UNITED STATES
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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 000-28782
NEOTHERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
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 preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No
------------- --------------
Indicate 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. [ X ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 22, 2002 was $49,866,601
As of March 22, 2002, there were 26,876,951 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2002 Annual Meeting of
Stockholders, to be held on June 17, 2002, are incorporated by reference in Part
III of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business..................................................................... 3
Item 2. Properties................................................................... 26
Item 3. Legal Proceedings............................................................ 26
Item 4. Submission of Matters to a Vote of Security Holders.......................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 27
Item 6. Selected Financial Data...................................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................... 43
Item 8. Financial Statements......................................................... 43
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................................... 73
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 73
Item 11. Executive Compensation....................................................... 73
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................................. 73
Item 13. Certain Relationships and Related Transactions............................... 73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 73
SIGNATURES ........................................................................... 84
2
NeoTherapeutics, Inc.'s Annual Report on Form 10-K contains certain words, not
limited to, "believes," "may," "will," "expects," "intends," "estimates,"
"anticipates," "plans," "seeks," or "continues," that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Readers should not put undue
reliance on these forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. NeoTherapeutics, Inc.'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 this
Report including the "Risk Factors," and in "ITEM 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in this
item 1.
PART I
ITEM 1. BUSINESS
GENERAL
NeoTherapeutics, Inc., was incorporated in Colorado as Americus Funding
Corporation (or 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. NeoTherapeutics had four subsidiaries at December 31, 2001:
NeoOncoRx, Inc., 90.48% owned by NeoTherapeutics and incorporated in California
in November 2000; NeoTherapeutics GmbH, wholly owned by NeoTherapeutics and
incorporated in Switzerland in April 1997; NeoGene Technologies, Inc., 88.4%
owned by NeoTherapeutics and incorporated in California in October 1999; and
NeoTravel, Inc., wholly owned by NeoTherapeutics and incorporated in California
in April 2001. Advanced ImmunoTherapeutics, Inc., a previously wholly owned
subsidiary of NeoTherapeutics, was merged into NeoTherapeutics in 2001. Unless
the context otherwise requires, all references to the "Company", "we", "our",
"us" and "NeoTherapeutics" refer to NeoTherapeutics, Inc. NeoTherapeutics GmbH,
Advanced ImmunoTherapeutics, NeoTravel, NeoGene, and NeoOncoRx as a consolidated
entity.
NeoTherapeutics is a development-stage pharmaceutical company engaged
in the pharmaceutical business and the functional genomics business. Our
pharmaceutical business engages in discovering and developing novel technology
platforms for the discovery and development, co-development and out-licensing of
therapeutic drugs for nervous system disorders and in the in-licensing and
development, co-development and out-licensing of late-stage cancer drugs. Our
functional genomics business engages in discovering gene functions and
validating novel molecular targets for innovative drug development. We conduct
our pharmaceutical activities at NeoTherapeutics and NeoOncoRx, and our
functional genomics activities at NeoGene. Financial information about our
pharmaceutical business and functional genomics business is provided under "Item
6. SELECTED FINANCIAL DATA" and "Item 8. FINANCIAL STATEMENTS" of this Form
10-K.
PHARMACEUTICAL BUSINESS
Our pharmaceutical business engages in the discovery and development of
novel drugs to treat significant medical diseases or indications associated with
nervous system disorders and cancer. We currently have four drug platforms
primarily focused on developing drug candidates for the following therapeutic
indications: cognition, psychosis, neuroregeneration, and oncology. We have six
drug candidates resulting from either our research in each platform or by
in-licensing a drug candidate from another pharmaceutical company:
Neotrofin(TM), AIT-034, NEO-339, Neoquin(TM), satraplatin, and elsamitrucin. For
our nervous system drugs, we built and maintain a resource infrastructure to
support our research and discovery of nervous system drug candidates. We believe
that this is necessary for discovering novel drug candidates that the nervous
system therapeutic market demands. For our oncology drug candidates, while the
methods of treating cancer may change significantly within the next five to ten
years, we believe that our business plan of in-licensing clinical stage cancer
drugs from larger pharmaceutical companies is a cost effective and expedient
business strategy. Some of our drug candidates may prove to be beneficial in
additional disease indications as our research progresses. Our pharmaceutical
business has never produced products or rendered services that generate
revenues.
3
PRODUCTS IN DEVELOPMENT
Our drug platforms, drug candidates, target indications and phase of
development are summarized in the following table:
NERVOUS SYSTEM
--------------
DRUG PLATFORM DRUG CANDIDATE TARGET INDICATION PHASE OF DEVELOPMENT
------------------------------- --------------------- ---------------------- ----------------------------------------------------
COGNITION PLATFORM Neotrofin Alzheimer's disease Phase 1: Ten clinical trials completed and
additional studies expected to be
conducted in 2002
Phase 2: Four clinical trials completed
Phase 2/3 One pivotal clinical trial in
progress
------------------------------- --------------------- ---------------------- ----------------------------------------------------
AIT-034 Dementia Pre-clinical: IND filed in 2001, Phase 1 study
expected to begin in 2002
------------------------------- --------------------- ---------------------- ----------------------------------------------------
NEO-339 Mild cognitive Pre-clinical: IND expected to be filed in 2002
impairment and
attention deficit
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Novel series of Cognitive and Pre-clinical
compounds from attentional disorders
which a lead
candidate is to be
selected
------------------------------- --------------------- ---------------------- ----------------------------------------------------
PSYCHOSIS PLATFORM NEO-356 Psychosis, Pre-clinical: Development candidate(s) expected
schizophrenia, mood to be selected in 2002
disorders
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Novel series of Psychosis, Pre-clinical
compounds from schizophrenia, mood
which lead disorders
candidate(s) are
to be selected
------------------------------- --------------------- ---------------------- ----------------------------------------------------
NEUROREGENERATION PLATFORM Neotrofin Spinal cord injury Phase 1/2: Phase 1/2 study in progress
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Parkinson's disease Phase 2: Phase 2 study in progress
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Peripheral neuropathy Phase 2: Two studies are in progress for
the prevention and treatment of
chemotherapy-induced peripheral
neuropathy
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Other Pre-clinical
neurodegenerative
and psychiatric
diseases
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Novel series of Neurodegenerative Pre-clinical
compounds from diseases
which a lead
candidate is to be
selected
------------------------------- --------------------- ---------------------- ----------------------------------------------------
ONCOLOGY
--------
DRUG PLATFORM DRUG CANDIDATE TARGET INDICATION PHASE OF DEVELOPMENT
------------------------------- --------------------- ---------------------- ----------------------------------------------------
ONCOLOGY PLATFORM Satraplatin Prostate cancer Phase 3: Study expected to begin in 2002
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Neoquin Bladder cancer Phase 2: Study in progress
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Radiation Phase 2
sensitization
------------------------------- --------------------- ---------------------- ----------------------------------------------------
Elsamitrucin Non-Hodgkin's Phase 2: Study expected to begin in 2002
lymphoma
------------------------------- --------------------- ---------------------- ----------------------------------------------------
4
NERVOUS SYSTEM, DRUGS CANDIDATES AND DEVELOPMENT STRATEGY, AND DISEASE TARGETS
NERVOUS SYSTEM
The average human brain contains approximately 10 billion nerve cells,
or neurons, interconnected through a complex matrix of axons and synapses.
Neurons and their interaction with each other control all sensory, motor and
cognitive activities. Communication between neurons involves chemical messengers
known as neurotransmitters released by the sending neuron and sent across a
small gap known as a synapse that bind to corresponding receptors on a receiving
neuron. Many psychiatric and neurological disorders, including memory deficits,
schizophrenia, depression, anxiety, Parkinson's disease and peripheral
neuropathy appear related to progressive cell loss, which results in
miscommunication, partial communication or lack of communication between
neurons.
Cell regeneration is a natural biological process that is involved in
the healing of the human body. However, because neurons do not regenerate
efficiently, the treatment and healing of nervous system diseases is
complicated. Currently available drugs for severe nervous system diseases such
as Alzheimer's and Parkinson's disease do not cure the disease, rather, they
treat symptoms. For example, some drugs function by increasing or replacing
supplies of critical neurotransmitters that temporarily improve synapse
activity. However, as more nerve cells die, these drugs become less effective
and are effective for shorter time periods. Eventually, too many nerve cells die
for these therapeutic drugs to be noticeably effective.
Much of neuroscience therapeutic research investigates certain proteins
that are necessary for the effective functioning of the nervous system. These
proteins are called neurotrophic factors and are necessary to a neuron's early
development and long-term function and survival. Neurotrophic factors are
involved in the fundamental formation and shaping of the nervous system. The
role of neurotrophic factors in neuron development and maintenance, which is
supported in part by evidence from animal studies, has led scientists to
hypothesize that neurotrophic factors could be used in the treatment of
neurodegenerative diseases.
One very significant obstacle related to the use of neurotrophic
factors for treating nervous system diseases is that the neurotrophic factor
molecules are too large to pass through the blood-brain barrier, which is a
filter that strictly regulates the entry of molecules into the brain and spinal
cord. Therefore, oral administration or injection of neurotrophic factors is not
likely to be effective in the treatment of nervous system diseases.
The approach we have taken, with our lead compound Neotrofin and some
of our other research platforms, is to synthesize bifunctional small molecules
which can be administered orally, pass through the blood-brain barrier, and have
the predicted target efficacy based upon pharmacologic effects of the compounds
from which they were derived (See "Nervous System Drug Candidates and
Development Strategy" below). We believe that such a development could represent
a major advancement in the treatment of neurological disorders.
NERVOUS SYSTEM DRUG CANDIDATES AND DEVELOPMENT STRATEGY
We engage in research primarily focused on developing novel drugs that
interact with the nervous system and that are therapeutic for neurological and
psychiatric diseases.
Our scientific strategy is to synthesize proprietary molecules that
modify specific biological processes in the nervous system. The methods by which
the molecules are synthesized are proprietary and we have patented specific
molecules and their methods of use. Our drug discovery platforms are based upon
the use of purines and other similarly structured compounds (or Primary
Molecule). Structural characteristics are very significant because they are what
enable the Primary Molecule to interact with animal and human biology. We then
select various other structures from known drugs or naturally occurring
molecules that are known to have therapeutic activity (or Secondary Molecules).
We link structural components of a Primary Molecule and a Secondary Molecule
together attempting to produce a bifunctional molecule (or Bifunctional
Molecules) that retains some of the characteristics of each individual molecule
and exhibits new characteristics unique to the Bifunctional Molecule. We study
Bifunctional Molecules for certain chemical, biochemical, pharmacological and
molecular biological, physiological, and behavioral activity, in laboratory and
in animal models and clinical tests. Based on our study results, Bifunctional
Molecules may become part of our series of proprietary compounds. We conduct the
early testing to establish therapeutic potential necessary to obtain patents on
these compounds and later conduct pre-clinical testing on the safety and
efficacy of our patented compounds. If pre-clinical testing supports appropriate
levels of safety and efficacy, we may decide to either file an Investigational
New Drug Application (or IND) for conducting clinical trials or out-license the
compound to a well-established pharmaceutical company.
5
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 that 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 associated with stroke, spinal cord injury and
peripheral neuropathy and neurodegenerative diseases such as Parkinson's disease
and Huntington's disease.
Our pre-clinical testing involving laboratory animals has indicated
that Neotrofin exhibits the following properties and/or effects:
o Reduces, delays and prevents memory deficits in aged animals and
enhances memory function in young and aged animals.
o Protects brain cells against neurotoxic injury.
o Causes production of numerous neurotrophic factors.
o Causes sprouting of nerve cells in culture and in animals.
o Causes proliferation of neural stem cells.
o Is safe and effective over a wide range of doses in animals.
We are in the midst of a pivotal human clinical trial in Alzheimer's
disease patients. Upon completion of this clinical trial, we intend to conduct
further human clinical trials. Until completion of the entire human clinical
trial process, we cannot assure you 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 neurite outgrowth effects similar to nerve growth factor, a
known protein made up of over 100 amino acids that promotes nerve cell growth
and may protect some types of nerve cells from damage. 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 system 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 through
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 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. Neurotrophic factors are also implicated in the proliferation,
maturation and differentiation of neural stem cells and Neotrofin has been
demonstrated to induce proliferation of neural stem cells in animals.
The FDA allowed an IND for Neotrofin in June 1997. The first clinical
trial of Neotrofin in the United States began in July 1997. 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, even at high doses.
Four Phase 2 clinical trials of Neotrofin have been completed with a
range of doses of Neotrofin for a treatment period of one to three months. The
Phase 2 studies completed to date demonstrate non-statistically significant
improvements in memory and behavior in patients with mild to moderate
Alzheimer's disease. One of these studies 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 certain doses of Neotrofin (500 and 1000 mg/day)
demonstrated positive effects on cognition in psychometric tests and positive
effects on PET and EEG (electroencephalogram) parameters. As of December 31,
2001, there were Phase 2 clinical trials of Neotrofin being conducted in
patients with Alzheimer's disease, Parkinson's disease, spinal cord injury and
chemotherapy-induced peripheral neuropathy.
If the results from our ongoing Phase 2 clinical trial of Neotrofin in
Alzheimer's disease demonstrate statistically significant improvements in memory
and behavior in patients, we expect that we will have to conduct additional
animal and human studies that will include Phase 3 human clinical studies prior
to submitting a New Drug Application (or NDA) for Neotrofin to the FDA, or
regulatory agencies in other countries, for marketing approval.
6
AIT-034: AIT-034 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 has structural similarities to piracetam, a compound
suggested to be both memory enhancing and neuroprotective. However, AIT-034 has
been shown to have advantages over piracetam in animal models for learning and
memory, with AIT-034 demonstrating a different efficacy profile and higher
potency. AIT-034 has been shown to have positive memory enhancing effects in
animal models of memory recall and reverse amnesia induced by specific
treatments in young, adult and aged mice. The memory enhancing effects of
AIT-034 are most pronounced in aged animals (24 month old mice) in which the
drug restored learning and memory recall in animals that had no apparent recall
capacity, a model in which other memory-enhancing agents were ineffective.
Toxicity studies conducted to date indicate that AIT-034 does not
induce any systemic toxicity in animals.
An IND application for AIT-034 was filed in September 2001 and clinical
trials are expected to commence in 2002 upon the completion of additional
toxicology studies required by the FDA. The FDA issued new toxicology and safety
testing guidelines just prior to our filing the IND. The FDA requested that
these additional studies be completed prior to the start of the first clinical
trial.
NEO-339: NEO-339 was designed and selected for the treatment of mild cognitive
impairment, cognitive impairment associated with psychiatric disorders, and
attention deficit disorders. We have shown in our research that NEO-339 produces
positive effects on the acquisition of memory in certain models of memory in
aged rodents, reverses the memory loss effects of certain pharmacological
treatments, and improves attention in models of information processing.
Based on our research results, we believe that NEO-339 will have
greater efficacy and fewer side effects than therapies currently under
evaluation for the treatment of mild cognitive impairment and attention deficits
associated with aging and dementia.
At the present time we intend to file an IND application with the FDA
for NEO-339 in 2002.
Attention/cognition platform: We synthesized a series of compounds that we
believe improve cognition, either by improving attention aspects of behavior or
by affecting cognition directly. These compounds are intended to address
problems seen in a variety of attention and memory disorders. Compounds from
this program are in the discovery phase and have not become development
candidates.
Psychosis platform: Our psychosis platform consists of the NEO-356 series and
other compounds. This platform was designed to create novel compounds for
schizophrenia and other psychosis-associated indications with minimal side
effects by combining structural components that are known to have anti-psychotic
activity with structural components that may enhance treatment of the "negative"
symptoms of schizophrenia. In addition, certain of these compounds may improve
memory and have other beneficial nervous system effects. We anticipate that a
lead compound from this platform will be chosen as a development candidate
during 2002.
Neuroregeneration platform: We have recently initiated research on additional
molecules, some of which are structurally related to Neotrofin, which address
specific neurodegenerative diseases or neuroregenerative mechanisms. Currently
all compounds from this program are in the discovery phase and have not become
development candidates.
Our drug discovery program has accelerated its process of synthesizing
and testing new compounds. We anticipate that additional compounds from this
research will become development candidates within several years. Until
extensive further development and testing is completed, which may take many
years, if undertaken at all, the therapeutic and other effects of these
compounds cannot be established.
NERVOUS SYSTEM DISEASE 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
7
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) (First Horizon), Aricept(R) (Pfizer and Eisai), Exelon(R)
(Novartis) and Reminyl(R) (Janssen and Shire). We have two compounds in
development, Neotrofin and AIT-034, which have shown therapeutic potential for
Alzheimer's disease and dementia.
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 some functional
restoration is 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 damaged site. 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 could be used to stimulate
regeneration of nerves damaged by spinal cord injury. We have paid $100,000 to
establish a NeoTherapeutics Fellowship as part of the Reeve-Irvine Research
Center for spinal cord injury at the University of California, Irvine. We are
currently conducting a Phase 1/2 clinical trial to further study the effects of
Neotrofin 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 loss of dopamine-producing neurons in the
substantia nigra, a structure in the mid-brain thought to be involved in the
control of voluntary movement. These cells are responsible for producing and
responding to the neurotransmitter dopamine that is deficient in patients with
Parkinson's disease. This dopamine deficiency leads to a variety of movement
disorders including rigidity, tremor, slowness of movement and poor balance.
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 are currently conducting a Phase 2
clinical trial to study the effects of Neotrofin on Parkinson's 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 experienced by patients undergoing
cancer chemotherapy. Chemotherapy-induced peripheral neuropathy is commonly
associated with chemotherapeutic agents such as vinca alkaloids, cisplatin and
Taxol(R). Chemotherapy-induced peripheral neuropathy is characterized as a
variety of symptoms including an abnormal or unexplained tingling, pricking, or
burning sensation on the skin (or paresthesias), abnormal sensation, such as the
sensation of being pricked by pins and needles or the sensation of insects
crawling on the skin (or dysethesias), and a decreased strength in the
anticipated reflex actions (or hyporeflexia). Less common are motor and sensory
loss, and even less common, involuntary (or autonomic) muscle dysfunction.
Peripheral neuropathy also limits the extent of chemotherapy treatment for
cancer. Currently there are no FDA approved treatments for chemotherapy-induced
peripheral neuropathy. Phase 2 studies of Neotrofin are being conducted in
cancer patients, for both the prevention and treatment of chemotherapy-induced
peripheral neuropathy.
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 have a positive significant economic
impact and would greatly improve the quality of life for the elderly population.
Both Neotrofin and AIT-034 have shown to be effective in improving memory
associated with aging in mice.
Mild Cognitive Impairment. Patients with mild cognitive impairment
represent the earliest clinically defined group with memory impairment beyond
that expected for normal individuals of the same age and education, but such
patients do not meet the clinical criteria for Alzheimer's disease. It is
estimated that each year, approximately 15% to 20% of patients with mild
cognitive impairment will progress to Alzheimer's disease.
Cognition. Impairment of memory and cognition is a serious health care
problem that is growing as the number of elderly persons increase. The incidence
and prevalence of cognitive deficits increase with age. Drug candidates that
alleviate deficits in memory and cognition could potentially enable elderly
individuals to lead more independent, higher quality lives. Cognitive deficits
are also associated with a number of other neurodegenerative diseases, including
multiple sclerosis, amyotrophic lateral sclerosis and Huntington's disease.
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
8
has the potential to be neuroprotective in addition to enhancing nerve
regeneration, we believe that it may prove useful in treating stroke and, as a
preventative therapeutic, the onset of nerve tissue damage caused by stroke.
Schizophrenia. An estimated 2 million Americans, or 1% of the American
population, is affected by schizophrenia. Both men and women are affected in
equal numbers, although onset is slightly later in women. People with
schizophrenia suffer severe disturbances in thinking, social behavior and
emotions such as hearing internal voices not heard by others, or believing that
other people are reading their minds, controlling their thoughts, or plotting to
harm them. They may exhibit eccentric behavior, social isolation, a "flat"
affect, a poor attention span and a lack of motivation. While there are
available treatments that can relieve some of the symptoms, these medications
cause significant side effects such as involuntary motor activity, weight gain,
and social withdrawal. Most people with schizophrenia continue to suffer some
symptoms throughout their lives and only one in five individuals recovers
completely. The cost of treating patients with schizophrenia in the United
States was estimated in 1990 (the most recent information available) at $32.5
billion per year.
Neurodegenerative Diseases. The neurodegenerative disorders are a
heterogeneous group of diseases of the nervous system. Many are hereditary, some
are due to toxic or metabolic processes, and others may result from infections.
Many of these diseases have no known causes. Some of the neurodegenerative
diseases have age-associated onsets and can be chronic and progressive and
without effective treatments. These diseases are often characterized by
abnormalities of relatively specific regions of the brain and types of neurons.
These cell groups in the different diseases determine the symptoms of the
disease. Due to the prevalence, morbidity and mortality of the neurodegenerative
diseases, they represent significant medical, social, and financial burdens.
Recent investigations in genetics and genomics have identified specific genes
for several neurodegenerative disorders.
Attention Deficits. Attention problems occur following stroke and
traumatic brain injury and are among the most common disabling neurological
conditions of adults. They affect the coherent processing of stimuli and
production of voluntary action over time, leading to distractibility, errors of
action, and poor sustained performance. Attention Deficit Hyperactivity
Disorder, commonly referred to as ADD, is the most commonly diagnosed disorder
among children. The National Institute of Mental Health estimates that ADD
affects three to five percent of school-age children, with about one child in
every classroom in the United States in need of help for this disorder.
ONCOLOGY, ONCOLOGY DRUGS CANDIDATES AND DEVELOPMENT STRATEGY, AND CANCER AND
THERAPEUTIC TARGETS
ONCOLOGY
Cancer is the second leading cause of death in the United States,
killing approximately 25% of all persons. In the United States, approximately
1.3 million new cancer cases were diagnosed and over 550,000 persons died from
the disease in 2001, which is an average of approximately 1,500 deaths per day.
More than three quarters of all cancers are diagnosed after age 50. Statistics
show that men in the United States have a 50% probability and U.S. women have a
33% probability of developing cancer in their lifetime. Accordingly, social
demand for improved and novel cancer treatments is very high. In addition, the
National Institute of Health estimates that $60 billion was spent in 2000 for
all direct cancer-related health expenditures. Cancers with anticipated cases
over 100,000 per year include prostate and lung. Cancers with anticipated cases
over 50,000 per year include colon, non-Hodgkin's lymphoma, bladder and skin.
Cancer is usually a malignant tumor or growth caused when cells
multiply uncontrollably, destroying healthy tissue. The different forms are:
Sarcomas: a malignant tumor that begins growing in connective tissue
such as muscle, bone, fat, or cartilage;
Carcinomas: a malignant tumor that starts in the epithelium (a thin
layer of tightly packed cells lining internal cavities, ducts, and organs of
animals and humans and covering exposed bodily surfaces, especially in healing
wounds) of an organ or body part and may spread to other parts of the body;
Leukemias: a type of cancer in which white blood cells displace normal
blood leading to infection, anemia (a blood condition in which there are too few
red blood cells or the red blood cells are deficient in hemoglobin, resulting in
poor health), bleeding, and other disorders, and often proves fatal; and
Lymphomas: a malignant tumor originating in a lymph node, for example,
Hodgkin's lymphoma or any of the range of cancers known as non-Hodgkin's
lymphomas.
All cancers involve the malfunction of genes that control cell growth
and division. Extensive unrestrained proliferation of cancerous cells will
result in the person's death. Cancer causing agents include both internal and
external factors such as chemicals, radiation, viruses, hormones, immune
deficiency conditions, and inherited mutations. The production of cancerous
cells most likely results from a combination of factors the body experiences
over time. Immediate detection of the initial carcinogenesis is not currently
possible using conventional test methodology; therefore, many cancers
9
are far progressed when diagnosed. Much progress has been made in the treatment
of cancer, however, the primary general treatment methodologies remain surgery,
radiation, chemotherapy, hormones, and immunotherapy.
CANCER DRUG CANDIDATES AND DEVELOPMENT STRATEGY
Novel cancer drugs are very exciting; however, we believe that
traditional chemotherapeutic agents will remain a primary foundation of cancer
treatment for the foreseeable future. Currently, we in-license from
well-established pharmaceutical companies, cancer drug candidates that are in
clinical trials. These drug candidates have the potential to be safe and
effective therapeutic agents. We intend to develop and commercialize them in the
United States and in world markets through our subsidiary NeoOncoRx. We do not
currently have in-house capabilities to perform drug discovery for
cancer-related therapies. The drug candidates that we in-license typically have
smaller market potentials than larger pharmaceutical companies target. Large
pharmaceutical companies typically require at minimum annual sales potential of
$250 to $300 million; therefore, these companies are typically motivated to
out-license drug candidates with expected sales potential below this market
level. Late stage drug candidates generally have a higher success rate with
respect to obtaining necessary FDA approval and ultimately being distributed
commercially. We believe that our in-licensing of late-stage oncology drug
candidates will position us to generate product revenues earlier than if we had
attempted to develop oncology drug candidates through in-house drug discovery
efforts. Although we are required to make milestone payments and royalty
payments under the in-licensing agreements, we expect that our anticipated
earlier realization of revenues and contribution to overhead and profit should
bring a quicker return on investment.
Satraplatin: Currently used in treating a wide range of cancers,
platinum derivatives have been available for some time and are one of the most
active classes of cytotoxic anti-cancer agents. Satraplatin is a class IV
platinum derivative stemming from cisplatin and carboplatin. Like cisplatin and
carboplatin, satraplatin produces interstrand and intrastrand crosslinkage in
DNA of rapidly dividing cells, thus preventing DNA, RNA, and protein synthesis.
One of satraplatin's major advantages over cisplatin and carboplatin is that it
has good oral bioavailability and therefore does not have to be administered by
intravenous infusion. Oral administration may allow outpatient treatment, thus
possibly reducing the cost of patient care. Satraplatin has shown activity
against platinum-sensitive tumors, such as ovarian and lung cancer, that is
comparable to that of carboplatin and cisplatin. Data from previous satraplatin
human clinical studies show particular efficacy in treating prostate cancer.
Johnson Matthey PLC developed satraplatin and, in 2001 we in-licensed
satraplatin from Johnson Matthey resulting in the transfer of the existing IND
for satraplatin to us. We may initiate a Phase 3 clinical study in 2002.
Neoquin(TM): In vitro data show that Neoquin (EO9, apaziquone) has
higher efficacy than mitomycin-C, a commonly used chemotherapy agent, in
treating bladder cancer. It is an inactive prodrug requiring metabolic
activation by a catalyst to become toxic to cells. DT-diaphorase, an enzyme
found in tumor cells at high concentrations in approximately 40% of bladder
cancer patients, acts as a catalyst to activate Neoquin. Neoquin is activated
under both aerobic and hypoxic conditions and can selectively kill hypoxic
cells, as compared to aerobic cells. In addition, studies have shown Neoquin as
a potential radiation sensitizer because of its ability to act on hypoxic cells
in tumors that are resistant to radiation therapy and some forms of
chemotherapy. Neoquin has the potential to improve treatment of bladder cancer
and a wide variety of other cancers. The New Drug Development Office (or NDDO)
Research Foundation in the Netherlands developed Neoquin (EO9) and 80 related
derivatives and we in-licensed it from them in 2001. We are currently conducting
a Phase 2 clinical trial in the United Kingdom of intravesical administration of
Neoquin in bladder cancer.
Elsamitrucin: Elsamitrucin is an anti-cancer antibiotic, with
significant activity against a variety of malignant cell lines in the laboratory
and experimental cancers in live animals. Elsamitrucin induces single-strand DNA
breaks resulting from drug intercalation between base pairs. A base pair is a
chemical unit that forms the bridge linking the complementary strands of DNA or
RNA and it consists of a purine linked to a pyrimidine by hydrogen bonds. The
single strand DNA break results in cell death. Elsamitrucin also causes the
inhibition of topoisomerase II, an enzyme that controls the manipulation of the
structure of DNA necessary for replication. Clinical studies of elsamitrucin
showed greatest efficacy in intermediate-grade lymphomas. Bristol-Myers Squibb
developed elsamitrucin and we in-licensed it from them in 2001. We may initiate
a Phase 2 clinical study in 2002.
CANCER AND THERAPEUTIC TARGETS
Prostate Cancer. Prostate cancer is the most commonly diagnosed
malignancy and the second leading cause of cancer death among men in the United
States. The American Cancer Society estimated that approximately 180,000 new
cases of prostate cancer were diagnosed in the United States during 2000.
Furthermore, an estimated 32,000 men die annually from prostate cancer in the
United States out of an estimated 165,000 prostate cancer-related deaths
worldwide. Current first-line pharmaceutical therapies used in combination with
surgery to treat prostate cancer are almost exclusively hormone-based therapies.
Unfortunately, such hormone therapies ultimately lose their ability to contain
the disease, leaving
10
patients with few second-line treatment options. Approximately 30 percent of all
newly diagnosed prostate cancer patients will progress to hormone-refractory
metastatic disease. Currently approved therapies are only effective in treating
the symptoms and slowing the progression of advanced prostate cancer. We may
initiate a Phase 3 study clinical study of satraplatin for the treatment of
prostate cancer in 2002.
Ovarian Carcinoma. Epithelial carcinoma of the ovary is one of the most
common gynecologic malignancies and the fourth most frequent cause of cancer
death in women, with half of all cases occurring in women over age 65. Ovarian
cancer spreads from the ovaries to the abdominal lining and cavity and invades
the bowel, bladder, and lymph node system. The incidence of cancer-positive
lymph nodes at primary surgery has been reported to be as high as 24% in stage
I, 50% in stage II, 74% in stage III, and 73% in stage IV ovarian cancer. Tumor
cells may also block diaphragmatic lymph nodes. The resulting impairment of
lymphatic drainage of the abdominal cavity is thought to play a role in
development of the abdominal swelling known as ascites in ovarian cancer. It is
also common for the cancer to spread to the chest wall lining.
Because ovarian cancer does not produce symptoms in its early stages,
most women have widespread disease at the time of diagnosis. Partly as a result
of this, yearly mortality in ovarian cancer is high, approximately 65% of the
incidence rate. Long-term follow-up of treated stage III and stage IV patients
reveals a 5-year survival rate of less than 10% even with combined
platinum-derivative chemotherapeutic therapy. Early stages of the disease are
curable in a high percentage of patients. Numerous clinical trials are in
progress to refine existing therapy and test the value of different approaches
to postoperative drug and radiation therapy. Platinum-derivative chemotherapy is
a very common therapy for stages II, III and IV. The most common platinum
agents, cisplatin and carboplatin, require hospital admission for patient
chemotherapy administration. Novel drugs are desirable that are more effective
with a lower cost of therapy administration, such as outpatient treatment.
Satraplatin may have the potential to treat ovarian and other cancers.
Bladder Cancer. Bladder cancer is the fifth most commonly diagnosed
malignancy and the tenth leading cause of cancer death among persons in the
United States. The American Cancer Society estimates that approximately 55,000
new cases of bladder cancer will be diagnosed in the United States during 2001.
In the same year, an estimated 13,000 persons will die from bladder cancer in
the United States out of an estimated 130,000 bladder cancer-related deaths
worldwide. Treatment for bladder cancer is primarily surgical and is used in
nearly all cases. Direct administration of immunotherapy or chemotherapy is
sometimes used in some types of bladder cancer. Bladder removal (or cystectomy)
is often aided by chemotherapy or radiation and has increased treatment
efficacy. The higher than average survival rate in bladder cancer cases is
dependent on early detection. If discovered after metastases, patient survival
rates fall dramatically. New therapies for all stages of bladder cancer are in
very high demand. We initiated a Phase 2 clinical study of Neoquin for the
treatment of bladder cancer in 2001.
Non-Hodgkin's Lymphoma. Non-Hodgkin's lymphoma is the fourth most
commonly diagnosed malignancy and the fifth leading cause of cancer death among
persons in the United States. The American Cancer Society estimates that
approximately 56,000 new cases of Non-Hodgkin's lymphoma will be diagnosed in
the United States during 2001. In the same year, an estimated 27,000 persons
will die from Non-Hodgkin's lymphoma in the United States out of an estimated
161,000 Non-Hodgkin's lymphoma-related deaths worldwide. Treatment for
Non-Hodgkin's lymphoma in its early stages, when the cancer is localized in the
lymph node, is usually radiation therapy. Later stage Non-Hodgkin's lymphoma is
typically treated with radiation and chemotherapy. Other therapies being used
include high-dose chemotherapy in conjunction with bone marrow transplantation
and monoclonal antibodies targeting lymph node cells. However, these treatments
are only used in selected patients who have relapsed. Like all other cancers,
early detection is vital. If discovered in later stages, Non-Hodgkin's lymphoma
is often fatal. Novel therapies for Non-Hodgkin's lymphoma are in high demand.
We may initiate a Phase 2 clinical study of elsamitrucin for the treatment of
Non-Hodgkin's lymphoma in 2002.
Radiation Sensitization. Radiotherapy combined with certain
chemotherapeutic agents or other drugs have shown increased efficacy in tumor
cell death. In 1999, the National Cancer Institute announced that strong
consideration should be given to treating cervical cancer patients with
cisplatin and radiation concurrently rather than just radiation alone. One
reason believed for combining therapies is to make oxygen-starved (or hypoxic)
tumor cells more radiosensitive.
Hypoxic cells that exist within tumors are difficult to destroy by
conventional treatment methods, yet they form up to 30% of any tumor. The higher
the percentage of hypoxic cells in a tumor, the worse the prognosis for the
patient. Hypoxic tumor cells resist radiation therapy and some forms of
chemotherapy. Hypoxic cells are also suspected of developing significantly more
malignant, aggressive and treatment-resistant tumors after radiotherapy and/or
chemotherapy treatments that have killed off many of the oxygen-rich tumor
cells.
Rarely do hypoxic cells exist in normal tissue but they are prevalent
in tumors due to the poorly formed blood vessels which develop inadequately in
the tumor to meet the needs of the fast growing tumor cells. The importance of
hypoxia is three-fold. It is known to protect cells from the cytotoxic effects
of standard chemotherapy drugs since they are dormant or non-cycling and
therefore are less susceptible to cytotoxic agents. Secondly, oxygen
significantly enhances the cytotoxic effects of radiation. Thirdly, a higher
percentage of hypoxic tumor cells may be indicative of tumors that are stress
11
resistant and of a more malignant phenotype. Standard therapies primarily target
better oxygenated cells, leaving the hypoxic cells to repopulate the tumor. For
complete and permanent tumor remission, it is essential to target and kill
hypoxic cells. One very important key to killing hypoxic tumor cells may be to
make them more radiosensitive through the use of chemotherapeutic agents and/or
other drugs.
Neoquin is a potential radiosensitizer. We may conduct studies to
evaluate Neoquin's efficacy as a radiosensitizer in 2002.
FUNCTIONAL GENOMICS BUSINESS
We began our functional genomics business with the formation of our
subsidiary NeoGene Technologies, Inc. in 1999 and entered into a collaborative
research agreement with the University of California, Irvine (or UCI) to exploit
certain of their functional genomics discoveries. Functional genomics involves
understanding the function and purpose of each of the human genes and
discovering drugs to combat diseases associated with these genes. Of the 35,000
genes that control the human body, 1,000 are genes that encode a "lock" on the
cell that is a special kind of receptor called a G-protein-coupled receptor.
Like a car's ignition, if you put the right key into the receptor, it will "turn
on" that gene's specific function. The biological function of approximately 140
of these special genes remains unknown. These so-called "orphan genes" each have
a natural key called a ligand. Discovering the ligands for orphan genes is only
part of our work. The second part of our work is to gain an understanding of the
specific function of the gene. So far we have identified genes that may be used
to develop drugs that could someday treat diseases such as obesity, asthma,
hypertension and epilepsy.
Our collaborative research agreement with UCI grants us the exclusive
right to all future technology developed by UCI through its research into
functional genomics and orphan G-protein-coupled receptors in the laboratory of
Dr. Olivier Civelli, in exchange for cash funding and other capital and human
resources for laboratory research and potential royalty payments on the
commercialization of such technology. We believe that this research complements
our pharmaceutical business and may enable us to discover a greater number of
drugs that more effectively address a broad array of neurological, cancer and
other diseases and conditions not currently part of our pharmaceutical business
focus. Our functional genomics' research operations are located in a
state-of-the-art facility in Irvine, California near UCI.
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. As previously mentioned, understanding
the function and purpose of each of the human genes in the body is a process
called functional genomics. Of the approximately 35,000 human genes that control
all of the body's functionality, approximately 1,000 are in a class called
G-protein-coupled receptor, which regulate key cell functions. The purpose and
function of over 100 G-protein-coupled receptors remains unknown today. They are
called the "orphan" receptors.
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. This work involves finding the natural ligand, or
molecule, which causes the receptor to become activated to induce its normal
function. Drug discovery techniques to find new drugs cannot be used unless the
natural ligand, and therefore the natural function, associated with a given
receptor are known. When a ligand binds to a G-protein-coupled receptor, a
cascade of events occurs, involving several signaling molecules within the cell,
which leads to intracellular changes causing the biological response to occur.
In order to identify the natural ligand, we first find the location of the
receptor in tissues, determine the type of ligand that will most likely to bind
to the receptor by analysis of the DNA sequence of the receptor, and then look
for molecules within the target tissues that bind to the orphan
G-protein-coupled receptor. Only after the natural ligand and the localization
of the receptor are found, can we determine the function. Knowing this function
then allows us to find drugs that stimulate or inhibit the action of the
receptor to treat diseases.
12
TARGET DEVELOPMENT STRATEGY
Of the 20 orphan receptor genes whose functions had been established
by the end of 2001, six were discovered as a result of research conducted by Dr.
Olivier Civelli of the University of California, Irvine. This is the most
discovered by a single group. In September 1999, we entered into a strategic
alliance under a collaborative research agreement with UCI that 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 million
over three years. We anticipate that this agreement will be renewed in 2002.
Initially, we are focused on discovering and validating new drug
development targets. Some of these targets may be new receptor/ligand systems
for which we have discovered the function. Others will be new disease targets
for which existing G-protein-coupled receptors will be found to have a role. We
identify new drug targets that can be developed either internally by NeoGene or
our pharmaceutical business, or that can be out-licensed to larger
pharmaceutical companies for development. For some of these drug development
targets we will purchase chemical libraries for lead generation and/or
synthesize new compounds and conduct the early testing to establish the
therapeutic potential necessary to obtain patents on new compounds. We intend to
seek out established pharmaceutical companies as partners for the development,
manufacture and marketing of certain of our compounds.
We also plan to engage in providing products and services that utilize
our primary functional genomics expertise. These plans may result in revenue
from strategic alliances that we enter into with other pharmaceutical companies
to co-develop potential biopharmaceutical drug targets. Additionally, we may
sell products to other pharmaceutical companies ancillary to our research
activities.
During 2001, NeoGene licensed two of its G-protein-coupled receptor
/ligand systems to Pfizer Inc. Additionally, NeoGene sold a biopharmaceutical
product to one company.
BUSINESS STRATEGY
Marketing and Sales
We do not currently sell any significant products or services on a
recurring basis and therefore have no marketing, sales, or distribution
organization. We intend to enter into strategic alliances with multinational or
large regional pharmaceutical companies having substantial financial capacity,
marketing capability and clinical development expertise, to assist us in the
development, marketing and sale of Neotrofin and our other drug candidates.
However, we may seek to retain rights to co-market our products in the United
States.
We have developed and we in-licensed several drug candidates and drug
technology platforms during 2001. As of December 31, 2001 our drug candidate
pipeline consisted of six drugs in various stages of development. We believe
that the technology platforms we developed and are currently pursuing in both
our pharmaceutical business and functional genomics business should continue
providing new drug candidates for nervous system diseases, cancer related
therapies, and other therapies that we will be able to develop in-house,
co-develop with other pharmaceutical companies, or out-license in exchange for
milestone payments and royalties.
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 the exploitation of the technology
platforms to develop additional novel drugs.
The most common phase in which industry collaborations are completed is
the discovery stage, since a license for early stage discoveries generally costs
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 enter into a licensing agreement for Neotrofin on terms more favorable
to us. We periodically engage in preliminary licensing discussions with one or
more multinational or regional pharmaceutical companies with respect to
Neotrofin. We anticipate that the terms of any strategic alliance that we enter
into for 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 have entered into three strategic alliances to in-license niche
market oncology drugs. In June 2001, we entered into a licensing agreement with
the New Drug Development Office (or NDDO) Research Foundation whereby we
acquired exclusive worldwide rights to Neoquin (EO9) and 80 related derivatives
for which we paid NDDO an up-front payment. This agreement is subject to certain
additional payments based upon achievement of defined milestones.
13
In August 2001, we entered into a licensing agreement with Johnson
Matthey whereby we acquired exclusive worldwide rights to satraplatin (JM216)
for which we paid Johnson Matthey an up-front payment. This agreement is subject
to certain additional payments based upon achievement of defined milestones. One
additional payment due in February 2002 was paid.
In October 2001, we entered into a licensing agreement with
Bristol-Myers Squibb Company whereby we acquired exclusive worldwide rights to
elsamitrucin for which we paid Bristol-Myers an up-front payment. This agreement
is subject to certain additional payments based upon achievement of defined
milestones.
In March 2001, we entered into an agreement whereby Pfizer Inc.
acquired rights to one of our G-protein-coupled receptor/ligand systems for
evaluation in their DrugPfinder program. This agreement provides for up-front
payments and milestone payments based upon reaching certain milestones in the
discovery and development of drug candidates in this system. As of December 31,
2001, no milestones had yet been reached regarding this agreement. In December
2001, we entered into a second DrugPfinder agreement with Pfizer for an
additional G-protein-coupled receptor/ligand system under similar conditions as
the previous agreement. Under these agreements, we have and will provide
validated cell lines expressing the G-protein-coupled receptor as well as
certain controls and supporting materials. In addition we will provide some
consulting services to Pfizer.
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 and/or contract research organizations 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 not established plans to build our own manufacturing
facilities. In connection with any licensing arrangements we may enter into
regarding Neotrofin or any other drug candidate, we intend to retain the rights
to control the manufacturing and sale of our compounds to our licensees. Our
preliminary estimates indicate that Neotrofin can be manufactured cost
effectively. Preliminary manufacturing proposals have also been received for
certain other central nervous system and cancer drug candidates and there are no
foreseen problems with manufacturing these compounds.
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 from time to time, 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. To
supply products for use in the United States, foreign manufacturing
establishments must also comply with Good Manufacturing Practices 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.
Estimated Cost of 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 December 2001 report by the Tufts Center
for the Study of Drug Development, it costs an average of $802 million and takes
between 10 and 15 years to develop a new prescription medicine and bring it to
the U.S. 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.
14
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 this 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 studies are 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
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 human
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 humans as well as to determine if
there are any side effects on humans. 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 human patients with the targeted disease. During the Phase 3
clinical trials, physicians monitor the human patients to determine drug
candidate efficacy and to observe and report any adverse reactions that may
result from long-term use of the drug on a large, more widespread, human patient
population.
New Drug Application (NDA)
After completion of all three clinical trial phases, 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.
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 any of our drug candidates will fulfill this requirement because there
are drugs currently approved and available for related therapies. However, our
drug candidates might qualify for "fast track" classification if the disease
indication for which we are seeking approval has no other current therapies
available in the market. At this time, we have not requested
15
fast track designation for any of our drug candidates, however, we believe that
certain of our oncology drugs may qualify for fast track classification.
The FDA 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 of whether the indication is serious or life-threatening. We believe
that some of our drug candidates may qualify for priority review.
Approval
If the FDA approves the NDA, the drug becomes available for physicians
to prescribe to patients for treatment. We must continue to submit periodic
reports to the FDA, including descriptions of any adverse reactions reported by
doctors prescribing the drug. 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. Certain drugs are removed from the market after receiving
FDA approval for a variety of issues ranging, for example, from reports of side
effects to unexplained patient death. Some drugs return to the market only after
the FDA agrees that issues identified have been adequately addressed or
eliminated.
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,
all of which are amended from time to time. Our research and development
activities involve the controlled use of hazardous materials, chemicals,
biological materials and various radioactive compounds. We must comply with
safety procedures for handling and disposing of such materials according to the
standards prescribed by state and federal regulations, however, no matter how
good compliance is with safety procedures, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In addition,
under certain circumstances, we may become liable due to violations by our
vendors and other partners that are subject to the same standards prescribed by
state and federal regulations.
For marketing outside the United States, our prospective licensees, or
we, are subject to foreign regulatory requirements governing human clinical
trials and marketing approval for drugs 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 resources
and efforts to research and development. Research and development expenditures
are expensed at the time we incur them and were approximately $20.1 million in
1999, $38.8 million in 2000 and $20.6 million in 2001.
PATENTS AND PROPRIETARY RIGHTS
PHARMACEUTICAL BUSINESS
Patents and other proprietary rights are vital to our businesses. 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
businesses. 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 our name, NeoTherapeutics(TM), and certain of our product
candidates.
Our pharmaceutical business is the assignee of nine patents issued to
Alvin J. Glasky, our Chairman, Chief Executive Officer and Chief Scientific
Officer and other inventors. In addition to a number of foreign patents, which
have been granted corresponding to issued U.S. patents, we currently have one
additional United States patent application allowed and eighteen additional U.S.
patent applications and a number of corresponding foreign patent applications on
file. Our issued patents expire beginning 2009 through 2019. It is possible that
the scope of the coverage claimed in our patent applications could be
significantly reduced prior to a patent being issued.
All issued, allowed and pending patents were assigned, by the
inventors, to our pharmaceutical business. In connection with these assignments,
we granted to one of the inventors, Dr. Alvin Glasky, a royalty of two percent
of all revenues derived by us from the use and sale of any products that 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 as described below. In the event we
terminate 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.
16
With respect to five issued U.S. patents (US Patent Nos. 5,447,939,
5,801,184, 6,027,936, 6,338,963, and 6,350,752), we entered into a license
agreement whereby McMaster University has licensed to us all patent rights
belonging to McMaster University contained in such patents. These patents
contain a subset of claims to which McMaster University claims patent rights.
This agreement calls for annual minimum royalty payments of $25,000 per year to
McMaster University, 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 us that incorporate the patent rights licensed to us by
McMaster University.
Our pharmaceutical business also maintains a portfolio of patent rights
as a result of our in-licensing activities. Currently our pharmaceutical
business has rights to six issued U.S. patents and one pending U.S. patent
application, along with the corresponding foreign patents for Neoquin,
satraplatin and elsamitrucin.
FUNCTIONAL GENOMICS BUSINESS
We also maintain a functional genomics patent portfolio with one
allowed patent application and four applications pending in the United States
and corresponding applications in foreign countries. All the patents in the
functional genomics portfolio were assigned to the University of California by
the inventors and licensed to us.
OTHER
The patent positions of our pharmaceutical and functional genomic
businesses are generally uncertain and involve complex legal and factual issues.
Third parties may 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 pharmaceutical
industry. Litigation is sometimes 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. No
third party has asserted that we are infringing upon their patent rights or
other intellectual property, nor are we aware that we are infringing upon any
third party's patent rights or other intellectual property. We may, however, be
infringing upon a third party's patent rights or other intellectual property,
and litigation asserting such claims might be initiated in which we would not
prevail or we would not be able to obtain the necessary licenses on reasonable
terms, if at all. All such litigation, whether meritorious or not, as well as
litigation initiated by us against third parties, is time consuming and very
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 required by the Patent and Trademark Office to
determine priority of invention, which could result in substantial costs, even
if we ultimately prevail. Results of interference proceedings are highly
unpredictable and may result in us having to try to obtain licenses in order to
continue to conduct clinical trials, manufacture or subsequently market certain
of our product candidates.
We rely on unpatented trade secrets and improvements, unpatented
know-how, and continuing technological innovation to develop and maintain our
competitiveness. We protect such information with employee, consultant, and
corporate partner and/or collaborator confidentiality agreements as such
relationships are formed. Confidentiality 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 shall not be disclosed to third parties except in specified circumstances.
Agreements with employees provide that all inventions conceived by the
individual while employed by us are our exclusive property. Confidentiality
agreements are sometimes not honored, and if breached, we might not have
adequate remedies and our trade secrets and improvements, unpatented know-how,
and continuing technological innovation might become known. Additionally, our
competitors may independently discover our trade secrets and improvements,
unpatented know-how, and continuing technological innovation.
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
pharmaceutical companies, engage in drug research and development and functional
genomics activities similar to ours.
Our pharmaceutical business competitors that have products on the
market or in research and development that are in the same clinical focus as us
include Amgen, Inc., Bayer AG, Eli Lilly and Co., Novartis AG, Bristol-Meyers
Squibb Company, Glaxo SmithKline, Regeneron Pharmaceuticals, Inc., Vertex
Pharmaceuticals, Inc., Guilford Pharmaceuticals, Inc., Cephalon, Inc., Aventis,
Elan Corporation, Pfizer, Inc., Janssen Pharmaceutica, Inc. and Shire
Pharmaceuticals Group plc,, among others. Competitors that have a strategic and
clinical focus similar to ours include Axonyx Inc., Cortex Pharmaceuticals Inc.,
Curis Inc., Diacrin Inc., Genset SA-ADR, Interneuron Pharmaceuticals Inc.,
Neurobiological
17
Technologies Inc., Neurocrine Biosciences Inc., Neurogen Corporation, NPS
Pharmaceuticals Inc., StemCells, Inc., Synaptic Pharmaceutical Corporation and
Titan Pharmaceuticals Inc, among others. Many of our competitors are large-cap
companies such as Eli Lilly, Shire Pharmaceuticals, and Bristol-Myers focusing
on a wide range of diseases and drug indications, and many are small to
medium-cap, public and private companies, often with niche focuses. Our
pharmaceutical business, although it is becoming more broadly focused, remains
very niched-focused. Companies focused on similar niche-markets are numerous,
making the market landscape very diversified and competitive.
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 that are similar to our
research. In the event that one or more of these programs is successful, the
market for some of our product candidates could be reduced or eliminated. Also,
over 1,000 novel cancer treatments that utilize significant variants in
pharmaceutical strategy are in the research and development pipeline worldwide.
Our functional genomics business faces competition from most major
pharmaceutical companies, as well as many small pharmaceutical companies, most
of which have research programs involving G-protein-coupled receptors similar to
our research and development program. In addition there are several academic
laboratories that are focused on orphan G-protein-coupled receptors. Successful
identification of natural ligands for G-protein-coupled receptors requires
considerable resources, freedom and time that are often not available in the
industrial setting. Therefore, some of these companies have chosen to pursue a
strategy different from ours that searches for alternative ligands that provide
binding activity to the receptor in question but often do not provide clear
information regarding the natural function of the receptor or the natural
ligand. We think that the orphan receptor strategy being pursued by our
functional genomics business, although possibly more expensive, is a more
effective means of identifying and validating novel drug targets.
In addition, colleges, universities, governmental agencies and other
public and private research institutions 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, among other things.
Although we have begun to conduct clinical trials with respect to
Neotrofin and Neoquin, we have not conducted clinical trials or sought the
approval of the FDA with respect to any of our other product candidates.
Furthermore, if we are permitted to commence commercial sales of any of our
product candidates and decide to manufacture and sell such products ourselves,
we will also be competing with respect to manufacturing efficiency and marketing
capabilities, which are business activities and processes in which we have no
prior experience.
Any product for which we obtain FDA approval must also compete for
market acceptance and market share. For example, 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: Cognex(R) (tacrine),
marketed by First Horizon, 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. Additionally, numerous oncology
drugs are on the market for each cancer type we are pursuing. For example,
cisplatin and carboplatin are the most prevalent platinum-based derivatives used
in chemotherapy. Our product candidate, satraplatin, if the FDA ever approves
it, would likely compete against these drugs directly. Unless satraplatin is
shown to have better efficacy and is as cost effective if not more cost
effective than cisplatin and carboplatin, it may not gain acceptance by the
medical field and therefore never be successful commercially.
We expect technological developments and improvements in the fields of
our businesses to continue to occur at a rapid rate and, as a result, expect
competition to remain intense. Although we think, based on the preliminary
pre-clinical and clinical test results involving certain of our drug candidates,
that we will be able to continue to compete in the discovery and early clinical
development of drug candidates in our market niche, we may be wrong.
Additionally, 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, 2001, we had 79 full-time employees, of which 15
hold Ph.D. degrees and 6 hold M.D. degrees, and 17 part-time employees. We
cannot assure you that we will be able to attract and retain qualified personnel
in sufficient numbers to meet our needs. Our employees are not subject to any
collective bargaining agreements, and we regard our relations with our employees
to be good.
18
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 Form 10-K carefully before deciding to invest in our common stock. If any
of the following risks actually occur, our businesses, financial condition and
operating results would be significantly 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, 2001 were approximately $124.1 million, almost all of which
consisted of research and development and general and administrative expenses.
We lost approximately $26.0 million in 1999, approximately $46.4 million in 2000
and approximately $27.8 million in 2001. We expect our losses 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 or services 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 VARIOUS STAGES OF CLINICAL AND PRE-CLINICAL
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, Neotrofin,
in human clinical trials. We are currently conducting clinical trials of
Neotrofin for Alzheimer's disease, spinal cord injury and Parkinson's disease.
We expect to complete the Alzheimer's trial before the end of the first quarter
of 2002 with full data analysis to be completed within approximately sixty days
thereafter. We expect the Parkinson's disease and spinal cord injury trials to
be completed by the end of 2002. In conjunction with our subsidiary, NeoOncoRx,
Inc., we have acquired rights to three anti-cancer drugs that are in clinical
trials, and we have commenced a clinical trial of Neotrofin for
chemotherapy-induced neuropathy. We expect that we will need to complete
additional trials before we will be able to apply for regulatory approval to
sell Neotrofin or any of our other potential drug products. Our other proposed
products are in pre-clinical development. We cannot be certain that any of our
proposed products will prove to be safe or effective in treating disorders of
the nervous system, cancer or any other diseases or indications. All of our
proposed 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 proposed drugs. We do not expect
to have any products commercially available for at least one year, if at all.
OUR EFFORTS TO DISCOVER AND VALIDATE NEW DRUG DEVELOPMENT TARGETS MAY FAIL.
We are focused on discovering and validating new drug development
targets. Some of these targets may be new receptor/ligand systems or new disease
targets for which existing G-protein-coupled receptors will be found to have a
role. We may not discover or validate any new drug development targets based on
our efforts. In addition, we may not have sufficient funds to purchase chemical
libraries necessary for lead generation and/or new compound synthesis and the
conducting of early testing to establish therapeutic potential necessary to
obtain patents on new compounds. Although we intend to seek out established
pharmaceutical companies as partners for the development, manufacture and
marketing of certain of our compounds, we may be unsuccessful in negotiating
related contracts on reasonable terms for us, if at all.
OUR BUSINESS DOES NOT GENERATE THE CASH NEEDED TO FINANCE OUR CURRENT AND
ANTICIPATED OPERATIONS AND OUR EXISTING CASH AND INVESTMENT SECURITIES ARE NOT
SUFFICIENT TO FUND OUR OPERATIONS FOR THE NEXT 12 MONTHS.
We spent cash in 2001 at an average rate in excess of approximately
$2.3 million per month, and we expect this rate of spending to continue through
the reporting of results from our current pivotal clinical trial for Neotrofin
in Alzheimer's disease. The burn-rate after that will be a function of the
result of that trial and the timing of our phase 3 clinical study of satraplatin
in prostate cancer. If the Alzheimer's trial is positive, we would expect the
burn-rate to remain stable. If based on the data we decide not to initiate
another pivotal study of Neotrofin in Alzheimer's disease, the burn-rate will
decrease significantly.
At the present time, our business does not generate cash from
operations needed to finance our short-term operations. We will rely primarily
on (a.) raising funds through the sale of our securities including under our
Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts"
basis, and/or (b.) out-licensing our technology, to meet all of our short-term
cash needs. We have generated operating losses since our inception and our
existing cash and investment securities, including net cash proceeds of $5.8
million raised in March 2002, are not sufficient to fund our current planned
pharmaceutical and functional genomics operations for the next 12 months.
Therefore, we will need to seek additional funding by the end of July 2002, or
sooner, through public or private financings, including equity financings, and
through other arrangements to continue operating our businesses. As has been
stated by our independent public accountants in their opinion, our current
financial position raises substantial doubt as to our ability to continue as a
going concern.
The results of a clinical trial on our lead drug candidate Neotrofin
should be available during the second quarter of 2002. If the results of this
trial are sufficiently positive, we expect to be able to raise the capital
necessary to fund our currently planned pharmaceutical and functional genomics
operations. Additionally, we anticipate that our long-term business plans
require that we enter into collaborative partnership agreements and strategic
alliance agreements with larger pharmaceutical companies to co-develop,
manufacture and market our product candidates. If the results of this trial are
negative (or not sufficiently positive), we may not be able to raise additional
funds on favorable terms, if at all. Accordingly, we would be forced to
significantly change our business plans and restructure our operations to
conserve cash, which would likely involve some, combination, or all of the
following:
- Out-license or sell some or all of our intellectual, technological,
and/or tangible property not presently contemplated and at terms that
we believe would not be favorable to us;
- Reduce the size of our workforce, including the number of our
scientific personnel;
- Reduce the scope and nature of our research and drug development
activities including the possible termination of clinical trials; and
- Terminate operating leases and other contractual arrangements.
Although no assurance can be given, we believe that we can continue to
operate as a going concern and, accordingly, our consolidated financial
statements have been prepared assuming that we will continue as a going concern.
Consequently, our consolidated financial statements do not include adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that would be required if we were
not able to continue as a going concern.
19
We will need substantial additional funds to complete the research and
development and clinical trials of Neotrofin before we will be able to submit it
to the FDA for approval for commercial sale. We will also need substantial
additional funds to support the continued research and development and clinical
trials of our other potential products. Since we currently have no products
available for commercial sale and minimal revenues from licensing in our
genomics division, we must use capital to fund our operating expenses. Our
operating expenses, and consequently our capital requirements, will depend on
many factors, including:
o continued scientific progress in research and development to
identify and develop or obtain additional product candidates;
o the costs and progress of preclinical and clinical testing of
Neotrofin, our anti-cancer drugs and additional drug candidates;
o cost involved in filing, prosecuting and enforcing patent claims;
o effect of competing technological developments;
o cost of manufacturing scale-up;
o cost of commercialization activities;
o time and cost involved in obtaining regulatory approvals; and
o our ability to establish collaborative and other arrangements with
third parties, such as licensing and manufacturing agreements.
COMPETITION FOR PATIENTS IN CONDUCTING 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, Parkinson's disease, spinal cord injuries and
our other targeted diseases and indications. As a result, we must compete with
them for clinical sites, physicians and the limited number of patients who
fulfill the stringent requirements for participation in clinical trials. In
addition, due to a lack of available information about the condition of
Alzheimer's disease sufferers in the United States, we cannot be certain how
many of the over 4 million patients with Alzheimer's disease in the United
States would meet the requirements for participating in our clinical trials.
Also, due to the confidential nature of clinical trials, we cannot be certain
how many of the eligible Alzheimer's disease, Parkinson's disease, spinal cord
injury and cancer patients may be enrolled in competing studies and consequently
not available to us. 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 FDA and comparable agencies in foreign countries impose many
requirements on the introduction of new drugs through lengthy and detailed
clinical testing and data collection procedures, and other costly and time
consuming compliance procedures. These requirements apply to every stage of the
clinical trial process and make it difficult to estimate when Neotrofin or any
other of our potential products 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. While we believe that we are currently in compliance
with applicable FDA regulations, if we fail to comply with the regulations
applicable to our clinical testing, the FDA 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
from the clinical tests may be unsuitable for submission to the FDA or other
regulatory agencies.
20
We cannot predict with certainty when we might submit any of our
proposed products currently under development for the regulatory approval
required in order to commercially sell the products. Once we submit a proposed
product for commercial sale approval, 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 these approvals, our business and prospects may be significantly
damaged. If we fail to comply with regulatory requirements, either prior to
seeking approval or in marketing our products after approval, we could be
subject to regulatory or judicial enforcement actions. These actions could
result in:
o product recalls or seizures;
o injunctions;
o civil penalties;
o criminal prosecution;
o refusals to approve new products and withdrawal of existing
approvals; and
o enhanced exposure to product liabilities.
THE LOSS OF KEY RESEARCHERS OR MANAGERS COULD SIGNIFICANTLY HINDER OUR DRUG
DEVELOPMENT PROCESS 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. Dr. Glasky has led our research and business
developments since founding our business in 1987 and is the inventor on several
of our patents. 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. Glasky in the face
amount of $2 million, we believe that the loss of Dr. Glasky's services would
damage our research and development efforts substantially. Dr. Glasky has an
employment agreement with us that provides for a three year term expiring
December 31, 2003, with automatic one-year renewals thereafter unless we or Dr.
Glasky gives notice of intent not to renew at least 90 days in advance of the
renewal date.
In addition to Dr. Glasky, the loss of Dr. Luigi Lenaz, our Vice
President, Oncology Division and President of our subsidiary NeoOncoRx, Inc.,
would damage the development of our anti-cancer business substantially, and the
loss of the services of Dr. Olivier Civelli, consultant to our subsidiary
NeoGene, Inc., would harm the development of our functional genomics business
substantially. Dr. Lenaz has an employment agreement with us that will expire on
July 1, 2003, with automatic one year renewals thereafter unless Dr. Lenaz or we
gives notice of intent not to renew at least 90 days in advance of the renewal
date. Dr. Civelli has a consulting agreement with us that expires on March 22,
2002. This agreement includes one-year renewals thereafter unless Dr. Civelli or
we gives notice of intent not to renew at least 15 days in advance of the
renewal date. We also will need substantial additional expertise in 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 significantly 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 rights to nine U.S. patents and currently have eighteen
U.S. patent applications pending, including one which has been allowed. Our
issued patents expire between 2009 and 2019. 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. Trade secrets are difficult to protect. While we enter into
proprietary information agreements with our employees, consultants and others,
these agreements may not successfully protect our trade secrets or other
proprietary information.
21
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 such as Amgen, Inc., Bayer AG, Eli Lilly and Co.,
Novartis AG, Bristol-Meyers Squibb Company, Glaxo SmithKline, Regeneron
Pharmaceuticals, Inc., Vertex Pharmaceuticals, Inc., Guilford Pharmaceuticals,
Inc., Cephalon, Inc., Aventis, Elan Corporation, Pfizer, Inc., Janssen
Pharmaceutica, Inc. and Shire Pharmaceuticals Group plc, are developing products
to treat Alzheimer's disease and certain of the other applications we are
pursuing. Competitors that have a strategic and clinical focus similar to ours
include Axonyx Inc., Cortex Pharmaceuticals Inc., Curis Inc., Diacrin Inc.,
Genset SA-ADR, Interneuron Pharmaceuticals Inc., Neurobiological Technologies
Inc., Neurocrine Biosciences Inc., Neurogen Corporation, NPS Pharmaceuticals
Inc., StemCells, Inc., Synaptic Pharmaceutical Corporation and Titan
Pharmaceuticals Inc, among others. Many of these companies have substantially
greater financial, research and development, manufacturing, marketing and sales
experience and resources than us. As a result, our competitors may be more
successful than us in developing their products, obtaining regulatory approvals
and marketing their products to consumers. In addition, our functional genomics
business faces competition from most major pharmaceutical companies, as well as
many small pharmaceutical companies, most of which have research programs
involving G-protein-coupled receptors similar to our research and development
program.
While we believe, based on recent industry publications, that Neotrofin
is more advanced in the drug development process than most other drugs seeking
to use neurotrophic factors to treat Alzheimer's disease, we cannot be certain
that Neotrofin will be the first of these drugs to receive FDA approval, if it
receives approval at all. In addition, there are four drugs currently approved
for the treatment of Alzheimer's disease in the United States, all of which use
a different approach to the disease than Neotrofin. If these treatments are
successful, or if other drugs using the neurotrophic factor approach are
approved before Neotrofin, or if any of these drugs prove to be more effective
than Neotrofin, the market for Neotrofin could be reduced or eliminated.
Additionally, numerous oncology drugs are on the market for each cancer type we
are pursuing. For example, cisplatin and carboplatin are the most prevalent
platinum-based derivatives used in chemotherapy. Our product candidate,
satraplatin, if the FDA ever approves it, would likely compete against these
drugs directly. Unless satraplatin is shown to have better efficacy and is as
cost effective if not more cost effective than cisplatin and carboplatin, it may
not gain acceptance by the medical field and therefore never be successful
commercially.
OUR LIMITED EXPERIENCE AT MANAGING AND CONDUCTING CLINICAL TRIALS OURSELVES MAY
DELAY THE TRIALS AND INCREASE OUR COSTS.
We will continue managing and conducting some future clinical trials
ourselves rather than hiring outside clinical trial contractors. We believe
managing and conducting clinical trials ourselves has reduced and will continue
to reduce the costs associated with our clinical trials and gives us more
control over the clinical trial process. However, while some of our management
has had experience at conducting clinical trials, we have limited experience in
doing so as a company. While we have not experienced significant delays or
increased costs to date by conducting clinical trials ourselves, as we move
forward with our self-conducted clinical trials, our limited experience may
delay the completion of our clinical trials and increase our costs.
HOLDERS OF OUR 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.
Short selling is a practice in which an investor borrows shares from a
stockholder to sell in the trading market, with an obligation to deliver the
same number of shares back to the lending stockholder at a future date. Short
sellers make a profit if the price of our common stock declines, allowing the
short sellers to sell the borrowed shares at a higher price than they have to
pay for shares delivered to the lending stockholder. Short selling increases the
number of shares of our common stock available for sale in the trading market,
putting downward pressure on the market price of our common stock.
Our Class B Warrants may be exercised for shares of our common stock
based in some cases on a floating exercise price related to the market price of
our common stock. The holders of these securities may benefit from the downward
price pressures caused by short selling due to the reduced exercise price that
must be paid to obtain shares of common stock upon exercise. In particular, 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% (or 95% if the market
price of our common stock is less than $5.00 per share) 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 replace the shares sold short and thereby profit by the decline in the market
price of the common stock
22
caused by their short selling. There are currently outstanding Class B Warrants
exercisable for 3,413,600 shares of common stock. The Class B Warrants expire on
June 12, 2002.
Montrose Investments Ltd. and Strong River Investments, Inc. each hold
Class B Warrants to purchase 1,706,800 shares of our common stock, for a total
of 3,413,600 shares of our common stock, or approximately 13.0% of the total
number of shares of our common stock outstanding, which Class B Warrants have an
exercise price of $33.75 per share if we do not deliver a redemption notice. No
other investors hold Class B Warrants. These facts give these two investors
greater influence over the market price of our stock if we deliver a redemption
notice, however, each of these investors make independent investment decisions,
and each has agreed to 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.
THE TRADING PRICE OF OUR COMMON STOCK AND THE TERMS OF OUR 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 common
stock falls below $1.00 (or under certain conditions, $3.00) per share for an
extended period, or if we fail to meet other Nasdaq standards, including minimum
stockholders equity of $10 million or minimum market capitalization of $50
million (both of which become applicable to us on November 1, 2002), or violate
Nasdaq rules, our common stock could be delisted from the Nasdaq National
Market.
Nasdaq has established rules regarding the issuance of "future priced
securities" or securities convertible into common stock based on a floating
conversion price, so that the number of shares of common stock issuable upon
conversion of the securities is not known when the securities are sold. These
rules may apply to a number of securities we have issued in the past, because
the number of shares of our common stock issuable upon conversion of those
securities were based upon a future price of our common stock. Nasdaq's concerns
regarding these securities include the potential dilution to our existing
stockholders if the price of our common stock goes down causing a large number
of shares to be issued upon conversion of the securities, and the corresponding
potential for excessive return on investment for the purchaser of the
convertible securities. In addition, since the holders of future priced
securities may benefit from a decrease in the market price of our common stock,
those holders may have greater incentive to engage in manipulative practices. In
light of these concerns, Nasdaq has indicated that the following rules may be
implicated by future priced securities:
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 in one
transaction or a series of related transactions at less than the greater of book
value or the then current market value without obtaining prior stockholder
consent.
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, some requirements for continued listing, such as the $1.00
(or $3.00) 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 would likely seek to list our
common stock on the Nasdaq SmallCap Market or for quotation on the American
Stock Exchange or a regional stock exchange, if available. 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.
23
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. ANY FUTURE EQUITY ISSUANCES BY US MAY HAVE DILUTIVE
AND OTHER EFFECTS ON OUR EXISTING STOCKHOLDERS.
There were 26,876,951 shares of our common stock outstanding as of
March 22, 2002. In addition, security holders held options, warrants and other
rights as of March 22, 2002 which, if exercised, would obligate us to issue up
to an additional 11,068,822 shares of common stock at a weighted average
exercise price of $15.43 per share, of which 3,913,693 shares are subject to
options or warrants which are currently exercisable at the sole election of the
holder at a weighted average exercise price of $7.36 per share. Some of these
shares, if issued, would likely be issued at a discount to the prevailing market
price. 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 $10.0 million of our common stock
pursuant to a shelf registration that will be eligible for immediate resale in
the market. Additionally, we have the ability to sell up to approximately $8
million through a registration statement that we filed in connection with a
certain underwriter sales agreement that, with our consent, gives the
underwriter the ability to sell our common stock on a "best efforts" basis.
Additional shares of our common stock sold, if any, under this agreement will be
eligible for immediate resale in the market. The market price of our common
stock could fall as a result of such resales due to the increased number of
shares available for sale in the market. If all 11,068,822 shares were issued
without a corresponding increase in our market capitalization, the market price
per share of our common stock may be reduced by approximately 30%, excluding any
effects of any other developments or market factors.
We have financed our operations, and we expect to continue to finance
our operations, by issuing and selling our common stock or securities
convertible into or exercisable for shares of our common stock. Any issuances by
us of equity securities may be at or below the prevailing market price of our
common stock and may have a dilutive impact on our other stockholders. These
issuances would also cause our net income, if any, or loss per share to decrease
in future periods. As a result, the market price of our common stock could drop.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS, AND MAY NOT HAVE SUFFICIENT
PRODUCT LIABILITY INSURANCE TO COVER ANY CLAIMS, WHICH MAY EXPOSE US TO
SUBSTANTIAL LIABILITIES.
We may be exposed to product liability claims from patients who
participate in our clinical trials, or, if we are able to obtain FDA approval
for one or more of our potential products, from consumers of our products.
Although we currently carry product liability insurance in the amount of $5
million per occurrence, it is possible that the amounts of this coverage will be
insufficient to protect us from future claims. Further, we cannot be certain
that we will be able to maintain our existing insurance or 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,
prospects and results of operations if claims are made that exceed our coverage.
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, including biological materials, chemicals and radioactive materials.
We are subject to federal, state and local laws and regulations governing the
storage, use and disposal of these materials and some waste products. We believe
that our safety procedures for the storage, use and disposal of these 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 were to be an accident, we could be held
liable for any damages that result, which could exceed our financial resources.
We currently maintain insurance coverage of up to $1,000,000 per occurrence for
injuries resulting from the hazardous materials we use, and up to $25,000 per
occurrence for pollution clean up and removal, however, future claims may exceed
these amounts. Currently the costs of complying with federal, state and local
regulations are not significant, and consist primarily of waste disposal
expenses. We may incur substantially increased costs to comply with regulations,
particularly 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
and volume of our common stock to decrease. In addition, the market price and
volume of our common stock is highly volatile. Factors that may cause the market
price and volume of our common stock to decrease 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
24
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 and
volume of our common stock may decrease if our results of operations fail to
meet the expectations of stock market analysts and investors. While a decrease
in market price could result in direct economic loss for an individual investor,
low trading volume could limit an individual investor's ability to sell our
common stock, which could result in substantial economic loss as well. During
2001, the price of our common stock has ranged between $6.60 and $2.31, and the
daily trading volume has been as high as 2,012,143 shares and as low as 10,222
shares, with a recent average from January 2, 2002 up to and including March 22,
2002 of approximately 144,000 shares.
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
11.30% of our outstanding common stock as of March 22, 2002. In addition,
several of our stockholders, including Montrose Investments Ltd. and Strong
River Investments, Inc. 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. As of March 22, 2002, these stockholders
collectively held warrants that could result in the issuance of up to 4,713,145
additional shares, in addition to shares of our common stock that they may own,
or approximately 17.5% of the total number outstanding, if all of those
securities were converted or exercised. However, none of the additional shares
can be issued at the option of the holder within 60 days of March 22, 2002. As a
result of these holdings, 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.
CERTAIN CHARTER AND BYLAWS PROVISIONS AND OUR STOCKHOLDER RIGHTS PLAN MAY MAKE
IT MORE DIFFICULT FOR SOMEONE TO ACQUIRE CONTROL OF US OR REPLACE CURRENT
MANAGEMENT.
Certain provisions of our Certificate of Incorporation and Bylaws may
make it more difficult for someone to acquire control of us or replace our
current management. These provisions may make it more difficult for stockholders
to take certain corporate actions and could delay, discourage or prevent someone
from acquiring our business or replacing our current management, even if doing
so would benefit our stockholders. 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
business 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, even if
doing so would benefit our stockholders.
OUR BUSINESSES ARE SOMETIMES INVOLVED, OR PERCEIVED BY THE PUBLIC TO BE
INVOLVED, IN ACTIVITIES THAT MAY BE SEEN AS MORALLY UNACCEPTABLE AND THEREFORE
MAY BE LEGISLATED AGAINST, PREVENTING US FROM ENGAGING IN CERTAIN RESEARCH AND
DEVELOPMENT ACTIVITIES AND EVENTUALLY MARKETING CERTAIN PRODUCT CANDIDATES.
Our businesses involve the use of animals for certain research and
development activities. Some groups perceive this as inhumane or otherwise
morally unacceptable. Additionally, our businesses involve gene research to
achieve specifically selected biological result(s): in the case of our
functional genomics business, the treatment of diseases or other disease related
indications. This too may be perceived as morally unacceptable. If pressure by
these groups and others results in legislation that limits or prevents any of
our research and development activities, our businesses may be significantly
harmed.
SIGNIFICANT EVENTS DURING 2001 HAD A NEGATIVE EFFECT ON OUR BUSINESS, THE
BUSINESS OF OUR VENDORS AND ASSOCIATES AND OUR ABILITY TO RAISE ADDITIONAL
NEEDED FUNDS.
On September 11, 2001, terrorists perpetrated the worst attack in
history against the United States. The U.S. economy slowed and the fear of
future attacks effected companies' perceived ability to safely conduct business.
In addition, certain very significant business failures and other negative
business events appear to have stymied investors' confidence in the capital
markets (or stock markets) and general consumer confidence. We believe that
these events have had a negative impact and will likely continue to have a
negative impact for a continued unknown duration of time on our business, the
business of our vendors and associates, and our ability to raise additional
needed funds.
25
ITEM 2. PROPERTIES
Our primary research and development and corporate administrative
offices are located in a 34,320 square foot facility containing office and
laboratory space, constructed for us in Irvine, California. We also entered into
a short-term lease that makes available to us an additional 31,640 square feet
of office space in a facility adjacent to our primary Irvine facility. We also
sub-leased from UCI, a new 10,000 square foot laboratory and administrative
facility in Irvine, California adjacent to the University in which we conduct
our functional genomics business activities. Each of our facilities is suitable
and adequate to undertake each of our business' current research efforts.
Depending on certain clinical trial results, we anticipate extending our
short-term lease or leasing additional local laboratory space.
The primary Irvine facility is occupied under a non-cancelable lease
for seven years and contains two five-year options to renew. The base monthly
rent for the primary Irvine facility is currently $40,435 which amount is
subject to certain cost of living increases, plus taxes, insurance and common
area maintenance. The facility adjacent to the primary Irvine facility is
occupied under a six-month non-cancelable lease that contains one five-year
option to renew. This lease has expired and we are currently occupying the
facility on a month-to-month basis. The base monthly rent is $34,417 and is
subject to taxes, insurance and common area maintenance. Under our sub-lease
with UCI, sub-lease payments are at the rate of 50% of the basic rent charge,
subject to certain conditions, including our continuation of specific grant
awards to UCI, and commenced during June 2001. Under those conditions, if UCI is
not able to pay all or part of their 50% portion of the sublease payment, we are
obligated to pay, in addition to our 50% of the sub-lease payment, the amount
that UCI is not able to pay. During 2001, we paid approximately 85% of the
sublease obligations. The base monthly rent is $26,064, plus taxes, insurance,
common area maintenance and scheduled rent increases for succeeding years over
the five-year term of the sublease.
We lease a small administrative office in Zurich, Switzerland on an
expense-sharing basis. The financial and other terms of this lease are ordinary
and are not material to our businesses.
ITEM 3. LEGAL PROCEEDINGS
We are involved in one matter of litigation that we consider ordinary routine
litigation incidental to our business. Our policy is to accrue during a period,
as a charge to operations, amounts related to legal matters if it is probable
that a liability has been incurred and the amount of loss can be reasonably
estimated, as required by SFAS No. 5, Accounting for Contingencies. Although it
is very difficult to accurately predict the ultimate outcome of pending
litigation and threatened litigation, we believe that it 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 ended December 31, 2001.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of March 22, 2002, there were 26,876,951 shares of common stock
outstanding held of record by approximately 400 stockholders. On March 22, 2002,
the closing bid price of our common stock was $1.93 per share.
MARKET FOR SECURITIES
Our common stock is traded on the Nasdaq Stock Market under the symbol
NEOT. The high and low trades of our common stock reported by Nasdaq during each
quarter ended in 2000 and 2001 were as follows:
High Low
------ -------
YEAR 2000
Quarter Ended
March 31 $ 17.75 $ 16.81
June 30 $ 10.88 $ 10.69
September 30 $ 8.81 $ 7.38
December 31 $ 4.44 $ 3.88
YEAR 2001
Quarter Ended
March 31 $ 5.88 $ 5.58
June 30 $ 4.18 $ 3.94
September 30 $ 3.22 $ 3.00
December 31 $ 3.67 $ 3.55
The high and low trades of our common stock reported by Nasdaq 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 involving sales of our
securities that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"), and have not been previously included in a quarterly
report on Form 10-Q. Exemption from registration was relied upon under Section
4(2) of the Securities Act for all transactions listed.
As of December 18, 2000, Brighton Capital, Ltd. ("Brighton") acquired a
five-year warrant to purchase up to 10,000 shares of our common stock at $6.17
per share for its services as a finder with respect to the negotiation and
execution of the sale of our securities to a certain investor on December 18,
2000. We made no solicitation in connection with Brighton's acquisition, other
than communications with the purchaser of our securities and Brighton; we
obtained representations from Brighton regarding its investment intent,
experience and sophistication; and the warrant was not acquired in lieu of the
payment of fees for services. This warrant replaces the warrant to purchase
10,000 shares of our subsidiary NeoGene Technologies, Inc.'s common stock at
$45.00 per share reported as compensation paid to Brighton for the same
transaction in our Report on Form 10-K, as amended, filed on April 25, 2001.
As of January 25, 2001, a clinical research organization acquired
50,000 shares of our common stock in a settlement of amounts owing following the
termination in November 2000 of clinical studies being conducted on our behalf
by the clinical research organization. We made no solicitation in connection
with the settlement, other than communications with the organization; we
obtained representations from the organization regarding its investment intent,
experience and sophistication; and the shares were not acquired as part of a
plan of financing.
27
As of April 17, 2001, Brighton acquired a five-year warrant to purchase
up to 30,000 shares of our common stock at $15.00 per share for its services as
a finder with respect to the negotiation and execution of the sale of our
securities to certain investors on April 17, 2001. We made no solicitation in
connection with Brighton's acquisition, other than communications with the
purchasers of our securities and Brighton; we obtained representations from
Brighton regarding its investment intent, experience and sophistication; and the
warrant was not acquired in lieu of the payment of fees for services.
As of May 18, 2001, Brighton acquired a five-year warrant to purchase
up to 29,750 shares of our common stock at $15.00 per share for its services as
a finder with respect to the negotiation and execution of the sale of our
securities to certain investors on May 17, 2001. We made no solicitation in
connection with Brighton's acquisition, other than communications with the
purchasers of our securities and Brighton; we obtained representations from
Brighton regarding its investment intent, experience and sophistication; and the
warrant was not acquired in lieu of the payment of fees for services.
As of June 29, 2001, NDDO Research Foundation ("NDDO") acquired 30,000
shares of our common stock pursuant to a license agreement with us. Pursuant to
the terms of the agreement, the shares may not be sold until one year has
elapsed from the date of signing the agreement, but if at one year from the date
of signing the agreement their value is less than $100,000 we will pay the NDDO
such sum in cash, our common stock, or other negotiable security as will bring
their value up to $100,000. We made no solicitation in connection with the
agreement, other than communications with NDDO; we obtained representations from
the organization regarding its investment intent, experience and sophistication;
and the shares were not acquired as part of a plan of financing.
As of August 10, 2001, Gruntal & Co., L.L.C. acquired a five-year
warrant to purchase up to 125,000 shares of our common stock at an exercise
price of $3.80 per share for its services as investment banker and financial
advisor to us. We made no solicitation in connection with Gruntal's acquisition,
other than communications with Gruntal; we obtained representations from Gruntal
regarding its investment intent, experience and sophistication; and the warrant
was not acquired in lieu of the payment of fees for services.
As of December 7, 2001, Cantor Fitzgerald & Co. ("Cantor") acquired a
five-year warrant to purchase up to 107,451 shares of our common stock at an
exercise price of $5.12 per share for its services as underwriter of sales of
our securities in October and November 2001. We made no solicitation in
connection with Cantor's acquisition, other than communications with the
purchasers of our securities and Cantor; we obtained representations from Cantor
regarding its investment intent, experience and sophistication; and the warrant
was not acquired in lieu of the payment of fees for services.
As of December 13, 2001, Cantor acquired a five-year warrant to
purchase up to 24,688 shares of our common stock at an exercise price of $5.01
per share for its services as underwriter of sales of our securities in December
2001. We made no solicitation in connection with Cantor's acquisition, other
than communications with the purchasers of our securities and Cantor; we
obtained representations from Cantor regarding its investment intent, experience
and sophistication; and the warrant was not acquired in lieu of the payment of
fees for services.
As of December 13, 2001, a placement agent acquired a five-year warrant
to purchase up to 250,000 shares of our common stock for its services as
placement agent to us. This warrant may be exercised with respect to 125,000
shares at an exercise price of $4.04 per share, and the warrant may become
exercisable with respect to the remaining 125,000 shares if we complete
financing transactions with parties introduced to us by the placement agent. To
date, the warrant has become exercisable with respect to an additional 6,667
shares of our common stock at an exercise price of $2.00 per share. We made no
solicitation in connection with the placement agent's acquisition, other than
communications with the placement agent; we obtained representations from the
placement agent regarding its investment intent, experience and sophistication;
and the warrant was not acquired in lieu of the payment of fees for services.
28
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data. Financial
data for the years ended 1999, 2000 and 2001 and as of December 31, 2000 and
2001 has been derived from our audited financial statements included elsewhere
in this Form 10-K and should be read in conjunction with those financial
statements and accompanying notes and with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Financial data for
the years ended 1997 and 1998 and as of December 31, 1997, 1998 and 1999 has
been derived from our audited financial statements not included herein.
CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE INCEPTION TO
YEARS ENDED DECEMBER 31: 1997 1998 1999 2000 2001 2001
------------------------------------ ---------- ---------- ---------- ---------- ---------- ------------
Revenues $ - $ - $ - $ - $ 41 $ 538
Operating expenses:
Research and development 4,508 8,542 20,058 38,767 20,611 95,453
General and administrative 2,342 3,123 3,465 5,107 7,580 25,045
Settlement of litigation - - 2,458 - - 2,458
---------- ---------- ---------- ---------- --------- ------------
Loss from operations (6,850) (11,665) (25,981) (43,874) (28,150) (122,418)
Other income (expense) 688 60 (9) (2,553) 315 (1,655)
---------- ---------- ---------- ---------- ---------- ------------
Net loss $ (6,162) $ (11,605) $ (25,990) $ (46,427) $ (27,835) $ (124,073)
Basic and diluted loss per share $ (1.14) $ (2.07) $ (3.68) $ (4.37) $ (1.46)
========== ========== ========== ========== ==========
BALANCE SHEET DATA AT DECEMBER 31: 1997 1998 1999 2000 2001
--------------------------------- --------- --------- ---------- --------- ---------
Cash, cash equivalents and marketable
securities $ 9,132 $ 2,867 $ 9,681 $ 11,470 $ 7,157
Property and equipment, net 3,475 3,252 3,161 3,416 4,689
Total assets 13,198 6,826 13,174 15,781 12,825
Current liabilities 2,478 2,364 4,757 5,110 5,212
Long-term debt, less current portion 177 1,126 637 474 464
Other non-current-liabilities - 46 75 87 362
Minority interest in consolidated
subsidiaries - - - 7,280 -
Total stockholders' equity $ 10,543 $ 3,290 $ 7,705 $ 2,830 $ 6,787
PHARMACEUTICAL BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE INCEPTION TO
YEARS ENDED DECEMBER 31: 1997 1998 1999 2000 2001 2001
------------------------------------ --------- --------- --------- --------- --------- -----------
Revenues $ - $ - $ - $ - $ - $ 497
Operating expenses:
Research and development 4,508 8,542 19,873 38,131 18,469 92,490
General and administrative 2,342 3,123 3,438 4,643 6,302 23,276
Settlement of litigation - - 2,458 - - 2,458
---------- ---------- ---------- ---------- ---------- ------------
Loss from operations (6,850) (11,665) (25,769) (42,774) (24,771) (117,727)
Other income (expense) 688 60 (9) (1,080) 152 (344)
Minority interest in consolidated
subsidiaries' net loss - - - (1,464) (48) (1,512)
---------- ---------- ---------- ---------- ---------- ------------
Net loss $ (6,162) $ (11,605) $ (25,778) $ (45,318) $ (24,667) $ (119,583)
========== ========== ========== ========== ========== ============
BALANCE SHEET DATA AT DECEMBER 31: 1997 1998 1999 2000 2001
--------------------------------- --------- ---------- ------- --------- -------
Property and equipment, net $ 3,475 $ 3,252 $ 3,161 $ 3,416 $ 3,691
Total assets $ 13,198 $ 6,826 $13,172 $ 10,317 $ 9,676
FUNCTIONAL GENOMICS BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE INCEPTION TO
YEARS ENDED DECEMBER 31: 1997 1998 1999 2000 2001 2001
------------------------------------ ---------- ---------- ---------- ---------- ---------- -----------
Revenues $ - $ - $ - $ - $ 41 $ 41
Operating expenses:
Research and development - - 185 636 2,142 2,963
General and administrative - - 27 464 1,278 1,769
---------- ---------- ---------- ---------- ---------- -----------
Loss from operations - - (212) (1,100) (3,379) (4,691)
Other income (expense) - - - (10) 211 201
---------- ---------- ---------- ---------- ---------- -----------
Net loss $ - $ - $ (212) $ (1,110) $ (3,168) $ (4,490)
========== ========== ========== ========== ========== ===========
BALANCE SHEET DATA AT DECEMBER 31: 1997 1998 1999 2000 2001
--------------------------------- ------ ------ ------ ------ ------
Property and equipment, net $ - $ - $ - $ - $ 998
Total assets $ - $ - $ 2 $5,464 $3,149
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of the financial condition and
results of our operations in conjunction with the financial statements and the
notes to those statements included elsewhere in this report. The discussion in
this report contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applying to all related forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed here.
Factors that could cause or contribute to these differences include those
discussed in "Risk Factors," as well as those discussed elsewhere.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of theses financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including cash
requirements resulting from estimating: planned research & development
activities and general and administrative requirements, the retention of key
personnel, certain clinical trial results, maintained market need for our
product candidates and other major business assumptions.
30
We believe that our most significant accounting policies that affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements are:
Development Stage Enterprise, Liquidity, and Going Concern
We have prepared the consolidated financial statements under the
assumption that we are a going concern. We are in the development stage and,
therefore, we devote substantially all of our efforts to research and
development activities. Since our inception, we have incurred cumulative losses
of approximately $124.1 million through December 31, 2001, and expect to incur
substantial losses over the next several years.
We spent cash in 2001 at an average rate in excess of approximately
$2.3 million per month, and we expect this rate of spending to continue through
the reporting of results from our current pivotal clinical trial for Neotrofin
in Alzheimer's disease. Our burn-rate after that will be a function of the
result of that trial and the timing of our phase 3 clinical study of satraplatin
in prostate cancer. If the Alzheimer's trial is positive, we would expect our
burn-rate to remain stable. If, based on the data, we decide not to initiate
another pivotal study of Neotrofin in Alzheimer's disease, our burn-rate will
decrease significantly.
At the present time, our business does not generate cash from
operations needed to finance our short-term operations. We will rely primarily
on (a.) raising funds through the sale of our securities including under our
Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts"
basis, and/or (b.) out-licensing our technology, to meet all of our short-term
cash needs. We have generated operating losses since our inception and our
existing cash and investment securities, including net cash proceeds of $5.8
million raised in March 2002, are not sufficient to fund our current planned
pharmaceutical and functional genomics operations for the next 12 months.
Therefore, we will need to seek additional funding by the end of July 2002, or
sooner, through public or private financings, including equity financings, and
through other arrangements to continue operating our businesses. As has been
stated by our independent public accountants in their opinion, our current
financial position raises substantial doubt as to our ability to continue as a
going concern.
The results of a clinical trial on our lead drug candidate Neotrofin
should be available during the second quarter of 2002. If the results of this
trial are sufficiently positive, we expect to be able to raise the capital
necessary to fund our currently planned pharmaceutical and functional genomics
operations. Additionally, we anticipate that our long-term business plans
require that we enter into collaborative partnership agreements and strategic
alliance agreements with larger pharmaceutical companies to co-develop,
manufacture and market our product candidates. If the results of this trial are
negative (or not sufficiently positive), we may not be able to raise additional
funds on favorable terms, if at all. Accordingly, we would be forced to
significantly change our business plans and restructure our operations to
conserve cash, which would likely involve some, combination, or all of the
following:
- Out-license or sell some or all of our intellectual, technological,
and/or tangible property not presently contemplated and at terms that
we believe would not be favorable to us;
- Reduce the size of our workforce, including the number of our
scientific personnel;
- Reduce the scope and nature of our research and drug development
activities including the possible termination of clinical trials; and
- Terminate operating leases and other contractual arrangements.
Although no assurance can be given, we believe that we can continue to
operate as a going concern and, accordingly, our consolidated financial
statements have been prepared assuming that we will continue as a going concern.
Consequently, our consolidated financial statements do not include adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that would be required if we were
not able to continue as a going concern.
Principles of Consolidation
Our consolidated financial statements include our accounts including
those of our wholly owned and majority owned subsidiaries. We eliminated all
significant intercompany accounts and transactions.
Cash and Cash Equivalents
Cash and cash 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
We classify investments in debt and equity securities among three
categories: held-to-maturity, trading, and available-for-sale. As of December
31, 2001, all of our debt and equity securities holdings were categorized as
available-for-sale. We carry available-for-sale securities at fair value, with
unrealized gains and losses included as a component of accumulated other
comprehensive income (loss) in stockholders' equity. We use quoted market prices
to determine the fair value of these investments.
Prepaid Expenses and Refundable Deposits
Prepaid expenses are deferred and later recorded as an expense during
the period benefited. Deposits are expected to become refundable at a later
date.
Property and Equipment Purchased or Leased
We carry property and equipment at historical cost, less accumulated
depreciation and amortization. When property and equipment are disposed of, the
related cost and accumulated depreciation are removed from the accounts and
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any resulting gain or loss is reflected in income. Depreciation and amortization
are computed using 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
We expense all research and development activity costs in the period
incurred.
Stock-Based Compensation
We account for all of our stock based compensation in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation" (or SFAS 123) that
encourages companies to recognize stock based compensation using a fair market
value methodology. Under SFAS 123, the fair value of a stock option (or its
equivalent) granted by a public entity shall be estimated using an
option-pricing model (for example, the Black-Scholes or binomial model) that
takes into account certain assumptions. However, SFAS 123 permits continued use
of accounting for employee stock based compensation using the intrinsic value
methodology of accounting promulgated by Accounting Principles Board (or APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" (or APB 25). Under
the intrinsic method, stock based compensation is measured as the excess, if
any, of the quoted market price of our common stock at the measurement date over
the exercise price.
We recognize non-employee stock based compensation or payments using a
fair market value methodology promulgated by SFAS 123.
We recognize employee stock based compensation using the intrinsic
value methodology promulgated by APB 25.
Basic and Diluted Net Loss Per Share
We calculate basic and diluted net loss per share using: the weighted
average number of common shares outstanding and the net loss, less preferred
stock dividends, during each year, respectively. We exclude all antidilutive
common stock equivalents from the basic and diluted net loss per share
calculation.
Use of Estimates
We make certain estimates to prepare our financial statements that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses reported during the reporting period. Actual results could
differ from our estimates.
We have estimated that our current working capital plus funds raised or
to be raised subsequent to year end will be sufficient for us to continue as a
going concern and therefore have prepared the financial statements on that
basis. That basis includes estimating future cash requirements of planned
research & development activities and general and administrative requirements,
the retention of key personnel, certain clinical trial results, maintained
market need for our product candidates, and other major business assumptions. If
these estimates prove to be wrong, we may not be able to continue as a going
concern.
Revenue Recognition
We recognize revenue from each sale contract over each sale contract's
operative life and after all contingencies related to us being due receipt of
such revenue are eliminated.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement bases
and tax bases of existing assets and liabilities. We recorded a valuation
allowance equal to our net deferred tax asset.
RESULTS OF OPERATIONS
From our inception in June 1987 through December 31, 2001, we have
devoted our resources primarily to fund research and development, and incurred a
cumulative net loss of approximately $124.1 million. During this period, we had
insignificant revenues from grants and licensing fees.
Separate segment information is presented for our pharmaceutical
business and functional genomics business.
Pharmaceutical Business
32
We had no revenues during each year in the three-year period ended
December 31, 2001.
The decrease in research and development expense during 2001 was due
primarily to us internally managing the majority of our clinical trials instead
of using more expensive outside clinical research organizations. However, for
that purpose, additional expenses from an increase in personnel, consultants and
office space rent offset a portion of this decrease. The most significant
clinical trials we conducted during 2001 were a pivotal phase 2 clinical trial
for Neotrofin in Alzheimer's disease, other Neotrofin clinical trials for other
neurology indications, and Neoquin, in the United Kingdom, for the treatment of
bladder cancer. We also incurred additional research and development expenses to
broaden our pharmaceutical platform base and further development of new drug
candidates, including activities to secure drug supplies and to prepare clinical
protocols for satraplatin, and the identification of compounds in our psychosis
platform. Overall during 2001, research and development expenses increased in
the category of salaries due to additional personnel, salary increases and
related benefits, increases in pre-clinical expenses related to broadening our
pharmaceutical platforms, and increases in consulting expenses primarily due to
internally managing the majority of our clinical trials. Research and
development expenses increased during 2000 and 1999 due primarily to accelerated
clinical and pre-clinical trials to commercialize Neotrofin. These 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 category of salaries due to additional personnel, salary increases and
related benefits. In addition, during 1999, we began allocating a higher
proportionate share of overall rent expense to research and development as a
result of research and development utilizing a higher proportion of our primary
Irvine facility.
The increases in general and administrative expense in 2001, 2000 and
1999 were each due primarily to increases in personnel, salary increases and
related benefits, recruiting, relocation, travel and depreciation and
amortization. In addition, we paid a break-up penalty fee of approximately
$405,000 in 2001 related to the cancellation of the first debenture tranche of
$10 million under the April 17, 2001 financing and we incurred approximately
$610,000 in investment banking consulting services expense in exchange for
warrants to purchase shares of our common stock. In addition, 1999 expenses
increased due to increases in investor relations expense, regulatory agency fees
and licenses, and printing expense, offset by a lower proportionate share of
overall rent expense to general and administrative as a result of general and
administrative utilizing a lower proportion of our primary Irvine facility.
We settled a single litigation matter in 1999 that resulted in a
non-recurring, non-cash expense of approximately $2.5 million by issuing shares
of NeoTherapeutics common stock.
The decrease in interest income during 2001 was due to lower average
balances in our investment accounts offset slightly by higher interest rates on
our investments. The increase in interest income in 2000 was due primarily to a
full year utilization of invested funds. The decrease in interest income in 1999
was due to lower average balances in our investment accounts. The decrease in
interest expense during 2001 was due primarily to the non-recurrence of a
non-cash charge incurred in 2000 of approximately $1.6 million of amortization
of debt discount and issuance costs associated with convertible debt that was
issued and converted into common stock during 2000, partially offset by an
increase in interest expense associated with capital lease obligations due to
higher interest rates and a higher average lease obligation balance. Interest
expense in 1999 increased primarily due to interest expense associated with a
higher average lease obligation balance.
Functional Genomics Business
Revenue was approximately $41,000 during 2001 primarily from
recognizing deferred licensing fees earned during 2001 from Pfizer, Inc. and
from a single product sale. We did not have any revenue during 2000 or 1999.
The increase in research and development expense during 2001 was due
primarily to a continued ramp up of operations in 2001 versus a year of
beginning operational ramp-up, organizing and strategizing in 2000. The year
2001 included a significant increase in personnel that increased salary and
related benefits and other expenses, offset slightly by a decrease in consulting
expense. Additionally, we occupied new facilities under a sub-lease that
commenced in June 2001. Under our new sub-lease agreement, we paid for
approximately 85% of the expenses of the new facility (see "Properties" for the
significant terms of this sub-lease agreement). Prior to 2001, we had no direct
occupancy expense related to our functional genomics business. The increase in
research and development during 2000 was due primarily to activities associated
with beginning operating and continued organizing and strategizing the
functional genomics business that included an increase in personnel that
increased salary and related benefit and other expenses, an increase in
consulting
33
expense, and an approximate $400,000 increase in research grants paid. In 1999,
research and development expenses consisted primarily of salaries and related
benefit and other expenses, research grants of approximately $150,000, and other
costs associated with the start up of our functional genomics business.
A significant portion of the general and administrative expense
incurred by the functional genomics business is allocated from NeoTherapeutics
to NeoGene. The increase in general and administrative during 2001 was due
primarily to a continued ramp up of operations in 2001 versus a year of
beginning operational ramp-up, organizing and strategizing in 2000. 2001
included a significant increase in the allocation of administrative personnel
costs from NeoTherapeutics to NeoGene due to the hiring of executive and
administrative personnel primarily at NeoTherapeutics that increased salary and
related benefits and other expenses. Additionally, our new sub-lease agreement
and the fact that we paid for approximately 85% of the expenses under the
sub-lease during 2001 caused an increase in occupancy expense (see "Properties"
for the significant terms of this sub-lease agreement). The increase in general
and administrative expense during 2000 was due primarily a ramp up of
organizational activity requiring an increase in the allocation of
administrative personnel costs from NeoTherapeutics to NeoGene that increased
salary and related benefits and other expenses. General and administrative
expenses during 1999 were primarily allocated salary expenses associated with
the start up of our functional genomics business.
The increase in interest income during 2001 and 2000 was due to higher
average investment balances. In the fourth quarter of 2000, we sold
approximately $7 million in convertible preferred stock in our NeoGene
subsidiary most of which we purchased back in the third quarter of 2001. We had
no interest income during 1999. We had no interest expense during 2001, 2000 or
1999.
FINANCIAL CONDITION
General
At the present time, our business does not generate cash from
operations needed to finance our short-term operations. We will rely primarily
on (a.) raising funds through the sale of our securities including under our
Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts"
basis, and/or (b.) out-licensing our technology, to meet all of our short-term
cash needs. We have generated operating losses since our inception and our
existing cash and investment securities, including net cash proceeds of $5.8
million raised in March 2002, are not sufficient to fund our current planned
pharmaceutical and functional genomics operations for the next 12 months.
Therefore, we will need to seek additional funding by the end of July 2002, or
sooner, through public or private financings, including equity financings, and
through other arrangements to continue operating our businesses. As has been
stated by our independent public accountants in their opinion, our current
financial position raises substantial doubt as to our ability to continue as a
going concern.
The results of a clinical trial on our lead drug candidate Neotrofin
should be available during the second quarter of 2002. If the results of this
trial are sufficiently positive, we expect to be able to raise the capital
necessary to fund our currently planned pharmaceutical and functional genomics
operations. Additionally, we anticipate that our long-term business plans
require that we enter into collaborative partnership agreements and strategic
alliance agreements with larger pharmaceutical companies to co-develop,
manufacture and market our product candidates. If the results of this trial are
negative (or not sufficiently positive), we may not be able to raise additional
funds on favorable terms, if at all. Accordingly, we would be forced to
significantly change our business plans and restructure our operations to
conserve cash, which would likely involve some, combination, or all of the
following:
o Out-license or sell some or all of our intellectual,
technological, and/or tangible property not presently
contemplated and at terms that we believe would not be
favorable to us;
o Reduce the size of our workforce, including the number of
our scientific personnel;
o Reduce the scope and nature of our research and drug
development activities including the possible termination of
clinical trials; and
o Terminate operating leases and other contractual arrangements.
Although no assurance can be given, we believe that we can continue to
operate as a going concern and, accordingly, our consolidated financial
statements have been prepared assuming that we will continue as a going
concern. Consequently, our consolidated financial statements do not include
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that would be required
if we were not able to continue as a going concern.
2001 Cash Flow Activities
At December 31, 2001, we had working capital of approximately $2.8
million that included cash and equivalents of approximately $0.7 million and
short-term investments of approximately $6.4 million. In comparison, at December
31, 2000, we had working capital of approximately $7.2 million that included
cash and cash equivalents of approximately $6.2 million and short-term
investments of approximately $5.3 million. The $4.4 million decrease in net
working capital during
34
the year ended December 31, 2001 is attributable primarily to the loss of $27.9
million, less non-cash compensation and other items of approximately $2.8
million, less changes in operating assets and liabilities of $0.2 million, plus
the purchase of Series A Preferred Stock of NeoGene for $5.5 million and 7%
Series C Preferred Stock of NeoTherapeutics for $0.3 million and equipment
purchases of $1.4 million and payments on capital lease obligation of $0.7
million, partially offset by the sale of approximately $28.4 million of our
common stock.
Historical Funding
We historically financed our operations primarily through sales of
securities, borrowings, grants and deferred payment of salaries and other
expenses from related parties.
During 1993, we issued 40,000 shares of common stock at the fair market
value on the date of issuance of $1.35 per share to a financial consultant in
exchange for $54,000 of investment banking services.
During 1994, we sold 13,000 shares of restricted common stock at $2.50
per share through a private placement for $32,500 in cash to three investors.
During 1995, we sold 22,000 shares of restricted common stock at $2.50 per share
through a private placement for $55,000 in cash to six investors. During 1996,
we sold 266,800 shares of restricted common stock at $2.50 per share through a
private placement for $633,650 in cash.
In June 1996, we filed a registration statement with the Securities and
Exchange Commission offering to the public 2,500,000 units (or the Units). Each
Unit consisted of one share of our common stock and one warrant to purchase one
share of our common stock. The registration statement became effective on
September 26, 1996, and on October 1, 1996, we sold all of the Units in exchange
for $17,363,003 in cash proceeds, net of public offering costs. On October 11,
1996, the principal underwriter of the offering exercised a portion of its
overallotment option and purchased from us 200,000 Units in exchange for
$1,389,280 in cash, net of transaction costs. The Units separated immediately
following issuance and the common stock and warrants that made up the Units
traded as separate securities. The warrants expired in September 2001.
On March 27, 1998, we executed a $15 million Private Equity Line of
Credit Agreement (the "Equity Line Agreement") with a private investor that
provides for minimum and maximum puts ranging from $250,000 to $2.0 million,
depending on our 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, we also issued to the investor warrants to purchase 25,000 shares of
our common stock at an exercise price of $11.62 per share. Under the Equity Line
Agreement, we received proceeds of approximately $3.55 million from sales of
506,049 shares of our common stock in 1998, $1.95 million from sales of 211,393
shares of our common stock in 1999, and during January 2000, we received $2.0
million from the sale of 186,961 shares of our common stock. The agreement
expired in February 2001.
On August 31, 1998, certain of our officers and directors exercised
non-qualified stock options and purchased 62,000 shares of our 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 are included as a component
of equity in the financial statements.
On May 31, 1999, we sold to a group of private investors 400,000 shares
of our common stock for $4.0 million in cash. The investors also received
five-year warrants to purchase 80,000 shares of our common stock at an exercise
price of $15 per share.
On July 27, 1999, we completed a secondary public offering and sold
1,150,000 shares of our common stock, including the underwriters' overallotment,
for $8.7 million in cash, net of offering costs.
On November 30, 1999, we sold to two private investors, 845,594 shares
of our common stock, for $9.4 million in cash, net of offering costs, and
warrants to purchase 126,839 shares of our common stock at $14.24 per share.
Based on a reset formula contained in the agreement, in March 2000 we issued to
the investors 43,383 additional shares of our common stock for no additional
consideration. The investors waived a second reset as partial consideration
under a different financing transaction.
On December 15, 1999, we entered into a settlement agreement for a
previous litigation matter. Under the terms of the settlement, the shareholder
forfeited 678,835 shares of common stock and warrants valued at $1,697,090 and
we issued 332,630 shares of commons stock and warrants valued at $4,155,449. We
charged the difference of $2,456,359 to operations.
On February 25, 2000 we sold to two private investors 520,324 shares of
our common stock for $8.0 million in
35
cash. The investors also received five-year warrants to purchase 104,000 shares
of our common stock at the price of $21.00 per share.
On April 6, 2000, we 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 our common stock over a two year period
and (c) five-year warrants to purchase from 115,000 shares up to 265,000 shares
of our common stock at an exercise price of $19.67 per share. The redeemable
warrants can be redeemed in part by us as frequently as several times per week,
subject to average daily volume restrictions and if the market price of our
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. During 2000, the investor converted the $10 million
of debentures into 1,555,409 shares of our common stock plus 38,768 shares of
our common stock in payment of accrued interest. Also in 2000, we called and the
investors exercised 586,400 of our redeemable warrants for 586,400 shares of our
common stock in exchange for $5,120,654 in cash. At both December 31, 2000 and
2001, there were 3,413,600 redeemable warrants outstanding. The warrants expire
in June 2002.
On May 1, 2000 we completed a private placement of 500,000 shares of
our common stock for $7.0 million in cash. The investors also received five-year
warrants to purchase 125,000 shares of our common stock at an exercise price of
$17.50 per shares.
On September 21, 2000, we sold 111,110 shares of Series A convertible
preferred stock of our majority owned subsidiary, NeoGene, for $5 million and a
five-year warrant to purchase up to (i) 80,000 shares of our 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 market 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. On August 13, 2001,
NeoTherapeutics purchased the Series A Preferred Stock of NeoGene for $5.5
million representing the $5.0 million face value of the preferred stock plus a
$500,000 redemption fee. The difference of approximately $0.8 million between
the book value of the preferred stock and the amount paid was recorded as a
charge to accumulated deficit. We also paid accrued dividends of approximately
$220,000 to the holders of the preferred stock.
On September 29, 2000, we entered into an agreement to sell 968,524
shares of our common stock to two private investors for $8 million cash and a
five-year warrant to purchase 193,706 shares of our 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 our common stock based on the market price of
our 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. As part
of the April 17, 2001 transaction described below, we agreed to issue an
additional 900,000 shares of our common stock to the investors under the second
and final reset under the agreement. We received no proceeds upon the investors'
exercise of the resets.
On December 18, 2000, we entered into an agreement between our majority
owned subsidiary, NeoGene, and an institutional investor for the issuance and
sale of NeoGene Series B convertible preferred stock and warrants for aggregate
consideration of $2.0 million. Under the provisions of the agreement, we issued
and sold to the investor a total of 44,445 shares of NeoGene 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 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. 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. We also granted an exchange right to the investor that will allow
the investor to exchange its shares of NeoGene Series B Preferred for our
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 NeoGene Series B Preferred shares then held by the investor
for a number of shares of our designated convertible preferred stock. In June
2001, the investor exercised its right to exchange all of the NeoGene Series B
Preferred stock then held by the investor for 200 shares of our 7% Series C
36
convertible Preferred stock. Under the terms of the exchange right, the investor
forfeited 4,693 or 50% of the previously granted five-year warrants to purchase
shares of NeoGene common stock at an exercise price of $45 per share. The shares
of our 7% Series C Preferred Stock were redeemable, under certain conditions at
the option of the holder, and each share is convertible into a number of shares
of our common stock equal to $10,000 divided by the lesser of (i) 100% of the
average of the lowest seven closing bid prices of our common stock in the
previous 30 trading days, or (ii) $5.97. In August 2001, the holder of our 7%
Series C Preferred Stock converted 170 shares of our 7% Series C Preferred Stock
into 485,591 shares of our common stock. In September 2001, we purchased the
remaining 30 shares of our 7% Series C Preferred Stock for $300,000 plus accrued
dividends and a settlement fee of approximately $72,000. The 30 shares of our 7%
Series C Preferred Stock are recorded as an offset to Stockholders' Equity.
2001 Fundings and Other Related Events and Information
We financed our 2001 business operations primarily through sales of
securities.
On January 2, 2001, we filed with the Securities and Exchange
Commission a "shelf" registration statement permitting the sale of our
securities with a maximum aggregate public offering price of $50 million. At
March 22, 2002, approximately $10 million remained available for sale under the
registration statement.
On July 2, 2001, we filed with the Securities and Exchange Commission a
registration statement permitting the sale by us, from time to time, of up to
$8.4 million of our common stock directly into the public trading market for our
common stock. The common stock sold pursuant to this registration statement will
be offered through an underwriter engaged by us on a "best efforts" basis. At
March 27, 2002, approximately $8 million remained available for sale under the
registration statement.
On April 6, 2001, in a special meeting, our stockholders approved an
increase in authorized common stock from 25 million to 50 million shares.
There were 26,876,951 issued and outstanding shares of our common stock
as of March 22, 2002. In addition, security holders held options and warrants as
of March 22, 2002 which, if exercised, would obligate us to issue up to an
additional 11,068,822 shares of common stock, of which 3,913,693 shares are
subject to options or warrants which are currently exercisable at the sole
election of the holder. A substantial number of those shares, when issued upon
exercise, will be available for immediate resale in the public market.
During 2001, we raised $28.3 million and issued 9,979,340 shares of our
common stock through the following transactions:
o On January 25, 2001, we issued to a vendor in settlement of
our obligation to them, 50,000 shares of our common stock and
a five-year warrant to purchase 50,000 shares of our common
stock at $3.50 per share.
o On January 30, 2001, we issued to two investors 1,070,336
shares of our common stock under the first reset provision
contained in the adjustable warrants issued in connection with
the September 29, 2000 sale of 968,524 shares of our common
stock for $8 million. On May 15, 2001 we also issued an
additional 900,000 shares of our common stock to the two
investors in respect of the second and final reset provision.
We did not receive any consideration as a result of issuing
shares of our common stock pursuant to the reset provisions of
this financing transaction. The reset provisions were part of
an earlier sale of our common stock and were previously
accounted for as a partial allocation of the proceeds of that
sale to common stock. As such, no further accounting was
necessary on the date the reset provision was exercised.
o On February 2, 2001, we sold 1,627,756 shares of our common
stock under the shelf registration statement to a private
investor for $3.5 million in cash.
o On March 8, 2001, we sold 1,250,000 shares of our common stock
under the shelf registration statement to a private investor
for $5 million in cash. The investor also received five-year
warrants to purchase up to 125,000 shares of our common stock
at the exercise price of $5.00 per share.
o 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 1,176,472 shares of our common
stock under the shelf registration statement for $6.0 million
cash, (b) an option to place with the investor groups two
tranches of convertible debenture notes of $10 million and $8
million within approximately 30 days and seven months
37
of the initial closing, respectively, at our option, and (c)
five-year warrants exercisable at 125% of the market price of
the date of the respective closing of each of the
aforementioned debenture issuances for a number of shares
equal to 20% of the number of shares into which the debentures
are initially convertible. We did not exercise the first
option for the debenture tranche of $10 million and paid a
break-up fee of $405,000 in July 2001, pursuant to the terms
of the financing transaction of May 17, 2001. This fee was
charged to general and administrative expense in the second
quarter of 2001. On November 13, 2001, we decided not to
exercise the second option for the debenture tranche of $8
million, pursuant to the April 17, 2001 financing transaction,
as amended.
o On May 17, 2001, we sold to the aforementioned two private
investor groups 1,400,000 shares of our common stock under the
shelf registration statement for $5.95 million in cash. The
investors also received five-year warrants to purchase up to
280,000 shares of our common stock at an exercise price of
$6.00 per share.
o On June 22, 2001, we sold to our employees through our
Employee Stock Purchase Plan (or ESPP), 40,390 shares of our
common stock for approximately $90,100. Pursuant to the ESPP,
the shares were sold at a 15% discount to market on the date
of purchase.
o On August 14, 2001, we sold 600,000 shares of our common stock
under the shelf registration statement to an institutional
investor for $2,010,000.
o On June 12, 2001, we entered into two securities sales
agreements with an investment banking firm acting as an
underwriter to sell our common stock on a "best efforts" basis
with the maximum aggregate public offering price under both
agreements combined of $33.4 million. The securities were
offered as part of a Controlled Equity Offering, or CEO(SM).
Under one of the sales agreements, we may sell up to $8.4
million of our common stock "at the market" or directly into
the established trading market for our common stock. Under the
other sales agreement, we may sell up to $25 million of our
common stock in any manner other than "at the market". Under
each agreement, if we and the underwriter agree to sell our
common stock on certain terms, the underwriter will use its
commercially reasonable efforts to sell our securities up to
the amount agreed upon, but will not be required to sell any
specific number or dollar amount of our securities. The net
proceeds from the sales will be the aggregate sales price at
which our securities were sold after deduction for the
underwriter's commission/discount of up to 4%. We will issue
to the underwriter five-year warrants to purchase shares of
our common stock in an amount equal to 10% of the number of
shares of common stock sold by us pursuant to the offering at
an exercise price per share equal to 130% of the volume
weighted average price at which such shares were issued. On
October 19, 2001, we and the investment banking firm executed
amendments to the sales agreements previously entered into by
the investment banking firm and us on June 12, 2001, and to
the advisory agreement previously entered into on April 11,
2001 and amended on June 12, 2001. The amendments relate
primarily to modifications of the compensation provisions of
the sales agreements. Through placement notices under each
sales agreement, during October and November of 2001, 949,710
shares of our common stock were sold pursuant to the $25
million sale agreement for aggregate cash proceeds of $3.8
million and approximately 124,800 shares of our common stock
were sold pursuant to the $8.4 million sale agreement for
aggregate cash proceeds of $0.4 million.
o On December 10, 2001, we sold to certain institutional
investors 519,480 shares of our common stock under the shelf
registration statement for cash proceeds of approximately $2.0
million.
o On December 13, 2001, under a second placement notice related
to the aforementioned $25 million sales agreement, we sold
246,883 shares of our common stock for aggregate cash proceeds
of approximately $1.0 million.
o On December 21, 2001, we sold to our employees through our
Employee Stock Purchase Plan (or ESPP), 23,513 shares of our
common stock for $67,953. Pursuant to the ESPP, the shares
were sold at a 15% discount to market on the date of purchase.
We also entered into the following financing transactions in March
2002:
o On March 12, 2002, we sold 2,575,000 shares of our common
stock at $2.00 per share for $5.15 million
38
of gross cash proceeds off of our shelf registration
statement. The investors also received warrants to purchase up
to 643,750 shares of our common stock at an exercise price of
$2.75 per share. Offering costs of this transaction were
approximately $230,000.
o On March 15, 2002, we sold 525,000 shares of our common stock
at $2.00 per share for $1.05 million of gross cash proceeds
off of our shelf registration statement. The investors also
received warrants to purchase up to 131,250 shares of our
common stock at an exercise price of $2.75 per share. Offering
costs of this transaction were approximately $130,000.
During 2001, we contracted two functional genomics' technology
out-licensing agreements with Pfizer, Inc. and received initial cash payments
aggregating $300,000.
RELATED PARTY TRANSACTIONS
During 1987 and 1988, Alvin J. Glasky, Ph.D., our Chief Executive
Officer (or CEO) who is also a major stockholder of ours, loaned a total of
$270,650 to us 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 (or RPU's). The RPU's were converted into 112,000
shares of our common stock.
From 1989 through 1993, we borrowed an additional $757,900 from Dr.
Glasky, which, together with accrued interest of $300,404, aggregated $1,058,304
on December 31, 1993, at which time we issued 200,000 shares of common stock to
Dr. Glasky in exchange for cancellation of $500,000 of loans made to us. The
remaining $257,900 in principal and $300,404 of accrued interest 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 we advanced cash to Dr.
Glasky to pay payroll taxes arising from his exercise of a warrant for 88,173
shares of common stock at $3.75 per share in August 2000. The note was partially
repaid in 2001. The note balance at December 31, 2001 was $135,574.
Assignment of Patents by Chief Executive Officer
Dr. Glasky assigned to us all of his rights in nine patents. In
connection with the assignment of these patents to us, we entered into royalty
agreements with Dr. Glasky (or CEO Agreements), which expire concurrently with
the expiration of the underlying patents and any additional patents derived from
the underlying patents. Under each of the CEO Agreements, as amended, we are
obligated to pay Dr. Glasky a royalty of two percent (2%) of all revenues
derived by us from the use and sale by us of any products or methods included in
the patents. Further, in the event that we terminate Dr. Glasky's employment
without cause, the royalty rate under each CEO Agreement will increase from two
percent (2%) to five percent (5%). Finally, in the event of Dr. Glasky's death,
the family or estate is entitled to continue to receive under each CEO Agreement
royalties at a rate of two percent (2%) for the duration of the respective CEO
Agreement.
McMaster University Agreement
On July 10, 1996, we entered into a license agreement with McMaster
University (or McMaster) that allows us the use of certain technologies
developed by McMaster covered in the patents filed jointly by us and McMaster
(US Patent Nos. 5,447,939, 5,801,184, 6,027,936, 6,338,963, and 6,350,752), all
of which are also encumbered by CEO Agreements. Under the agreement, we paid a
one time licensing fee of $15,000 and are obligated to pay to McMaster an annual
royalty of five percent (5%) on net sales of products containing compounds
developed by McMaster. In July 1997, we began, and have continued making, annual
minimum royalty payments of $25,000.
Director and Officer Notes for the Exercise of Equity Instruments
We made loans to certain of our directors and officers for the exercise
of stock options or the purchase of stock. We loaned $286,560 in 1998, and
$435,649 in 2000. During 2000, one individual paid $61,560 back to us and during
2001, in connection with the settlement of a litigation matter, we forgave a
$45,000 note to one individual. At December 31, 2001, $615,649 remained due to
us from directors and officers for the purchase of shares of common stock or the
exercise of stock options. These notes accrue interest at rates between 7% and
9% and are classified as an offset to stockholders' equity.
CONTRACTUAL AND COMMERCIAL OBLIGATIONS
Debt and Capital Leases
In September 1998, we entered into a Master Note and Security Agreement
(or the Note) with a finance company affiliated with our bank whereby we
borrowed $1.5 million under the Note for equipment and computer software
purchases. Borrowings are collateralized by substantially all of our assets,
exclusive of our 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. We
have also granted to the finance company a warrant to purchase up to 13,459
shares of our common stock at $7.43 a share which was valued at $45,000 using
the Black-Scholes option-pricing
39
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, we financed the premium amounting to $322,000 for a
three-year insurance policy through a borrowing from the insurer. The loan was
payable through August 2001 in monthly installments of $30,556 including
principal and 8.57% annual interest. At December 31, 2000, approximately
$210,000 related to this note was classified on the balance sheet as accrued
expenses.
On September 22, 2000 we signed an agreement to lease up to $2.5
million in equipment from a major equipment leasing and remarketing company (or
lessor). Under the terms of the agreement, we can draw up to $2.5 million
through September 2001 and are required to make quarterly payments over three
years on cumulative advances drawn by us. We drew a total of $1,029,381 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
at that time, re-marketed by the lessor, or re-leased by us.
In October 2000, we financed $151,249 of laboratory equipment through
an equipment vendor under a capital lease agreement. Under the terms of the
agreement, we are required to make monthly payments of $4,839 over three years,
including effective interest at approximately 9% per annum.
Future installments of debt principal on capital lease obligations are
as follows:
Year Ending
December 31: Amount
------------ ----------
2002 $ 654,434
2003 315,355
2003 148,350
----------
$1,118,139
==========
Additionally, under our current capital lease obligations arrangements,
we will be obligated to pay approximately $69,000 in interest.
Facility, Property and Equipment Operating Leases
We lease certain facilities for our research and development and
administrative functions and its subsidiaries. Certain leases also require
scheduled annual fixed rent increases, payments of property taxes, insurance and
maintenance. Our functional genomics segment sub-leases a facility from its
collaboration partner (see "Joint Venture" below) that requires us to pay 50% of
the lease payments plus any shortfall by our collaboration partner. In 2001, we
paid approximately 85% of the minimum lease requirements under this lease
representing a contingent rental incurred in excess of our 50% commitment of
approximately $102,000 in 2001. The minimum lease requirements below include
100% of the minimum lease requirements to be made under this lease. In addition,
we lease certain office and telephone equipment under non-cancelable operating
leases.
40
Minimum lease requirements for each of the next five years and
thereafter under the property and equipment leases are as follows:
Year ending December 31: Amount
------------------------ -----------
2002 $ 1,049,400
2003 944,200
2004 681,600
2005 405,800
2006 171,500
-----------
$ 3,252,500
===========
Research and Fellowship Grants
At December 31, 2001, we had committed to pay approximately $419,000
during 2002 and an aggregate of approximately $528,000 from 2003 through 2005,
principally to the University of California, Irvine to conduct general
scientific research programs.
Joint Venture
In September 1999, we entered into a three-year joint venture agreement
with the University of California, Irvine (or UCI) to assist in the marketing
and commercialization of discoveries made by certain members of its functional
genomics science department. We are 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. As of December 31, 2001 no obligation remains under this
minimum obligation. The agreement is cancelable by either UCI or us upon giving
thirty days notice. We have 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.
FINANCIAL MARKET RISKS
We are exposed to certain market risks associated with interest rate
fluctuations and credit risk on our marketable securities and borrowing
arrangements. All investments in marketable securities and borrowing
arrangements are entered into for purposes other than trading. Our primary
objective of our investment activities is to preserve principal while at the
same time maximizing yields without significantly increasing risk. We do not
utilize hedging contracts or similar instruments.
Our investments during 2001 and as of December 31, 2001 are fixed rate,
short-term corporate and government notes and bonds, which are available for
sale. Because the interest rates are fixed, changes in interest rates affect the
fair value of these investments but do not affect the interest earnings. Because
these financial instruments are considered "available for sale," all changes in
fair value is recorded in stockholders' equity as "Unrealized (losses) gains on
available-for-sale securities" until the investment is either sold or matures,
at which time the gain or loss, if any, is recognized as a realized gain or loss
in the statement of operations. If a 10% change in interest rates were to have
occurred on December 31, 2001, any decline in the fair value of our investments
would not be material. In addition, we are exposed to certain market risks
associated with corporations' credit ratings of which we have purchased
corporate paper (or bonds). If these companies were to experience a significant
detrimental change in their credit ratings, the fair market value of such
corporate paper may significantly decrease. If these companies were to default
on such corporate paper, we may lose part or all of our principal. We believe
that we effectively manage this market risk by diversifying our corporate paper
investments by purchasing a few bonds of many large, well known, companies in a
variety of industries.
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 our investment portfolio, and (4) credit risk of the
companies' bonds in which we invest. 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.
Our borrowings bear interest at fixed rates. Changes in interest rates
affect the fair value of our borrowings, but do not have an impact on interest
expense. Because of the relatively short-term nature of our borrowings,
fluctuations in fair value are not deemed to be material.
41
BUSINESS OUTLOOK
You should read the following discussion of our business outlook
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.
Pharmaceutical Business
We are near the end of a pivotal clinical trial for Neotrofin in
Alzheimer's disease. This clinical trial should result in statistically
significant data showing whether or not Neotrofin has efficacy in the treatment
of Alzheimer's disease. It should also show whether or not Neotrofin has acute
affect on certain sub-populations of patients that participated in the trial
and, possibly provide insight into appropriate clinical study protocols for
future clinical trials. The results of this trial should be known during the
second quarter of 2002. We hope that the current pivotal trial will return
positive results that will make the marketing of Neotrofin for the treatment of
Alzheimer's disease come to fruition within two years. We believe that this drug
candidate, with further development and study, will show efficacy for the
treatment of Alzheimer's disease, however, our ability to do so may be limited
or prevented if sufficient funds cannot be raised. However, if results from this
clinical trial show that Neotrofin has no efficacy in the treatment of
Alzheimer's disease, we will stop all trials of Neotrofin in Alzheimer's disease
and focus all of our resources on other opportunities for this drug candidate
and all of the other drug candidates that we have for the treatment of nervous
system diseases and indications, and drug candidates for the treatment of
certain cancer and related indications, all of which are discussed in "ITEM 1.
BUSINESS" above.
The capital markets have historically perceived us as a "one-drug"
company. Therefore, if the results of our pivotal trial for Neotrofin in the
treatment of Alzheimer's disease show that Neotrofin is unsuccessful, our
ability to raise additional capital will be significantly harmed. If this were
to occur, we would likely engage in immediate restructuring activities under a
board-approved operational restructuring plan, which would include, but would
not be limited to (a) layoffs of a substantial number of our personnel, (b)
reduction in the scope and nature of our research and development activities,
and (c) termination of operating leases and other contractual arrangements.
Although these measures would reduce our ongoing burn-rate, there would be
certain up-front non-recurring cash costs incurred, including severance and
other termination-related costs. However, our hope is that, in the event that
Neotrofin is unsuccessful, the capital markets recognize the value in developing
all of our drug candidates for our targeted diseases and indications; therefore,
our ability to raise additional capital may not be harmed. We intend to continue
to expand the number of our drug candidates and indications. If we are able to
raise sufficient funds to proceed with our proposed pre-clinical and clinical
work on all of our drug candidates, we believe that our pipeline of drug
candidates will eventually produce outstanding company growth. There is a risk,
however, notwithstanding the results from the Neotrofin pivotal trial, that our
ability to raise capital will be limited and that we will be forced to engage in
restructuring activities as discussed previously.
Our current pipeline consists of six drug candidates: Neotrofin(TM),
AIT-034, NEO-339, Neoquin(TM), satraplatin, and elsamitrucin. We are currently
developing these drug candidates for the treatment in Alzheimer's disease,
spinal cord injury, Parkinson's disease, peripheral neuropathy, dementia and
memory impairment associated with aging, mild cognitive impairment, cognition,
stroke, schizophrenia, other neurodegenerative diseases, attention deficits,
prostate cancer, ovarian carcinoma, bladder cancer, Non-Hodgkin's lymphoma, and
radiation sensitization as it relates to radiation treatment for cancer.
Currently, each of our drug candidates relates to life threatening diseases and
is novel in its treatment or indication; therefore, we hope for expedited
regulatory approval, if appropriate. We believe that all of our proposed drug
candidates, with sufficient funding, will eventually be marketed by us or with
the assistance and leadership of a co-development partner.
We continue development of therapeutic technology that is novel in its
treatment or indication. We are currently looking for additional cognitive
enhancers both related to Neotrofin and AIT-034 and novel compounds. As
previously noted, Neotrofin is in late stage development for the treatment of
Alzheimer's disease and is being evaluated in spinal cord injury, Parkinson's
disease and peripheral neuropathy in chemotherapy patients. Additionally,
NEO-339 is our lead drug candidate for mild cognitive impairment and attention
disorders. We also have additional compounds in evaluation for attention
disorders. Similarly, we have a series of compounds for psychosis indications,
including the NEO-356 series and other compounds, from which a lead candidate is
in the process of being selected. In recent studies conducted by us, some of
these compounds show favorable receptor affinity over psychosis drugs currently
marketed. We hope that these compounds will eventually provide to people who
suffer from schizophrenia, therapy that has improved efficacy and reduced side
effects. We believe that we will market satraplatin initially for the treatment
of prostate cancer and eventually other cancer types. We also believe that
satraplatin will have better efficacy for the cancer indications contemplated
than current platinum based drug therapy and that satraplatin will reduce the
cost of treatment for certain cancer patients since it has proven oral
bio-availability making it possibly a candidate for out-patient administration.
We believe that Neoquin and elsamitrucin will both eventually be marketed for
the treatment of bladder cancer and Non-Hodgkin's lymphoma,
42
respectively. In addition, Neoquin has the potential to become one of the first
radiosensitizer drugs on the market and would improve the effectiveness of
cancer related radiation treatment.
We currently lack sufficient funds and strategic alliances to complete
our current business plans. We believe that our existing capital resources,
including net cash proceeds of $5.8 million raised from the sale of our common
stock in March 2002, will not be adequate to fund our capital needs for the next
12 months of operations at our current level. We do not know whether or not we
will be able to secure sufficient new funds to continue our businesses for the
next twelve months and whether such funds can be obtained in time before we will
have to take other actions that we otherwise would not take, like selling
certain or all of our intellectual property rights and restructuring our
operations or a combination of these activities.
If we are able to secure sufficient new funds and are able to develop
strategic alliances with other pharmaceutical businesses for co-development
opportunities, we would expect that our operating expenses would 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. We also expect
that research and development expenses will increase as we expand our clinical
trials on all of our drug candidates. Depending on the results of our ongoing
and planned clinical trials for Neotrofin and other drug candidates and the
outcome of the regulatory approval process, we will expand our marketing and
manufacturing abilities as we approach commercializing each of our product
candidates.
Functional Genomics Business
NeoGene believes and has proven during 2001 that it has the expertise
to discover novel therapeutic targets. During 2001, we signed two contracts with
Pfizer for out-licensing two of our G-protein-coupled receptor systems that we
discovered.
Over the next twelve months, we anticipate that our first agreement
with Pfizer, Inc. will reach at least one milestone, thereby triggering payments
from Pfizer to NeoGene. In addition, the scope of this agreement may be
expanded. The second Pfizer agreement, may also reach the first milestone during
2002. We anticipate that we will enter into additional agreements with
pharmaceutical or biotechnology companies during 2002 whereby they would obtain
rights to certain of the proprietary receptor/ligand systems we have discovered.
Additional types of agreements that we anticipate entering into this
year are strategic alliances under collaborative research agreements whereby we
will determine the natural ligands of a company's proprietary receptors. This
type of agreement is anticipated to involve ongoing research funding for several
years. We may also provide cell lines and clones to certain companies for
compensation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS", subheading "Financial market risks", above.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants......................................................... 44
Consolidated Balance Sheets...................................................................... 45
Consolidated Statements of Operations............................................................ 46
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)........ 47
Consolidated Statements of Cash Flows............................................................ 53
Notes to Consolidated Financial Statements....................................................... 55
43
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) and subsidiaries as of December 31, 2001 and 2000,
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, 2001 and for the period from inception (June 15, 1987) to December
31, 2001. These consolidated 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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NeoTherapeutics,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of its
consolidated operations and its cash flows for each of the three years in the
period ended December 31, 2001 and for the period from inception (June 15, 1987)
to December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments relating to recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
Orange County, California
March 27, 2002
44
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------------------
ASSETS 2000 2001
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents............................ $ 6,158,375 $ 749,213
Marketable securities and short-term investments..... 5,311,215 6,407,388
Other receivables.................................... 334,059 474,007
Prepaid expenses and refundable deposits............. 418,010 386,229
------------------ -----------------
Total current assets............................. 12,221,659 8,016,837
PROPERTY AND EQUIPMENT, at cost:
Equipment............................................ 3,412,932 5,397,052
Leasehold improvements............................... 1,853,227 1,937,912
Accumulated depreciation and amortization............ (1,850,076) (2,646,103)
------------------ ------------------
Property and equipment, net...................... 3,416,083 4,688,861
OTHER ASSETS - Prepaid expenses and deposits.............. 53,242 119,164
------------------ -----------------
Total assets..................................... $ 15,690,984 $ 12,824,862
================== =================
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 3,965,506 $ 4,186,085
Accrued payroll and related taxes.................... 265,383 236,223
Note payable to related party........................ 285,574 135,574
Current portion of capital lease obligations ........ 593,609 654,434
------------------ -----------------
Total current liabilities........................ 5,110,072 5,212,316
CAPITAL LEASE OBLIGATIONS, net of current portion......... 474,004 463,705
OTHER NON-CURRENT LIABILITIES............................. 86,532 361,831
------------------ -----------------
Total liabilities................................ 5,670,608 6,037,852
COMMITMENTS AND CONTINGENCIES (NOTE 10)
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, 2000 and 2001.................... - -
Common Stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 13,307,227 and
23,777,158 shares, respectively............... 13,307 23,777
Additional paid in capital........................... 101,169,912 134,659,267
Deferred compensation expense........................ (959,850) (1,889,628)
Notes receivable from officers and directors......... (660,649) (615,649)
Accumulated other comprehensive income............... 763 87,065
Deficit accumulated during the development stage..... (96,823,218) (125,477,822)
------------------ -----------------
Total stockholders' equity....................... 2,740,265 6,787,010
------------------ ----------------
Total liabilities, minority interest and
stockholders' equity............................. $ 15,690,984 $ 12,824,862
================== ================
The accompanying notes are an integral part of these consolidated balance
sheets.
45
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,
1999 2000 2001 2001
--------------- ---------------- --------------- ---------------
REVENUES:
Grants................................ $ - $ - $ - $ 497,128
Licensing and other................... - - 41,113 41,113
--------------- ---------------- --------------- ---------------
- - 41,113 538,241
OPERATING EXPENSES:
Research and development.............. 20,057,687 38,766,884 20,611,119 95,452,791
General and administrative............ 3,465,443 5,106,812 7,579,866 25,045,009
Settlement of litigation.............. 2,458,359 - - 2,458,359
--------------- ---------------- --------------- ---------------
25,981,489 43,873,696 28,190,985 122,956,159
--------------- ---------------- --------------- ---------------
LOSS FROM OPERATIONS........................ (25,981,489) (43,873,696) (28,149,872) (122,417,918)
OTHER INCOME (EXPENSE):
Interest income ...................... 199,267 776,348 693,766 2,926,598
Interest expense...................... (243,410) (1,857,640) (129,567) (2,923,188)
Other income (expense)................ 35,727 (8,702) (200,694) (146,234)
--------------- ---------------- --------------- ---------------
Total other income (expense)........ (8,416) (1,089,994) 363,505 (142,824)
--------------- ---------------- --------------- ---------------
NET LOSS BEFORE MINORITY
INTEREST IN CONSOLIDATED
SUBSIDIARIES............................. (25,989,905) (44,963,690) (27,786,367) (122,560,742)
MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES'
NET LOSS.................................. - (1,463,597) (48,453) (1,512,050)
--------------- ---------------- --------------- ---------------
NET LOSS............................ $ (25,989,905) $ (46,427,287) $ (27,834,820) $ (124,072,792)
=============== ================ =============== ===============
BASIC AND DILUTED LOSS
PER SHARE................................. $ (3.68) $ (4.37) $ (1.46)
=============== ================ ===============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING............................... 7,105,041 10,629,408 19,674,500
=============== ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
46
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
REVENUE ADDITIONAL
PARTICIPATION PAID IN DEFERRED
PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION
--------------------- ---------------------- ------------- ----------- ---------------
SHARES PAR SHARES PAR
---------- ---------- ---------- -----------
Balance at Inception (June 15, 1987) - - - - - - -
Net loss - - - - - - -
Common stock issued - - 465,902 2,100 - - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 1987 - - 465,902 2,100 - - -
Net loss - - - - - - -
Common Stock Issued - - 499,173 2,250 - - -
Revenue participation units
issuance - - - - 594,000 - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 1988 - - 965,075 4,350 594,000 - -
Net loss - - - - - - -
Revenue participation units
issuance - - - - 82,000 - -
Net effect of acquisition - - 145,000 354,316 - - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 1989 - - 1,110,075 358,666 676,000 - -
Net loss - - - - - - -
Exercise of warrants - - 31,108 136,402 - - -
Common stock issued in exchange
for accrued salaries - - 402,518 503,144 - - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 1990 - - 1,543,701 998,212 676,000 - -
Net loss - - - - - - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 1991 - - 1,543,701 998,212 676,000 - -
Net loss - - - - - - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
(continuation of table)
NOTES DEFICIT
RECEIVABLE ACCUMULATED ACCUMULATED
FROM OTHER DURING THE
DIRECTORS AND COMPREHENSIVE DEVELOPMENT
OFFICERS INCOME (LOSS) STAGE TOTAL
------------ --------------- -------------- -------------
Balance at Inception (June 15, 1987) - - - -
Net loss - - (31,875) (31,875)
Common stock issued - - - 2,100
------------ --------------- -------------- -------------
Balance at December 31, 1987 - - (31,875) (29,775)
Net loss - - (556,484) (556,484)
Common Stock Issued - - - 2,250
Revenue participation units
issuance - - - 594,000
------------ --------------- -------------- -------------
Balance at December 31, 1988 - - (588,359) 9,991
Net loss - - (934,563) (934,563)
Revenue participation units
issuance - - - 82,000
Net effect of acquisition - - - 354,316
------------ --------------- -------------- -------------
Balance at December 31, 1989 - - (1,522,922) (488,256)
Net loss - - (859,172) (859,172)
Exercise of warrants - - - 136,402
Common stock issued in exchange
for accrued salaries - - - 503,144
------------ --------------- -------------- -------------
Balance at December 31, 1990 - - (2,382,094) (707,882)
Net loss - - (764,488) (764,488)
------------ --------------- -------------- -------------
Balance at December 31, 1991 - - (3,146,582) (1,472,370)
Net loss - - (423,691) (423,691)
------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
47
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL
PARTICIPATION PAID IN DEFERRED
PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION
--------------------- ---------------------- ------------- ----------- ---------------
SHARES PAR SHARES PAR
---------- ---------- ---------- -----------
Balance at December 31, 1992 - - 1,543,701 998,212 676,000 - -
Net loss - - - - - - -
Common stock issued in exchange
for investment banking service - - 40,000 54,000 - - -
Common stock issued in exchange
for accrued salaries - - 255,476 638,694 - - -
Common stock issued in exchange
for note payable to President - - 200,000 500,000 - - -
Common stock issued in exchange
for accrued expenses - - 20,842 52,104 - - -
Stock options issued in exchange
for accrued professional services - - - 108,000 - - -
Stock options issued in exchange
for future services - - - 39,750 - - -
Stock options issued for services - - - - (93,749) - -
---------- ---------- ---------- ----------- ------------- ----------- --------------
Balance at December 31, 1993 - - 2,060,019 2,390,760 582,251 - -
Net loss - - - - - - -
Common stock issued for cash - - 13,000 32,500 - - -
Amortization of deferred
compensation - - - - 93,749 - -
---------- ---------- ---------- ----------- ------------- ----------- --------------
Balance at December 31, 1994 - - 2,073,019 2,423,260 676,000 - -
Net loss - - - - - - -
Common stock issued for cash - - 22,000 55,000 - - -
Common stock forfeiture - - (678,836) (1,193,943) - - -
Common stock reissued - - 678,836 1,697,090 - - -
Stock options issued for services - - - 105,000 - - -
---------- ---------- ---------- ----------- ------------- ----------- --------------
Balance at December 31, 1995 - - 2,095,019 3,086,407 676,000 - -
Net loss - - - - - - -
Common stock issued for cash - - 266,788 633,625 - - -
Stock options issued for services - - - 103,950 - - -
Conversion of revenue participation
units into common stock - - 300,000 1,125,000 (676,000) - -
Common stock and warrants issued
for cash net of costs of
public offering - - 2,700,000 18,176,781 - - -
---------- ---------- ---------- ----------- ------------- ----------- --------------
(continuation of table)
NOTES DEFICIT
RECEIVABLE ACCUMULATED ACCUMULATED
FROM OTHER DURING THE
DIRECTORS AND COMPREHENSIVE DEVELOPMENT
OFFICERS INCOME (LOSS) STAGE TOTAL
------------- --------------- -------------- -------------
Balance at December 31, 1992 - - (3,570,273) (1,896,061)
Net loss - - (237,815) (237,815)
Common stock issued in exchange
for investment banking service - - - 54,000
Common stock issued in exchange
for accrued salaries - - - 638,694
Common stock issued in exchange
for note payable to President - - - 500,000
Common stock issued in exchange
for accrued expenses - - - 52,104
Stock options issued in exchange
for accrued professional services - - - 108,000
Stock options issued in exchange
for future services - - - 39,750
Stock options issued for services - - - (93,749)
------------ --------------- -------------- -------------
Balance at December 31, 1993 - - (3,808,088) (835,077)
Net loss - (312,342) (312,342)
Common stock issued for cash - - - 32,500
Amortization of deferred
compensation - - - 93,749
------------ --------------- -------------- -------------
Balance at December 31, 1994 - - (4,120,430) (1,021,170)
Net loss - - (895,378) (895,378)
Common stock issued for cash - - - 55,000
Common stock forfeiture - - - (1,193,943)
Common stock reissued - - - 1,697,090
Stock options issued for services - - - 105,000
------------ --------------- -------------- -------------
Balance at December 31, 1995 - - (5,015,808) (1,253,401)
Net loss - - (1,038,875) (1,038,875)
Common stock issued for cash - - - 633,625
Stock options issued for services - - - 103,950
Conversion of revenue participation
units into common stock - - (449,000) -
Common stock and warrants issued
for cash net of costs of
public offering - - - 18,176,781
------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
48
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL
PARTICIPATION PAID IN DEFERRED
PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION
--------------------- ---------------------- ------------- ----------- ---------------
SHARES PAR SHARES PAR
---------- ---------- ---------- -----------
Balance at December 31, 1996 - - 5,361,807 23,125,763 - - -
Net loss - - - - - - -
Unrealized gains on
available-for-sale securities - - - - - - -
Comprehensive loss
Stock options exercise - - 104,000 2,600 - - -
Stock options issued for services - - - 60,000 - - -
Reincorporation - - - (23,182,897) - 23,182,897 -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 1997 - - 5,465,807 5,466 - 23,182,897 -
Net loss - - - - - - -
Unrealized gains on
available-for-sale securities - - - - - - -
Comprehensive loss
Common stock and warrants issued
for cash under Line of Equity
agreement, net of issuance
costs - - 506,047 506 - 3,451,276 -
Stock options exercised by
employees, directors and
consultants - - 134,000 134 - 340,426 -
Notes receivable from certain
officers and directors to
exercise stock options - - - - - - -
Exercise of underwriters' warrant - - 41,000 41 - 373,879 -
Stock options issued for services - - - - - 422,264 -
Warrant to purchase common stock
issued in connection with
equipment financing - - - - - 45,000 -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
(continuation of table)
NOTES DEFICIT
RECEIVABLE ACCUMULATED ACCUMULATED
FROM OTHER DURING THE
DIRECTORS AND COMPREHENSIVE DEVELOPMENT
OFFICERS INCOME (LOSS) STAGE TOTAL
------------- --------------- -------------- -------------
Balance at December 31, 1996 - - (6,503,683) 16,622,080
Net loss - - (6,161,541) (6,161,541)
Unrealized gains on
available-for-sale securities - 20,256 - 20,256
--------------- -------------- -------------
Comprehensive loss 20,256 (6,161,541) (6,141,285)
Stock options exercise - - - 2,600
Stock options issued for services - - - 60,000
Reincorporation - - - -
------------ --------------- -------------- -------------
Balance at December 31, 1997 - 20,256 (12,665,224) 10,543,395
Net loss - - (11,604,556) (11,604,556)
Unrealized gains on
available-for-sale securities - 3,951 - 3,951
--------------- -------------- -------------
Comprehensive loss 3,951 (11,604,556) (11,600,605)
Common stock and warrants issued
for cash under Line of Equity
agreement, net of issuance
costs - - - 3,451,782
Stock options exercised by
employees, directors and
consultants - - - 340,560
Notes receivable from certain
officers and directors to
exercise stock options (286,560) - - (286,560)
Exercise of underwriters' warrant - - - 373,920
Stock options issued for services - - - 422,264
Warrant to purchase common stock
issued in connection with
equipment financing - - - 45,000
------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
49
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL
PARTICIPATION PAID IN DEFERRED
PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION
--------------------- ---------------------- ------------- ----------- ---------------
SHARES PAR SHARES PAR
---------- ---------- ---------- -----------
Balance at December 31, 1998 - - 6,146,854 6,147 - 27,815,742 -
Net loss - - - - - - -
Unrealized gains on
available-for-sale securities - - - - - - -
Comprehensive loss
Sale of common stock to Private
Equity Line investor, net of
issuance costs - - 211,393 211 - 1,917,941 -
Sale of shares of 5% Series A
Preferred stock, net of
offering costs and allocated
warrants 400 3,608,788 - - - - -
Conversion of preferred stock
into common stock (400) (3,608,788) 347,334 347 - 3,608,441 -
Common stock and warrants issued
for cash under an exempt
private sale agreement, net of
offering costs - - 400,000 400 - 3,982,316 -
Sale of common stock pursuant to
a secondary public offering,
net of offering costs - - 1,150,000 1,150 - 8,705,510 -
Common stock issued to legal
counsel for services - - 12,500 13 - 69,987 -
Fair value of warrants issued as
compensation to investment
advisor - - - - - 204,280 -
Exercise of underwriters' warrants - - 9,000 9 - 82,071 -
Stock options exercised by employees - - 1,900 2 - 12,487 -
Stock options and warrants issued for
legal consulting services - - - - - 119,471 -
Sale of common stock to private
investors - - 845,594 846 - 9,440,157 -
Common stock forfeiture in settlement
of litigation - - (678,835) (679) - (1,696,411) -
Common stock and warrants issued in
settlement of litigation - - 332,630 333 - 4,155,116 -
Dividends paid on preferred stock - - - - - - -
------- ---------- ---------- ----------- ------------- ----------- --------------
(Continuation of table)
NOTES DEFICIT
RECEIVABLE ACCUMULATED ACCUMULATED
FROM OTHER DURING THE
DIRECTORS AND COMPREHENSIVE DEVELOPMENT
OFFICERS INCOME (LOSS) STAGE TOTAL
------------- --------------- -------------- -------------
Balance at December 31, 1998 (286,560) 24,207 (24,269,780) 3,289,756
Net loss - - (25,989,905) (25,989,905)
Unrealized gains on
available-for-sale securities - (62,779) - (62,779)
------------- ------------ -----------
Comprehensive loss (62,779) (25,989,905) (26,052,684)
Sale of common stock to Private
Equity Line investor, net of
issuance costs - - - 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 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
Dividends paid on preferred stock - - (136,246) (136,246)
------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
50
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL
PARTICIPATION PAID IN DEFERRED
PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION
--------------------- ---------------------- ------------- ----------- ---------------
SHARES PAR SHARES PAR
---------- ---------- ---------- -----------
Balance at December 31, 1999 - - 8,778,370 8,779 - 58,417,108 -
Net loss - - - - - - -
Unrealized gains on
available-for-sale securities - - - - - - -
Comprehensive loss
Sale of common stock, net of
issuance costs - - 2,805,592 2,806 - 28,755,541 -
Fair value of warrants sold with
5% convertible debentures - - - - - 10,000,000 -
Conversion of convertible debentures - - 1,594,177 1,594 - 1,673,869 -
Fair value of warrants sold in
subsidiary offerings - - - - - 512,740 -
Common stock to be issued to
vendor for services - - - 27 - 104,973 -
Fair value of warrants to be
issued to vendor for services - - - - - 131,250 -
Common stock issued to
consultants for service - - 2,000 2 - 23,498 -
Public warrant exercise - - 4,490 5 - 51,181 -
Stock options exercised by employees - - 92,598 93 - 539,153 -
Stock options exercised by
non-employees - - 30,000 1 - 749 -
Deferred compensation from
employee stock options - - - - - 959,850 (959,850)
Notes receivable from certain
officers and directors to
purchase stock or exercise
stock options - - - - - - -
Repayment and forgiveness of
notes to officers and directors
upon exercise of stock options - - - - - - -
------ ---------- ---------- ----------- ------------- ----------- ---------------
(Continuation of table)
NOTES DEFICIT
RECEIVABLE ACCUMULATED ACCUMULATED
FROM OTHER DURING THE
DIRECTORS AND COMPREHENSIVE DEVELOPMENT
OFFICERS INCOME (LOSS) STAGE TOTAL
------------- --------------- -------------- -------------
Balance at December 31, 1999 (286,560) (38,572) (50,395,931) 7,704,824
Net loss - - (46,427,287) (46,427,287)
Unrealized gains on
available-for-sale securities - 39,335 - 39,335
--------------- -------------- -------------
Comprehensive loss 39,335 (46,427,287) (46,387,952)
Sale of common stock, net of
issuance costs - - - 28,758,347
Fair value of warrants sold with
5% convertible debentures - - - 10,000,000
Conversion of convertible debentures - - - 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 service - - - 23,500
Public warrant exercise - - - 51,186
Stock options exercised by employees - - - 539,246
Stock options exercised by
non-employees - - - 750
Deferred compensation from
employee stock options - - - -
Notes receivable from certain
officers and directors to
purchase stock or exercise
stock options (435,649) - - (435,649)
Repayment and forgiveness of
notes to officers and directors
upon exercise of stock options 61,560 - - 61,560
------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
51
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL
PARTICIPATION PAID IN DEFERRED
PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION
--------------------- ---------------------- ------------- ----------- ---------------
SHARES PAR SHARES PAR
---------- ---------- ---------- -----------
Balance at December 31, 2000 - - 13,307,227 13,307 - 101,169,912 (959,850)
Net loss - - - - - - -
Unrealized gains on
available-for-sale securities - - - - - - -
Comprehensive loss
Sale of common stock for cash
net of issuance costs - - 9,979,340 9,979 - 28,316,993 -
Fair value of stock options
granted to consultant - - - - - 10,597 -
Fair value of warrants issued
for consulting services - - - - - 609,875 -
Fair value of common stock
issued for consulting services - - 5,000 5 - 22,742 -
Conversion of Preferred Stock of
Subsidiary into Series C
Preferred Stock 200 1,973,488 - - - - -
Conversion of Series C Preferred
Stock into common stock (170) (1,677,465) 485,591 486 - 1,676,979 -
Purchase and retirement of
Series C Preferred Stock (30) (296,023) - - - - -
Deferred compensation from
employee stock options - - - - - 2,391,118 (2,391,118)
Amortization of employee stock
option compensation
previously deferred - - - - - - 1,461,340
Sale of stock in subsidiary - - - - - 900 -
Dividends paid on preferred stock - - - - - - -
Reclassification of warrants
fair value and other
items previously included in
minority interest - - - - - 460,151 -
Litigation settlement - - - - - - -
---------- ---------- ---------- ----------- ------------- ----------- ---------------
Balance at December 31, 2001 - - 23,777,158 23,777 - 134,659,267 (1,889,628)
========== ========== ========== =========== ============= =========== ===============
(Continuation of table)
NOTES DEFICIT
RECEIVABLE ACCUMULATED ACCUMULATED
FROM OTHER DURING THE
DIRECTORS AND COMPREHENSIVE DEVELOPMENT
OFFICERS INCOME (LOSS) STAGE TOTAL
------------- --------------- -------------- -------------
Balance at December 31, 2000 (660,649) 763 (96,823,218) 2,740,265
Net loss - - (27,834,820) (27,834,820)
Unrealized gains on
available-for-sale securities - 86,302 - 86,302
--------------- -------------- -------------
Comprehensive loss 86,302 (27,834,820) (27,748,518)
Sale of common stock for cash
net of issuance costs - - - 28,326,972
Fair value of stock options
granted to consultant - - - 10,597
Fair value of warrants issued
for consulting services - - - 609,875
Fair value of common stock
issued for consulting services - - - 22,747
Conversion of Preferred Stock of
Subsidiary into Series C
Preferred Stock - - - 1,973,488
Conversion of Series C Preferred
Stock into common stock - - - -
Purchase and retirement of
Series C Preferred Stock - - (3,977) (300,000)
Deferred compensation from
employee stock options - - - -
Amortization of employee stock
option compensation
previously deferred - - - 1,461,340
Sale of stock in subsidiary - - - 900
Dividends paid on preferred stock - - (815,807) (815,807)
Reclassification of warrants
fair value and other
items previously included in
minority interest - - - 460,151
Litigation settlement 45,000 - - 45,000
------------ --------------- -------------- -------------
Balance at December 31, 2001 (615,649) 87,065 (125,477,822) 6,787,010
============ =============== ============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
52
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
THROUGH
DECEMBER 31,
1999 2000 2001 2001
------------- ------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) (25,989,905) (46,427,287) (27,834,820) (124,072,792)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash items included in net loss:
Minority interest in net loss - - (162,380) (162,380)
Depreciation and amortization 519,875 588,856 796,027 2,770,660
Amortization of debt discount 13,102 13,102 13,102 39,306
Amortization of employee stock option compensation
previously deferred 393,751 755,496 1,461,340 3,415,550
Issuance of common stock for services - - 33,344 56,844
Beneficial conversion feature related to
preferred stock of consolidated subsidiary - 1,463,597 - 1,463,597
Amortization of discount on convertible
debentures and beneficial conversion
feature - 539,277 - 539,277
Fair value of warrants issued for consulting
services - - 609,875 609,875
Issuance of common stock in settlement of
litigation 2,458,359 - - 2,458,359
Forgiveness of notes to officers and
directors - - 45,000 45,000
Compensation expense for extension of Debt
Conversion Agreements, net - - - 503,147
Gain on sale of assets - - - (5,299)
Changes in operating assets and liabilities:
Increase in other receivables, prepaid expenses
and refundable deposits (35,482) (186,025) (108,167) (441,980)
Increase in accounts payable and accrued
expenses 2,334,726 329,512 220,579 3,864,931
Increase (decrease) in accrued payroll and related taxes 30,452 153,562 (29,160) 874,917
Increase in other non-current liabilities 28,812 11,411 275,299 361,830
(Repayment of) proceeds from notes payable to related
parties, net - (272,731) (150,000) 135,574
Decrease in employee expense reimbursement and
accrued interest to related parties - - - 300,404
------------ ------------- -------------- ---------------
Net cash used in operating activities (20,246,310) (43,031,230) (24,829,961) (107,243,180)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (429,861) (368,911) (1,363,516) (6,709,978)
Purchases of marketable securities
and short-term investments, net (1,248,643) (2,316,668) (1,009,871) (6,320,323)
(Increase) decrease in other assets 412,376 (300,910) (65,922) (441,639)
Payment of organization costs - - - (66,093)
Proceeds from sale of equipment - - - 29,665
Issuance of notes receivable - - - 100,000
------------ ------------- -------------- ---------------
Net cash used in investing activities (1,266,128) (2,986,489) (2,439,309) (13,408,368)
The accompanying notes are an integral part of these consolidated
financial statements.
53
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
THROUGH
DECEMBER 31,
1999 2000 2001 2001
------------ ------------- -------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:...
Proceeds from issuance of common stock and
warrants, net of related offering costs and expenses 24,048,532 29,912,724 28,326,972 105,957,813
Proceeds from issuance of common stock in
consolidated subsidiary - - 1,000 1,000
Proceeds from preferred stock issuance, net of offering 3,608,788 - - 3,608,788
Proceeds from sale of preferred stock of consolidated
subsidiary, net of issuance cost - 6,488,493 - 6,488,493
Proceeds from exercise of stock options and warrants 94,569 75,436 - 863,585
Proceeds from sale of convertible debentures,
net of issuance cost - 9,387,321 - 9,387,321
Proceeds from long-term debt - - - 2,600,448
Payments made on capital lease and loan obligations (474,326) (475,660) (667,865) (1,832,614)
Proceeds from notes receivables from officers and
directors for purchase of common stock - 61,560 - 61,560
Purchase of preferred stock of consolidated subsidiary - - (4,684,192) (4,684,192)
Payments of dividend on preferred stock of
consolidated subsidiary - - (815,807) (815,807)
Purchase of series C preferred stock - - (300,000) (300,000)
Dividends paid to preferred stockholders (136,246) - - (136,246)
Cash at acquisitions - - - 200,612
------------ ------------- -------------- ---------------
Net cash provided by financing activities 27,141,317 45,449,874 21,860,108 121,400,761
------------ ------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,628,879 (567,845) (5,409,162) 749,213
Cash and cash equivalents, beginning of period 1,097,341 6,726,220 6,158,375 -
------------ ------------- -------------- ---------------
Cash and cash equivalents, end of period 6,726,220 6,158,375 749,213 749,213
============ ============= ============== ===============
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fixed assets financed by capital lease $ - $ 475,340 $ 705,289 $ 2,916,144
============ ============= ============== ===============
Unrealized (gain) loss on marketable securities $ 62,779 $ (39,335) $ (86,302) $ (87,065)
============ ============= ============== ===============
Stock and stock options granted to employees and
non-employees below fair market value $ - $ 959,850 $ 2,391,118 $ 3,350,968
============ ============= ============== ===============
Conversion of subsidiary preferred stock into company
series C preferred stock - - $1,973,488 $ 1,973,488
============ ============= ============== ===============
Conversion of preferred stock and convertible
debentures into shares of common stock $ - $ 1,675,463 $ 1,677,465 $ 3,601,553
============ ============= ============== ===============
Retirement of preferred stock $ - $ - $ (3,977) $ (3,977)
============ ============= ============== ===============
Reclassification of warrants and other $ - $ - $ 460,151 $ 460,151
============ ============= ============== ===============
Minority interest share of proceeds from issuance of
common stock in consolidated subsidiary $ - $ - $ (100) $ (100)
============ ============= ============== ===============
Financing of insurance policies and other assets $ - $ 379,000 $ - $ 407,260
============ ============= ============== ===============
Issuance of warrants in connection with equity and
debt financing $ 344,610 $ 512,740 $ - $ 1,860,461
============ ============= ============== ===============
Dividends on preferred stock paid in shares of
common stock $ 82,312 $ - $ - $ 82,312
============ ============= ============== ===============
Conversion of the accrued liabilities to shares of
common stock $ - $ - $ - $ 1,442,567
============ ============= ============== ===============
Conversion of accrued interest into notes payable to
related parties $ - $ - $ - $ 300,404
============ ============= ============== ===============
Conversion of revenue participation units into shares of
common stock $ - $ - $ - $ 676,000
============ ============= ============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
54
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. ORGANIZATION AND BUSINESSES AND SUMMARY OF CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Organization and Business
We incorporated NeoTherapeutics, Inc. (or NeoTherapeutics) in Colorado
as Americus Funding Corporation (or AFC) in December 1987. In August 1996, we
changed AFC's name to NeoTherapeutics, Inc. and in June 1997, we reincorporated
NeoTherapeutics in the state of Delaware. We had four subsidiaries as of
December 31, 2001: NeoTherapeutics GmbH, wholly owned, incorporated in
Switzerland in April 1997 (or NeoGmbH); NeoGene Technologies, Inc., 88.4% owned,
incorporated in California in October 1999 (or NeoGene); NeoOncoRx, Inc., 90.5%
owned, incorporated in California in November 2000 (or NeoOncoRx); and
NeoTravel, Inc., wholly owned, incorporated in California in April 2001 (or
NeoTravel). We merged a previously wholly owned subsidiary, Advanced
ImmunoTherapeutics, Inc., into NeoTherapeutics, Inc. in 2001. The accompanying
consolidated financial statements include the operating results of
NeoTherapeutics, Inc. and its subsidiaries (or collectively, the Company, we,
our, and similar references).
We are a development-stage pharmaceutical company engaged in the
pharmaceutical business and the functional genomics business. Our pharmaceutical
business engages in discovering and developing novel technology platforms for
the discovery and development, co-development and out-licensing of therapeutic
drugs for nervous system disorders and in the in-licensing and development,
co-development and out-licensing of late-stage cancer drugs. Our functional
genomics business engages in discovering gene functions and validating novel
molecular targets for innovative drug development. We conduct our pharmaceutical
activities at NeoTherapeutics and NeoOncoRx, and our functional genomics
activities at NeoGene.
Summary of Critical Accounting Policies and Estimates
Development Stage Enterprise and Liquidity
We have prepared the consolidated financial statements under the
assumption that we are a going concern. We are in the development stage and,
therefore, we devote substantially all of our efforts to research and
development activities. Since our inception, we have incurred cumulative losses
of approximately $124.1 million through December 31, 2001, and expect to incur
substantial losses over the next several years.
We spent cash in 2001 at an average rate in excess of approximately
$2.3 million per month, and we expect this rate of spending to continue through
the reporting of results from our current pivotal clinical trial for Neotrofin
in Alzheimer's disease. Our burn-rate after that will be a function of the
result of that trial and the timing of our phase 3 clinical study of satraplatin
in prostate cancer. If the Alzheimer's trial is positive, we would expect our
burn-rate to remain stable. If, based on the data, we decide not to initiate
another pivotal study of Neotrofin in Alzheimer's disease, our burn-rate will
decrease significantly.
At the present time, our business does not generate cash from
operations needed to finance our short-term operations. We will rely primarily
on (a.) raising funds through the sale of our securities including under our
Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts"
basis, and/or (b.) out-licensing our technology, to meet all of our short-term
cash needs. We have generated operating losses since our inception and our
existing cash and investment securities, including net cash proceeds of $5.8
million raised in March 2002, are not sufficient to fund our current planned
pharmaceutical and functional genomics operations for the next 12 months.
Therefore, we will need to seek additional funding by the end of July 2002, or
sooner, through public or private financings, including equity financings, and
through other arrangements to continue operating our businesses. As has been
stated by our independent public accountants in their opinion, our current
financial position raises substantial doubt as to our ability to continue as a
going concern.
The results of a clinical trial on our lead drug candidate Neotrofin
should be available during the second quarter of 2002. If the results of this
trial are sufficiently positive, we expect to be able to raise the capital
necessary to fund our currently planned pharmaceutical and functional genomics
operations. Additionally, we anticipate that our long-term business plans
require that we enter into collaborative partnership agreements and strategic
alliance agreements with larger pharmaceutical companies to co-develop,
manufacture and market our product candidates. If the results of this trial are
negative (or not sufficiently positive), we may not be able to raise additional
funds on favorable terms, if at all. Accordingly, we would be forced to
significantly change our business plans and restructure our operations to
conserve cash, which would likely involve some, combination, or all of the
following:
- Out-license or sell some or all of our intellectual, technological,
and/or tangible property not presently contemplated and at terms that
we believe would not be favorable to us;
- Reduce the size of our workforce, including the number of our
scientific personnel;
- Reduce the scope and nature of our research and drug development
activities including the possible termination of clinical trials; and
- Terminate operating leases and other contractual arrangements.
Although no assurance can be given, we believe that we can continue to
operate as a going concern and, accordingly, our consolidated financial
statements have been prepared assuming that we will continue as a going concern.
Consequently, our consolidated financial statements do not include adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that would be required if we were
not able to continue as a going concern.
55
Principles of Consolidation
Our consolidated financial statements include our accounts including
those of our wholly owned and majority owned subsidiaries. We eliminated all
significant intercompany accounts and transactions.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Cash and Cash Equivalents
Cash and cash 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
We classify investments in debt and equity securities among three
categories: held-to-maturity, trading, and available-for-sale. As of December
31, 2001, all of our debt and equity securities holdings were categorized as
available-for-sale. We carry available-for-sale securities at fair value, with
unrealized gains and losses included as a component of accumulated other
comprehensive income (loss) in stockholders' equity. We use quoted market prices
to determine the fair value of these investments.
Prepaid Expenses and Refundable Deposits
Prepaid expenses are deferred and later recorded as an expense during
the period benefited. Deposits are expected to become refundable at a later
date.
Property and Equipment Purchased or Leased
We carry property and equipment at historical cost, less accumulated
depreciation and amortization. When property and equipment are 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 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
We expense all research and development activity costs in the period
incurred.
Stock-Based Compensation
We account for all of our stock based compensation in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation" (or SFAS 123) that
encourages companies to recognize stock based compensation using a fair market
value methodology. Under SFAS 123, the fair value of a stock option (or its
equivalent) granted by a public entity shall be estimated using an
option-pricing model (for example, the Black-Scholes or binomial model) that
takes into account certain assumptions. However, SFAS 123 permits continued use
of accounting for employee stock based compensation using the intrinsic value
methodology of accounting promulgated by Accounting Principles Board (or APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" (or APB 25). Under
the intrinsic method, stock based compensation is measured as the excess, if
any, of the quoted market price of our common stock at the measurement date over
the exercise price.
We recognize non-employee stock based compensation or payments using a
fair market value methodology promulgated by SFAS 123.
We recognize employee stock based compensation using the intrinsic
value methodology promulgated by APB 25.
Basic and Diluted Net Loss Per Share
We calculate basic and diluted net loss per share using: the weighted
average number of common shares outstanding and the net loss, less preferred
stock dividends, during each year, respectively. We exclude all antidilutive
common stock equivalents from the basic and diluted net loss per share
calculation.
56
Use of Estimates
We make certain estimates to prepare our financial statements that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses reported during the reporting period. Actual results could
differ from our estimates.
We have estimated that our current working capital plus funds raised or
to be raised subsequent to year end will be sufficient for us to continue as a
going concern and therefore have prepared the financial statements on that
basis. That basis includes estimating future cash requirements of planned
research & development activities and general and administrative requirements,
the retention of key personnel, certain clinical trial results, maintained
market need for our product candidates, and other major business assumptions. If
these estimates prove to be wrong, we may not be able to continue as a going
concern.
Revenue Recognition
We recognize revenue from each sale contract over each sale contract's
operative life and after all contingencies related to us being due receipt of
such revenue are eliminated.
Income Taxes
We recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement bases
and tax bases of existing assets and liabilities. We recorded a valuation
allowance equal to our net deferred tax asset.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (or FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations (or
SFAS 141). SFAS 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16. Business Combinations, and FASB
Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises, SFAS 141 requires use of the purchase method of accounting for all
business combinations initiated after June 30, 2001, the same date that we
adopted SFAS 141. The adoption of SFAS 141 did not have a material impact on our
financial condition or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (or SFAS 142). SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS
142 addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. SFAS also
addresses how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. Goodwill shall
no longer be amortized but shall be assessed at least annually for impairment
using a fair value methodology. We adopted SFAS 142 for all goodwill and other
intangible assets acquired after June 30, 2001 and for all existing goodwill and
other intangible assets beginning January 1, 2002. We do not anticipate the
adoption of SFAS 142 to have a material impact on our financial condition or
results of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (or SFAS 143). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002, with
earlier application being encouraged. We do not anticipate the adoption of SFAS
143 to have a material impact on our financial condition or results of
operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (or SFAS 144). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and
57
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in APB Opinion
No. 30). SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, with early application encouraged, and
generally is to be applied prospectively. We do not anticipate the adoption of
SFAS 144 to have a material impact on our financial condition and results of
operations.
2. CONCENTRATIONS OF CREDIT RISK
We invest our excess cash in marketable debt and equity securities and
do not require collateral or other security in addition to collateral or other
security contained in the investment contract. Investments are not insured
against the possibility of a complete loss of earnings or principal and are
subject to a degree of credit risk related to the credit worthiness of the
underlying issuer. We widely diversify our investments in high-grade securities
to avoid concentrations of credit risk and believe that such credit risk
inherent in our investments at December 31, 2001 is minimal.
3. RELATED PARTY TRANSACTIONS
During 1987 and 1988, our Chief Executive Officer (or CEO), who is also
a major stockholder of ours, loaned a total of $270,650 to us 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
(or RPU's). The RPU's were converted into 112,000 shares of our common stock.
From 1989 through 1993, we borrowed an additional $757,900 from the
CEO, which, together with accrued interest of $300,404, aggregated $1,058,304 on
December 31, 1993, at which time we issued 200,000 shares of common stock to the
CEO in exchange for cancellation of $500,000 of loans made to us. The remaining
$257,900 in principal and $300,404 of accrued interest 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 we advanced cash to the
CEO to pay payroll taxes arising from the CEO's exercise of a warrant for 88,173
shares of our common stock at $3.75 per share in August 2000. Additional
repayments were made in 2001. The note balance at December 31, 2001 was
$135,574.
Assignment of Patents by Chief Executive Officer
The CEO assigned to us all of his rights in nine patents. In connection
with the assignment of these patents to us, we entered into royalty agreements
with the CEO (or CEO Agreements), which expire concurrently with the expiration
of the underlying patents and any patents derived therefrom. Under each of the
CEO Agreements, as amended, we are obligated to pay the CEO a royalty of two
percent (2%) of all revenues derived by us from the use and sale by us of any
products or methods included in the patents. Further, in the event that we
terminate the CEO's employment without cause, the royalty rate under each CEO
Agreement will increase from two percent (2%) to five percent (5%). Finally, in
the event of the CEO's death, the family or estate is entitled to continue to
receive under each CEO Agreement royalties at a rate of two percent (2%) for the
duration of the respective CEO Agreement.
McMaster University Agreement
On July 10, 1996, we entered into a license agreement with McMaster
University (or McMaster) that allows us the use of certain technologies
developed by McMaster covered in the patents filed jointly by us and McMaster
(US Patent Nos. 5,447,939, 5,801,184, 6,027,936, 6,338,963, and 6,350,752), all
of which are also encumbered by CEO Agreements. Under the agreement, we paid a
one time licensing fee of $15,000 and are obligated to pay to McMaster an annual
royalty of five percent (5%) on net sales of products containing compounds
developed by McMaster. In July 1997, we began, and have continued making, annual
minimum royalty payments of $25,000.
Director and Officer Notes for the Exercise of Equity Instruments
We made loans to certain of our directors and officers for the exercise
of stock options or the purchase of stock. We loaned $286,560 in 1998, and
$435,649 in 2000. During 2000, one individual paid $61,560 back to us and during
2001, in connection with the settlement of a litigation matter, we forgave a
$45,000 note to one individual. At December 31, 2001, $615,649 remained due to
us from directors and officers for the purchase of shares of common stock or the
exercise of stock options. These notes accrue interest at rates between 7% and
9% and are classified as an offset to stockholders' equity.
58
4. NET LOSS PER SHARE
Basic and diluted loss per share for the year ended December 31, 2001
was computed after increasing the net loss by dividend amounting to $815,807
paid to Series A Preferred Stock holders that resulted from our repurchase of
the preferred stock.
5. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
A summary of marketable securities and short-term investments at
December 31, 2000 and 2001 is as follows:
Gross Gross
Unrealized Unrealized Market
Type of Investment Cost Gains (Losses) Value
--------------------------------- ------------- ---------- ---------- ----------
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
============= ========= ========== ===========
December 31, 2001:
Available-for-Sale:
U.S. Government Treasury
Notes and Bonds $ 150,072 $ 2,279 $ - $ 152,351
U.S. Government guaranteed
securities 212,491 6,709 - 219,200
Corporate Bonds 6,461,227 78,077 - 6,539,304
Margin Loans (503,467) - - (503,467)
------------- --------- ---------- -----------
Total Investments $ 6,320,323 $ 87,065 $ - $ 6,407,388
============= ========= ========== ===========
For the years ended December 31, 2000 and 2001, sales of securities at
fair market value aggregated $848,202 and $7,642,687, and the Company realized
gains over original cost of $3,892 and of $131,150 and losses below original
cost of $13,561 and of $101,171, respectively. All gains and losses reported in
a year as other comprehensive income have been reclassified into net income in
the subsequent year.
From time to time, we use margin loans to purchase certain
available-for-sale securities when cash is not available based on timing of
other investment maturities. Our agreement with our bank secures the margin
loans with our investments and grants the bank the right to collect money owed
to them by us as a result of a margin loan prior to cash being distributed to
the Company. Therefore, the margin loans are offset in the balance sheet against
marketable securities and short-term investments.
6. CAPITAL LEASE OBLIGATIONS AND OTHER DEBT
In September 1998, we entered into a Master Note and Security Agreement
(or the Note) with a finance company affiliated with our bank whereby we
borrowed $1.5 million under the Note for equipment and computer software
purchases. Borrowings are collateralized by substantially all of our assets,
exclusive of our 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. We
have also granted to the finance company a warrant to purchase up to 13,459
shares of our 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, we financed the premium amounting to $322,000 for a
three-year insurance policy through a borrowing from the insurer. The loan was
payable through August 2001 in monthly installments of $30,556 including
principal and 8.57% annual interest. At December 31, 2000, approximately
$210,000 related to this note was classified on the balance sheet as accrued
expenses.
59
On September 22, 2000 we signed an agreement to lease up to $2.5
million in equipment from a major equipment leasing and remarketing company (or
lessor). Under the terms of the agreement, we can draw up to $2.5 million
through September 2001 and are required to make quarterly payments over three
years on cumulative advances drawn by us. We drew a total of $1,029,381 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
at that time, re-marketed by the lessor, or re-leased by us.
In October 2000, we financed $151,249 of laboratory equipment through
an equipment vendor under a capital lease agreement. Under the terms of the
agreement, we are required to make monthly payments of $4,839 over three years,
including effective interest at approximately 9% per annum.
Future installments of debt principal on capital lease obligations are
as follows:
Year Ending
December 31: Amount
----------- ------------
2002 $ 654,434
2003 315,355
2004 148,350
----------
$1,118,139
==========
Additionally, under our current capital lease obligations arrangements,
we will be obligated to pay approximately $69,000 in interest.
7. REVENUE FROM GRANTS
From 1991 to 1995, we received funding in the form of two Small
Business Innovative Research Grants (or 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. We have received an aggregate of
$497,128 from the two SBIR grants. No additional grants have been received.
8. DEFERRED REVENUE
We had deferred revenue of $258,887 classified as other non-current
liabilities in our balance sheet at December 31, 2001. During 2001 we received
initial payments of $300,000 from two licensing agreements that we have between
our functional genomic business segment and Pfizer, Inc. Under these agreements,
we out-licensed certain technology to Pfizer for investigating potential drug
targets. We may receive additional payments from Pfizer if they achieve certain
milestones as defined in the agreements. In accordance with our revenue
recognition policy these initial payments will be recognized as revenue over a
three-year period from the date of inception of the respective agreement.
Accordingly, we recognized licensing revenue of $36,113 during 2001.
9. INCOME TAXES
We did not provide any current of deferred federal or state income tax
provision or benefit for the period presented because we have experienced
operating losses since our inception. Significant components of the income tax
benefit are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 2000 2001
------------ ------------- -------------
Current:
Federal $ - $ - $ -
State 800 800 1,600
Foreign - - -
------------ ------------- -------------
$ 800 $ 800 $ 1,600
============ ============= =============
Deferred:
Federal $ - $ - $ -
State - - -
Foreign - - -
------------ ------------- -------------
$ - $ - $ -
============ ============= =============
60
The following is a reconciliation from the statutory federal income tax
rate to our effective tax rate for income taxes:
1999 2000 2001
----------------- ----------------- -----------------
Federal statutory tax rate $ (6,075,765) $ (10,042,749) $ (6,595,893)
Non-utilization of net operating losses 6,075,765 10,042,749 6,595,893
----------------- ----------------- -----------------
Effective tax rate $ - $ - $ -
================= ================= =================
Significant components of our deferred tax assets and liabilities as of
December 31, 2000 and 2001 are shown below. A valuation allowance has been
recognized to fully offset the net deferred tax assets as of December 31, 2000
and 2001 as realization of such assets is uncertain.
DEFERRED TAX ASSETS: 2000 2001
----------------- ----------------
Net operating loss and business credit carryforwards $ 29,380,902 $ 39,075,459
DEFERRED TAX LIABILITIES:
Depreciation and amortization differences 681,587 735,712
----------------- ----------------
NET DEFERRED TAX ASSETS $ 28,699,315 $ 38,339,747
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS $ (28,699,315) $ (38,339,747)
----------------- ----------------
$ - $ -
================= ================
At December 31, 2001 we had federal and California income tax loss
carryforwards of $66,904,774 and $34,734,529, respectively. The federal and
California tax loss carryforwards will begin to expire in 2009 and 2001,
respectively, unless previously utilized. The Tax Reform Act of 1986 limits the
use of net operating loss carryforwards in the case of an "ownership change" of
a corporation. Any ownership changes, as defined, may restrict utilization of
our carryforwards. As of December 31, 2001, we had foreign loss carryforwards
of $36,686,337.
10. COMMITMENTS AND CONTINGENCIES
Facility and Equipment Leases
We lease certain facilities for our research and development and
administrative functions and its subsidiaries. Certain leases also require
scheduled annual fixed rent increases, payments of property taxes, insurance and
maintenance. Our functional genomics segment sub-leases a facility from its
collaboration partner (see "Joint Venture" below) that requires us to pay 50% of
the lease payments plus any shortfall by our collaboration partner. In 2001, we
paid approximately 85% of the minimum lease requirements under this lease
representing a contingent rental incurred in excess of our 50% commitment of
approximately $102,000 in 2001. The minimum lease requirements below include
100% of the minimum lease requirements to be made under this lease. In addition,
we lease certain office and telephone equipment under non-cancelable operating
leases.
Minimum lease requirements for each of the next five years and
thereafter under the property and equipment leases are as follows:
Year ending December 31: Amount
------------------------ -----------
2002 $ 1,049,400
2003 944,200
2004 681,600
2005 405,800
2006 171,500
-----------
$ 3,252,500
===========
Rent expense for the years ended December 31, 1999, 2000 and 2001
aggregated approximately, $601,100, $637,000, and $808,000 respectively.
61
Research and Fellowship Grants
At December 31, 2001, we had committed to pay approximately $419,000
during 2002 and an aggregate of approximately $528,000 from 2003 through 2005,
principally to the University of California, Irvine to conduct general
scientific research programs. Grant expense for 1999, 2000 and 2001 was
approximately $617,000, $1,309,000, and $822,000 respectively, and is included
in research and development on the consolidated statement of operations.
Licensing agreements
We purchased licenses to further develop certain therapeutic compounds.
We are contingently liable for certain milestone payments to the licensor if we
reach certain development milestones. We have not reached any milestones and
cannot determine when or if ever a milestone will be reached. If we reach a
milestone, it will likely occur prior to revenues being generated from the
related compound.
Joint Venture
In September 1999, we entered into a three-year joint venture agreement
with the University of California, Irvine (or UCI) to assist in the marketing
and commercialization of discoveries made by certain members of its functional
genomics science department. We are 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. As of December 31, 2001 no obligation remains under this
minimum obligation. The agreement is cancelable by either UCI or us upon giving
thirty days notice. We have 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.
Employment Agreements
We entered into employment agreements with certain of our key executive
personnel. The agreements provide for, among other things, guaranteed severance
payments equal to up to twice the officer's annual base salary upon the
termination of employment without cause or upon a change in control under
certain circumstances.
Litigation
We are involved in one matter of litigation considered normal to our
business. It is our policy to accrue for amounts related to legal matters if it
is probable that a liability has been incurred and an amount is reasonably
determinable. We believe that the outcome of this matter will not materially
impact our financial position.
11. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
The Minority Interest in Consolidated Subsidiaries shown in the
accompanying balance sheet represents the investments by outside parties in our
consolidated subsidiaries. The minority interest in consolidated subsidiaries'
net loss amounting to $1,463,597 and $48,453 in 2000 and 2001, respectively, in
the accompanying consolidated statements of operations consists primarily of the
amortization of beneficial conversion feature and dividends on convertible
preferred stock issued by our NeoGene and net losses attributable to the
minority interest holders. As of December 31, 2001, the minority holders had no
net equity, therefore, we are currently recording 100% of our majority owned
subsidiaries net losses.
12. STOCKHOLDERS' EQUITY
Revenue Participation Units
In 1988 and 1989, we raised $676,000 in private placement funds from
the issuance of seventy-five Revenue Participation Units (or RPU's) at prices
ranging from $9,000 to $10,000 per RPU. RPUs entitled holders to receive cash
payments based on a stipulated percentage of revenues. RPU holders were entitled
to convert to common stock at any time. We 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 RPU holders and we agreed to convert all 75 RPUs into
300,000 shares of our common stock.
Stock Split
In June 1996, our Board of Directors authorized, with stockholder
approval, a reverse split of our outstanding common stock on the basis of 1
share for each 2.5 shares of then outstanding common stock. Our
62
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. On April 6, 2001, in a special meeting, our stockholders
approved an increase in the authorized common stock from 25 million to 50
million shares.
Re-incorporation
During June 1997, our stockholders approved our re-incorporation as a
Delaware corporation. In connection therewith, a par value of $0.001 per share
was assigned to our common stock. The total number of authorized and issued
shares remained unchanged.
Deferred compensation expense
NeoTherapeutics
We granted 1,352,000 stock options to employees in 2000 with exercise
prices less than the fair value of our common stock at the measurement date. The
intrinsic value of the option grants amounting to $959,850 was recorded as
deferred compensation and is being amortized to expense over the vesting period,
in accordance with APB Opinion No. 25. During 2001, we recorded compensation
expense of $641,332 as a result of such amortization.
NeoGene
We issued 140,654 stock options of our majority owned subsidiary
NeoGene to our employees in 2001 with exercise prices less than the fair market
value of NeoGene's common stock at the measurement date. The intrinsic value of
the option grants amounting to $2,391,118 was recorded as deferred compensation
and is being amortized to expense over the vesting period, in accordance with
APB Opinion No. 25. During 2001, we recorded compensation expense of $820,008 as
a result of such amortization.
Preferred, Common Stock, and Warrant transactions
During 1993, we issued 40,000 shares of common stock at the fair market
value on the date of issuance of $1.35 per share to a financial consultant in
exchange for $54,000 of investment banking services.
During 1994, we sold 13,000 shares of restricted common stock at $2.50
per share through a private placement for $32,500 in cash to three investors.
During 1995, we sold 22,000 shares of restricted common stock at $2.50 per share
through a private placement for $55,000 in cash to six investors. During 1996,
we sold 266,800 shares of restricted common stock at $2.50 per share through a
private placement for $633,650 in cash.
In June 1996, we filed a registration statement with the Securities and
Exchange Commission offering to the public 2,500,000 units (or the Units). Each
Unit consisted of one share of our common stock and one warrant to purchase one
share of our common stock. The registration statement became effective on
September 26, 1996, and on October 1, 1996, we sold all of the Units in exchange
for $17,363,003 in cash proceeds, net of public offering costs. On October 11,
1996, the principal underwriter of the offering exercised a portion of its
overallotment option and purchased from us 200,000 Units in exchange for
$1,389,280 in cash, net of transaction costs. The Units separated immediately
following issuance and the common stock and warrants that made up the Units
traded as separate securities. The warrants expired in September 2001.
On March 27, 1998, we executed a $15 million Private Equity Line of
Credit Agreement (the "Equity Line Agreement") with a private investor that
provides for minimum and maximum puts ranging from $250,000 to $2.0 million,
depending on our 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, we also issued to the investor warrants to purchase 25,000 shares of
our common stock at an exercise price of $11.62 per share. Under the Equity Line
Agreement, we received proceeds of approximately $3.55 million from sales of
506,049 shares of our common stock in 1998, $1.95 million from sales of 211,393
shares of our common stock in 1999, and during January 2000, we received $2.0
million from the sale of 186,961 shares of our common stock. The agreement
expired in February 2001.
On August 31, 1998, certain of our officers and directors exercised
non-qualified stock options and purchased 62,000 shares of our 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 are included as a component
of equity in the financial statements.
63
On May 31, 1999, we sold to a group of private investors 400,000 shares
of our common stock for $4.0 million in cash. The investors also received
five-year warrants to purchase 80,000 shares of our common stock at an exercise
price of $15 per share.
On July 27, 1999, we completed a secondary public offering and sold
1,150,000 shares of our common stock, including the underwriters' overallotment,
for $8.7 million in cash, net of offering costs.
On November 30, 1999, we sold to two private investors, 845,594 shares
of our common stock, for $9.4 million in cash, net of offering costs, and
warrants to purchase 126,839 shares of our common stock at $14.24 per share.
Based on a reset formula contained in the agreement, in March 2000 we issued to
the investors 43,383 additional shares of our common stock for no additional
consideration. The investors waived a second reset as partial consideration
under a different financing transaction.
On December 15, 1999, we entered into a settlement agreement for a
previous litigation matter. Under the terms of the settlement, the shareholder
forfeited 678,835 shares of common stock and warrants valued at $1,697,090 and
we issued 332,630 shares of common stock and warrants valued at $4,155,449. We
charged the difference of $2,456,359 to operations.
On February 25, 2000 we sold to two private investors 520,324 shares of
our common stock for $8.0 million in cash. The investors also received five-year
warrants to purchase 104,000 shares of our common stock at the price of $21.00
per share.
On April 6, 2000, we 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 our common stock over a two year period
and (c) five-year warrants to purchase from 115,000 shares up to 265,000 shares
of our common stock at an exercise price of $19.67 per share. The redeemable
warrants can be redeemed in part by us as frequently as several times per week,
subject to average daily volume restrictions and if the market price of our
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. During 2000, the investor converted the $10 million
of debentures into 1,555,409 shares of our common stock plus 38,768 shares of
our common stock in payment of accrued interest. Also in 2000, we called and the
investors exercised 586,400 of our redeemable warrants for 586,400 shares of our
common stock in exchange for $5,120,654 in cash. At both December 31, 2000 and
2001, there were 3,413,600 redeemable warrants outstanding. The warrants expire
in June 2002.
On May 1, 2000 we completed a private placement of 500,000 shares of
our common stock for $7.0 million in cash. The investors also received five-year
warrants to purchase 125,000 shares of our common stock at an exercise price of
$17.50 per shares.
On September 21, 2000, we sold 111,110 shares of Series A convertible
preferred stock of our majority owned subsidiary, NeoGene, for $5 million and a
five-year warrant to purchase up to (i) 80,000 shares of our 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 market 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. On August 13, 2001,
NeoTherapeutics purchased the Series A Preferred Stock of NeoGene for $5.5
million representing the $5.0 million face value of the preferred stock plus a
$500,000 redemption fee. The difference of approximately $0.8 million between
the book value of the preferred stock and the amount paid was recorded as a
charge to accumulated deficit. We also paid accrued dividends of approximately
$220,000 to the holders of the preferred stock.
On September 29, 2000, we entered into an agreement to sell 968,524
shares of our common stock to two private investors for $8 million cash and a
five-year warrant to purchase 193,706 shares of our 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 our common stock based on the market price of
our common stock determined thirty and sixty days after the effective date of
the
64
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. As part of
the April 17, 2001 transaction described below, we agreed to issue an additional
900,000 shares of our common stock to the investors under the second and final
reset under the agreement. We received no proceeds upon the investors' exercise
of the resets.
On December 18, 2000, we entered into an agreement between our majority
owned subsidiary, NeoGene, and an institutional investor for the issuance and
sale of NeoGene Series B convertible preferred stock and warrants for aggregate
consideration of $2.0 million. Under the provisions of the agreement, we issued
and sold to the investor a total of 44,445 shares of NeoGene 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 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. 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. We also granted an exchange right to the investor that will allow
the investor to exchange its shares of NeoGene Series B Preferred for our
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 NeoGene Series B Preferred shares then held by the investor
for a number of shares of our designated convertible preferred stock. In June
2001, the investor exercised its right to exchange all of the NeoGene Series B
Preferred stock then held by the investor for 200 shares of our 7% Series C
convertible Preferred stock. Under the terms of the exchange right, the investor
forfeited 4,693 or 50% of the previously granted five-year warrants to purchase
shares of NeoGene common stock at an exercise price of $45 per share. The shares
of our 7% Series C Preferred Stock were redeemable, under certain conditions at
the option of the holder, and each share is convertible into a number of shares
of our common stock equal to $10,000 divided by the lesser of (i) 100% of the
average of the lowest seven closing bid prices of our common stock in the
previous 30 trading days, or (ii) $5.97. In August 2001, the holder of our 7%
Series C Preferred Stock converted 170 shares of our 7% Series C Preferred Stock
into 485,591 shares of our common stock. In September 2001, we purchased the
remaining 30 shares of our 7% Series C Preferred Stock for $300,000 plus accrued
dividends and a settlement fee of approximately $72,000. The 30 shares of our 7%
Series C Preferred Stock are recorded as an offset to Stockholders' Equity.
On January 25, 2001, we issued to a vendor in settlement of our
obligation to them, 50,000 shares of our common stock and a five-year warrant to
purchase 50,000 shares of our common stock at $3.50 per share.
On January 30, 2001, we issued to two investors 1,070,336 shares of our
common stock under the first reset provision contained in the adjustable
warrants issued in connection with the September 29, 2000 sale of 968,524 shares
of our common stock for $8 million. On May 15, 2001 we also issued an additional
900,000 shares of our common stock to the two investors in respect of the second
and final reset provision. We did not receive any consideration as a result of
issuing shares of our common stock pursuant to the reset provisions of this
financing transaction. The reset provisions were part of an earlier sale of our
common stock and were previously accounted for as a partial allocation of the
proceeds of that sale to common stock. As such, no further accounting was
necessary on the date the reset provision was exercised.
On February 2, 2001, we sold 1,627,756 shares of our common stock under
the shelf registration statement to a private investor for $3.5 million in cash.
On March 8, 2001, we sold 1,250,000 shares of our common stock under
the shelf registration statement to a private investor for $5 million in cash.
The investor also received five-year warrants to purchase up to 125,000 shares
of our common stock at the exercise price of $5.00 per share.
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 1,176,472 shares of our common stock under the shelf registration
statement for $6.0 million cash, (b) an option to place with the investor groups
two tranches of convertible debenture notes of $10 million and $8 million within
approximately 30 days and seven months of the initial closing, respectively, at
our option, and (c) five-year warrants exercisable at 125% of the market price
of the date of the respective closing of each of the aforementioned debenture
issuances for a number of shares equal to
65
20% of the number of shares into which the debentures are initially convertible.
We did not exercise the first option for the debenture tranche of $10 million
and paid a break-up fee of $405,000 in July 2001, pursuant to the terms of the
financing transaction of May 17, 2001. This fee was charged to general and
administrative expense in the second quarter of 2001. On November 13, 2001, we
decided not to exercise the second option for the debenture tranche of $8
million, pursuant to the April 17, 2001 financing transaction, as amended.
On May 17, 2001, we sold to the aforementioned two private investor
groups 1,400,000 shares of our common stock under the shelf registration
statement for $5.95 million cash. The investors also received five-year warrants
to purchase up to 280,000 shares of our common stock at an exercise price of
$6.00 per share.
On June 22, 2001, we sold to our employees through our Employee Stock
Purchase Plan (or ESPP), 40,390 shares of our common stock for approximately
$90,100. Pursuant to the ESPP, the shares were sold at a 15% discount to market
on the date of purchase.
On August 14, 2001, we sold 600,000 shares of our common stock under
the shelf registration statement to an institutional investor for $2,010,000.
On June 12, 2001, we entered into two securities sales agreements with
an investment banking firm acting as an underwriter to sell our common stock on
a "best efforts" basis with the maximum aggregate public offering price under
both agreements combined of $33.4 million. The securities were offered as part
of a Controlled Equity Offering, or CEO(SM). Under one of the sales agreements,
we may sell up to $8.4 million of our common stock "at the market" or directly
into the established trading market for our common stock. Under the other sales
agreement, we may sell up to $25 million of our common stock in any manner other
than "at the market". Under each agreement, if we and the underwriter agree to
sell our common stock on certain terms, the underwriter will use its
commercially reasonable efforts to sell our securities up to the amount agreed
upon, but will not be required to sell any specific number or dollar amount of
our securities. The net proceeds from the sales will be the aggregate sales
price at which our securities were sold after deduction for the underwriter's
commission/discount of up to 4%. We will issue to the underwriter five-year
warrants to purchase shares of our common stock in an amount equal to 10% of the
number of shares of common stock sold by us pursuant to the offering at an
exercise price per share equal to 130% of the volume weighted average price at
which such shares were issued. On October 19, 2001, we and the investment
banking firm executed amendments to the sales agreements previously entered into
by the investment banking firm and us on June 12, 2001, and to the advisory
agreement previously entered into on April 11, 2001 and amended on June 12,
2001. The amendments relate primarily to modifications of the compensation
provisions of the sales agreements. Through placement notices under each sales
agreement, during October and November of 2001, 949,710 shares of our common
stock were sold pursuant to the $25 million sale agreement for aggregate cash
proceeds of $3.8 million and approximately 124,800 shares of our common stock
were sold pursuant to the $8.4 million sale agreement for aggregate cash
proceeds of $0.4.
On December 10, 2001, we sold to certain institutional investors
519,480 shares of our common stock under the shelf registration statement for
cash proceeds of approximately $2.0 million.
On December 13, 2001, under a second placement notice related to the
aforementioned $25 million sales agreement, we sold 246,883 shares of our common
stock for aggregate cash proceeds of approximately $1.0 million.
On December 21, 2001, we sold to our employees through our Employee
Stock Purchase Plan (or ESPP), 23,513 shares of our common stock for $67,953.
Pursuant to the ESPP, the shares were sold at a 15% discount to market on the
date of purchase.
13. STOCK BASED COMPENSATION
We have three stock option plans: the 1991 Stock Incentive Plan (or the
1991 Plan), the 1997 Stock Incentive Plan (of the 1997 Plan) and the 2000
NeoGene Stock Incentive Plan (or the 2000 NeoGene Plan) (collectively, the
Plans). The Plans were adopted by stockholders and Board of Directors in May
1991, June 1997, and August 2000, respectively, and provide for the granting of
incentive and nonqualified stock options as well as other stock-based
compensation. 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
66
prices at least equal to 110% 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 us. Under the Plans, shares of common stock may be
granted to directors, officers and employees, except that incentive stock
options may not be granted to non-employee directors. The 1991 Plan, as amended,
authorizes for issuance up to 401,430 shares of our common stock. The 1997 Plan,
as amended, authorizes for issuance up to 3,000,000 shares of our common stock
of which all had been granted at December 31, 2001. The 2000 NeoGene Plan
authorizes for issuance up to 250,000 shares of NeoGene common stock.
A summary of our stock option activities for the 1991 Plan and 1997
Plan are as follows:
1999 2000 2001
---- ---- ----
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
SHARES EXERCISE PRICE SHARES PRICE SHARES PRICE
------ -------------- ------ -------- ------ --------
Outstanding at beginning of
year 853,873 $5.78 1,389,373 $6.77 2,490,175 $8.34
Granted 543,500 $10.76 1,358,000 $7.04 721,500 $3.86
Exercised (1,900) $6.57 (122,598) $2.85 - -
Forfeited (6,100) $8.08 (134,600) $8.78 (294,700) $4.92
----------- ------------- ----------- ------------- ------------ ----------
Outstanding, at end of year 1,389,373 $6.77 2,490,175 $8.34 2,916,975 $6.40
----------- ------------- ----------- ------------- ----------- ----------
Exercisable, at end of year 662,823 $3.23 745,758 $3.80 1,610,067 $4.72
=========== ============= =========== ============= =========== ==========
The following table summarizes information about stock options
outstanding under the 1991 Plan and 1997 Plan at December 31, 2001:
OPTIONS WEIGHTED OPTIONS WEIGHTED
RANGE OF EXERCISE OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
PRICE 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE
----- -------- -------------- -------------- ----------- --------------
$2.14 - $3.64 161,500 9.77 $2.95 4,500 $9.81
$3.650 - $5.625 1,344,600 8.78 $4.10 733,150 $8.54
$5.626 - $8.874 492,075 7.37 $6.83 332,900 $6.78
$8.875 - $13.00 918,800 7.84 $11.09 539,517 $7.68
---------- ---------
2,916,975 1,610,067
========== =========
A summary of our stock option activities for the 2000 NeoGene Plan is
as follows:
2001
------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Outstanding at beginning
of year - -
Granted 140,654 $1.16
Exercised - -
Forfeited (3,000) $1.00
-------------
Outstanding, at end of year 137,654 $1.16
------------
Exercisable, at end of year - -
============
The following table summarizes information about stock options
outstanding under the 2000 NeoGene Plan at December 31, 2001:
67
OPTIONS WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE
-------------- -------- -------------- -------------- -------- --------------
$1.00 135,654 9.00 $1.00 - -
$18.00 2,000 9.33 $18.00 - -
----------- ---------------
137,654 -
=========== ===============
We apply APB Opinion No. 25 and related interpretations in accounting
for stock options granted to employees, and do 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 1999, 2000 and 2001, respectively: risk-free
interest rates of 5.80 percent (1999); 5.90 percent (2000); and 4.22 percent
(2001), zero expected dividend yields; expected lives of 5 years; expected
volatility of 75.44 percent in 1999; 90.72 percent in 2000; and 87.58 percent in
2001.
For purposes of the following required pro forma information, the
weighted average fair value of stock options granted in 1999, 2000 and 2001 was
$7.57, $5.31, and $2.65, respectively. The total estimated fair value is
amortized to expense over the vesting period.
1999 2000 2001
-------------- -------------- -------------
Pro forma net loss $ (27,414,976) $ (49,050,557) $(32,142,737)
Pro forma basic and diluted
loss per share $ (3.82) $ (4.61) $ (1.63)
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:
1999 2000 2001
----------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE COMMON AVERAGE COMMON AVERAGE
COMMON SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- -------------- ------ -------------- ------ --------------
Outstanding, at beginning
of year 2,697,459 $11.38 3,217,123 $11.95 4,140,189 $13.57
Granted 528,664 $13.41 927,556 $16.76 1,192,569 $9.05
Exercised (9,000) $11.40 (4,490) $11.40 - -
Forfeited (1) - - - - (2,735,510) $11.37
------------- ---------- -----------
Outstanding, at end of year 3,217,123 $11.95 4,140,189 $13.57 2,597,248 $12.91
============= ========== ===========
(1) Expiration of public warrants that were issued at time of initial
public offering.
68
The following table summarizes information about warrants outstanding
at December 31, 2001:
WARRANTS WEIGHTED WARRANTS WEIGHTED
OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE
-------------- -------------- ---------------- -------------- ----------- --------------
$3.50 - $5.50 682,139 4.67 $4.34 557,139 $4.40
$5.51 - $7.43 333,459 4.19 $6.07 53,459 $6.45
$7.44 - $10.47 273,706 3.74 $10.23 - -
$10.48 - $13.00 132,632 1.98 $12.68 56,631 $12.29
$13.01 - $15.00 462,312 3.20 $14.79 335,473 $15.00
$15.01 - $17.50 260,000 3.04 $16.72 260,000 $16.72
$17.51 - $19.67 314,000 3.26 $19.67 - -
$19.68 - $21.00 139,000 3.08 $20.91 35,000 $20.63
---------- ---------
2,597,248 1,297,702
========== =========
The preceding table excludes the Class B warrants that are callable at
our option and subject to certain terms described in Note 12. Stockholders'
Equity,under the subtitle, "Preferred, Common Stock, and Warrant transactions".
On September 1, 2000, we granted and our Board of Director approved
250,000 stock options to purchase shares of our common stock at an exercise
price of $6.0625 per share to one of our officers. This agreement was amended on
February 12, 2001, which revised certain of the vesting milestones noted below.
100,000 of these options vest ratably over two years. 100,000 of these stock
options vest in two tranches of 50,000 on a day when the market closing price of
our common stock is equal to or greater than $6.00 and $9.00 per share,
respectively. The remaining tranche of 50,000 stock options vests on the earlier
of certain milestones being reached, one of which is a day when the market
closing price of our common stock is equal to or greater than $12.00.
An additional 1,316,000 options with an exercise price of $3.00 per
share were granted, subject to shareholder approval, to employees, officers, and
directors on October 9, 2001.
We issued to various consultants stock options that are not associated
with any of the aforementioned Plans (Non-Plan Options). During the period from
December 1993 through December 1996, we issued to two scientific consultants and
a financial consultant in exchange for past and future services a total of
194,000 Non-Plan Options to purchase common stock 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 our Board of Directors on the grant
date. All of these Non-Plan Options were vested and exercisable upon issuance.
We issued to a consultant 180,000 Non-Plan Options in 1997 at an
exercise price of $3.875 per share, of which 30,000 vested immediately. In 1998,
we issued to the same consultant an additional 25,000 Non-Plan Options at an
exercise price of $8.5625 per share, all of which vested immediately.
Compensation expense related to these options grants that vested immediately was
recorded in the respective year of grant. The remaining 150,000 stock options
granted in 1997 did not vest and no compensation expense was recorded.
In September 1990, we issued to our Chief Executive Officer a warrant
to purchase 88,173 shares of our common stock at $3.75 per share. The Chief
Executive Officer exercised the warrant in August 2000 by delivery of a
promissory note payable to us (See footnote 3, Related Party Transactions).
14. DEFINED CONTRIBUTION PENSION PLAN
We established a 401(k) Salary Deferral Plan on January 1, 1990. This
plan allows eligible employees to defer part of their income on a tax-free
basis. Contributions by us to this plan are discretionary upon approval by our
Board of Directors. As of December 31, 2001, we have not made any contributions
into this plan.
69
15. EMPLOYEE STOCK PURCHASE PLAN
In January 2001, we adopted the NeoTherapeutics Employee Stock Purchase
Plan (or the ESPP). The ESPP is subject to the provisions of Section 423 of the
Internal Revenue Code offers to our eligible employees, on a tax-advantaged
basis, the opportunity to purchase shares of our common stock, at a discount,
through payroll deductions. The ESPP allows the participant to deduct up to a
specified maximum percentage of their gross income each pay period. Under the
ESPP, our common stock will be offered during the six month offering periods
commencing on each June and December. Under the ESPP, shares of our common stock
are purchased, for those employees who chose to participate, automatically, at a
purchase price equal to 85% of the lesser of (i) the fair market value of our
common stock on the first trading day of an offering period and (ii) the fair
market value of our common stock on the last trading day of an offering period.
16. SEGMENT INFORMATION
We are organized in two business segments: pharmaceutical and
functional genomics. Our pharmaceutical business segment engages in the
discovery and development of novel drugs to treat significant medical diseases
or indications associated with nervous system disorders and cancer. Our
functional genomics business segment is involved in determining the function and
purpose of human genes for the purpose of discovering drugs that combat diseases
associated with these genes. The information shown below for our pharmaceutical
business segment represents the accounts of NeoTherapeutics, NeoOncoRx and all
of our wholly owned subsidiaries. The information shown below for our functional
genomics business segment represents the accounts of our majority owned
subsidiary NeoGene. Summary intercompany transactions and balances are not
shown. Intercompany transactions include primarily cash loaned and general and
administrative services rendered by our pharmaceutical segment to our functional
genomics segment. The allocation of general and administrative services is
carved out from our pharmaceutical business based on our best estimates but may
not be indicative of the cost of these services if they had been rendered by an
independent third party. The information below represents amounts that are
included in the measure of segment operating results that are reviewed by our
management.
PHARMACEUTICAL BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED INCEPTION TO
DECEMBER 31: 1999 2000 2001 2001
----------- ---------- ---------- ------------
Revenues $ - $ - $ - $ 497
Operating expenses:
Research and development 19,873 38,131 18,469 92,490
General and administrative 3,438 4,643 6,302 23,276
Settlement of litigation 2,458 - - 2,458
------------ ----------- ---------- ------------
Loss from operations (25,769) (42,774) (24,771) (117,727)
Other income (expense) (9) (1,080) 152 (344)
Minority interest in consolidated subsidiaries'
net loss - (1,464) (48) (1,512)
------------ ----------- ---------- ------------
Net loss $ (25,778) $ (45,318) $ (24,667) $ (119,583)
============ =========== ========== ============
BALANCE SHEET DATA AT DECEMBER 31: 1999 2000 2001
-------- -------- -------
Capital expenditures $ 430 $ 844 $ 1,045
Property and equipment, net 3,161 3,416 3,691
Total assets $ 13,172 $ 10,317 $ 9,676
70
FUNCTIONAL GENOMICS BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED INCEPTION TO
DECEMBER 31: 1999 2000 2001 2001
----------- --------- ---------- ------------
Revenues $ - $ - $ 41 $ 41
Operating expenses:
Research and development 185 636 2,142 2,963
General and administrative 27 464 1,278 1,769
------------ ----------- ------------ --------------
Loss from operations (212) (1,100) (3,379) (4,691)
Other income (expense) - (10) 211 201
------------ ----------- ------------ --------------
Net loss $ (212) $ (1,110) $ (3,168) $ (4,490)
============ =========== ============ ==============
BALANCE SHEET DATA AT DECEMBER 31: 1999 2000 2001
----- ------ ------
Capital expenditures $ - $ - $1,024
Property and equipment, net - - 998
Total assets $ 2 $5,464 $3,149
CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED INCEPTION TO
DECEMBER 31: 1999 2000 2001 2001
----------- ---------- ----------- --------------
Revenues $ - $ - $ 41 $ 538
Operating expenses:
Research and development 20,058 38,767 20,611 95,453
General and administrative 3,465 5,107 7,580 25,045
Settlement of litigation 2,458 - - 2,458
------------ ----------- ------------ --------------
Loss from operations (25,981) (43,874) (28,150) (122,418)
Other income (expense) (9) (2,553) 315 (1,655)
------------ ----------- ------------ --------------
Net loss $ (25,990) $ (46,427) $ (27,835) $ (124,073)
============ =========== ============ ==============
BALANCE SHEET DATA AT DECEMBER 31: 1999 2000 2001
------- ------- -------
Capital expenditures $ 430 $ 844 $ 2,069
Property and equipment, net 3,161 3,416 4,689
Total assets $13,174 $15,781 $12,825
All revenue is domestic licensing except $5,000 that was from a single
non-recurring product sale made to a company in Spain. All of our long-lived
assets reside in the United States.
71
17. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations for each of the calendar quarters ended in the two-year period ended
December 31, 2001 (in thousands, except per share data):
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
Fiscal 2001 March 31 June 30 September 30 December 31
------------ ------------- ------------ -----------
Revenues $ - $ 8 $ 8 $ 25
Total operating expenses $ 5,608 $ 6,745 $ 6,217 $ 9,620
Net loss $ (5,478) $ (6,643) $ (5,979) $ (9,735)
Basic and diluted loss per share $ (0.36) $ (0.36) $ (0.39) $ (0.48)
Shares used in calculation 15,336 18,510 17,582 20,316
18. SUBSEQUENT EVENTS
On March 12, 2002, we sold 2,575,000 shares of our common stock at
$2.00 per share for gross cash proceeds of $5.15 million off of our shelf
registration statement. The investors also received warrants to purchase up to
643,750 shares of our common stock at an exercise price of $2.75 per share.
Offering costs of this transaction were approximately $230,000.
On March 15, 2002, we sold 525,000 shares of our common stock at $2.00
per share for gross cash proceeds of $1.05 million off of our shelf registration
statement. The investors also received warrants to purchase up to 131,250 shares
of our common stock at an exercise price of $2.75 per share. Offering costs of
this transaction were approximately $130,000.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our directors and executive officers
required under this item is incorporated herein by reference from our definitive
proxy statement, to be filed pursuant to Regulation 14A, related to our 2002
Annual Meeting of Stockholders to be held on June 17, 2002 (or the 2002 Proxy
Statement).
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference from our 2002 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 2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference from our 2002 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, 2000 and 2001.
Consolidated Statement of Operations for the years ended December 31,
1999, 2000 and 2001 and the period from inception through
December 31, 2001.
Consolidated Statement of Stockholders' Equity for the period from
inception through December 31, 2001.
Consolidated Statement of Cash Flow for the years ended December 31,
1999, 2000 and 2001 and the period from inception through
December 31, 2001.
Notes to Consolidated Financial Statements.
(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.
73
(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.)
3.1.1+ Certificate of Amendment to the Certificate of Incorporation
of the Registrant.
3.1.2 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.)
3.1.3 Certificate of Designation of Rights, Preferences and
Privileges of Series B Junior Participating Preferred Stock of
the Registrant. (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.)
3.1.4 Certificate of Designations of the Series C Preferred Stock of
the Registrant. (Filed as Exhibit 4.7 to the Registration
Statement on Form S-3, as amended (No. 333-64432), as filed
with the Securities and Exchange Commission on July 2, 2001,
and incorporated herein by reference.)
3.2+ Bylaws of the Registrant, as amended.
4.1+ Form of Warrant issued by the Registrant to Sanford Glasky,
dated as of December 15, 1997, to purchase up to 16,631 shares
of our common stock.
4.2+ Warrant issued by the Registrant to Leasing Technologies,
Inc., dated as of September 9, 1998.
4.3 Registration Rights Agreement dated as of January 29, 1999, by
and among the 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.)
4.4 Form of Warrant issued by the 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.)
4.5 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of January 29, 1999. (Filed as Exhibit 4.13 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.6+ Form of Warrant issued by the Registrant to certain
investors, dated as of May 11, 1999, to purchase up to an
aggregate of 80,000 shares of our common stock.
4.7+ Warrant issued by the Registrant to Stradling Yocca Carlson
& Rauth, dated as of May 17, 1999.
4.8 Form of Representative's Warrant issued to Joseph Charles &
Associates, Inc., dated as of July 26, 1999, to purchase up to
100,000 shares of our common stock. (Filed as Exhibit 4.12 to
the Registration Statement on Form S-1, as amended (No.
333-79935), as filed with the Securities and Exchange
Commission on July 21, 1999, and incorporated herein by
reference.)
74
EXHIBIT NO. DESCRIPTION
----------- -----------
4.9 Registration Rights Agreement dated as of November 19, 1999,
by and among the 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
December 7, 1999, and incorporated herein by reference.)
4.10 Closing Warrant issued by the 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 December 7, 1999, and incorporated
herein by reference.)
4.11 Closing Warrant issued by the 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 December 7, 1999, and incorporated
herein by reference.)
4.12 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of November 19, 1999. (Filed as Exhibit 4.14 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.13 Registration Rights Agreement dated as of February 25, 2000,
by and among the 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.)
4.14 Closing Warrant issued by the 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.)
4.15 Closing Warrant issued by the 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.)
4.16 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of February 25, 2000. (Filed as Exhibit 4.15 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.17 Registration Rights Agreement dated as of April 6, 2000, by
and among the 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.)
4.18 Class A Warrant issued by the 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.)
4.19 Class A Warrant issued by the 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.)
4.20 Class B Warrant issued by the 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.)
75
EXHIBIT NO. DESCRIPTION
----------- -----------
4.21 Class B Warrant issued by the 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.)
4.22 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of April 6, 2000. (Filed as Exhibit 4.16 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.23 Registration Rights Agreement dated as of April 28, 2000, by
and among the 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.)
4.24 Warrant issued by the 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.)
4.25 Warrant issued by the 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.)
4.26 Registration Rights Agreement dated as of September 21, 2000,
by and among the 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.)
4.27 Warrant issued by the 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.)
4.28 Warrant issued by the 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.)
4.29 Registration Rights Agreement dated as of September 29, 2000,
by and among the 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.)
4.30 Closing Warrant issued by the 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.)
4.31 Closing Warrant issued by the 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.)
4.32+ Form of Warrants issued by the Registrant to Brighton
Capital, Ltd., dated between September 18, 2000 and May 18,
2001, to purchase up to an aggregate of 130,473 shares of our
common stock.
76
EXHIBIT NO. DESCRIPTION
----------- -----------
4.33 Rights Agreement, dated as of December 13, 2000, between the
Registrant 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.)
4.34 Registration Rights Agreement dated as of December 18, 2000,
by and between the 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.)
4.35 Warrant issued by the 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.)
4.36+ Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of December 18, 2000.
4.37+ Warrant issued by the Registrant to CroMedica Global, Inc.,
dated as of January 25, 2001.
4.38 Warrant issued by the 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.)
4.39 Advisory Agreement dated as of April 11, 2001, by and between
the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit
4.1 to the Registration Statement on Form S-3, as amended (No.
333-64444), as filed with the Securities and Exchange
Commission on July 2, 2001, and incorporated herein by
reference.)
4.40 Amendment to the Advisory Agreement dated as of June 12, 2001,
by and between the Registrant and Cantor Fitzgerald & Co.
(Filed as Exhibit 4.2 to the Registration Statement on Form
S-3, as amended (No. 333-64444), as filed with the Securities
and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
4.41 Amendment to the Advisory Agreement, dated as of October 19,
2001, by and between the Registrant and Cantor Fitzgerald &
Co. (Filed as Exhibit 4.1 to Form 8-K, as filed with the
Securities and Exchange Commission on October 24, 2001, and
incorporated herein by reference.)
4.42 Warrant issued by the Registrant to Montrose Investments Ltd.,
dated as of May 18, 2001. (Filed as Exhibit 4.1 to Form 8-K,
as filed with the Securities and Exchange Commission on May
21, 2001, and incorporated herein by reference.)
4.43 Warrant issued by the Registrant to Strong River Investments,
Inc., dated as of May 18, 2001. (Filed as Exhibit 4.2 to Form
8-K, as filed with the Securities and Exchange Commission on
May 21, 2001, and incorporated herein by reference.)
4.44+ Form of Warrant issued by the Registrant to Gruntal & Co.,
L.L.C., dated as of August 10, 2001, to purchase up to 125,000
shares of our common stock.
77
EXHIBIT NO. DESCRIPTION
----------- -----------
4.45 Form of Warrants issued by the Registrant to Cantor Fitzgerald
& Co, dated as of December 6, 2001 and December 13, 2001, to
purchase up to an aggregate of 132,139 shares of our common
stock. (Filed as Exhibit A to Schedule 1 to Exhibit 1.1 to
Form 8-K, as filed with the Securities and Exchange Commission
on October 24, 2001, and incorporated herein by reference.)
4.46+ Warrant issued by the Registrant to Jefferies & Company,
Inc., dated as of December 13, 2001.
4.47+ Form of Warrant issued by the Registrant to certain
purchasers, dated as of March 13, 2002 and March 15, 2002, to
purchase up to an aggregate of 795,000 shares of our common
stock.
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.)
10.2* Note dated as of 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.)
10.3* Addendum to Note dated as of 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.)
10.4* 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.)
10.5* 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.)
10.6* 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.)
10.7 Industrial Lease Agreement dated as of January 16, 1997,
between the Registrant 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.)
10.8*+ Amended and Restated 1997 Stock Incentive Plan.
10.9 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.)
10.10 Securities Purchase Agreement dated as of February 25, 2000,
by and among the 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.)
78
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11 Convertible Debenture Purchase Agreement dated as of April 6,
2000, by and among the 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.)
10.12 Securities Purchase Agreement dated as of April 28, 2000, by
and between the 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.)
10.13 Letter Agreement dated as of May 1, 2000, by and between the
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.)
10.14 Securities Purchase Agreement dated as of September 21, 2000,
by and among the 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 13, 2000, and incorporated herein by reference.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18+ Warrant issued by NeoGene Technologies, Inc., to Brighton
Capital, Ltd., dated as of September 21, 2000.
10.19 Master Lease Agreement dated as of September 22, 2000, by and
between the Registrant and Comdisco Laboratory and Scientific
Group. (Filed as Exhibit 10.16 to the Annual Report on Form
10-K, as amended, as filed with the Securities and Exchange
Commission on April 25, 2001, and incorporated herein by
reference.)
10.20 Amendment No. 1 to Master Lease Agreement dated as of
September 22, 2000, by and between the Registrant and Comdisco
Laboratory and Scientific Group. (Filed as Exhibit 10.17 to
the Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.21 Equipment Schedule No. S-01 dated as of September 22, 2000, by
and between the Registrant and Comdisco Laboratory and
Scientific Group. (Filed as Exhibit 10.18 to the Annual Report
on Form 10-K, as amended, as filed with the Securities and
Exchange Commission on April 25, 2001, and incorporated herein
by reference.)
79
EXHIBIT NO. DESCRIPTION
----------- -----------
10.22 Addendum to Equipment Schedule No. SG-01 dated as of September
22, 2000, by and between the Registrant and Comdisco
Laboratory and Scientific Group. (Filed as Exhibit 10.19 to
the Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.23 Securities Purchase Agreement dated as of September 29, 2000,
by and among the 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.)
10.24 Securities Purchase Agreement dated as of December 18, 2000,
by and among the 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.)
10.25 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.)
10.26 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.)
10.27 Stock Purchase Agreement dated as of January 31, 2001, by and
between the 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.)
10.28 Securities Purchase Agreement dated as of March 8, 2001, by
and between the 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.)
10.29 Letter Agreement dated as of April 17, 2001, by and between
the Registrant, Montrose Investments Ltd., Strong River
Investments, Inc. and HBK Master Fund L.P. (Filed as Exhibit
10.20 to the Annual Report on Form 10-K, as amended, as filed
with the Securities and Exchange Commission on April 25, 2001,
and incorporated herein by reference.)
10.30 Securities Purchase Agreement dated as of April 20, 2001, by
and between the Registrant, Montrose Investments Ltd. and
Strong River Investments, Inc. (Filed as Exhibit 4.63 to the
Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.31* Employee Stock Purchase Plan. (Filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (No.
333-54246), and incorporated herein by reference.)
10.32* Amendment 2001-1 to the Employee Stock Purchase Plan
effective as of June 21, 2001. (Filed as Exhibit 10.22 to the
Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.33* Executive Employment Agreement for Alvin J. Glasky, Ph.D.,
dated as of December 1, 2000. (Filed as Exhibit 10.23 to the
Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
80
EXHIBIT NO. DESCRIPTION
----------- -----------
10.34* Executive Employment Agreement for Sam Gulko, dated as of
December 1, 2000. (Filed as Exhibit 10.24 to the Annual Report
on Form 10-K, as amended, as filed with the Securities and
Exchange Commission on April 25, 2001, and incorporated herein
by reference.)
10.35*+ Executive Employment Agreement for Rajesh C. Shrotriya,
M.D., dated as of December 1, 2000.
10.36 Securities Purchase Agreement dated as of May 17, 2001, by and
among the Registrant, Montrose Investments Ltd. and Strong
River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K, as
filed with the Securities and Exchange Commission on May 21,
2001, and incorporated herein by reference.)
10.37 Letter Agreement dated as of May 17, 2001, by and among the
Registrant, Montrose Investments Ltd. and Strong River
Investments, Inc. (Filed as Exhibit 10.2 to Form 8-K, as filed
with the Securities and Exchange Commission on May 21, 2001,
and incorporated herein by reference.)
10.38 License Agreement dated as of June 29, 2001, by and between
the Registrant and NDDO Research Foundation. (Filed as Exhibit
10.4 to Form 10-Q, as filed with the Securities and Exchange
Commission on November 14, 2001, and incorporated herein by
reference.)
10.39+ Letter Agreement dated as of August 10, 2001, by and between
the Registrant and Gruntal & Co., L.L.C.
10.40 Stock Purchase Agreement dated as of August 13, 2001, by and
among the Registrant, NeoGene Technologies, Inc., Montrose
Investments Ltd. and Strong River Investments, Inc. (Filed as
Exhibit 10.1 to Form 8-K, as filed with the Securities and
Exchange Commission on August 27, 2001, and incorporated
herein by reference.)
10.41 Stock Purchase Agreement dated as of August 14, 2001, by and
between the Registrant and Summit Capital Management L.L.C.
(Filed as Exhibit 10.1 to Form 8-K, as filed with the
Securities and Exchange Commission on August 15, 2001, and
incorporated herein by reference.)
10.42 License Agreement dated as of August 28, 2001, by and between
the Registrant and Johnson Matthey plc. (Filed as Exhibit 10.5
to Form 10-Q, as filed with the Securities and Exchange
Commission on November 14, 2001, and incorporated herein by
reference.)
10.43 Stock Purchase and Settlement Agreement and Release dated as
of September 19, 2001, by and among the Registrant, NeoGene
Technologies, Inc. and Societe Generale. (Filed as Exhibit
10.1 to Form 8-K, as filed with the Securities and Exchange
Commission on September 24, 2001, and incorporated herein by
reference.)
10.44 License Agreement dated as of October 24, 2001, by and between
the Registrant and Bristol-Myers Squibb Company. (Filed as
Exhibit 10.6 to Form 10-Q, as filed with the Securities and
Exchange Commission on November 14, 2001, and incorporated
herein by reference.)
10.45 Letter Agreement dated as of November 19, 2001, by and between
the Registrant and Ladenburg Thalmann & Co., Inc. (Filed as
Exhibit 1.1 to Form 8-K, as filed with the Securities and
Exchange Commission on December 11, 2001, and incorporated
herein by reference.)
10.46+ Form of Securities Purchase Agreement, by and between the
Registrant and certain investors, dated as of December 10,
2001, for the purchase of an aggregate of 519,480 shares of
our common stock.
81
EXHIBIT NO. DESCRIPTION
----------- -----------
10.47+ Letter Agreement dated as of March 11, 2002, by and between
the Registrant and Brighton Capital, Ltd.
10.48+ Form of Securities Purchase Agreement, by and between the
Registrant and certain investors, dated as of March 12, 2002
and March 15, 2002, for the purchase of an aggregate of
3,100,000 shares of our common stock.
21+ Subsidiaries of Registrant.
23+ Consent of Arthur Andersen LLP.
99.1+ Letter dated April 1, 2002 from the Registrant to the
Commission.
* Indicates a management contract or compensatory plan or arrangement.
+ Filed herewith
82
(b) Reports on Form 8-K.
1. We filed a Report on Form 8-K on October 24, 2001 to report that on
October 19, 2001, we executed amendments to the Sales Agreements dated
June 12, 2001 as well as the Advisory Agreement dated April 11, 2001
and amended on June 12, 2001 that we had previously entered into with
Cantor Fitzgerald & Co.
2. We filed a Report on Form 8-K on October 30, 2001 and on December 20,
2001 to report press releases issued on October 30, 2001 and December
20, 2001, respectively.
3. We filed a Report on Form 8-K on December 11, 2001 to report that we
entered into a letter agreement with Ladenburg Thalmann & Co. pursuant
to which Landenburg Thalmann & Co. would act as a non-exclusive
placement agent in connection with proposed public offerings of common
stock and/or warrants to purchase common stock of NeoTherapeutics
pursuant to NeoTherapeutics' existing effective shelf registration
statement on Form S-3, file number 333-53108.
83
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: April 2, 2002 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 Annual Report on Form 10-K 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 2, 2002
------------------------------------ Chief Executive Officer
Alvin J. Glasky, Ph.D. and Director
(Principal Executive Officer)
/s/ Rajesh C. Shrotriya, M.D. President, Chief April 2, 2002
-------------------------------------- Operating Officer and
Rajesh C. Shrotriya, M.D. Director
/s/ Samuel Gulko Senior Vice President Finance, April 2, 2002
------------------------------------ Chief Financial Officer, Secretary,
Samuel Gulko Treasurer and Director
(Principal Accounting and
Financial Officer)
/s/ Mark J. Glasky Director April 2, 2002
------------------------------------
Mark J. Glasky
/s/ Ann C. Kessler Director April 2, 2002
------------------------------------
Ann C. Kessler, Ph.D.
/s/Armin M. Kessler Director April 2, 2002
------------------------------------
Armin M. Kessler
/s/ Eric L. Nelson Director April 2, 2002
------------------------------------
Eric L. Nelson, Ph.D.
/s/ Carol O'Cleireacain Director April 2, 2002
------------------------------------
Carol O'Cleireacain, Ph.D.
/s/ Paul H. Silverman Director April 2, 2002
------------------------------------
Paul H. Silverman Ph.D., D.Sc.
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.)
3.1.1+ Certificate of Amendment to the Certificate of Incorporation
of the Registrant.
3.1.2 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.)
3.1.3 Certificate of Designation of Rights, Preferences and
Privileges of Series B Junior Participating Preferred Stock of
the Registrant. (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.)
3.1.4 Certificate of Designations of the Series C Preferred Stock of
the Registrant. (Filed as Exhibit 4.7 to the Registration
Statement on Form S-3, as amended (No. 333-64432), as filed
with the Securities and Exchange Commission on July 2, 2001,
and incorporated herein by reference.)
3.2+ Bylaws of the Registrant, as amended.
4.1+ Form of Warrant issued by the Registrant to Sanford Glasky,
dated as of December 15, 1997, to purchase up to 16,631 shares
of our common stock.
4.2+ Warrant issued by the Registrant to Leasing Technologies,
Inc., dated as of September 9, 1998.
4.3 Registration Rights Agreement dated as of January 29, 1999, by
and among the 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.)
4.4 Form of Warrant issued by the 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.)
4.5 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of January 29, 1999. (Filed as Exhibit 4.13 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.6+ Form of Warrant issued by the Registrant to certain
investors, dated as of May 11, 1999, to purchase up to an
aggregate of 80,000 shares of our common stock.
4.7+ Warrant issued by the Registrant to Stradling Yocca Carlson
& Rauth, dated as of May 17, 1999.
4.8 Form of Representative's Warrant issued to Joseph Charles &
Associates, Inc., dated as of July 26, 1999, to purchase up to
100,000 shares of our common stock. (Filed as Exhibit 4.12 to
the Registration Statement on Form S-1, as amended (No.
333-79935), as filed with the Securities and Exchange
Commission on July 21, 1999, and incorporated herein by
reference.)
EXHIBIT NO. DESCRIPTION
----------- -----------
4.9 Registration Rights Agreement dated as of November 19, 1999,
by and among the 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
December 7, 1999, and incorporated herein by reference.)
4.10 Closing Warrant issued by the 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 December 7, 1999, and incorporated
herein by reference.)
4.11 Closing Warrant issued by the 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 December 7, 1999, and incorporated
herein by reference.)
4.12 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of November 19, 1999. (Filed as Exhibit 4.14 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.13 Registration Rights Agreement dated as of February 25, 2000,
by and among the 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.)
4.14 Closing Warrant issued by the 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.)
4.15 Closing Warrant issued by the 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.)
4.16 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of February 25, 2000. (Filed as Exhibit 4.15 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.17 Registration Rights Agreement dated as of April 6, 2000, by
and among the 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.)
4.18 Class A Warrant issued by the 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.)
4.19 Class A Warrant issued by the 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.)
4.20 Class B Warrant issued by the 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.)
EXHIBIT NO. DESCRIPTION
----------- -----------
4.21 Class B Warrant issued by the 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.)
4.22 Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of April 6, 2000. (Filed as Exhibit 4.16 to the
Registration Statement on Form S-3 (No. 333-37180), as filed
with the Securities and Exchange Commission on May 16, 2000,
and incorporated herein by reference.)
4.23 Registration Rights Agreement dated as of April 28, 2000, by
and among the 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.)
4.24 Warrant issued by the 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.)
4.25 Warrant issued by the 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.)
4.26 Registration Rights Agreement dated as of September 21, 2000,
by and among the 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.)
4.27 Warrant issued by the 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.)
4.28 Warrant issued by the 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.)
4.29 Registration Rights Agreement dated as of September 29, 2000,
by and among the 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.)
4.30 Closing Warrant issued by the 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.)
4.31 Closing Warrant issued by the 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.)
4.32+ Form of Warrants issued by the Registrant to Brighton
Capital, Ltd., dated between September 18, 2000 and May 18,
2001, to purchase up to an aggregate of 130,473 shares of our
common stock.
EXHIBIT NO. DESCRIPTION
----------- -----------
4.33 Rights Agreement, dated as of December 13, 2000, between the
Registrant 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.)
4.34 Registration Rights Agreement dated as of December 18, 2000,
by and between the 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.)
4.35 Warrant issued by the 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.)
4.36+ Warrant issued by the Registrant to Brighton Capital, Ltd.,
dated as of December 18, 2000.
4.37+ Warrant issued by the Registrant to CroMedica Global, Inc.,
dated as of January 25, 2001.
4.38 Warrant issued by the 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.)
4.39 Advisory Agreement dated as of April 11, 2001, by and between
the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit
4.1 to the Registration Statement on Form S-3, as amended (No.
333-64444), as filed with the Securities and Exchange
Commission on July 2, 2001, and incorporated herein by
reference.)
4.40 Amendment to the Advisory Agreement dated as of June 12, 2001,
by and between the Registrant and Cantor Fitzgerald & Co.
(Filed as Exhibit 4.2 to the Registration Statement on Form
S-3, as amended (No. 333-64444), as filed with the Securities
and Exchange Commission on July 2, 2001, and incorporated
herein by reference.)
4.41 Amendment to the Advisory Agreement, dated as of October 19,
2001, by and between the Registrant and Cantor Fitzgerald &
Co. (Filed as Exhibit 4.1 to Form 8-K, as filed with the
Securities and Exchange Commission on October 24, 2001, and
incorporated herein by reference.)
4.42 Warrant issued by the Registrant to Montrose Investments Ltd.,
dated as of May 18, 2001. (Filed as Exhibit 4.1 to Form 8-K,
as filed with the Securities and Exchange Commission on May
21, 2001, and incorporated herein by reference.)
4.43 Warrant issued by the Registrant to Strong River Investments,
Inc., dated as of May 18, 2001. (Filed as Exhibit 4.2 to Form
8-K, as filed with the Securities and Exchange Commission on
May 21, 2001, and incorporated herein by reference.)
4.44+ Form of Warrant issued by the Registrant to Gruntal & Co.,
L.L.C., dated as of August 10, 2001, to purchase up to 125,000
shares of our common stock.
EXHIBIT NO. DESCRIPTION
----------- -----------
4.45 Form of Warrants issued by the Registrant to Cantor Fitzgerald
& Co, dated as of December 6, 2001 and December 13, 2001, to
purchase up to an aggregate of 132,139 shares of our common
stock. (Filed as Exhibit A to Schedule 1 to Exhibit 1.1 to
Form 8-K, as filed with the Securities and Exchange Commission
on October 24, 2001, and incorporated herein by reference.)
4.46+ Warrant issued by the Registrant to Jefferies & Company,
Inc., dated as of December 13, 2001.
4.47+ Form of Warrant issued by the Registrant to certain
purchasers, dated as of March 13, 2002 and March 15, 2002, to
purchase up to an aggregate of 795,000 shares of our common
stock.
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.)
10.2* Note dated as of 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.)
10.3* Addendum to Note dated as of 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.)
10.4* 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.)
10.5* 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.)
10.6* 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.)
10.7 Industrial Lease Agreement dated as of January 16, 1997,
between the Registrant 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.)
10.8*+ Amended and Restated 1997 Stock Incentive Plan.
10.9 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.)
10.10 Securities Purchase Agreement dated as of February 25, 2000,
by and among the 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.)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11 Convertible Debenture Purchase Agreement dated as of April 6,
2000, by and among the 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.)
10.12 Securities Purchase Agreement dated as of April 28, 2000, by
and between the 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.)
10.13 Letter Agreement dated as of May 1, 2000, by and between the
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.)
10.14 Securities Purchase Agreement dated as of September 21, 2000,
by and among the 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 13, 2000, and incorporated herein by reference.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18+ Warrant issued by NeoGene Technologies, Inc., to Brighton
Capital, Ltd., dated as of September 21, 2000.
10.19 Master Lease Agreement dated as of September 22, 2000, by and
between the Registrant and Comdisco Laboratory and Scientific
Group. (Filed as Exhibit 10.16 to the Annual Report on Form
10-K, as amended, as filed with the Securities and Exchange
Commission on April 25, 2001, and incorporated herein by
reference.)
10.20 Amendment No. 1 to Master Lease Agreement dated as of
September 22, 2000, by and between the Registrant and Comdisco
Laboratory and Scientific Group. (Filed as Exhibit 10.17 to
the Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.21 Equipment Schedule No. S-01 dated as of September 22, 2000, by
and between the Registrant and Comdisco Laboratory and
Scientific Group. (Filed as Exhibit 10.18 to the Annual Report
on Form 10-K, as amended, as filed with the Securities and
Exchange Commission on April 25, 2001, and incorporated herein
by reference.)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.22 Addendum to Equipment Schedule No. SG-01 dated as of September
22, 2000, by and between the Registrant and Comdisco
Laboratory and Scientific Group. (Filed as Exhibit 10.19 to
the Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.23 Securities Purchase Agreement dated as of September 29, 2000,
by and among the 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.)
10.24 Securities Purchase Agreement dated as of December 18, 2000,
by and among the 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.)
10.25 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.)
10.26 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.)
10.27 Stock Purchase Agreement dated as of January 31, 2001, by and
between the 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.)
10.28 Securities Purchase Agreement dated as of March 8, 2001, by
and between the 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.)
10.29 Letter Agreement dated as of April 17, 2001, by and between
the Registrant, Montrose Investments Ltd., Strong River
Investments, Inc. and HBK Master Fund L.P. (Filed as Exhibit
10.20 to the Annual Report on Form 10-K, as amended, as filed
with the Securities and Exchange Commission on April 25, 2001,
and incorporated herein by reference.)
10.30 Securities Purchase Agreement dated as of April 20, 2001, by
and between the Registrant, Montrose Investments Ltd. and
Strong River Investments, Inc. (Filed as Exhibit 4.63 to the
Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.31* Employee Stock Purchase Plan. (Filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (No.
333-54246), and incorporated herein by reference.)
10.32* Amendment 2001-1 to the Employee Stock Purchase Plan
effective as of June 21, 2001. (Filed as Exhibit 10.22 to the
Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
10.33* Executive Employment Agreement for Alvin J. Glasky, Ph.D.,
dated as of December 1, 2000. (Filed as Exhibit 10.23 to the
Annual Report on Form 10-K, as amended, as filed with the
Securities and Exchange Commission on April 25, 2001, and
incorporated herein by reference.)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.34* Executive Employment Agreement for Sam Gulko, dated as of
December 1, 2000. (Filed as Exhibit 10.24 to the Annual Report
on Form 10-K, as amended, as filed with the Securities and
Exchange Commission on April 25, 2001, and incorporated herein
by reference.)
10.35*+ Executive Employment Agreement for Rajesh C. Shrotriya,
M.D., dated as of December 1, 2000.
10.36 Securities Purchase Agreement dated as of May 17, 2001, by and
among the Registrant, Montrose Investments Ltd. and Strong
River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K, as
filed with the Securities and Exchange Commission on May 21,
2001, and incorporated herein by reference.)
10.37 Letter Agreement dated as of May 17, 2001, by and among the
Registrant, Montrose Investments Ltd. and Strong River
Investments, Inc. (Filed as Exhibit 10.2 to Form 8-K, as filed
with the Securities and Exchange Commission on May 21, 2001,
and incorporated herein by reference.)
10.38 License Agreement dated as of June 29, 2001, by and between
the Registrant and NDDO Research Foundation. (Filed as Exhibit
10.4 to Form 10-Q, as filed with the Securities and Exchange
Commission on November 14, 2001, and incorporated herein by
reference.)
10.39+ Letter Agreement dated as of August 10, 2001, by and between
the Registrant and Gruntal & Co., L.L.C.
10.40 Stock Purchase Agreement dated as of August 13, 2001, by and
among the Registrant, NeoGene Technologies, Inc., Montrose
Investments Ltd. and Strong River Investments, Inc. (Filed as
Exhibit 10.1 to Form 8-K, as filed with the Securities and
Exchange Commission on August 27, 2001, and incorporated
herein by reference.)
10.41 Stock Purchase Agreement dated as of August 14, 2001, by and
between the Registrant and Summit Capital Management L.L.C.
(Filed as Exhibit 10.1 to Form 8-K, as filed with the
Securities and Exchange Commission on August 15, 2001, and
incorporated herein by reference.)
10.42 License Agreement dated as of August 28, 2001, by and between
the Registrant and Johnson Matthey plc. (Filed as Exhibit 10.5
to Form 10-Q, as filed with the Securities and Exchange
Commission on November 14, 2001, and incorporated herein by
reference.)
10.43 Stock Purchase and Settlement Agreement and Release dated as
of September 19, 2001, by and among the Registrant, NeoGene
Technologies, Inc. and Societe Generale. (Filed as Exhibit
10.1 to Form 8-K, as filed with the Securities and Exchange
Commission on September 24, 2001, and incorporated herein by
reference.)
10.44 License Agreement dated as of October 24, 2001, by and between
the Registrant and Bristol-Myers Squibb Company. (Filed as
Exhibit 10.6 to Form 10-Q, as filed with the Securities and
Exchange Commission on November 14, 2001, and incorporated
herein by reference.)
10.45 Letter Agreement dated as of November 19, 2001, by and between
the Registrant and Ladenburg Thalmann & Co., Inc. (Filed as
Exhibit 1.1 to Form 8-K, as filed with the Securities and
Exchange Commission on December 11, 2001, and incorporated
herein by reference.)
10.46+ Form of Securities Purchase Agreement, by and between the
Registrant and certain investors, dated as of December 10,
2001, for the purchase of an aggregate of 519,480 shares of
our common stock.
EXHIBIT NO. DESCRIPTION
----------- -----------
10.47+ Letter Agreement dated as of March 11, 2002, by and between
the Registrant and Brighton Capital, Ltd.
10.48+ Form of Securities Purchase Agreement, by and between the
Registrant and certain investors, dated as of March 12, 2002
and March 15, 2002, for the purchase of an aggregate of
3,100,000 shares of our common stock.
21+ Subsidiaries of Registrant.
23+ Consent of Arthur Andersen LLP.
99.1+ Letter dated April 1, 2002 from the Registrant to the
Commission.
* Indicates a management contract or compensatory plan or arrangement.
+ Filed herewith