UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
.
Commission file number 0-23280
NEUROBIOLOGICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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94-3049219
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.)
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2000 Powell Street, Suite 800, Emeryville, California 94608
(Address of principal executive offices)
(510) 595-6000
(Registrants telephone number, including area code)
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting company. See definition
of accelerated filer, large accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller Reporting Company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of the common
stock, as of the latest practical date.
Common Stock, $0.001 par value: 27,019,805 shares outstanding as of November 10, 2009.
NEUROBIOLOGICAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
NEUROBIOLOGICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
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September 30,
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June 30,
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2009
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2009
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(Unaudited)
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(Note 1)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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9,583
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$
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8,230
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Short-term investments
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16,906
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15,819
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Accounts receivable
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3,000
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184
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Prepaid expenses and other current assets
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205
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305
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Total current assets
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29,694
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24,538
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Deposits
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52
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52
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Property and equipment, net
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36
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70
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$
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29,782
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$
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24,660
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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$
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21
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Accrued professional expenses
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345
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493
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Accrued compensation, including severance
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166
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281
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Income taxes payable
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96
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Other accrued liabilities
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19
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25
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Warrant liability
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29
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295
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Total current liabilities
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655
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1,115
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $0.001 par value, 5,000
shares authorized; 3,000 authorized
shares designated as Series A
convertible preferred stock, 2,332
shares issued and 494 outstanding, with
aggregate liquidation preference of $247
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247
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247
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Common stock, $0.001 par value, 50,000
shares authorized, 26,930 shares issued
and outstanding
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27
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27
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Additional paid-in capital
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145,846
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145,739
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Accumulated deficit
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(117,063
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)
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(122,468
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)
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Accumulated other comprehensive income
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70
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Total stockholders equity
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29,127
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23,545
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$
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29,782
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$
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24,660
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See accompanying notes.
3
NEUROBIOLOGICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share amounts)
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Three months ended
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September 30,
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2009
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2008
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REVENUES
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Royalty
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$
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6,019
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$
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2,078
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Technology sale and collaboration services
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7
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1,487
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Total revenues
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6,026
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3,565
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EXPENSES
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Research and development
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5,452
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General and administrative
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878
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1,331
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Total expenses
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878
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6,783
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Operating income (loss)
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5,148
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(3,218
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)
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Interest income
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93
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249
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Gain on sale of long-term investments
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170
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Loss on sale of property and equipment
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(6
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Non-cash gain on decrease in fair value of warrants
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266
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37
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Income (loss) before provision for income taxes
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5,501
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(2,762
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Provision for income taxes
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(96
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)
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NET INCOME (LOSS)
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$
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5,405
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$
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(2,762
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BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
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$
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0.20
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$
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(0.10
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Shares used in basic net loss per share calculation
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26,930
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26,924
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Shares used in diluted net loss per share calculation
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26,945
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26,924
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See accompanying notes.
4
NEUROBIOLOGICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
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Three months ended
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September 30,
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2009
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2008
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OPERATING ACTIVITIES:
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Net income (loss)
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$
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5,405
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$
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(2,762
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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14
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49
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Stock-based compensation
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107
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244
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Gain on sale of long-term investments
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(170
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)
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Loss on sale of property and equipment
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6
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Non-cash gain on decrease in fair value of warrants
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(266
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)
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(37
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)
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Changes in assets and liabilities:
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Accounts receivable
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(2,816
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)
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415
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Prepaid expenses and other current assets
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100
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12
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Accounts payable and accrued liabilities
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(290
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)
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612
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Income taxes payable
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96
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Deferred revenue
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(1,375
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)
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Net cash provided by (used in) operating activities
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2,356
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(3,012
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)
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INVESTING ACTIVITIES:
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Purchase of investments
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(11,088
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)
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Maturity and sale of investments
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10,071
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1,195
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Proceeds from sale of property and equipment
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14
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Purchases of property and equipment
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(2
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Net cash (used in) provided by investing activities
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(1,003
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)
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1,193
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FINANCING ACTIVITIES
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Increase (decrease) in cash and cash equivalents
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1,353
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(1,819
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)
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Cash and equivalents at beginning of period
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8,230
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27,941
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Cash and equivalents at end of period
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$
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9,583
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$
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26,122
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See accompanying notes.
5
NEUROBIOLOGICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
(Tabular amounts in thousands, except per share amounts, percentages and years)
1. Basis of Presentation and Summary of Significant Accounting Policies
Business Description
Neurobiological Technologies, Inc. is a biopharmaceutical company historically
focused on developing investigational drugs for central nervous system conditions. The
Companys stockholders recently approved the dissolution of the Company pursuant to a
plan of complete liquidation and dissolution (the Plan of Dissolution). Please refer
Note 9 Subsequent Events for additional information.
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, NTI-Empire, Inc. All intercompany accounts
and transactions have been eliminated. NTI operates in one business segment, the
development of pharmaceutical products.
These financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnote disclosures required by GAAP for reporting
on complete financial statements. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes in the Companys
Annual Report on Form 10-K for the year ended June 30, 2009. The condensed consolidated
financial statements reflect all adjustments, which, in the opinion of management, are
necessary for a fair presentation of results for the interim periods presented. Such
adjustments consist only of normally recurring items. Operating results for the three
months ended September 30, 2009 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2010.
The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the balances and disclosures. Actual
results could differ from these estimates.
The consolidated balance sheet as of June 30, 2009 has been derived from the
audited financial statements at that date but as noted above does not include all
disclosures required for complete financial statements.
Revenue Recognition
Revenues are recognized according to the terms of contractual agreements to which
NTI is a party, when the Companys performance requirements have been fulfilled, the
amount is fixed and determinable, and collection is reasonably assured. Revenue from
license fees with non-cancelable, non-refundable terms and no future performance
obligations is recognized when collection is assured. Milestone payments are recognized
when the Company has fulfilled development milestones and collection is assured. Revenue
from services performed for other parties is recorded during the period in which the
expenses are incurred.
Royalty revenue is recorded when payments are received since the Company is unable
to estimate the amount of royalties as they are earned. Revenue from sales of royalty
rights is recorded as royalty revenue during the period in which the arrangement is
completed and collection is assured.
Revenue arrangements with multiple components are divided into separate units of
accounting if certain criteria are met, including whether the delivered component has
stand-alone value to the customer, and whether there is objective reliable evidence of
the fair value of the undelivered items. Consideration received is allocated among the
separate units of accounting based on their relative fair values, and the applicable
revenue recognition criteria are identified and applied to each of the units.
6
2. Investments
Available-for-sale securities were as follows:
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As of September 30,
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As of June 30,
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2009
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2009
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Estimated
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Estimated
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Cost
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Fair Value
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Cost
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Fair Value
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Type of security and term
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U.S. Government and Agency Obligations
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Maturing within one year
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$
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11,649
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$
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11,649
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$
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10,292
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$
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10,292
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Auction rate securities (ARS)
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Maturing in 21 to 36 years
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5,187
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*
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|
5,257
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|
5,527
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*
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5,527
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Total investments
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$
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16,836
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$
|
16,906
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$
|
15,819
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|
$
|
15,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*
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Cost represents purchase price less impairment charges of $1,813,000 and $1,973,000 on securities still held at September 30,
2009 and June 30, 2009, respectively.
|
The Companys investments in ARS were structured to provide liquidity via an auction
process that reset the applicable interest rate at predetermined calendar intervals. Beginning
in February 2008, failed auctions occurred throughout the ARS market, and since then all
auctions for NTIs ARS have been unsuccessful. While the credit rating of these securities
generally remains high and the ARS are paying interest according to their terms, as a result of
the potentially long maturity, currently low interest rates and lack of liquidity for ARS, the
Company believes the value of the ARS in NTIs portfolio has been impaired. During the fiscal
years ended June 30, 2009 and 2008, the Company recorded other than temporary impairment charges
in its realized losses related to the ARS, based on models of discounted future cash flows and
assumptions regarding interest rates. Values as of September 30, 2009 are based on models of
discounted future cash flows or subsequent selling prices for the securities. Other than the
realized losses recorded to date for the ARS, as noted in the table above, and unrealized gains
of $70,000 on the ARS as of September 30, 2009, all other realized and unrealized gains and
losses on the Companys investments were not material.
3. Fair Value of Financial Instruments
The following table provides the fair value measurements of our financial assets as of
September 30, 2009, according to a hierarchy based on three levels of input objectivity:
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Fair Value Measurements Using Inputs from
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Carrying Value
|
|
|
Level 1
|
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Level 2
|
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|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
9,583
|
|
|
$
|
9,583
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|
|
$
|
|
|
|
$
|
|
|
U.S government and agency obligations
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|
|
11,649
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|
|
|
|
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11,649
|
|
|
|
|
|
Auction rate securities
|
|
|
5,257
|
|
|
|
|
|
|
|
4,287
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,489
|
|
|
$
|
9,583
|
|
|
$
|
15,936
|
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 inputs in the table above are quoted prices in active markets for identical assets
or liabilities. Level 2 inputs are quoted prices in active markets for similar assets and
liabilities, quoted prices in markets that are not active, or other inputs that are observable
for the asset or liability. Level 3 inputs are based on managements own assumptions used to
measure the fair value of assets and liabilities, which are supported by little or no market
activity. Level 1 and Level 2 inputs are considered observable, while Level 3 inputs are
considered unobservable. A financial asset or liabilitys classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value measurement.
The input levels and the methodology used for valuing securities are not necessarily an
indication of the credit risk associated with the securities.
Fair values are based on quoted market prices, where available. These fair values are
obtained primarily from third party pricing services, which generally use Level 1 or Level 2
inputs for the determination of fair value. Third party pricing services normally derive the
security prices through recently reported trades for identical or similar securities making
adjustments through the reporting date based upon available market observable information. For
securities not actively traded, the third party pricing services may use quoted market prices of
comparable instruments or discounted cash flow analyses, incorporating inputs that are currently
observable in the markets for similar securities. Inputs that are often used in the valuation
methodologies include, but are not limited to, benchmark yields, broker quotes, credit spreads,
default rates and prepayment speed. The Company performs a review of the prices received from
third parties to determine whether the prices are reasonable estimates of fair value.
7
The Companys investments in ARS are classified as Level 2 if they represent ARS with
reliable observable inputs, such as recent sales for the same or similar CUSIPs. The Companys
investments in ARS are classified within Level 3 when there are no active markets for the ARS
and the Company is unable to obtain independent valuations from market sources. Level 3 ARS
were valued using discounted cash flow models, and certain inputs to the cash flow model are
unobservable in the market. The changes in Level 3 assets measured at fair value for the three
months ended September 30, 2009 were as follows:
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
5,527
|
|
Unrealized gains included in other comprehensive income
|
|
|
70
|
|
Sales of securities
|
|
|
(340
|
)
|
Transfer to Level 2 assets
|
|
|
(4,287
|
)
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
970
|
|
|
|
|
|
The balance of Level 3 securities at September 30, 2009 represents one student loan
ARS, CUSIP 69847RAA0, issued by Panhandle Plains Student Fin. Corp., with a maturity
date of December 1, 2031 and a par value of $1,200,000.
4. Warrant Liability
The fair value of warrants issued by the Company in connection with an April 2007
sale of common stock has been recorded as a liability on the consolidated balance sheet
based on a Black-Scholes option pricing model, and is marked to market on each financial
reporting date. The change in fair value of the warrants is recorded in the consolidated
statements of operations as a non-cash gain or loss. The key assumptions used to value
the warrants at September 30, 2009 were a volatility factor of 1.00, a risk-free
interest rate of 1.25% and no dividend yield for the remaining 2
1
/
2
years until maturity.
5. Stock-based Compensation
The Company recognizes stock-based compensation expense in its statement of
operations based on estimates of the fair value of employee stock option and stock grant
awards as measured on the grant date and uses the Black-Scholes option pricing model to
determine the value of the awards granted. The Company amortizes the estimated value of
the options as of the grant date over the stock options vesting period, which generally
ranges from one to four years.
Stock-based compensation expense has been recorded in the condensed consolidated
statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
107
|
|
|
$
|
139
|
|
Research and development
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
107
|
|
|
$
|
244
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2009, the Company did not grant any
stock options. During the three months ended September 30, 2008, the Company granted
options to purchase 111,000 shares of common stock, which were all issued with a
ten-year term. The option pricing model requires various input assumptions, and to
value these options the Company estimated a volatility factor of the Companys common
stock of 67%, an option term of 6
1
/
4
years, a risk-free interest rate of 2.8%, and a
dividend yield of 0%. Based on these assumptions, the grant-date fair value of options
granted during the three months ended September 30, 2008 was $77,000. As of September
30, 2009, there was $234,000 of total unrecognized compensation cost related to unvested
stock-based compensation awards, which is expected to be recognized over the weighted
average remaining vesting period of 2.4 years.
6. Income Taxes
The Company makes certain estimates and judgments in determining income tax expense
for financial statement reporting purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities which arise from differences in the
timing of recognition of revenue and expenses for financial statement and tax reporting
purposes. As of September 30, 2009, the Companys net deferred tax assets remain fully
offset by a valuation allowance due to the significant uncertainty of the Companys
ability to realize these assets.
8
The provision for income taxes in the amount of $96,000 for the three months ended
September 30, 2009 is comprised of:
|
|
|
$30,000 for federal alternative minimum tax (AMT), due to certain
limitations on the utilization of prior years net operating loss
carryforwards to offset current year alternative taxable income and
|
|
|
|
|
$66,000 for California state income taxes, due to temporary provisions
enacted in California that prevent utilization of net operating loss
carryforwards and research and development tax credit carryforwards.
|
7. Net Income per Share
Basic net income or loss per share is based on the weighted average number of
shares of common stock issued and outstanding during the period. Dilutive net income per
share is calculated based on the weighted-average number of shares of common stock
outstanding as well as other potentially dilutive securities outstanding during the
period using the treasury stock method. For the three months ended September 30, 2009,
dilutive securities included options to purchase 90,000 shares of common stock. Because
their effect would have been anti-dilutive for the quarter ended September 30, 2009,
dilutive securities excluded options to purchase 727,000 shares of common stock,
warrants to purchase 544,000 shares of common stock and the conversion of convertible
preferred stock into 71,000 shares of common stock. If the Company had reported net
income for the three months ended September 30, 2008, the dilutive effect of these
equity instruments then totaling 2,994,000 shares would need to be considered.
8. Comprehensive Income (Loss)
The Companys comprehensive income was $5,475,000 for the three months ended
September 30, 2009. The Companys comprehensive loss was $3,293,000 for the three months
ended September 30, 2008. The comprehensive income or loss is comprised of the net
income or loss and certain changes in equity that are excluded from the Companys net
income or loss, which are the unrealized holding gains or loss on available-for-sale
investments.
9. Subsequent Events
The Company performed an evaluation of subsequent events through November 13, 2009,
the date these financial statements were issued.
On October 27, 2009, the Company held a special meeting of stockholders. At the
special meeting, stockholders approved the dissolution of the Company pursuant to the
Plan of Dissolution and an amendment to the Companys certificate of incorporation to
authorize the redemption of the Companys Series A Preferred Stock.
On October 27, 2009, following stockholder approval of the Plan of Dissolution, the
Companys board of directors declared an extraordinary dividend of $0.75 per share of
common stock, payable to stockholders of record as of November 10, 2009. Payment date of
the extraordinary dividend is expected to be November 18, 2009.
On November 4, 2009, the Company redeemed all 494,000 outstanding shares of Series
A Preferred Stock at the original issue price and liquidation preference of $0.50 per
share, or $247,000 in aggregate.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Except for the historical information contained herein, the matters discussed in
this Managements Discussion and Analysis of Financial Condition and Results of
Operations, and elsewhere in this Form 10-Q are forward-looking statements that involve
risks and uncertainties. The factors referred to in the section captioned Risk
Factors, as well as any cautionary language in this Form 10-Q, provide examples of
risks, uncertainties and events that may cause our actual results to differ materially
from those projected. The Companys Annual Report on Form 10-K, filed with the SEC on
August 31, 2009, and the Companys definitive proxy statement, filed with the SEC on
September 22, 2009 (the Proxy Statement), also contain risk factors that provide
examples of risks, uncertainties, and events that may cause our actual results to differ
materially from those implied or projected.
Except as may be required by law, we undertake no obligation to update any
forward-looking statement to reflect events after the date of this report.
9
Overview
We are a biopharmaceutical company historically focused on developing
investigational drugs for central nervous system conditions. On October 27, 2009, our
stockholders approved the dissolution of the Company pursuant to the Plan of
Dissolution, and our board of directors declared an extraordinary dividend of $0.75 per
share, payable to stockholders of record as of November 10, 2009, with an expected
payment date of November 18, 2009.
On August 12, 2009, we announced the termination of our license and cooperation
agreement with Merz Pharmaceuticals GmbH, or Merz, and Childrens Medical Center
Corporation. Under the license and cooperation agreement, as amended in 2008, we
previously received quarterly royalty payments on sales of memantine in the United
States, based on a declining royalty-rate schedule, and Merz had the ability to
terminate the agreement upon six months notice. In addition to a royalty payment of $1.1
million for prior period sales, Merz paid us $4.9 million in various installments for
the termination of the agreement.
Celtic Pharmaceuticals, to whom we sold rights to the investigational drug XERECEPT
in 2005, continues to develop XERECEPT for the treatment of brain edema associated with
cerebral tumors. We remain entitled to receive payments from Celtic based upon Celtics
successful development and commercialization of XERECEPT, or based upon the net proceeds
received by Celtic, if Celtic sells its rights to XERECEPT.
RESULTS OF OPERATIONS
Summary
During the three months ended September 30, 2009, we entered into an agreement to
terminate a license agreement under which we were previously receiving royalties from
Merz in return for Merzs agreement to provide us with a one-time payment. Amounts
received as royalties and as payment in return for the termination of the
royalty-bearing agreement aggregated substantially more than our administrative
operating expenses, and we recorded net income of $5,405,000. During the three months
ended September 30, 2008, our primary focus as a company was the development of
Viprinex, an investigational drug for stroke, the majority of our costs were related to
its potential development, and we recorded a net loss of $2,762,000.
Revenues
The major components of our revenue are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Royalty
|
|
$
|
6,019
|
|
|
$
|
2,078
|
|
|
$
|
3,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XERECEPT
®
sale
|
|
|
|
|
|
|
1,375
|
|
|
|
(1,375
|
)
|
Collaboration services
|
|
|
7
|
|
|
|
112
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
Technology sale and collaboration services
|
|
|
7
|
|
|
|
1,487
|
|
|
|
(1,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
6,026
|
|
|
$
|
3,565
|
|
|
$
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues of $6,026,000 for the three months ended September 30, 2009
increased by $2,461,000 from revenues of $3,565,000 for the three months ended September
30, 2008. Our first quarter fiscal 2010 revenues consisted almost entirely of $6,019,000
from our license agreement for the product memantine with Merz Pharmaceuticals GmbH
under which we received royalties on sales by Merzs marketing partner in the United
States. Included in first quarter fiscal 2010 revenues were $1,119,000 received as a
royalty and $4,900,000 from Merzs buy-out of its future royalty obligations upon
termination of our license agreement. We do not expect to receive any further royalty
revenue related to memantine.
In June 2009 we terminated our continuing service obligations related to our
earlier sale of XERECEPT, and accordingly only recorded minimal revenue related to our
services during the quarter ended September 30, 2009. We do not expect to receive any
revenue related to collaboration services in the future. Future revenue related to our
earlier sale of XERECEPT will be dependent on either the successful development and
commercialization of XERECEPT by Celtic, or the sale of XERECEPT by Celtic, which we are
not able to predict.
10
RESEARCH AND DEVELOPMENT EXPENSES
During the quarter ended September 30, 2009 we did not record any research and
development expenses, as compared to research and development expenses of $5,452,000 for
the quarter ended September 30, 2008. Because we have previously terminated all of our
drug development and drug discovery programs, no research and development expenses were
incurred in the first quarter of our 2010 fiscal year. During the quarter ended
September 30, 2008, our expenses were primarily related to clinical trials and
manufacturing costs of Viprinex, an investigational drug for stroke which did not
demonstrate efficacy in a clinical trial unblinded in December 2008. We do not expect to
incur any research and development expenses in the future.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased to $878,000 for the quarter ended
September 30, 2009 compared to $1,331,000 for the quarter ended September 30, 2008, a
reduction of $453,000, or 34%. General and administrative expenses decreased during the
period in fiscal 2010 largely due to across-the-board personnel reductions following the
termination of our Viprinex program in stroke. Higher legal fees in connection with
preparing the company for liquidation and dissolution partially offset the savings as a
result of the large personnel reductions.
We expect general and administrative expenses to be comparable to or below the
level for the three months ended September 30, 2009 in future periods until we file for
dissolution, after which we expect these expenses to decrease significantly.
INTEREST INCOME
Interest income for the three months ended September 30, 2009 was $93,000, compared
to $249,000 for the three months ended September 30, 2008. The decrease over the same
period in the prior year is primarily due to both lower cash and investment balances and
lower interest rates.
GAIN ON SALE OF LONG-TERM INVESTMENTS
There was no gain on sale of long-term investments during the three months ended
September 30, 2009 because we have classified the auction-rate securities in our
portfolio as available-for-sale based on our plans to liquidate our assets. During the
three months ended September 30, 2008, the gain on sale of long-term investments
represented securities called by the issuer at par and securities sold at what we deemed
to be favorable prices.
LOSS ON SALE OF PROPERTY AND EQUIPMENT
During the three months ended September 30, 2009, we sold various furniture and
other assets as we prepared for liquidation.
NON-CASH GAIN ON DECREASE IN FAIR VALUE OF WARRANTS
During the three months ended September 30, 2009, we recorded a non-cash gain of
$266,000 on the decrease in the estimated fair value of equity warrants we previously
issued, as compared to a non-cash gain of $37,000 for the three months ended September
30, 2008. The decrease in the estimated fair value of the warrants, which resulted in
the gain recorded during the most recent quarter, was primarily due to a decrease in the
estimated volatility of our common stock, combined with a decrease in the estimated term
of the warrants, partially offset by an increase in the value of our common stock.
The non-cash changes in the estimated fair value of warrants represent changes in
the Black-Scholes value of warrants we issued in April 2007. The April 2007 warrants
require us to provide the investors with registered shares upon the warrants exercise.
The warrants may also require cash payments to be made in connection with certain
fundamental transactions involving us or our common stock. Because accounting rules
specify that delivery of registered shares is beyond the control of the company that
issued the warrants, and also because in some circumstances there may be cash payments
to the investors in lieu of a warrant exercise, we are required to account for the value
of these warrants as a liability. We have estimated the liability based on the
Black-Scholes option pricing model, and this warrant liability is re-valued on each
reporting date with changes in the fair value from prior periods reported as a non-cash
charge or gain to earnings.
11
PROVISION FOR INCOME TAXES
We reported a provision for income taxes of $96,000 for the three months ended
September 30, 2009 compared to no provision or benefit reported for the three months
ended September 30, 2008. The increased provision for income
taxes is a result of income for the first quarter of fiscal 2010 as compared to
losses in the first quarter of fiscal 2009. Our provision for income taxes for the three
months ended September 30, 2009 would have been significantly higher if we did not have
previous net operating loss, or NOL, carryforwards that had been reserved
through a valuation allowance.
Federal alternative minimum tax requirements only allow us to offset 90% of federal
alternative minimum tax liability with alternative minimum tax NOL carryforwards, and as
a result we have recorded a tax provision of $30,000 for federal alternative minimum
taxes. For our fiscal year ending June 30, 2010, the state of California has temporarily
suspended the use of previous NOLs to offset California taxable income. The state of
California has also imposed certain new and temporary restrictions on the use of
accumulated R&D tax credits for our current fiscal year. As a result, we have recorded a
state tax provision of $66,000 for California income taxes.
LIQUIDITY AND CAPITAL RESOURCES
We assess liquidity primarily by the cash and investments available to fund our
operations and provide for estimated expenses and contingencies as we prepare for the
dissolution and liquidation of the Company.
Since our inception in 1987, we have applied the majority of our resources to our
research and development programs and generated only limited operating revenue.
Following the termination of our Viprinex program in stroke, we terminated all of our
remaining research and development programs and terminated the employment of the
majority of our employees. Following the termination of our research and development
programs, in March 2009 our board of directors hired an independent financial advisor to
assist in an evaluation of strategic and other alternatives to determine whether we
could enter into a transaction that could provide our stockholders a greater return than
a liquidation. In August 2009, after reviewing various alternatives, our board
determined that a transaction providing stockholders a greater return than liquidation
was unlikely. In September 2009, our board of directors approved the Plan of
Dissolution, which was approved by the stockholders at a special meeting on October 27,
2009. Following the stockholder approval of the Plan of Dissolution, on October 27,
2009, the board of directors declared an extraordinary dividend of $0.75 per share and
approved the redemption of the outstanding shares of our Series A Preferred Stock for
$0.50 per share. Pro-forma financial information as if the dividend and preferred stock
redemption were made as of September 30, 2009 is contained in the table of liquid assets
below (this pro-forma financial information was considered by our board of directors in
determining the amount of the extraordinary dividend). Stockholders should note that our
ARS are NOT included in the table below:
|
|
|
|
|
|
|
September 30,
|
|
(amounts in thousands, except share and per share data)
|
|
2009
|
|
|
|
(Pro-forma)
|
|
|
|
|
|
|
Currently liquid assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,583
|
|
Short-term investments, excluding auction-rate securities
|
|
|
11,649
|
|
Portion of
accounts receivable collected subsequent to September 30, 2009 and prior to October 27, 2009
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
Subtotal, currently liquid assets (A)
|
|
|
23,632
|
|
|
|
|
|
|
Payments expected to be made:
|
|
|
|
|
Current liabilities, excluding warrant liability
|
|
|
(626
|
)
|
Estimated one-time severance payments
|
|
|
(275
|
)
|
Lease obligations
|
|
|
(300
|
)
|
Estimated operating expenses through filing of
certificate
of dissolution
|
|
|
(375
|
)
|
Estimated legal and other related liquidation costs
|
|
|
(250
|
)
|
Estimated insurance
|
|
|
(350
|
)
|
Redemption of Series A Preferred Stock
|
|
|
(247
|
)
|
Estimated accounting costs
|
|
|
(100
|
)
|
|
|
|
|
Subtotal, payments expected to be made before
consideration of extraordinary dividend (B)
|
|
|
(2,523
|
)
|
|
|
|
|
|
|
|
|
|
Cash potentially available for extraordinary dividend: (A) (B)
|
|
|
21,109
|
|
Extraordinary dividend declared, $0.75 per share, 27,019,805
shares of common stock outstanding
|
|
|
(20,265
|
)
|
|
|
|
|
|
|
|
|
|
Cash retained for liquidating distributions, preservation of
continued stockholder interest in currently illiquid assets,
or unknown or unexpected contingencies
|
|
$
|
844
|
|
|
|
|
|
12
We believe that our cash and investments as of September 30, 2009, excluding the
ARS, will be sufficient to fund our declared dividend of $0.75 per share, our accrued
and future liabilities, our planned operating and dissolution costs, and any potential
contingencies that may arise. We believe additional proceeds will be available to
distribute to stockholders upon the settlement of sales of our auction-rate securities
and further additional proceeds would be available if we are able to realize value for
our interest in XERECEPT. Additional proceeds would also be distributed to stockholders
to the extent that our liabilities, costs and expenses are less than estimated or if the
contingencies are less than provided. These additional proceeds would be lower if costs
and expenses are greater than estimated or if additional contingencies arise. Many of
the factors influencing the amount of cash distributed to our stockholders cannot
currently be quantified with certainty and are subject to change. Expenses can be
greater than those estimated and new developments can adversely impact the cash or other
assets that are required by the business to the detriment of the cash we are able to
distribute to stockholders. Stockholders may receive less than we are currently
estimating, and we are not attempting to estimate the final distribution payments, if
any, that will be received by stockholders.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our consolidated financial statements or upon our
liquidity or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, our financial position is subject to a variety of
risks, including market risk associated with interest rate movements. We regularly
assess these risks and have established policies and business practices designed to help
us protect against these and other exposures. We do not anticipate material potential
losses in these areas, but no policies or business practices can protect against all
risks, and there is always a chance that unanticipated risks could arise and create
losses for us.
We currently invest funds primarily in short-term U.S. government and agency
obligations, which are investment grade securities. We do not believe that changes in
interest rates would result in a material decrease or increase in the fair value of our
available-for-sale securities due to the short-term nature of our investment portfolio.
We have no investments denominated in foreign country currencies and therefore our
investments are not subject to foreign currency exchange risk.
As of September 30, 2009, we had $5.3 million invested in ARS, issued principally
by student loan agencies. Our original purchase price for these securities was
$7.0 million, which was subsequently written-down to a value of $5.2 million in fiscal
2008 and 2009. ARS are structured to provide liquidity via an auction process that
resets the applicable interest rate at predetermined calendar intervals, which are
approximately once a month. Beginning in February 2008, auctions for the securities in
our portfolio failed, and none have been successful since that time. We have classified
all of our ARS as short-term investments as of September 30, 2009 because we plan to
liquidate these holdings. ARS with a carrying value of $4.3 million as of September 30,
2009 have been sold subsequent to this date for the values listed in our September 30,
2009 condensed consolidated balance sheet, and we believe that we will be able to sell
the single remaining ARS at or near the current carrying value. If we are not able to
sell the remaining ARS at or near the current carrying value, we will be required to
record an additional loss.
Item 4. Controls and Procedures.
Our Acting Chief Executive Officer and Chief Financial Officer are responsible for
establishing and maintaining disclosure controls and procedures (as defined in the
rules promulgated under the Securities Exchange Act of 1934, as amended, the Exchange
Act) for our company. Based on their evaluation of our disclosure controls and
procedures (as defined in the rules promulgated under the Securities Exchange Act of
1934), our Acting Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of September 30, 2009, the end of
the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the
quarter ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently party to any material legal proceedings, although from time to
time we are named as a party to lawsuits in the normal course of business.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the year ended June 30, 2009, filed with the SEC on August 31, 2009,
our definitive proxy statement filed with the SEC on September 22, 2009, and the
following updates to these risk factors. Any of these risks could materially affect our
business, financial condition and future results. The risks described below, in our
Annual Report on Form 10-K and in the Proxy Statement are not the only risks we face.
Additional risks and uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business, financial condition
and future results.
The amount we distribute to our stockholders pursuant to the Plan of Dissolution may be
substantially less than the amount we currently estimate if the amounts of our
liabilities, other obligations and expenses or claims against us are higher than we
currently anticipate.
The amount of cash ultimately distributed to our stockholders pursuant to the Plan
of Dissolution approved by our stockholders depends on the amount of our liabilities,
obligations and expenses and claims against us, and contingency reserves that we
establish during the liquidation process. We have attempted to estimate reasonable
reserves for such liabilities, obligations, expenses and claims against us. However,
those estimates may be inaccurate. Factors that could impact our estimates include the
following:
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If any of our estimates, including the expense of satisfying outstanding
obligations, liabilities and claims during the liquidation process, are
inaccurate, the amount we distribute to our stockholders may be substantially
less than the amount we currently estimate. If claims are asserted against us,
including any claims related to payments to suppliers or other vendors or claims
from patients in our clinical trials, we will have to defend or resolve such
claims before making distributions to our common stockholders, which will reduce
amounts otherwise available for distribution; and
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We have made estimates regarding the expense of personnel required and
other operating expenses (including legal, accounting and other professional
fees) necessary to dissolve and liquidate the Company. Our actual expenses could
vary significantly and depend on the timing and manner of the elective
dissolution process described in the Proxy Statement. If the timing differs from
our plans, we may incur additional expenses above our current estimates, which
could substantially reduce funds available for distribution to our common
stockholders.
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We may continue to incur the expenses of complying with public company reporting
requirements, which may be economically burdensome.
Our common stock is currently registered under the Exchange Act, which requires that
we, and our officers and directors with respect to Section 16 of the Exchange Act, comply
with certain public reporting and proxy statement requirements thereunder. Until we file
to deregister our common stock, we have an obligation to continue to comply with these
reporting requirements, even though such compliance may be economically burdensome and of
minimal value to our stockholders. Following payment of an extraordinary dividend, we
intend to seek relief from the SEC to suspend our reporting obligations under the
Exchange Act, and ultimately to terminate the registration of our Common Stock. We
anticipate that, if granted such relief, we would continue to file current reports on
Form 8-K to disclose material events relating to our dissolution and liquidation along
with any other reports that the SEC might require. To the extent that we are unable to
suspend our obligation to file periodic reports with the SEC, we will be obligated to
continue complying with the applicable reporting requirements of the Exchange Act and, as
a result, will be required to continue to incur the
expenses associated with these reporting requirements, which will reduce the cash
available for distribution to our stockholders.
14
If the amount of our contingency reserve is insufficient to satisfy the aggregate amount
of our liabilities and other obligations, each stockholder may be liable to our creditors
for the amount of liquidating distributions received by such stockholder under the Plan
of Dissolution, which could also have adverse tax consequences.
After we file to dissolve the corporation, our corporate existence will continue for
a minimum of three years, but we will not be able to carry on any business except for the
purpose of winding up the business and affairs of the Company. After we file the
certificate of dissolution we will commence the elective dissolution process, under
Sections 280 and 281(a) of the Delaware General Corporation Law, or DGCL, which involves
providing notice of our dissolution to potential claimants and paying or making
reasonable provision to pay all claims and obligations, including all contingent,
conditional or unmatured contractual or statutory claims, known to us. We also may obtain
and maintain insurance coverage or establish and set aside a reasonable amount of cash or
other assets as a contingency reserve to satisfy claims against and obligations of the
Company. In the event that the amount of the contingency reserve, insurance and other
measures calculated to provide for the satisfaction of liabilities and claims are
insufficient to satisfy the aggregate amount ultimately found payable in respect of our
liabilities and claims against us, each stockholder could be held liable for amounts due
to creditors up to the amounts distributed to such stockholder under the Plan of
Dissolution. In such event, a stockholder could be required to return any amounts
received as distributions pursuant to the Plan of Dissolution. Moreover, for U.S. federal
income tax purposes, payments made by a stockholder in satisfaction of our liabilities
not covered by the cash or other assets in our contingency reserve or otherwise satisfied
through insurance or other reasonable means generally would produce a capital loss for
such stockholder in the year the liabilities are paid. The deductibility of any such
capital loss generally would be subject to limitations under the Internal Revenue Code of
1986, as amended.
Liquidating distributions to our stockholders could be delayed or diminished.
All or a portion of any liquidating distributions we make to our stockholders could be
delayed, depending on many factors, including, without limitation:
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if a creditor or other third party seeks an injunction against the making
of distributions to our stockholders on the ground that the amounts to be
distributed are needed to provide for the satisfaction of our liabilities or
other obligations;
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if we become a party to lawsuits or other claims asserted by or against
us, including any claims or litigation arising in connection with our decision to
liquidate and dissolve, payments to suppliers or other vendors or claims from
patients in our clinical trials;
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if we are unable to liquidate our remaining ARS or if such liquidation
takes longer than expected;
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if we are unable to resolve claims with creditors or other third parties,
or if such resolutions take longer than expected; or
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the elective dissolution process is not completed in a timely manner due
to all of the steps required to complete such a process, including any potential
backlog in the Delaware Court of Chancery, which could delay final approval of
our petition.
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Any of the foregoing could delay or substantially diminish the amount available for
distribution to our stockholders. In addition, under the DGCL, claims and demands may be
asserted against us at any time during the three years following the filing of the
certificate of dissolution. Accordingly, our board of directors may retain funds to
obtain and maintain insurance coverage or establish and set aside a reasonable amount of
cash or other assets as a contingency reserve to satisfy claims against and obligations
of the Company that may arise during that three-year period. As a result of these
factors, we may retain for distribution at a later date, some or all of the estimated
amounts that we expect to distribute to our stockholders.
We may not be able to settle all of our obligations to creditors.
We have current obligations to creditors. Our estimate of ultimate distributions to
our stockholders takes into account all of our known obligations and our best estimate of
the amount reasonably required to satisfy such obligations. As part of the dissolution
process, we will attempt to settle those obligations with our creditors. We cannot assure
you that we will be able to settle all of these obligations or that they can be settled
for the amounts we have estimated for purposes of calculating the likely distribution to stockholders. If we are unable to
reach agreement with a creditor relating to an obligation, that creditor may bring a
lawsuit against us. Amounts required to settle obligations or defend lawsuits in excess
of the estimated amounts will result in distributions to stockholders that are smaller
than those that we presently estimate or may eliminate distributions entirely.
15
Our board of directors may abandon implementation of the Plan of Dissolution.
If for any reason our board of directors determines that such action would be in our
best interests and the best interests of our stockholders, our board, in its sole
discretion and without requiring further stockholder approval, prior to the filing of the
certificate of dissolution, abandon the Plan of Dissolution and all actions contemplated
thereunder. An abandonment of the Plan of Dissolution would result in our stockholders
not receiving any liquidating distribution.
We may be the potential target of an acquisition.
Until we dissolve and terminate registration of our common stock, we will continue
to exist as a public company. We could become an acquisition target, through a hostile
tender offer or other means, as a result of our business operations, cash holdings or for
other reasons. In addition, in connection with its approval of the Plan of Dissolution,
our board of directors terminated our stockholder rights plan, or poison pill,
effective August 31, 2009, and, although our certificate of incorporation, bylaws and
Delaware law contain provisions that may delay or prevent an acquisition, the termination
of our poison pill has removed one potential obstacle to action by our stockholders. If
we become the target of a successful acquisition, the board of directors, prior to the
filing of the certificate of dissolution, could potentially decide to either delay or
abandon the Plan of Dissolution, and our stockholders may not receive any proceeds that
otherwise would have been distributed in connection with the proposed liquidation and
dissolution.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On October 27, 2009, we held a special meeting of stockholders at which our
stockholders approved the dissolution of the Company pursuant to the Plan of Dissolution
by a vote of 15,906,024 shares of capital stock in favor, 131,569 against, and 6,051
abstaining. Stockholders also approved an amendment to the certificate of incorporation
authorizing the redemption of our Series A Preferred Stock, by a vote of 15,902,144
shares of capital stock in favor, 134,626 against, and 6,874 abstaining, including
380,000 shares of preferred stock in favor, 0 against and 0 abstaining.
Item 5. Other Information.
None.
Item 6. Exhibits.
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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NEUROBIOLOGICAL TECHNOLOGIES, INC.
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Dated: November 16, 2009
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/s/
William A. Fletcher
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William A. Fletcher
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Acting Chief Executive Officer
(Principal Executive Officer)
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Dated: November 16, 2009
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/s/
Matthew M. Loar
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Matthew M. Loar
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Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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17
EXHIBIT INDEX
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Exhibit
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No.
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Description
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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18
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