ ============ ============ ============
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of accrued payroll into shares
of common stock ........................... $ -- $ -- $ -- $ 1,141,838
============ ============ ============ ============
Conversion of notes payable to related
parties into shares of common stock ....... $ -- $ -- $ -- $ 500,000
============ ============ ============ ============
Conversion of accrued interest into notes
payable to related parties ................ $ -- $ -- $ -- $ 300,404
============ ============ ============ ============
Conversion of preferred stock and convertible
debentures into shares of common stock .... $ -- $ 3,608,788 $ 1,675,463 $ 5,532,876
============ ============ ============ ============
Conversion of Revenue Participation
Units into shares of common stock ......... $ -- $ -- $ -- $ 676,000
============ ============ ============ ============
Issuance of stock options and warrants
for services ............................. $ 422,264 $ 393,751 $ 775,496 $ 1,860,461
============ ============ ============ ============
Issuance of common stock and warrants
in connection with settlement of litigation $ -- $ 2,458,359 $ -- $ 2,458,359
============ ============ ============ ============
Issuance of warrants in connection with
equity and debt financings ................ $ 45,000 $ 344,610 $ 512,740 $ 2,330,251
============ ============ ============ ============
Conversion of other accrued liabilities to
shares of no par value common stock ....... $ -- $ -- $ -- $ 300,729
============ ============ ============ ============
Dividends on preferred stock payable in
shares of common stock ................. $ -- $ 82,312 $ -- $ 82,312
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
37
39
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to NeoTherapeutics, Inc. and in June 1997, the Company was
reincorporated in the state of Delaware. At December 31, 2000, the Company had
four controlled subsidiaries, Advanced ImmunoTherapeutics, Inc. ("AIT"),
incorporated in California in June 1987, NeoTherapeutics GmbH ("NEOT GmbH"),
incorporated in Switzerland in April 1997, NeoGene Technologies, Inc.
("NeoGene"), incorporated in California in October 1999 and NeoOncoRx
("NeoOncoRx") Inc., incorporated in California in November 2000. AIT became a
wholly owned subsidiary of AFC in July 1989 in a transaction accounted for as a
reverse acquisition. All references to the "Company" hereinafter refer to the
Company, AIT, NEOT GmbH, NeoGene and NeoOncoRx as a consolidated entity.
The Company is a development stage biopharmaceutical enterprise
principally engaged in the discovery and development of novel therapeutic drugs
intended to treat neurological and psychiatric diseases and conditions, such as
memory deficits associated with Alzheimer's disease, aging, stroke, spinal cord
injuries, Parkinson's disease, migraine, depression and obesity. The Company has
recently expanded its clinical development program to include anti-cancer drugs.
The Company is also engaged in research involving functional genomics. The
accompanying consolidated financial statements include the results of the
Company and its subsidiaries.
Development Stage Enterprise
The Company is in the development stage and, therefore, devotes
substantially all of its efforts to research and development activities. Since
its inception, the Company has incurred cumulative losses of approximately $96.2
million through December 31, 2000, and expects to incur substantial losses over
the next several years. The Company believes that its existing capital
resources, including the total of $8.5 million raised from sales of common stock
in February and March 2001, and the $25 million of committed funds from a major
investment bank pursuant to several agreements entered into during April 2001,
will be adequate to fund its capital needs for at least 12 months of operations.
The Company also believes that, ultimately, it will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize its proposed products. The Company's
future capital requirements and availability of capital will depend upon many
factors including, but not limited to, continued scientific progress in research
and development programs, the scope and results of preclinical studies and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing scale-up, the cost of
commercialization activities and other factors which may not be within the
Company's control. Without additional funding, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research and
development projects, or obtain funds through arrangements with collaborative
partners or others which may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize on its own. Other factors impacting the future
success of the Company are the ability to develop products which will be safe
and effective in treating targeted diseases, the ability to obtain government
approval and to retain key personnel.
Principles of Consolidation
The consolidated financial statements include accounts of the Company
and its subsidiaries. The Company accounts separately for the minority interest
in net loss of subsidiaries that are not wholly-owned. All significant
intercompany accounts and transactions have been eliminated.
Cash and Equivalents
Cash and equivalents consist of cash and highly liquid investments of
commercial paper and demand notes with original maturities of 90 days or less.
Marketable Securities and Short-Term Investments
Investments in debt and equity securities are classified among three
categories as follows: held-to-maturity, trading and available-for-sale. As of
December 31, 2000, all securities held by the Company were considered as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity. Quoted market prices have been used in determining the
fair value of these investments.
38
40
Prepaid Expenses and Refundable Deposits
Prepaid expenses and refundable deposits are capitalized and amortized
over the period benefited, or as the related services are rendered.
Property and Equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income.
Depreciation and amortization are computed using principally the straight-line
method over the following estimated useful lives:
Equipment 5 to 7 years
Leasehold Improvements The shorter of the estimated useful life or lease term
Research and Development
All costs related to research and development activities are expensed in
the period incurred.
Grant Revenue
Revenue consists of amounts earned from grants which are recognized in
accordance with the terms of the related agreements.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance is provided for the Company's net deferred tax
asset.
Stock-Based Compensation
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation" in October 1995. SFAS 123 encourages
companies to adopt a fair value approach to valuing stock options that would
require compensation cost to be recognized based on the fair value of stock
options granted. The Company has elected, as permitted by the standard, to
continue to follow its intrinsic value based method of accounting for stock
options issued to employees consistent with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
method, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's common stock at the measurement date
over the exercise price.
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share is calculated using the weighted
average number of common shares outstanding for the period. Net loss used in the
calculation of net loss per share includes preferred stock dividends. Common
stock options and warrants are excluded from the computation as their effect
would be antidilutive.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
41
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 2000 as amended by SFAS No. 137 and SFAS No. 138. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value,
and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company did not
have any derivative instruments as of December 31, 1999 and 2000 and believes
that the adoption of SFAS No. 133 will not have a material impact on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. SAB 101, as amended by SAB 101A
and SAB101B, is required to be implemented no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company did not
have any revenue as of December 31, 1999 and 2000 and believes that the adoption
of SAB 101 will have no material impact on its financial position or the results
of operations.
In March 2000, the FASB issued interpretation No. 44, "Accounting For
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion NO. 25." The Interpretation clarifies the application of APB Opinion No.
39
42
25 in certain situations, as defined. The Interpretation is effective July 1,
2000, but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by the
effective date, the effects of applying this Interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final Interpretation, (a) no adjustments would be made to the
financial statements for periods before the effective date and (b) no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. The adoption of this new
Interpretation had no impact on the Company's consolidated financial statements,
based on its current structure and operations.
2. RELATED PARTY TRANSACTIONS
During 1987 and 1988, the Company's Chief Executive Officer, who is also
a major stockholder of the Company, loaned a total of $270,650 to the Company
for working capital purposes, of which $250,000 plus $2,000 of accrued interest
was canceled in December 1988 in exchange for the issuance of 28 Revenue
Participation Units ("RPU's"). The RPU's, in turn, were converted into 112,000
shares of common stock.
From 1989 through 1993, the Company borrowed an additional $757,900 from
the Chief Executive Officer which, together with accrued interest of $300,404,
aggregated $1,058,304 on December 31, 1993, at which time the Company issued
200,000 shares of common stock to the Chief Executive Officer in exchange for
cancellation of $500,000 of loans made to the Company. The remaining $257,900 in
principal and accrued interest of $300,404 were converted to a $558,304
promissory note which, as amended from time to time, is currently unsecured, and
is payable upon demand. Interest is payable monthly at the annual rate of 9%.
The note was partially repaid in 2000 when the Company advanced, on his behalf,
payroll taxes arising from the officer's exercise in August 2000, of a warrant
for 88,173 shares of common stock at $3.75 per share. The note balance at
December 31, 2000 was $285,574.
In October 2000, the Company's President and Chief Operating Officer
borrowed $90,000 from the Company. The note is collateralized by 10,000 shares
of the Company's common stock and is personally guaranteed by him. The principal
note is due October 2002 together with accrued interest of 9%.
Assignment of Patents by Chief Executive Officer
The Chief Executive Officer of the Company has assigned all of his
rights in the following four patents to the Company:
1. U.S. Patent No. 5,091,432 issued on February 25, 1992;
2. U.S. Patent No. 5,447,939 issued on September 5, 1995;
3. U.S. Patent No. 5,801,184 issued on September 1, 1998; and
4. U.S. Patent No. 6,027,936 issued on February 22, 2000.
In connection with the assignment of these patents to the Company, the
Chief Executive Officer and the Company entered into royalty agreements, which
expire concurrently with the expiration of the underlying patents and any
patents derived therefrom. Under each of the Agreements, as amended, the Company
is obligated to pay the Chief Executive Officer a royalty of two percent (2%) of
all revenues derived by the Company from the use and sale by the Company of any
products or methods included in the patents. Further, in the event that the
Chief Executive Officer's employment is terminated by the Company without cause,
the royalty rate under each Agreement was to be increased to five percent (5%).
Finally, in the event of the Chief Executive Officer's death, the family or
estate is entitled to continue to receive under each Agreement royalties at a
rate of two percent (2%) for the duration of the respective Agreement.
McMaster University Agreement
On July 10, 1996, the Company entered into a license agreement with
McMaster University (the "University") which allows the Company use of certain
chemical compounds developed by the University covered in the patents filed
jointly by the Company and the University. Under the agreement, the Company paid
a one time licensing fee of $15,000 and is obligated to pay an annual royalty of
five percent (5%) on net sales of products containing compounds developed by the
University. The Company commenced payment of annual minimum royalties of $25,000
beginning July 1997 and has continued such annual payments through 2000. The
third and fourth patent noted above were also jointly filed by the Company and
the University and are subject to the same royalty agreement.
3. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
A summary of marketable securities and short-investments at December 31,
1999 and 2000 are as follows:
40
43
Gross Gross
Unrealized Unrealized Market
Type of Investment Cost Gains (Losses) Value
- ------------------ ---------- ---------- ---------- ----------
December 31, 1999:
Available-for-Sale:
U.S. Government Treasury
Notes and Bonds $ 403,357 $ -- $ (11,433) $ 391,924
U.S. Government guaranteed
securities 295,060 1,996 (503) 296,553
Corporate Bonds 2,295,367 -- (28,632) 2,266,735
---------- ---------- ---------- ----------
Total Investments $2,993,784 $ 1,996 $ (40,568) $2,955,212
========== ========== ========== ==========
December 31, 2000:
Available-for-Sale:
U.S. Government Treasury
Notes and Bonds 1,643,758 2,421 -- 1,646,179
U.S. Government guaranteed
securities 246,493 4,185 -- 250,678
Corporate Bonds 3,420,201 4,822 (10,665) 3,414,358
---------- ---------- ---------- ----------
Total Investments $5,310,452 $ 11,428 $ (10,665) $5,311,215
========== ========== ========== ==========
For the years ended December 31, 1999 and 2000, sales of securities
aggregated $2,230,139 and $848,202, and the Company realized a net gain of
$35,727 and a net loss of $9,669, respectively.
4. DEBT
In September 1998, the Company entered into a $2 million Master Note and
Security Agreement (the "Note") with a finance company affiliated with its bank.
Through December 31, 1999, the Company borrowed $1.5 million under the Note for
equipment and computer software purchases. Borrowings are collateralized by
substantially all of the Company's assets, exclusive of its patents and other
intellectual properties. The note requires monthly repayments of $41,277, bears
interest at approximately 12% and is due March 2002, at which time a final
principal installment of $150,000 is due. The Company has also granted to the
finance company a warrant to purchase up to 13,459 shares of its common stock at
$7.43 a share which was valued at $45,000 using the Black-Scholes option-pricing
model with the following assumptions: Risk-free interest rate of 5.02 percent;
expected life of three years; expected volatility of 75.3 percent. The warrant
was recorded as a prepaid expense and is being amortized using the effective
interest method over the life of the note.
In September 2000, the Company financed the premium amounting to
$322,000 for a three-year insurance policy through a borrowing from the insurer.
The loan is payable through August 2001 in monthly installments of $30,556
including principal and 8.57% interest per annum.
On September 22, 2000 the Company signed an agreement to lease up to
$2.5 million in equipment financing from a major equipment leasing and
remarketing company ("lessor"). Under the terms of the agreement, the Company is
required to make quarterly payments over three years on cumulative advances
drawn by the Company. The Company has drawn $324,091 as of December 31, 2000
under the lease agreement. The lease is collateralized by the underlying
equipment. At the conclusion of the lease term the equipment may be purchased
for fair value, re-marketed by the lessor, or re-leased by the Company.
In October 2000, the Company financed $151,249 of laboratory equipment
through an equipment vendor under a capital lease agreement. Under the terms of
the agreement, the Company is required to make monthly payments of $4,839 over
three years, including effective interest at approximately 9% per annum.
Future installments of debt principal are as follows:
Year Ending
December 31: Amount
- ----------- ----------
2001 $ 850,871
2002 356,446
2003 117,558
----------
$1,324,875
==========
5. REVENUE FROM GRANTS
From 1991 to 1995, the Company received funding in the form of two Small
Business Innovative Research Grants ("SBIR") from the National Institutes of
Health. A Phase 1 grant was initiated in September 1991 and a Phase 2 grant was
initiated in August 1993. In July 1995, both grants were completed and no
additional funds were due or collected. The Company has received an aggregate of
$497,128 from the two SBIR grants. No additional grants have been received.
6. PROVISION FOR INCOME TAXES
No provision for federal or state income taxes has been recorded, as the
Company has incurred cumulative net
41
44
operating losses through December 31, 2000. At December 31, 2000, the Company
and its domestic subsidiaries had approximately $62.1 million of federal net
operating loss carryforwards available to offset future United States taxable
income, if any. Such carryforwards expire on various dates beginning 2009
through 2019. In addition, the Company has available to offset future federal
income tax liabilities, if any, research credits of approximately $1.5 million.
Under the Tax Reform Act of 1986, the amounts of, and benefits from, net
operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50 percent over a three year
period. At December 31, 2000, the effect of such limitation, if imposed, has not
been determined. The Company's foreign subsidiary has a loss carryforward of
approximately $28.3 million at December 31, 2000, resulting principally from the
transfer of licensing rights by the Parent to the foreign subsidiary and from
the Parent Company's allocation of research and development costs to the foreign
subsidiary during the period from April 1997 through December 2000. The Company
has recognized a valuation allowance for the full amount of the Company's net
deferred tax asset due to the uncertainty of its realization.
7. COMMITMENTS AND CONTINGENCIES
Facility Leases
The Company leases certain facilities for its research and development,
administrative functions and its subsidiaries. Certain leases also require
scheduled annual fixed rent increases, payments of property taxes, insurance and
maintenance. In addition, the Company leases certain office and telephone
equipment under non-cancelable operating leases expiring in 2002.
Minimum lease requirements for each of the next five years and
thereafter under the aforementioned property and equipment leases assuming a
commencement date of June 2001, for the aforementioned NeoGene laboratories are
as follows:
Year ending December 31: Amount
------------------------ ----------
2001 $ 614,900
2002 718,300
2003 740,400
2004 481,600
2005 206,200
Thereafter 85,600
----------
$2,847,000
==========
Rent expense for the years ended December 31, 1998, 1999 and 2000
aggregated approximately, $572,400, $601,100, $637,003 respectively.
Research and Fellowship Grants
At December 31, 2000, the Company has committed to pay, principally in
the year 2001, approximately $700,000 to a number of universities to conduct
general scientific research programs. Grant expense for 1998, 1999 and 2000
amounted to approximately $465,900, $617,000, and $1,309,000 respectively, and
is included in research and development.
Joint Venture
In September 1999, the Company entered into a three-year joint venture
agreement with University of California, Irvine ("UCI") to assist in the
marketing and commercialization of discoveries made by certain members of its
functional genomics science department. The Company is obligated under the
agreement to fund the joint venture for three years with minimum payments of
$2.0 million over the life of the agreement. The agreement is cancelable by
either party upon giving thirty days notice. The Company has the right of first
refusal to acquire the licensing rights to any new discoveries and UCI retains
ownership rights to all discoveries under the agreement.
Major Clinical Trials
In 1998 and 1999, the Company entered into agreements with a contract
research organization to conduct multiple clinical trials in a number of
countries involving approximately 2,500 patients. The agreements were cancelable
by either party upon thirty days notice. On November 6, 2000 the Company
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terminated the above stated clinical trials. The Company has accrued the total
cost of termination in the year 2000. Commencing April 2001, the Company is
starting a 500 patient trial for Alzheimer's disease and two smaller trials for
spinal cord injury and Parkinson's disease. The trials will be managed
internally and are estimated to cost an aggregate of approximately $9.7 million
over an eighteen-month period.
Employment Agreements
On December 1, 2000, the Company entered into an employment agreement
with the Chief Executive Officer. The agreement provides for an annual base
salary of $300,000, with annual increases and periodic bonuses as determined by
the Board of Directors. The agreement ends on December 31, 2003, and may be
terminated by the Company, with or without cause as defined in the agreement.
The agreement also provides for guaranteed severance payments equal to the
officer's annual base salary upon the termination of employment without cause or
upon a change in control for the greater of two years or the remaining life of
the agreement.
On December 1, 2000, the Company entered into an employment agreement
with the Senior Vice President, Finance, Chief Financial Officer, Secretary
and Treasurer. The agreement provides for an annual base salary of $200,000,
with annual increases and periodic bonuses and stock options as determined by
the Board of Directors. The agreement ends on December 31, 2002 and may be
terminated by the Company, with or without cause as defined in the agreement.
The agreement also provides for guaranteed severance payments equal to two years
of annual base salary paid out monthly or in one lump sum payment upon the
termination of employment without cause or upon a change in control.
Litigation
The Company is involved in several matters of litigation and threatened
litigation considered normal to its business. It is the Company's policy to
accrue for amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably determinable. Management
believes that the outcome of these matters will not materially impact the
Company's financial position.
In December 1998, the Company was served with a lawsuit initiated by
four of its former employees. The lawsuit also named Dr. Alvin J. Glasky, the
Company's founder and Chief Executive Officer, as a defendant. The lawsuit
arises from a dispute concerning the termination, as of December 31, 1997, of
agreements entered into as of June 1990 and December 1993 between the Company
and each of the former employees, pursuant to which the employees agreed to
accept an aggregate of 278,590 shares of our common stock, subject to forfeiture
provisions, in exchange for the cancellation of indebtedness owed to them by the
Company arising from unpaid compensation and expenses in the total amount of
$458,411. Pursuant to these agreements, the employees were not entitled to keep
the shares unless the Company achieved certain revenue goals by a specified
date, as determined by its independent auditors in accordance with generally
accepted accounting principles. The revenue goals were not met and the Company
demanded that the forfeited shares be returned pursuant to the terms of the
agreements. In the lawsuit the plaintiffs alleged, among other things, that the
Company's cumulative revenues were met and that the defendants fraudulently
induced the plaintiffs into entering into the agreements and the subsequent
amendments to the agreements.
On December 15, 1999, the Company entered into a settlement agreement
with the plaintiffs. The agreement provided that each of the parties pay their
own legal fees and that the plaintiffs forfeit 51%, or 142,081 of their shares
of common stock. In addition, the plaintiffs received three-year warrants to
purchase an aggregate of 6,826 shares of common stock at $13.00 per share.
Pursuant to the settlement terms of the litigation and in accordance with the
terms of their agreement with the Company, Dr. and Mrs. Glasky forfeited 204,125
shares of their common stock and received identical warrants to purchase 9,806
shares of common stock. Accordingly, of the 678,836 total number of shares in
dispute, the Company cancelled 346,206 shares and retained as outstanding
332,630 shares of common stock. The Company recorded a charge to operations in
the fourth quarter of 1999 in the net amount of $2,458,359, representing the
increase from 1995, the date of the previous reissuance of shares of common
stock under this transaction, in the market value of the shares that remained
outstanding ($2,357,005) plus the value of the warrants issued ($101,355).
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8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
The Minority Interest in Consolidated Subsidiaries shown in the
accompanying balance sheet represents the investments by outside parties in
convertible preferred stock of the Company's consolidated subsidiaries (see Note
9). The minority interest in consolidated subsidiaries' net loss amounting to
$1,463,597 in the accompanying consolidated statements of operations consists
primarily of the amortization of beneficial conversion feature and dividends on
convertible preferred stock issued by the Company's consolidated subsidiaries.
9. STOCKHOLDERS' EQUITY
Revenue Participation Units
In 1988 and 1989, AIT raised private placement funds via a financial
instrument specified as a RPU. The Company raised an aggregate of $676,000 from
the issuance of seventy-five RPU's at prices ranging from $9,000 to $10,000 per
RPU. The RPU's entitled holders to cash payments based on stipulated percentages
of revenues. Holders of RPU's were entitled to convert to common stock at any
time and AIT had the option to redeem the RPU's subject to certain conditions by
paying cash or in exchange for common stock.
In July 1996, the Company offered, and all RPU holders accepted, an
option to convert each RPU unit into 4,000 shares of common stock (300,000
shares in the aggregate) in exchange for waiving all rights as an RPU holder.
Reverse Stock Split
In June 1996, the Board of Directors authorized, with stockholder
approval, a reverse split of the Company's outstanding common stock on the basis
of 1 share for each 2.5 shares of then outstanding common stock. The Board of
Directors also authorized, with stockholder approval, an increase in the
authorized common stock from 10 million to 25 million shares and the creation of
a new class of preferred stock with the authorization to issue up to 5 million
shares of such preferred stock. All references to common stock amounts and loss
per share in the accompanying financial statements give effect to the reverse
stock split.
Re-incorporation
During June 1997, the stockholders of the Company approved the
re-incorporation of the Company as a Delaware corporation. In connection
therewith, a par value of $0.001 per share was assigned to the common stock of
the Company. The total number of authorized and issued shares remained
unchanged.
Deferred compensation expense
During 2000, the Company granted stock options to employees with
exercise prices less than the fair value of the Company's common stock at the
measurement date. The intrinsic value of the grants was recorded as deferred
compensation and is being amortized to expense over the vesting period, in
accordance with APB Opinion No. 25.
Common Stock
During 1993, the Company issued to a financial consultant in exchange
for investment banking services, 40,000 shares of common stock at $1.35 per
share, the market value on issuance date, for an aggregate amount of $54,000.
During 1994, three investors bought 13,000 shares of restricted
(restrictions as to transferability) common stock at $2.50 per share, for an
aggregate amount of $32,500, through a private placement. During 1995, six
investors bought 22,000 shares of restricted common stock at $2.50 per share,
for an aggregate amount of $55,000, through a private placement.
From January 1, 1996, to June 20, 1996, 266,800 shares of restricted
(restrictions as to transferability) common stock were issued at $2.50 per
share, for an aggregate amount of $633,650 (net of commission), through a
private placement.
In June 1996, the Company filed a registration statement with the
Securities and Exchange Commission offering to the public 2,500,000 units (the
"Units"), each Unit consisting of one share of the Company's common stock (the
"common stock"), and one warrant to purchase one share of common stock (the
"warrants"). The registration statement became effective on September 26, 1996,
and on October 1, 1996, the Company realized $17,363,003 in net proceeds from
the sale of the 2,500,000 Units.
47
On October 11, 1996, the principal underwriter of the offering exercised
a portion of its overallotment option and purchased 200,000 Units for net cash
of $1,389,280. The Units separated immediately following issuance and the common
stock and warrants that made up the Units trade as separate securities.
On March 27, 1998, the Company executed a $15 million Private Equity
Line of Credit Agreement (the "Equity Line Agreement") with a private investor,
which provides for minimum and maximum puts ranging from $250,000 to $2.0
million, depending on the Company's stock price and trading volume. At the time
of each put, the investor receives a discount of 12% from the then current
average market price, as determined under the Equity Line Agreement. Pursuant to
the Equity Line Agreement, the Company also issued to the investor warrants to
purchase 25,000 shares of common stock at an exercise price of $11.62 per share.
Under the Equity Line Agreement, the Company received proceeds of approximately
$3.45 million from sales of 506,049 shares of common stock in 1998, $1.9 million
from sales of 211,393 shares of common stock in 1999, and during January 2000,
the Company received $2.0 million from the sale of 186,961 shares of common
stock. The agreement expired in February 2001.
On August 31, 1998, certain officers and directors of the Company
exercised non-qualified stock options and purchased 62,000 shares of common
stock. The exercise price of the stock options was at $4.50 per share for 50,000
shares and $5.13 per share for 12,000 shares for an aggregate purchase price of
$286,560, represented by notes issued by the purchasers. The notes are full
recourse promissory notes bearing interest at 7% per annum, and are
collateralized by the stock issued upon the exercise of the stock options.
Interest and principal are payable two years after the issue dates. The notes
have been offset against the underlying common stock in the accompanying
financial statements.
On May 31, 1999, the Company sold to a group of private investors
400,000 shares of common stock for proceeds of $4.0 million. The investors also
received five year warrants to purchase 80,000 shares of common stock at an
exercise price of $15 per share.
On July 27, 1999, the Company completed a secondary public offering and
sold 1,150,000 shares of common stock (including the underwriters
overallotment), realizing approximately $8.7 million in net cash proceeds from
the sale.
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48
On November 30, 1999, the Company sold to two private investors, one of
whom had invested in the below mentioned preferred stock transaction, 845,594
shares of common stock, for net proceeds of $9.4 million, and warrants to
purchase 126,839 shares of common stock at $14.24 per share. Based on a reset
formula contained in the agreement, in March 2000 the Company issued to the
investors 43,383 additional shares of common stock for no additional
consideration. A second reset was waived by the investors as consideration for
entering into the April 2000 financing transaction.
On February 25, 2000 the Company sold to two private investors 520,324
shares of common stock for $8.0 million. The investors also received five year
warrants to purchase 104,000 shares of common stock at the price of $21.00 per
share.
On April 6, 2000, the Company entered into a financing transaction with
two private investor groups. The transaction consisted of (a) $10 million in 5%
subordinated convertible debentures due April 6, 2005, (b) redeemable warrants
to purchase up to 4 million shares of common stock over a two year period and
(c) five year warrants to purchase from 115,000 shares up to 265,000 shares of
common stock at an exercise price of $19.67 per share. The redeemable warrants
can be redeemed in part by the Company as frequently as several times per week,
subject to average daily volume restrictions and if the market price of the
common stock is above $5.00 per share and, when called for redemption, can be
exercised by the investor at 97% of the per share closing market price (i.e., a
discount of 3%) and are exercisable at the sole option of the investors at the
price of $33.75 per share. Between September 14, 2000 and October 26, 2000 the
$10 million of debentures were converted into 1,555,409 shares of common stock
plus 38,768 shares of common stock in payment of accrued interest. From June
2000 to November 2000 the Company called and the investors exercised 586,400 of
the Company's redeemable warrants, resulting in issuance of 586,400 shares of
common stock for net proceeds of $5,120,654. At December 31, 2000, there were
3,413,600 redeemable warrants outstanding.
On May 1, 2000 the Company completed a private placement of 500,000
shares of common stock for $7.0 million cash. The investors also received
five year warrants to purchase 125,000 shares of common stock at an exercise
price of $17.50 per shares.
On September 21, 2000, the Company's subsidiary, NeoGene, sold 111,110
shares of Series A preferred stock for $5 million. The preferred stock is
initially convertible into an equal number of shares of common stock,
representing approximately 10% ownership of NeoGene. The investors also received
five year warrants to purchase up to (i) 80,000 shares of the Company's common
stock at an exercise price of $10.47 per share and (ii) 22,676 shares of NeoGene
common stock at an exercise price of $45.00 per share. The fair value of the
warrant was estimated at $411,040 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0 percent; expected volatility of 74.97 percent; risk free interest
rate of 6.01 percent; and an expected life of five years. The fair value of the
warrant was estimated at $540,301 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0 percent; expected volatility of 74.97 percent; risk free interest
rate of 5.93 percent; and an expected life of three years. 5% cumulative
dividends on the preferred stock are payable in common stock or cash at the
option of the Company. The preferred stock is automatically convertible into
NeoGene common stock upon the closing of an initial public offering meeting
certain criteria. As a result of the Company's common stock price per share
recently being less than $5.00 for five consecutive days, the investors have the
right to exchange their NeoGene preferred shares for similar securities of the
Company, which is convertible into common stock of the Company, within five
years at a conversion price equal to the lesser of (i) 120% of the average of
the closing bid prices of the Company's common stock for the five trading days
immediately preceding the first date of issuance of any shares of the Company's
preferred stock and (ii) 101% of the average of the lowest ten closing bid
prices of the common stock, during the thirty trading days immediately preceding
the conversion.
On September 29, 2000, the Company entered into an agreement to sell
968,524 shares of its common stock to two private investors for $8 million cash.
The investors also received five year warrants to purchase 193,706 shares of
common stock at $10.13 per share. The fair value of the warrant was estimated at
$847,657 on the date of issuance using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0 percent; expected volatility
of 74.97 percent; risk free interest rate of 5.88 percent; and an expected life
of five years. The agreement contains a reset formula which provides for the
investor to obtain at nominal cost, additional shares of common stock based on
the market price of the common stock determined thirty and sixty days after the
effective date of the registration statement to be filed for this transaction.
On January 30, 2001, the first vested period ended which resulted under the
reset formula in the issuance of 1,070,336 shares of the Company's common stock
to the investors and on March 14, 2001, an additional 840,974 shares of the
Company's common stock was owed to the investors under the
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second and final reset under the agreement. No significant proceeds were
received by the Company upon exercise of the resets.
On December 18, 2000, the Company's subsidiary, NeoGene, entered into an
agreement with an institutional investor for the issuance and sale of Series B
preferred stock and warrants for aggregate consideration of $2.0 million. Under
the provisions of the agreement, NeoGene issued and sold to the investor a total
of 44,445 shares of its Series B Convertible Preferred Stock, at a purchase
price of $45 per share, and issued a five year warrant to purchase a total of
9,387 shares of NeoGene common stock, at an exercise price of $45 per share. The
fair value of the warrant was estimated at $250,351 on the date of issuance
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0 percent; expected volatility of 88.96 percent; risk free
interest rate of 5.14 percent; and an expected life of three years. The Series B
Preferred is convertible into shares of NeoGene common stock on a one-to-one
basis, subject to certain antidilution adjustments, and automatically converts
upon the earlier to occur of December 18, 2005 or the closing of an initial
public offering of NeoGene common stock meeting certain criteria. The investor
also received a five year warrant to purchase an aggregate of 30,000 shares of
the Company's common stock, at an exercise price of $6.10 per share. The fair
value of the warrant was estimated at $101,700 on the date of issuance using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0 percent; expected volatility of 88.96 percent; risk free interest
rate of 5.10 percent; and an expected life of five years. The Company also
granted an exchange right to the investor which will allow the investor to
exchange its shares of Series B Preferred for preferred stock of the Company.
The exchange right grants the investor the right, at its option, at any time and
from time to time after June 18, 2001, to exchange all or a portion of the
Series B Preferred shares then held by the investor for a number of shares of
the Company designated convertible preferred stock, equal to (i) the aggregate
liquidation preference of the Series B Preferred shares surrendered for exchange
plus any accrued but unpaid dividends thereon, divided by (ii) the stated value
per share of the Company preferred stock. The Company preferred stock will be
convertible into shares of common stock at a conversion price equal to the
lesser of (i) 150% of the average of the closing bid prices of the Company's
common stock for the five trading days immediately preceding the first date of
issuance of any shares of the Company's preferred stock and (ii) 100% of the
average of the lowest seven closing bid prices of the common stock during the
thirty trading days immediately preceding the conversion.
10. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans: the 1991 Stock Incentive Plan
(the "1991 Plan") and the 1997 Stock Incentive Plan (the "1997 Plan")
(collectively, the "Plans"). The Plans were adopted by the Company's
stockholders and Board of Directors in May 1991 and June 1997, respectively, and
provide for the granting of incentive and nonqualified stock options as well as
other stock-based compensation. The 1991 Plan, as amended, authorizes for
issuance up to 401,430 shares of the Company's common stock. Options which have
been granted under the 1991 Plan contain vesting provisions determined by the
Board of Directors which range from one to four years. The 1997 Plan, as
amended, authorizes for issuance up to 2,000,000 shares of the Company's common
stock. As of December 31, 2000 there was outstanding 2,153,175 options to
employees and directors under the 1997 Plan. Under the Plans, shares of the
Company's common stock may be granted to directors, officers and employees of
the Company, except that incentive stock options may not be granted to
non-employee directors.
The Plans provide for issuance of incentive stock options having
exercise prices equal to the fair market values of the stock on the date of
grant of the options or, in certain circumstances, at option prices at least
equal to 110 percent of the fair market value of the stock on the date the
options are granted. Options granted under the Plans are exercisable in such a
manner and within such period, not to exceed ten years from the date of the
grant, as shall be set forth in a stock option agreement between the director,
officer or employee and the Company.
Stock options have also been issued outside of the aforementioned plans
to various consultants. During the period from December 1993 through December
1996, the Company issued a total of 194,000 options to purchase common stock to
two scientific consultants and a financial consultant in exchange for past and
future services. The options are exercisable through December 31, 2001, at an
exercise price of $0.025 per share. As the exercise price was lower than the
fair market value of the stock on the date the options were granted,
compensation expense was recorded for the difference between the option exercise
price and the estimated fair market value of the stock as determined by the
Board of Directors on the grant date. All options and warrants issued outside of
the Plan were vested and exercisable upon issuance. In September 1990, the
Company issued a warrant to the Chief Executive Officer of the Company to
purchase 88,173 shares of common stock at $3.75 per share. The warrant was
exercised during August 2000.
In January 1997, the Company issued to a financial consultant, 10-year
options to purchase 180,000 shares of the Company's common stock at the exercise
price of $3.875 per share, of which 30,000 options vested immediately. In
November 1998, the Company issued to the same financial consultant additional
10-year options to purchase 25,000 shares of the Company's common stock at an
exercise price of $8.5625 per share, all of which vested immediately. The
Company recognized $422,264, $393,751 and 775,496 of compensation expense for
these options in 1998, 1999 and 2000, respectively. Compensation expense was
determined in accordance with SFAS No. 123, with the fair values determined
using the Black-Scholes option pricing model at the original grant dates.
Management believes that the fair value results using calculations over the
respective vesting periods of these options would not have been materially
different.
A summary of stock option activities are as follows:
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1998 1999 2000
------------------------ ------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year 658,173 $ 4.66 853,873 $ 5.78 1,389,373 $ 6.77
Granted 331,300 8.03 543,500 10.76 1,358,000 7.04
Exercised (134,000) 2.54 (1,900) 6.57 (122,598) 2.85
Forfeited (1,600) 8.88 (6,100) 8.08 (134,600) 8.78
------- ------ --------- ------ --------- ------
Outstanding, at end of year 853,873 $ 5.78 1,389,373 $ 6.77 2,490,175 $ 8.34
======= ====== ========= ====== ========= ======
Exercisable, at end of year 391,048 $ 1.95 662,823 $ 3.23 745,758 $ 3.80
======= ====== ========= ====== ========= ======
The following table summarizes information about stock options
outstanding at December 31, 2000:
Weighted Weighted Weighted
Range of Options Average Average Options Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/00 Life Price 12/31/00 Price
---------------- ----------- --------- --------------- ----------- --------
$3.65 to 5.625 1,048,600 8.27 4.15 211,500 4.81
5.626 to 8.875 492,075 8.37 6.85 219,350 8.00
8.876 to 13.00 949,500 8.86 11.13 314,908 11.77
As of December 31, 2000, there were 2,153,175 options outstanding under
the 1997 Plan and 126,000 options outstanding under the 1991 Plan. The remaining
211,000 outstanding options were granted outside of option plans.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options granted to employees, and does not recognize
compensation expense when the exercise price of the options equals the fair
market value of the underlying shares at the date of grant. Directors' stock
options are treated in the same manner as employee stock options for accounting
purposes. Under SFAS No. 123, the Company is required to present certain pro
forma earnings information determined as if employee stock options were
accounted for under the fair value method of that statement.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998, 1999 and 2000, respectively: risk-free
interest rates of 4.96 percent (1998); 5.80 percent (1999) and 5.90 percent
(2000), zero expected dividend yields; expected lives of 5 years; expected
volatility of 75.26 percent in 1998, 75.44 percent in 1999 and 90.72 percent in
2000.
For purposes of the following required pro forma information, the
weighted average fair value of stock options granted in 1998, 1999 and 2000 was
$4.96, $7.57 and $5.31, respectively. The total estimated fair value is
amortized to expense over the vesting period.
1998 1999 2000
-------------- -------------- --------------
Pro forma net loss $ (12,395,411) $ (27,414,976) $ (49,050,557)
Pro forma basic and diluted
loss per share $ (2.21) $ (3.82) $ (4.61)
Warrants are typically issued by the Company to investors as part of a
financing transaction, or in connection with services rendered by outside
consultants and expire at varying dates ranging from September 2001 through
November 2004. A summary of warrant activity follows:
1998 1999 2000
------------------------------- ----------------------------- ---------------------------
Range of Range of Range of
Common Exercise Common Exercise Common Exercise
Shares Prices Shares Prices Shares Prices
--------- -------------- --------- --------------- --------- -------------
Outstanding, at beginning of year 2,700,000(1) $ 11.40 2,697,459 3,217,123
Granted 38,459 7.43 to 11.618 528,664 11.00 to 20.625 927,556 10.13 to 21.0
Exercised (41,000) 11.40 (9,000) 11.40 (4,490) 11.40
Outstanding, at end of year 2,697,459 3,217,123 4,140,189
(1) Public warrants issued at time of initial public offering.
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11. SALARY DEFERRAL PLAN
The Company established a 401(k) Salary Deferral Plan on January 1,
1990. The Plan allows eligible employees to defer part of their income on a
tax-free basis. Contributions by the Company to the Plan are discretionary upon
approval by the Board of Directors. To date, the Company has not made any
contributions into the Plan.
12. EMPLOYEE STOCK PURCHASE PLAN
In January 2001, the Company adopted the NeoTherapeutics Employee Stock
Purchase Plan (the "Plan"). The Plan
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is subject to the provisions of Section 423 of the Internal Revenue Code. The
Plan offers to eligible employees of the Company, on a tax-advantaged basis, the
opportunity to purchase shares of the Company's common stock, at a discount,
through payroll deductions. The Plan allows the participant to deduct up to a
specified maximum percentage of their gross income each pay period. The
Company's common stock will be offered during the six month offering periods
commencing on each June and December. The per share purchase price of shares of
the Company's common stock purchased on the last trading day of an offering
period will be the lesser of 85% of the fair market value of a share on the
first trading day of the period, and 85% of the fair market value of a share on
the last trading day of the period. The Plan limits the purchase of shares by
each employee of the Company's common stock to a maximum number of shares per
offering period and to $25,000 fair market value of the purchased shares of the
Company's common stock in the calendar year. Any payroll deductions not applied
because of these limitations will be refunded to the participant.
13. RESEARCH ACTIVITIES
During 1995, the National Institute on Aging (NIA) and the National
Institute for Mental Health (NIMH) issued contracts to an independent
subcontractor of theirs to manufacture Neotrofin(TM) for animal and human
testing programs. The NIA also issued an additional contract to one of its
subcontractors to conduct the subchronic animal toxicity studies required by the
U.S. Food and Drug Administration as a part of an Investigational New Drug (IND)
application for Neotrofin(TM). The entire cost of these two contracts was funded
by the NIA and NIMH directly to the subcontractors.
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations for fiscal 1998, 1999 and 2000 (in thousands, except per share data):
Fiscal 1998 March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
Revenues $ -- $ -- $ -- $ --
Total operating expenses 2,528 2,643 2,984 3,509
Net loss $ (2,508) $ (2,581) $ (3,000) $ (3,515)
Basic and diluted loss per share $ (0.46) $ (0.47) $ (0.54) $ (0.60)
Shares used in calculation 5,467 5,493 5,570 5,918
Fiscal 1999 March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
Revenues $ -- $ -- $ -- $ --
Total operating expenses 4,404 4,006 5,425 12,146
Net loss $ (4,419) $ (4,056) $ (5,329) $(12,186)
Basic and diluted loss per share $ (0.71) $ (0.63) $ (0.70) $ (1.47)
Shares used in calculation 6,204 6,444 7,583 8,387
Fiscal 2000 March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
Revenues $ -- $ -- $ -- $ --
Total operating expenses 9,455 11,387 11,778 11,253
Net loss $ (9,332) $(12,346) $(13,223) $(11,526)
Basic and diluted loss per share $ (1.02) $ (1.29) $ (1.27) $ (0.88)
Shares used in calculation 9,135 9,536 10,383 13,077
48
53
15. SUBSEQUENT EVENTS
On January 24, 2001, the Company filed with the Securities and Exchange
Commission a "shelf" registration statement permitting the sale of securities
with a maximum aggregate public offering price of $50 million. At April 16,
2001, $41.5 million remain available.
On February 2, 2001, the Company sold 1,627,756 shares of common stock
to a private investor for $3.5 million.
On March 8, 2001, the Company sold 1,250,000 shares of common stock to a
private investor for $5.0 million. The investor also received five year warrants
to purchase up to 125,000 shares of common stock at the exercise price of $5.00
per share. The fair value of the warrant was estimated at $563,750 on the date
of issuance using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0 percent; expected volatility of 91.05 percent;
risk free interest rate of 4.73 percent; and an expected life of five years.
On March 15, 2001, the Company's subsidiary, NeoGene, entered into a
licensing agreement with Pfizer Inc. Under the terms of the agreement, Pfizer
will make use of NeoGene's technology to screen potential drug candidates. In
return, NeoGene received an initial payment of $100,000 and is entitled to
receive milestone payments which could total $12 million if Pfizer receives
final market approval from the FDA for a drug candidate identified using
NeoGene's technology under the agreement; however, there can be no assurance
that the development project will be successful and result in the Company
receiving any further milestone payments.
On April 6, 2001, in a special meeting called for this purpose, the
stockholders of the Company approved the increase in authorized common stock
from 25 million to 50 million shares.
On April 17, 2001, we entered into a financing transaction with two
private investor groups which provide, among other things, for (a) the sale of
approximately 1,176,000 shares of our common stock for $6.0 million cash, (b) an
option to place with the investor groups two tranches of convertible debenture
notes of $10 and $8 million within approximately 30 days and seven months, of
the initial closing, respectively, and (c) five year warrants exercisable at
125% of the market price on the date of the respective closing for 20% of the
gross proceeds of each of the aforementioned common stock and debenture
issuances.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
49
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of
NeoTherapeutics, Inc. required under this item is incorporated herein by
reference from our definitive proxy statement, to be filed pursuant to
Regulation 14A, related to our 2001 Annual Meeting of Stockholders to be held on
June 11, 2001 (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference from our 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference from our 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference from our 2001 Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. CONSOLIDATED FINANCIAL STATEMENTS:
The following are included herein under Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheet as of December 31, 1999 and 2000.
Consolidated Statement of Operations for the period ended December 31, 1998,
1999 and 2000.
Consolidated Statement of Stockholders' Equity for the period from inception
through December 31, 2000.
Consolidated Statement of Cash Flow for the period ended December 31, 1998, 1999
and 2000.
Notes to Consolidated Financial Statement.
(a)2. FINANCIAL STATEMENT SCHEDULES:
None. All financial statement schedules are omitted because they are not
applicable or the required information is included in the Consolidated Financial
Statements or notes thereto.
(a)3. EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of the Registrant, as filed on May
7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement
dated May 8, 1997, for the Annual Meeting of Shareholders of
NeoTherapeutics Colorado, the predecessor to Registrant, held on
June 17, 1997, as filed with the Securities and Exchange
Commission on May 9, 1997, and incorporated herein by
reference.)
3.2 Certificates of Amendment to the Bylaws of the Registrant.
4.1 Form of Registration Rights Agreement dated as of July 23, 1996,
entered into between the Registrant and certain investors named
therein. (Filed as Exhibit 4.1 to the Registration Statement on
Form SB-2 as amended (No. 333-05342-LA), and incorporated herein
by reference.)
50
55
EXHIBIT NO. DESCRIPTION
----------- -----------
4.2 Form of Registration Rights Agreement dated December 30, 1993,
entered into between the Registrant and each of Alvin J. Glasky,
Sanford J. Glasky, Joanne Law, Luana M. Kruse, Rosalie H. Glasky
and John W. Baldridge. (Filed as Exhibit 4.2 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
4.3 Form of Representatives' Warrant Agreement dated as of September
25, 1996, entered into in connection with the public offering of
the Company's securities on September 26, 1996. (Filed as
Exhibit 4.3 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.4 Form of Stock Purchase Agreement dated December 30, 1993,
including amendment effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.4 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.5 Form of Stock Purchase Agreement dated June 30, 1990, as amended
on May 27, 1992, June 30, 1993, and December 30, 1993, and
amendment thereto effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.5 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.6 Warrant Agreement entered into between NeoTherapeutics, Inc. and
U.S. Stock Transfer Corporation dated as of September 25, 1996.
(Filed as Exhibit 4.6 to the Registration Statement on Form SB-2
as amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.7 Private Equity Line of Credit Agreement between Registrant and
Kingsbridge Capital Limited dated as of March 27, 1998. (Filed
as Exhibit 4.1 to the Registrant's Registration Statement on
form S-3 (No. 333-52331), and incorporated herein by reference.)
4.8 Registration Rights Agreement between Registrant and Kingsbridge
Capital Limited dated as of March 27, 1998. (Filed as Exhibit
4.2 to the Registrant's Registration Statement on form S-3 (No.
333-52331), and incorporated herein by reference.)
4.9 Warrant to Purchase up to 25,000 shares of common stock of
Registrant, issued to Kingsbridge Capital Limited as of March
27, 1998. (Filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-3 (No. 333-52331), and incorporated herein
by reference.)
4.10 Certificate of Designation of 5% Series A Preferred Stock with
Conversion Features. (Filed as Exhibit 4.1 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9, 1999,
and incorporated herein by reference.)
4.11 Preferred Stock Purchase Agreement dated as of January 29, 1999,
by and among Registrant, Westover Investments L.P. and Montrose
Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9, 1999,
and incorporated herein by reference.)
4.12 Registration Rights Agreement dated as of January 29, 1999, by
and among Registrant, Westover Investments L.P. and Montrose
Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9, 1999,
and incorporated herein by reference.)
4.13 Form of warrant issued by Registrant to Westover Investments
L.P. and Montrose Investments Ltd. dated as of January 29, 1999.
(Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities
and Exchange Commission on February 9, 1999, and incorporated
herein by reference.)
51
56
EXHIBIT NO. DESCRIPTION
----------- -----------
4.14 Securities Purchase Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.15 Registration Rights Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.16 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission on
November 19, 1999, and incorporated herein by reference.)
4.17 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.18 Adjustable Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission on
November 19, 1999, and incorporated herein by reference.)
4.19 Adjustable Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.20 Securities Purchase Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong River
Investments, Inc. (Filed as Exhibit 4.1 to Form 8-K as filed
with the Securities and Exchange Commission on April 3, 2000,
and incorporated herein by reference.)
4.21 Registration Rights Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong River
Investments, Inc. (Filed as Exhibit 4.2 to Form 8-K as filed
with the Securities and Exchange Commission on April 3, 2000,
and incorporated herein by reference.)
4.22 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.3 to
Form 8-K as filed with the Securities and Exchange Commission on
April 3, 2000, and incorporated herein by reference.)
4.23 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of February 25, 2000. (Filed as
Exhibit 4.4 to Form 8-K as filed with the Securities and
Exchange Commission on April 3, 2000, and incorporated herein by
reference.)
4.24 Securities Purchase Agreement dated as of April 28, 2000, by and
between Registrant and Royal Canadian Growth Fund. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on May 25, 2000, and incorporated herein by
reference.)
4.25 Registration Rights Agreement dated as of April 28, 2000, by and
among Registrant, Royal Canadian Growth Fund and Dlouhy
Investments Inc. (Filed as Exhibit 4.2 to Form 8-K as filed with
the Securities and Exchange Commission on May 25, 2000, and
incorporated herein by reference.)
52
57
EXHIBIT NO. DESCRIPTION
----------- -----------
4.26 Warrant issued by Registrant to Royal Canadian Growth Fund,
dated as of May 1, 2000. (Filed as Exhibit 4.3 to Form 8-K as
filed with the Securities and Exchange Commission on May 25,
2000, and incorporated herein by reference.)
4.27 Warrant issued by Registrant to Dlouhy Investments Inc., dated
as of May 1, 2000. (Filed as Exhibit 4.4 to Form 8-K as filed
with the Securities and Exchange Commission on May 25, 2000, and
incorporated herein by reference.)
4.28 Letter Agreement dated as of May 1, 2000, by and between
Registrant and Royal Canadian Growth Fund. (Filed as Exhibit 4.5
to Form 8-K as filed with the Securities and Exchange Commission
on May 25, 2000, and incorporated herein by reference.)
4.29 Convertible Debenture Purchase Agreement dated as of April 6,
2000, by and among Registrant, Strong River Investments, Inc.
and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K
as filed with the Securities and Exchange Commission on April
21, 2000, and incorporated herein by reference.)
4.30 Registration Rights Agreement dated as of April 6, 2000, by and
among Registrant, Strong River Investments, Inc. and Montrose
Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K as filed with
the Securities and Exchange Commission on April 21, 2000, and
incorporated herein by reference.)
4.31 Form of 5% Subordinated Convertible Debenture issued by
Registrant, dated as of April 6, 2000. (Filed as Exhibit 4.3 to
Form 8-K as filed with the Securities and Exchange Commission on
April 21, 2000, and incorporated herein by reference.)
4.32 Class A Warrant issued by Registrant to Montrose Investments
Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.4 to Form
8-K as filed with the Securities and Exchange Commission on
April 21, 2000, and incorporated herein by reference.)
4.33 Class A Warrant issued by Registrant to Strong River
Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit
4.5 to Form 8-K as filed with the Securities and Exchange
Commission on April 21, 2000, and incorporated herein by
reference.)
4.34 Class B Warrant issued by Registrant to Montrose Investments
Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.6 to Form
8-K as filed with the Securities and Exchange Commission on
April 21, 2000, and incorporated herein by reference.)
4.35 Class B Warrant issued by Registrant to Strong River
Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit
4.7 to Form 8-K as filed with the Securities and Exchange
Commission on April 21, 2000, and incorporated herein by
reference.)
4.36 Registration Rights Agreement dated as of September 21, 2000, by
and among NeoGene Technologies, Inc., Strong River Investments,
Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.3 to Form
8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.37 Registration Rights Agreement dated as of September 21, 2000, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.4 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
53
58
EXHIBIT NO. DESCRIPTION
----------- -----------
4.38 Warrant issued by NeoGene Technologies, Inc., to Montrose
Investments Ltd., dated as of September, 21, 2000. (Filed as
Exhibit 4.5 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.39 Warrant issued by NeoGene Technologies, Inc., to Strong River
Investments, Inc., dated as of September 21, 2000. (Filed as
Exhibit 4.6 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.40 Warrant issued by Registrant to Montrose Investments Ltd., dated
as of September 21, 2000. (Filed as Exhibit 4.7 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
4.41 Warrant issued by Registrant to Strong River Investments, Inc.,
dated as of September 21, 2000. (Filed as Exhibit 4.8 to Form
8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.42 Form of Registrant Terms of Preferred. (Filed as Exhibit 4.9 to
Form 8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.43 Form of Registrant 5% Subordinated Convertible Debenture. (Filed
as Exhibit 4.10 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.44 Securities Purchase Agreement dated as of September 29, 2000, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.11 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
4.45 Registration Rights Agreement dated as of September 29, 2000, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.12 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
4.46 Closing Warrant issued by Registrant to Montrose Investments,
Ltd., dated as of September, 29, 2000. (Filed as Exhibit 4.13 to
Form 8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.47 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of September, 29, 2000. (Filed as
Exhibit 4.14 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.48 Adjustable Warrant issued by Registrant to Montrose Investments,
Ltd., dated as of September 29, 2000. (Filed as Exhibit 4.15 to
Form 8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.49 Adjustable Warrant issued by Registrant to Strong River
Investments, Inc., dated as of September 29, 2000. (Filed as
Exhibit 4.16 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.50 Certificate of Designation of Rights, Preferences and Privileges
of Series B Junior Participating Preferred Stock of
NeoTherapeutics, Inc. (Filed as Exhibit 3.1 to Form 8-A12G as
filed with the Securities and Exchange Commission on December
26, 2000, and incorporated herein by reference.)
54
59
EXHIBIT NO. DESCRIPTION
----------- -----------
4.51 Rights Agreement, dated as of December 13, 2000, between
NeoTherapeutics, Inc. and U.S. Stock Transfer Corporation, as
Rights Agent, which includes as Exhibit A thereto the form of
Certificate of Designation for the Series B Junior Participating
Preferred Stock, as Exhibit B thereto the Form of Rights
Certificate and as Exhibit C thereto a Summary of Terms of
Stockholder Rights Plan. (Filed as Exhibit 4.1 to Form 8-A12G as
filed with the Securities and Exchange Commission on December
26, 2000, and incorporated herein by reference.)
4.52 Securities Purchase Agreement dated as of December 18, 2000, by
and among Registrant, NeoGene Technologies, Inc. and Societe
Generale. (Filed as Exhibit 4.1 to Form 8-K as filed with the
Securities and Exchange Commission on December 28, 2000, and
incorporated herein by reference.)
4.53 Certificate of Determination of NeoGene Technologies, Inc.
(Filed as Exhibit 4.2 to Form 8-K as filed with the Securities
and Exchange Commission on December 28, 2000, and incorporated
herein by reference.)
4.54 Registration Rights Agreement dated as of December 18, 2000, by
and between NeoGene Technologies, Inc. and Societe Generale.
(Filed as Exhibit 4.3 to Form 8-K as filed with the Securities
and Exchange Commission on December 28, 2000, and incorporated
herein by reference.)
4.55 Registration Rights Agreement dated as of December 18, 2000, by
and between Registrant and Societe Generale. (Filed as Exhibit
4.4 to Form 8-K as filed with the Securities and Exchange
Commission on December 28, 2000, and incorporated herein by
reference.)
4.56 Warrant issued by NeoGene Technologies, Inc., to Societe
Generale, dated as of December 18, 2000. (Filed as Exhibit 4.5
to Form 8-K as filed with the Securities and Exchange Commission
on December 28, 2000, and incorporated herein by reference.)
4.57 Warrant issued by Registrant to Societe Generale, dated as of
December 18, 2000. (Filed as Exhibit 4.6 to Form 8-K as filed
with the Securities and Exchange Commission on December 28,
2000, and incorporated herein by reference.)
4.58 Form of Registrant Terms of Preferred. (Filed as Exhibit 4.7 to
Form 8-K as filed with the Securities and Exchange Commission on
December 28, 2000, and incorporated herein by reference.)
4.59 Stock Purchase Agreement dated as of January 31, 2001, by and
between Registrant and Amro International S.A. (Filed as Exhibit
10.1 to Form 8-K as filed with the Securities and Exchange
Commission on February 16, 2001, and incorporated herein by
reference.)
4.60 Securities Purchase Agreement dated as of March 8, 2001, by and
between Registrant and IAT ReInsurance Syndicate Ltd. (Filed as
Exhibit 10.1 to Form 8-K as filed with the Securities and
Exchange Commission on March 14, 2001, and incorporated herein
by reference.)
4.61 Warrant issued by Registrant to IAT ReInsurance Syndicate Ltd.
dated as of March 8, 2001. (Filed as Exhibit 10.2 to Form 8-K as
filed with the Securities and Exchange Commission on March 14,
2001, and incorporated herein by reference.)
4.62 Certificate of Determination of NeoGene Technologies, Inc.
(Filed as Exhibit 4.2 to Form 8-K as filed with the Securities
and Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
10.1* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
55
60
EXHIBIT NO. DESCRIPTION
----------- -----------
10.2* Employment Agreement between the Registrant and Alvin J.
Glasky, Ph.D. (Filed as Exhibit 10.3 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.3 Note dated June 21, 1996, between the Registrant and Alvin J.
Glasky and related Security Agreement dated August 31, 1990.
(Filed as Exhibit 10.4 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.4 Warrant to purchase common stock of the Registrant dated August
31, 1990, held by Alvin J. Glasky. (Filed as Exhibit 10.6 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.5 Agreement dated as of June 6, 1991, as amended on July 26, 1996,
by and between the Registrant and Alvin J. Glasky. (Filed as
Exhibit 10.7 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.6 Agreement dated as of June 30, 1991, as amended on July 26,
1996, by and between the Registrant and Alvin J. Glasky. (Filed
as Exhibit 10.8 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.7* Form of Indemnification Agreement between the Registrant and
each of its officers and directors. (Filed as Exhibit 10.10 to
the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.8 Underwriting Agreement dated as of September 25, 1996, among the
Company, Paulson Investment Company, Inc. and First Colonial
Securities Group, Inc. (Filed as Exhibit 1.1 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.9 Industrial Lease Agreement dated January 16, 1997, between the
Company and the Irvine Company. (Filed as Exhibit 10.11 to the
Form 10-KSB for the fiscal year ended December 31, 1996, as
filed with the Securities and Exchange Commission on March 31,
1997, and incorporated herein by reference.)
10.10 Addendum to Note dated June 21, 1996, between the Registrant and
Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB for
fiscal year ended December 31, 1996, as filed with the
Securities and Exchange Commission on March 31, 1997, and
incorporated herein by reference.)
10.11* 1997 Stock Incentive Plan. (Filed as Exhibit D to the Definitive
Proxy Statement dated May 8, 1997, for the Annual Meeting of
Shareholders of NeoTherapeutics Colorado, the predecessor to
Registrant, held on June 17, 1997, as filed with the Securities
and Exchange Commission on May 9, 1997, and incorporated herein
by reference.)
10.12 Master Note and Security Agreement between the Registrant and
Leasing Technologies, Inc. dated as of July 10, 1998. (Filed as
Exhibit 4 to Form 10-QSB for the quarter ended September 30,
1998, as filed with the Securities and Exchange Commission on
November 9, 1998, and incorporated herein by reference.)
10.13 Employment Agreement entered into as of May 6, 1999 between
Alvin J. Glasky, Ph.D. and NeoTherapeutics, Inc. (Filed as
Exhibit 10.14 to the Registration Statement on form S-1 (No.
333-79935), and incorporated herein by reference.)
56
61
EXHIBIT NO. DESCRIPTION
----------- -----------
10.14 Form of Financial Consulting Agreement between the Registrant
and Joseph Charles & Associates, Inc. entered into in connection
with the public offering of the Registrant's securities on July
27, 1999. (Filed as Exhibit 1.4 to the Registration Statement on
Form S-1 (No. 333-79935), and incorporated herein by reference.)
10.15 Underwriting Agreement between the Registrant and Joseph Charles
& Associates, Inc. entered into in connection with the public
offering of the Registrant's securities on July 27, 1999. (Filed
as Exhibit 1.1 to the Registration Statement on Form S-1, as
amended (No. 333-79935), and incorporated herein by reference.)
10.16 Master Lease Agreement dated as of September 22, 2000 by and
between NeoTherapeutics, Inc. and Comdisco Laboratory and
Scientific Group.
10.17 Amendment No. 1 to Master Lease Agreement dated as of September
22, 2000 by and between NeoTherapeutics, Inc. and Comdisco
Laboratory and Scientific Group.
10.18 Equipment Schedule No. S-01 dated as of September 22, 2000 by
and between NeoTherapeutics, Inc. and Comdisco Laboratory and
Scientific Group.
10.19 Addendum to Equipment Schedule No. SG-01 dated as of September
22, 2000 by and between NeoTherapeutics, Inc. and Comdisco
Laboratory and Scientific Group.
21 Subsidiaries of Registrant.
23 Consent of Arthur Andersen LLP.
- ----------
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. The Registrant filed a Report on Form 8-K dated
April 3, 2000, April 21, 2000, May 25, 2000, November 13, 2000, December
26, 2000, December 28, 2000, February 16, 2001 and March 14, 2001 to
report financing transactions. The Registrant filed a Report on Form 8-K
on January 5, 2001 and March 20, 2001, to report press releases issued
on January 4, 2001 and March 19, 2001, respectively.
57
62
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: April 17, 2001 By: /s/ ALVIN J. GLASKY
---------------------------------
Alvin J. Glasky, Ph.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALVIN J. GLASKY
- ---------------------------------- Chairman of the Board, April 17, 2001
Alvin J. Glasky, Ph.D. Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ SAMUEL GULKO
- ---------------------------------- Senior Vice President Finance, April 17, 2001
Samuel Gulko Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Accounting and
Financial Officer)
/s/ MARK J. GLASKY
- ---------------------------------- Director April 17, 2001
Mark J. Glasky
/s/ ANN C. KESSLER
- ---------------------------------- Director April 17, 2001
Ann C. Kessler, Ph.D.
/s/ ARMIN M. KESSLER
- ---------------------------------- Director April 17, 2001
Armin M. Kessler
/s/ CAROL O'CLEIREACAIN
- ---------------------------------- Director April 17, 2001
Carol O'Cleireacain, Ph.D.
/s/ PAUL H. SILVERMAN
- ---------------------------------- Director April 17, 2001
Paul H. Silverman Ph.D., D.Sc.
/s/ ERIC L. NELSON
- ---------------------------------- Director April 17, 2001
Eric L. Nelson, Ph.D.
/s/ JOSEPH RUBINFELD
- ---------------------------------- Director April 17, 2001
Joseph Rubinfeld, Ph.D.
58
63
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of the Registrant, as filed on May
7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement
dated May 8, 1997, for the Annual Meeting of Shareholders of
NeoTherapeutics Colorado, the predecessor to Registrant, held on
June 17, 1997, as filed with the Securities and Exchange
Commission on May 9, 1997, and incorporated herein by
reference.)
3.2 Certificates of Amendment to the Bylaws of the Registrant.
4.1 Form of Registration Rights Agreement dated as of July 23, 1996,
entered into between the Registrant and certain investors named
therein. (Filed as Exhibit 4.1 to the Registration Statement on
Form SB-2 as amended (No. 333-05342-LA), and incorporated herein
by reference.)
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EXHIBIT NO. DESCRIPTION
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4.2 Form of Registration Rights Agreement dated December 30, 1993,
entered into between the Registrant and each of Alvin J. Glasky,
Sanford J. Glasky, Joanne Law, Luana M. Kruse, Rosalie H. Glasky
and John W. Baldridge. (Filed as Exhibit 4.2 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
4.3 Form of Representatives' Warrant Agreement dated as of September
25, 1996, entered into in connection with the public offering of
the Company's securities on September 26, 1996. (Filed as
Exhibit 4.3 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.4 Form of Stock Purchase Agreement dated December 30, 1993,
including amendment effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.4 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.5 Form of Stock Purchase Agreement dated June 30, 1990, as amended
on May 27, 1992, June 30, 1993, and December 30, 1993, and
amendment thereto effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.5 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.6 Warrant Agreement entered into between NeoTherapeutics, Inc. and
U.S. Stock Transfer Corporation dated as of September 25, 1996.
(Filed as Exhibit 4.6 to the Registration Statement on Form SB-2
as amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.7 Private Equity Line of Credit Agreement between Registrant and
Kingsbridge Capital Limited dated as of March 27, 1998. (Filed
as Exhibit 4.1 to the Registrant's Registration Statement on
form S-3 (No. 333-52331), and incorporated herein by reference.)
4.8 Registration Rights Agreement between Registrant and Kingsbridge
Capital Limited dated as of March 27, 1998. (Filed as Exhibit
4.2 to the Registrant's Registration Statement on form S-3 (No.
333-52331), and incorporated herein by reference.)
4.9 Warrant to Purchase up to 25,000 shares of common stock of
Registrant, issued to Kingsbridge Capital Limited as of March
27, 1998. (Filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-3 (No. 333-52331), and incorporated herein
by reference.)
4.10 Certificate of Designation of 5% Series A Preferred Stock with
Conversion Features. (Filed as Exhibit 4.1 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9, 1999,
and incorporated herein by reference.)
4.11 Preferred Stock Purchase Agreement dated as of January 29, 1999,
by and among Registrant, Westover Investments L.P. and Montrose
Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9, 1999,
and incorporated herein by reference.)
4.12 Registration Rights Agreement dated as of January 29, 1999, by
and among Registrant, Westover Investments L.P. and Montrose
Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9, 1999,
and incorporated herein by reference.)
4.13 Form of warrant issued by Registrant to Westover Investments
L.P. and Montrose Investments Ltd. dated as of January 29, 1999.
(Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities
and Exchange Commission on February 9, 1999, and incorporated
herein by reference.)
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EXHIBIT NO. DESCRIPTION
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4.14 Securities Purchase Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.15 Registration Rights Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.16 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission on
November 19, 1999, and incorporated herein by reference.)
4.17 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.18 Adjustable Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission on
November 19, 1999, and incorporated herein by reference.)
4.19 Adjustable Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.20 Securities Purchase Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong River
Investments, Inc. (Filed as Exhibit 4.1 to Form 8-K as filed
with the Securities and Exchange Commission on April 3, 2000,
and incorporated herein by reference.)
4.21 Registration Rights Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong River
Investments, Inc. (Filed as Exhibit 4.2 to Form 8-K as filed
with the Securities and Exchange Commission on April 3, 2000,
and incorporated herein by reference.)
4.22 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.3 to
Form 8-K as filed with the Securities and Exchange Commission on
April 3, 2000, and incorporated herein by reference.)
4.23 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of February 25, 2000. (Filed as
Exhibit 4.4 to Form 8-K as filed with the Securities and
Exchange Commission on April 3, 2000, and incorporated herein by
reference.)
4.24 Securities Purchase Agreement dated as of April 28, 2000, by and
between Registrant and Royal Canadian Growth Fund. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on May 25, 2000, and incorporated herein by
reference.)
4.25 Registration Rights Agreement dated as of April 28, 2000, by and
among Registrant, Royal Canadian Growth Fund and Dlouhy
Investments Inc. (Filed as Exhibit 4.2 to Form 8-K as filed with
the Securities and Exchange Commission on May 25, 2000, and
incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
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4.26 Warrant issued by Registrant to Royal Canadian Growth Fund,
dated as of May 1, 2000. (Filed as Exhibit 4.3 to Form 8-K as
filed with the Securities and Exchange Commission on May 25,
2000, and incorporated herein by reference.)
4.27 Warrant issued by Registrant to Dlouhy Investments Inc., dated
as of May 1, 2000. (Filed as Exhibit 4.4 to Form 8-K as filed
with the Securities and Exchange Commission on May 25, 2000, and
incorporated herein by reference.)
4.28 Letter Agreement dated as of May 1, 2000, by and between
Registrant and Royal Canadian Growth Fund. (Filed as Exhibit 4.5
to Form 8-K as filed with the Securities and Exchange Commission
on May 25, 2000, and incorporated herein by reference.)
4.29 Convertible Debenture Purchase Agreement dated as of April 6,
2000, by and among Registrant, Strong River Investments, Inc.
and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K
as filed with the Securities and Exchange Commission on April
21, 2000, and incorporated herein by reference.)
4.30 Registration Rights Agreement dated as of April 6, 2000, by and
among Registrant, Strong River Investments, Inc. and Montrose
Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K as filed with
the Securities and Exchange Commission on April 21, 2000, and
incorporated herein by reference.)
4.31 Form of 5% Subordinated Convertible Debenture issued by
Registrant, dated as of April 6, 2000. (Filed as Exhibit 4.3 to
Form 8-K as filed with the Securities and Exchange Commission on
April 21, 2000, and incorporated herein by reference.)
4.32 Class A Warrant issued by Registrant to Montrose Investments
Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.4 to Form
8-K as filed with the Securities and Exchange Commission on
April 21, 2000, and incorporated herein by reference.)
4.33 Class A Warrant issued by Registrant to Strong River
Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit
4.5 to Form 8-K as filed with the Securities and Exchange
Commission on April 21, 2000, and incorporated herein by
reference.)
4.34 Class B Warrant issued by Registrant to Montrose Investments
Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.6 to Form
8-K as filed with the Securities and Exchange Commission on
April 21, 2000, and incorporated herein by reference.)
4.35 Class B Warrant issued by Registrant to Strong River
Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit
4.7 to Form 8-K as filed with the Securities and Exchange
Commission on April 21, 2000, and incorporated herein by
reference.)
4.36 Registration Rights Agreement dated as of September 21, 2000, by
and among NeoGene Technologies, Inc., Strong River Investments,
Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.3 to Form
8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.37 Registration Rights Agreement dated as of September 21, 2000, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.4 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
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4.38 Warrant issued by NeoGene Technologies, Inc., to Montrose
Investments Ltd., dated as of September, 21, 2000. (Filed as
Exhibit 4.5 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.39 Warrant issued by NeoGene Technologies, Inc., to Strong River
Investments, Inc., dated as of September 21, 2000. (Filed as
Exhibit 4.6 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.40 Warrant issued by Registrant to Montrose Investments Ltd., dated
as of September 21, 2000. (Filed as Exhibit 4.7 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
4.41 Warrant issued by Registrant to Strong River Investments, Inc.,
dated as of September 21, 2000. (Filed as Exhibit 4.8 to Form
8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.42 Form of Registrant Terms of Preferred. (Filed as Exhibit 4.9 to
Form 8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.43 Form of Registrant 5% Subordinated Convertible Debenture. (Filed
as Exhibit 4.10 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.44 Securities Purchase Agreement dated as of September 29, 2000, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.11 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
4.45 Registration Rights Agreement dated as of September 29, 2000, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.12 to Form 8-K as
filed with the Securities and Exchange Commission on November
13, 2000, and incorporated herein by reference.)
4.46 Closing Warrant issued by Registrant to Montrose Investments,
Ltd., dated as of September, 29, 2000. (Filed as Exhibit 4.13 to
Form 8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.47 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of September, 29, 2000. (Filed as
Exhibit 4.14 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.48 Adjustable Warrant issued by Registrant to Montrose Investments,
Ltd., dated as of September 29, 2000. (Filed as Exhibit 4.15 to
Form 8-K as filed with the Securities and Exchange Commission on
November 13, 2000, and incorporated herein by reference.)
4.49 Adjustable Warrant issued by Registrant to Strong River
Investments, Inc., dated as of September 29, 2000. (Filed as
Exhibit 4.16 to Form 8-K as filed with the Securities and
Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
4.50 Certificate of Designation of Rights, Preferences and Privileges
of Series B Junior Participating Preferred Stock of
NeoTherapeutics, Inc. (Filed as Exhibit 3.1 to Form 8-A12G as
filed with the Securities and Exchange Commission on December
26, 2000, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
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4.51 Rights Agreement, dated as of December 13, 2000, between
NeoTherapeutics, Inc. and U.S. Stock Transfer Corporation, as
Rights Agent, which includes as Exhibit A thereto the form of
Certificate of Designation for the Series B Junior Participating
Preferred Stock, as Exhibit B thereto the Form of Rights
Certificate and as Exhibit C thereto a Summary of Terms of
Stockholder Rights Plan. (Filed as Exhibit 4.1 to Form 8-A12G as
filed with the Securities and Exchange Commission on December
26, 2000, and incorporated herein by reference.)
4.52 Securities Purchase Agreement dated as of December 18, 2000, by
and among Registrant, NeoGene Technologies, Inc. and Societe
Generale. (Filed as Exhibit 4.1 to Form 8-K as filed with the
Securities and Exchange Commission on December 28, 2000, and
incorporated herein by reference.)
4.53 Certificate of Determination of NeoGene Technologies, Inc.
(Filed as Exhibit 4.2 to Form 8-K as filed with the Securities
and Exchange Commission on December 28, 2000, and incorporated
herein by reference.)
4.54 Registration Rights Agreement dated as of December 18, 2000, by
and between NeoGene Technologies, Inc. and Societe Generale.
(Filed as Exhibit 4.3 to Form 8-K as filed with the Securities
and Exchange Commission on December 28, 2000, and incorporated
herein by reference.)
4.55 Registration Rights Agreement dated as of December 18, 2000, by
and between Registrant and Societe Generale. (Filed as Exhibit
4.4 to Form 8-K as filed with the Securities and Exchange
Commission on December 28, 2000, and incorporated herein by
reference.)
4.56 Warrant issued by NeoGene Technologies, Inc., to Societe
Generale, dated as of December 18, 2000. (Filed as Exhibit 4.5
to Form 8-K as filed with the Securities and Exchange Commission
on December 28, 2000, and incorporated herein by reference.)
4.57 Warrant issued by Registrant to Societe Generale, dated as of
December 18, 2000. (Filed as Exhibit 4.6 to Form 8-K as filed
with the Securities and Exchange Commission on December 28,
2000, and incorporated herein by reference.)
4.58 Form of Registrant Terms of Preferred. (Filed as Exhibit 4.7 to
Form 8-K as filed with the Securities and Exchange Commission on
December 28, 2000, and incorporated herein by reference.)
4.59 Stock Purchase Agreement dated as of January 31, 2001, by and
between Registrant and Amro International S.A. (Filed as Exhibit
10.1 to Form 8-K as filed with the Securities and Exchange
Commission on February 16, 2001, and incorporated herein by
reference.)
4.60 Securities Purchase Agreement dated as of March 8, 2001, by and
between Registrant and IAT ReInsurance Syndicate Ltd. (Filed as
Exhibit 10.1 to Form 8-K as filed with the Securities and
Exchange Commission on March 14, 2001, and incorporated herein
by reference.)
4.61 Warrant issued by Registrant to IAT ReInsurance Syndicate Ltd.
dated as of March 8, 2001. (Filed as Exhibit 10.2 to Form 8-K as
filed with the Securities and Exchange Commission on March 14,
2001, and incorporated herein by reference.)
4.62 Certificate of Determination of NeoGene Technologies, Inc.
(Filed as Exhibit 4.2 to Form 8-K as filed with the Securities
and Exchange Commission on November 13, 2000, and incorporated
herein by reference.)
10.1* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
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10.2* Employment Agreement between the Registrant and Alvin J.
Glasky, Ph.D. (Filed as Exhibit 10.3 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.3 Note dated June 21, 1996, between the Registrant and Alvin J.
Glasky and related Security Agreement dated August 31, 1990.
(Filed as Exhibit 10.4 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.4 Warrant to purchase common stock of the Registrant dated August
31, 1990, held by Alvin J. Glasky. (Filed as Exhibit 10.6 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.5 Agreement dated as of June 6, 1991, as amended on July 26, 1996,
by and between the Registrant and Alvin J. Glasky. (Filed as
Exhibit 10.7 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.6 Agreement dated as of June 30, 1991, as amended on July 26,
1996, by and between the Registrant and Alvin J. Glasky. (Filed
as Exhibit 10.8 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.7* Form of Indemnification Agreement between the Registrant and
each of its officers and directors. (Filed as Exhibit 10.10 to
the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.8 Underwriting Agreement dated as of September 25, 1996, among the
Company, Paulson Investment Company, Inc. and First Colonial
Securities Group, Inc. (Filed as Exhibit 1.1 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.9 Industrial Lease Agreement dated January 16, 1997, between the
Company and the Irvine Company. (Filed as Exhibit 10.11 to the
Form 10-KSB for the fiscal year ended December 31, 1996, as
filed with the Securities and Exchange Commission on March 31,
1997, and incorporated herein by reference.)
10.10 Addendum to Note dated June 21, 1996, between the Registrant and
Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB for
fiscal year ended December 31, 1996, as filed with the
Securities and Exchange Commission on March 31, 1997, and
incorporated herein by reference.)
10.11* 1997 Stock Incentive Plan. (Filed as Exhibit D to the Definitive
Proxy Statement dated May 8, 1997, for the Annual Meeting of
Shareholders of NeoTherapeutics Colorado, the predecessor to
Registrant, held on June 17, 1997, as filed with the Securities
and Exchange Commission on May 9, 1997, and incorporated herein
by reference.)
10.12 Master Note and Security Agreement between the Registrant and
Leasing Technologies, Inc. dated as of July 10, 1998. (Filed as
Exhibit 4 to Form 10-QSB for the quarter ended September 30,
1998, as filed with the Securities and Exchange Commission on
November 9, 1998, and incorporated herein by reference.)
10.13 Employment Agreement entered into as of May 6, 1999 between
Alvin J. Glasky, Ph.D. and NeoTherapeutics, Inc. (Filed as
Exhibit 10.14 to the Registration Statement on form S-1 (No.
333-79935), and incorporated herein by reference.)
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10.14 Form of Financial Consulting Agreement between the Registrant
and Joseph Charles & Associates, Inc. entered into in connection
with the public offering of the Registrant's securities on July
27, 1999. (Filed as Exhibit 1.4 to the Registration Statement on
Form S-1 (No. 333-79935), and incorporated herein by reference.)
10.15 Underwriting Agreement between the Registrant and Joseph Charles
& Associates, Inc. entered into in connection with the public
offering of the Registrant's securities on July 27, 1999. (Filed
as Exhibit 1.1 to the Registration Statement on Form S-1, as
amended (No. 333-79935), and incorporated herein by reference.)
10.16 Master Lease Agreement dated as of September 22, 2000 by and
between NeoTherapeutics, Inc. and Comdisco Laboratory and
Scientific Group.
10.17 Amendment No. 1 to Master Lease Agreement dated as of September
22, 2000 by and between NeoTherapeutics, Inc. and Comdisco
Laboratory and Scientific Group.
10.18 Equipment Schedule No. S-01 dated as of September 22, 2000 by
and between NeoTherapeutics, Inc. and Comdisco Laboratory and
Scientific Group.
10.19 Addendum to Equipment Schedule No. SG-01 dated as of September
22, 2000 by and between NeoTherapeutics, Inc. and Comdisco
Laboratory and Scientific Group.
21 Subsidiaries of Registrant.
23 Consent of Arthur Andersen LLP.
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* Indicates a management contract or compensatory plan or arrangement.