<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] 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 0-20954
COCENSYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0538836
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
201 TECHNOLOGY DRIVE, IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(949) 753-6100
(REGISTRANT'S 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 X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.001 PAR VALUE 24,664,378
(CLASS OF COMMON STOCK) (OUTSTANDING AT AUGUST 6, 1998)
<PAGE>
COCENSYS, INC.
(A development stage company)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets as of June 30, 1998
and December 31, 1997 3
Condensed Statements of Operations for the
three and six-month periods ended June 30, 1998
and 1997 and the period from inception
(February 15, 1989) through June 30, 1998 4
Condensed Statements of Cash Flows for the
six-month periods ended June 30, 1998 and 1997
and the period from inception (February 15, 1989)
through June 30, 1998 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 17
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18
SIGNATURES 20
</TABLE>
2
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,388 $ 3,410
Short-term investments 14,587 9,050
Receivables from corporate partners 20 414
Other current assets 355 484
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TOTAL CURRENT ASSETS 19,350 13,358
Property and equipment, net 2,770 2,823
Investments 500 500
Other assets, net 219 235
------- -------
$22,839 $16,916
------- -------
------- -------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $501 $866
Other accrued liabilities 1,044 1,911
Accrued compensation and benefits 490 1,107
Deferred revenue 2,150 -
Due to corporate partners 1,498 747
Capital lease obligation - current portion 393 353
------- -------
TOTAL CURRENT LIABILITIES 6,076 4,984
Capital lease obligation, less current portion 425 567
Other liabilities 530 534
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value,
5,000,000 shares authorized; 208,000 shares
issued and outstanding at June 30, 1998 and
214,286 at December 31, 1997 16,530 13,000
Common stock - $.001 par value,
75,000,000 shares authorized; 24,664,378 shares
issued and outstanding at June 30, 1998 and
22,857,506 at December 31, 1997 105,864 97,230
Deficit accumulated during the development stage (106,227) (98,983)
Deferred compensation (345) (430)
Accumulated comprehensive income (14) 14
------- -------
TOTAL STOCKHOLDERS' EQUITY 15,808 10,831
------- -------
$22,839 $16,916
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</TABLE>
3
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 15,
THREE MONTHS ENDED SIX MONTHS ENDED 1989) TO
JUNE 30, JUNE 30, JUNE 30,
------------------ --------------------
1998 1997 1998 1997 1998
------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Co-promotion revenues from corporate partners $ - $ 1,185 $ 540 $ 2,308 $ 30,705
Co-development revenues from corporate partners 425 6,247 1,021 6,949 17,714
-------- ------- ------- ------- ---------
Total revenues 425 7,432 1,561 9,257 48,419
-------- ------- ------- ------- ---------
OPERATING EXPENSES
Research and development 4,063 5,984 7,422 11,416 98,351
Marketing, general and administrative 884 2,825 2,032 5,504 50,188
Acquired research and development - - - - 14,879
-------- ------- ------- ------- ---------
Total operating expenses 4,947 8,809 9,454 16,920 163,418
-------- ------- ------- ------- ---------
OPERATING LOSS (4,522) (1,377) (7,893) (7,663) (114,999)
Gain on disposition of sales division 750 - 750 - 5,478
Interest income 232 189 434 408 4,887
Interest expense (20) (37) (44) (51) (1,102)
-------- ------- ------- ------- ---------
NET LOSS (3,560) (1,225) (6,753) (7,306) (105,736)
Dividends on preferred stock 357 - 491 - 491
-------- ------- ------- ------- ---------
Net loss attributable to common shareholders $(3,917) $(1,225) $(7,244) $(7,306) $(106,227)
-------- ------- ------- ------- ---------
-------- ------- ------- ------- ---------
Net loss per share $ (0.16) $ (0.05) $ (0.31) $ (0.33)
-------- ------- ------- -------
-------- ------- ------- -------
Shares used in computing net loss per share 23,740 22,519 23,318 22,391
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
4
<PAGE>
COCENSYS, INC.
(A development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (FEBRUARY 15,
JUNE 30, 1989) TO
--------------------- JUNE 30,
1998 1997 1997
-------- -------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,753) $(7,306) $(105,736)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 437 530 7,262
Amortization of deferred compensation 86 142 3,693
Issuance of stock and warrants for services 199 - 2,535
Loss on sale of fixed assets - 12 100
Gain on disposition of sales force (750) - (5,478)
Acquired research and development - - 12,279
Decrease (increase) in other current assets 129 (254) (427)
Decrease (increase) in receivable from corporate partner 394 2 (20)
Increase (decrease) in advances from corporate partners 751 (295) 1,498
Increase (decrease) in accounts payable and other accrued liabilities 146 (403) 2,912
-------- -------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,361) (7,572) (81,382)
-------- -------- -----------
INVESTING ACTIVITIES
Decrease (increase) in short-term investments (5,565) 1,766 (14,601)
Purchase of property and equipment (384) (351) (7,484)
Decrease (increase) in other assets and notes receivable from officers 16 (153) (1,375)
Cash received on disposition of sales division 750 - 8,750
Cash received on sale of fixed assets - - 20
Increase in deferred costs - - (2,475)
Purchase of investments - - (500)
Acquisition of Acea Pharmaceuticals, net of cash acquired - - (62)
-------- -------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,183) 1,262 (17,727)
-------- -------- -----------
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 154 2,291 61,399
Net cash proceeds from issuance of preferred stock 11,320 5,000 40,701
Proceeds from sale/leaseback of fixed assets and notes payable 150 529 5,385
Payments on capital lease obligations and notes payable (102) (368) (3,988)
-------- -------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,522 7,452 103,497
-------- -------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 978 1,142 4,388
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,410 1,050 -
-------- -------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,388 $2,192 $4,388
-------- -------- -----------
-------- -------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 44 $ 39 $ 864
-------- -------- -----------
-------- -------- -----------
</TABLE>
5
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COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
CoCensys, Inc. ("CoCensys" or the "Company") is a biopharmaceutical
company dedicated to the discovery, development, marketing and sales of
small molecule drugs to treat neurological and psychiatric disorders.
The interim financial information for the three and six-month periods
ended June 30, 1998 and 1997 is unaudited but includes all adjustments
(consisting only of normal recurring entries) that the Company's
management of believes to be necessary for the fair presentation of the
financial position, results of operations and cash flows for the periods
presented. The accompanying interim financial statements should be read
in conjunction with the financial statements and related notes included
in the Company's 1997 Annual Report on Form 10-K for the year ended
December 31, 1997. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
Securities and Exchange Commission rules and regulations. Interim
results of operations for the three and six-month period ended June 30,
1998, are not necessarily indicative of operating results to be expected
for the full year.
REVENUE AND EXPENSE RECOGNITION
See Notes 2, 3, 4, 5 and 6 for revenue recognition policies related
to co-promotion and co-development revenues from corporate partners.
NET LOSS PER SHARE
In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of options, warrants and convertible securities. All per share
amounts for all prior periods have been presented and, where appropriate,
restated to conform to the SFAS 128 requirements.
Both basic and diluted loss per share are computed using the weighted
average number of shares of common stock outstanding. Common equivalent
shares from stock options, warrants and convertible securities are excluded
from the computation of diluted earnings per share, as their effect would
be antidilutive.
6
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COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains and losses on available-for-
sale securities, which prior to adoption were reported separately on
stockholders' equity, to be included in other comprehensive income. Prior
financial statements have been restated to conform to the requirements of
SFAS 130.
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 15,
THREE MONTHS ENDED SIX MONTHS ENDED 1989) TO
JUNE 30, JUNE 30, JUNE 30,
------------------ ---------------- ------------
1998 1997 1998 1997 1998
------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net loss $(3,560) $(1,225) $ (6,753) $(7,306) $(105,736)
Unrealized gain (loss) on investments 3 (37) (28) (3) (14)
------- ------- -------- ------- --------
Comprehensive loss $(3,557) $(1,262) $ (6,781) $(7,309) $(105,750)
------- ------- -------- ------- --------
------- ------- -------- ------- --------
</TABLE>
Pending Adoption of Financial Accounting Standards No. 131
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures about Segments of and Enterprise
and Related Information" (SFAS 131). SFAS 131 establishes standards for
the way that public business enterprises report information about segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
SFAS 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS 131 is effective
for financial statements for fiscal years beginning after December 15,
1997, and therefore the Company will adopt the new requirements effective
with filing of the Annual Report on Form 10-K for the year ended December
31, 1998. Management has not completed its review of SFAS 131, but does
not expect that it will have an impact on the Company's results of
operations, financial position or cash flows.
2. DISPOSITION OF SALES AND MARKETING DIVISION
On October 8, 1997, the Company entered into an Asset Purchase Agreement
(the "Agreement") to sell its sales and marketing division (the "Division")
to Watson Laboratories, Inc. ("Watson"), a
7
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COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
wholly owned subsidiary of Watson Pharmaceuticals, Inc. Under the terms
of the Agreement, Watson assumed the Division's co-promotion agreements,
acquired certain of its operating assets and obtained the right to hire
approximately 70 employees of the Division. As consideration for these
assets, the Company received $8.0 million from Watson in October 1997
with up to $1.0 million more due to the Company if Watson retained, as of
specified future dates, certain percentages of the employees from the
Division. Pursuant to this contingency arrangement, in April 1998,
Watson paid CoCensys $750,000. An additional $250,000 is due to CoCensys
in October 1998 if certain retention percentages are met at that time.
In order to satisfy certain provisions of the Agreement, the Company
entered into, and transferred to Watson, agreements with two pharmaceutical
companies for marketing rights and NDAs for two drugs with an aggregate
cost of $2.0 million, of which the Company paid $1.0 million in October
1997. An additional $1.0 million is payable by the Company in future
installments. Pursuant to the Agreement, $1.0 million of the $8.0 million
in proceeds from the sale of the Division was deposited into an escrow
account to satisfy the Company's future obligations related to the
acquisition of these marketing rights and NDAs.
3. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH WYETH-AYERST LABORATORIES
In May 1997, the Company entered into a development and commercialization
agreement for Co 2-6749, its lead anxiolytic compound, with the Wyeth-
Ayerst Laboratories Division ("Wyeth-Ayerst") of American Home Products
Corporation ("AHP"). Under the terms of the agreement, Wyeth-Ayerst paid
CoCensys a non-refundable $5.0 million licensing fee and AHP paid $5.0
million to purchase 100,000 shares of the Company's Series C Convertible
Preferred Stock. Additionally, CoCensys will receive specified milestone
payments dependent upon the achievement of key development events and
$750,000 per quarter for up to three years to identify back-up compounds.
However, if Co 2-6749 fails to meet certain criteria, and the back-up
program fails to produce a back-up compound that meets other certain
criteria, Wyeth-Ayerst has the right to terminate the back-up program and
require CoCensys to reimburse them for a portion of the back-up funding.
Accordingly, a portion of the back-up program funding has been recorded as
deferred revenue and will be recognized as revenue when Co 2-6749 or a
back-up compound meets applicable criteria for acceptance by Wyeth-Ayerst.
Wyeth-Ayerst is responsible for the costs associated with developing Co
2-6749. The Company and Wyeth-Ayerst will co-promote any resulting
product in certain market segments in the United States, while
Wyeth-Ayerst will have rights to develop, register and market any drugs
derived from the collaboration in the rest of the world, subject to
royalty obligations to CoCensys. The preferred stock is convertible into
common stock after May 12, 1999, at a conversion price based on the
market price of the common stock at that time (subject to certain minimum
and maximum limits).
8
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
4. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY
In October 1995, the Company entered into collaboration with
Warner-Lambert Company ("Warner-Lambert") and its Parke-Davis division to
develop and market therapeutic drugs for the treatment of certain central
nervous system disorders. This arrangement consists of the Research,
Development and Marketing Collaboration Agreement (the "1995 Warner
Collaboration Agreement"), for the worldwide development and
commercialization of a new class of neurological and psychiatric drugs,
termed subtype selective NMDA receptor antagonists ("SSNRAs"), and the
Parke-Davis Promotion Agreement. Pursuant to the Parke-Davis Promotion
Agreement, the Company co-promoted Parke-Davis' central nervous system
drug, Cognex-Registered Trademark-, until June 1997 when Parke-Davis
terminated the co-promotion agreement. In addition, in October 1997, the
1995 Warner Collaboration Agreement was amended and extended until at
least October 1999 (the "amended Warner Collaboration Agreement").
Under the amended Warner Collaboration Agreement, both companies share
technology and resources to develop SSNRA candidates. Warner is obligated
to pay for all costs to develop any development candidates arising from the
Agreement, subject to CoCensys' right to re-engage in the development by
funding a percentage of the development costs. Warner is also obligated to
pay for all costs to promote any product developed under the Warner
Collaboration Agreement, subject to CoCensys' right to co-promote in the
United States (including sharing of costs to promote) any product for which
CoCensys re-engaged development rights. CoCensys will receive royalties on
sales of any products developed under the Warner Collaboration Agreement,
at rates based in part upon whether CoCensys co-developed and co-promoted
such product. In addition, upon achievement of certain clinical
development and regulatory milestones, Warner will make nonrefundable
milestone payments to CoCensys. Payments received under the amended Warner
Collaboration Agreement are recognized as co-development revenues and
payments made are recognized as expenses.
Pursuant to the 1995 Warner Collaboration Agreement, Warner-Lambert
purchased $2.0 million of CoCensys Common Stock in October 1995 and an
additional $2.0 million of CoCensys Common Stock in March 1997.
In October 1997, in connection with the amended Warner Collaboration
Agreement, Warner-Lambert purchased convertible preferred stock form the
Company with a face value of $7.0 million. Warner-Lambert paid the Company
$1.0 million of the $7.0 million total in October 1997 and $6.0 million in
January 1998. The Company allocated $1.6 million to be recognized as co-
development revenue during fiscal 1998, $4.4 million as preferred stock and
$1.0 million as a liability (payable in common stock) due to Warner-Lambert
in January 1999. The preferred stock accrues an imputed non-cash dividend
at twelve percent per annum until its mandatory conversion date in October
2001 and is convertible at the price of the common stock at the time of
conversion (subject to a limit on the maximum number of shares that may be
issued). The Company may elect to force conversion at an earlier date at a
price equal to the greater of the then current price or the price when
issued.
9
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COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
5. DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH G.D. SEARLE & CO.
In May 1996, the Company entered into an agreement with G.D. Searle & Co.
("Searle") to co-develop and co-promote CCD 3693, the Company's lead
compound for the treatment of insomnia along with its back-up compounds.
Pursuant to the agreement, Searle paid a $3.0 million license fee and
purchased 100,000 shares of the Company's Series B Convertible Preferred
Stock for $7.0 million. The license fee was recognized as co-development
revenue in 1996. In May 1998, the Series B Convertible Preferred Stock
converted, in accordance with its terms, into 1.6 million shares of
common stock at a conversion price of $4.375 per share.
In July 1998, Searle notified CoCensys that it had decided not to
participate further in the development of the Company's proprietary
compounds for the treatment of insomnia. CoCensys intends to continue
research and development of its compounds to treat insomnia and will
consider seeking a new partner for the program in the future.
6. PROMOTION AGREEMENT WITH SOMERSET PHARMACEUTICALS, INC.
In January 1996, the Company and Somerset Pharmaceuticals, Inc.
("Somerset") entered into the Somerset Promotion Agreement, pursuant to
which the Company, through its sales and marketing division, promoted
Somerset's drug Eldepryl-Registered Trademark-to neurologists in the
United States for the treatment of Parkinson's disease. Effective
January 1, 1997, the initial agreement was superseded by the 1997
Somerset Promotion Agreement. Under the 1997 Somerset Promotion
Agreement, CoCensys had the exclusive right to detail Eldepryl to certain
neurologists and other physicians in the United States and was
compensated based upon the number of details undertaken and gross sales
of Eldepryl. In October 1997 the Company sold its sales and marketing
division, and all related co-promotion agreements, to Watson. In March
1998, the Company received and recognized a $540,000 bonus for 1997 sales
of Eldepryl. The Company does not expect to receive any more payments
pursuant to the Somerset agreement.
7. CYTOVIA LICENSING AGREEMENT
In January 1998, the Company licensed certain non-core technology to
Cytovia, Inc., a new company that will focus on the commercialization of
patented drug screening technology, using living cells, in the area of
apoptosis or programmed cell death. In exchange, CoCensys received shares
of common stock of Cytovia, will be entitled to receive certain royalties
and will retain certain rights relating to the development of future
therapeutic agents for central nervous system disorders. As of June 30,
1998, CoCensys' interest in Cytovia was less than twenty percent and is
accounted for on a cost basis.
10
<PAGE>
COCENSYS, INC.
(A development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
8. Private Placement of Preferred Stock
In June 1998, the Company raised $8.0 million through the private placement
of convertible preferred stock. The preferred stock is convertible into
common stock on June 8, 2001, or earlier at the holder's option at a price
based on the value of the common stock, subject to a maximum price of $3.93
per share. See Part II, Item 2, "Changes in Securities and Use of
Proceeds," below. The terms of the private placement included the issuance
of warrants to purchase 350,000 shares of common stock at $4.50 per share,
with additional warrants to be issued for 100,000 shares of common stock if
investors hold a specified amount of preferred stock for at least five
months following purchase.
The preferred stock carries an annual dividend of 7.5 percent of the face
value of the outstanding shares, subject to reductions in the dividend rate
if the market price of Company's common stock increases to certain levels.
Dividends are payable quarterly in cash or, at the election of the Company,
by adding the amount of the dividend to the conversion value of the
preferred stock. Additionally, $390,000 of the $8.0 million in proceeds
was allocated to the warrants and $890,000 was allocated to a beneficial
conversion feature that allows investors to convert at 90% of the market
price of the common stock after 120 days. These two allocated amounts have
been credited to additional paid in capital and will be treated as issuance
discounts. Accordingly, the $390,000 and $890,000 will be amortized over
three years and 120 days, respectively, in the form of additional preferred
dividends.
11
<PAGE>
COCENSYS, INC.
(A development stage company)
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE COMPANY'S 1997 ANNUAL REPORT
ON FORM 10-K.
OVERVIEW
CoCensys, Inc. is a biopharmaceutical company dedicated to the discovery,
development, marketing and sales of small molecule drugs to treat
neurological and psychiatric disorders. The Company's product discovery and
development programs are focused on the exploration of novel receptors and
enzymes and their ligands and inhibitors through three technology platforms:
GABAA receptor modulators named Epalons; glutamate receptor antagonists; and
sodium channel blockers.
Since its inception in February 1989, the Company has devoted substantially
all of its resources to the discovery and development of neuropharmaceutical
products for the treatment of disorders affecting the central nervous system.
The Company has incurred losses since inception and expects losses to
continue for the foreseeable future, primarily due to the expansion of
programs for research and development. Operating results are expected to
fluctuate as a result of uncertainty in the timing and amount of revenues to
be earned from achievement of research and development milestones, and
uncertainty in the timing and amount of expenses for product development,
including clinical trials. As of June 30, 1998, the Company's accumulated
deficit was approximately $106.2 million.
RESULTS OF OPERATIONS
The Company recognized no co-promotion revenues for the three-month period
ended June 30, 1998, and $540,000 for the six-month period ended June 30,
1998, compared to $1.2 and $2.3 million during the same periods in fiscal
1997. In October 1997, the Company sold its sales and marketing division to
Watson Pharmaceuticals, Inc. ("Watson") and is no longer involved in
co-promotional activities. The 1998 co-promotion revenue is attributable to a
bonus for fiscal 1997 activity that was received and recognized in March 1998.
The Company recognized $425,000 and $1.0 million in co-development revenues
for the three and six-month periods ended June 30, 1998, respectively,
compared to $6.2 and $6.9 million for the same periods in 1997. In 1998,
co-development revenues are primarily associated with the SSNRA
(subtype-selective NMDA receptor antagonists) program with Warner-Lambert.
In the second quarter of 1997, the Company recognized $5.8 million related to
an agreement with Wyeth-Ayerst to co-develop the Company's anxiolytic
compound.
Research and development expenses decreased to $4.1 and $7.4 million for the
three and six-month periods ended June 30, 1998, respectively, from $6.0 and
$11.4 million in the comparable periods of
12
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COCENSYS, INC.
(A development stage company)
the prior year. The decreases in expenses in the current year are
attributable to a lower level of external clinical activity relative to a
year earlier and cost savings that resulted from last year's organizational
restructuring. In the first half of 1997, the Company had ongoing clinical
trials for epilepsy, migraine and stroke. In the first half of 1998, the
Company's clinical efforts were mainly focused on planning a Phase II
clinical trial of ganaxolone in the treatment of migraine. This trial
commenced in June 1998 and, accordingly, the Company expects research and
development costs to increase during the second half of the year.
Marketing, general and administrative expense decreased to $884,000 and $2.0
million in the three and six-month periods ended June 30, 1998, respectively,
from $2.8 and $5.5 million in the comparable periods of the prior year.
Results for the first half of 1997 include the costs of the sales and
marketing division, which was sold in October 1997.
Gain on disposition of sales division was $750,000 for the three-month period
ended June 30, 1998. In April 1998, criteria based on Watson's ability to
retain members of the sales and marketing division were met and Watson paid
the Company the first of two contingent payments. The second payment of
$250,000 is due in October 1998, contingent upon attainment of additional
specified criteria.
Interest income was $232,000 and $434,000 for the three and six-month periods
ended June 30, 1998, respectively, compared to $189,000 and $408,000 for the
same periods in fiscal 1997. The increase is due to higher average cash and
investment balances in the current year when compared to the same periods a
year earlier.
Preferred dividends were $357,000 and $491,000 for the three and six-month
periods ended June 30, 1998, respectively, while there were no dividends
declared in the comparable periods of the prior fiscal year. The preferred
dividends increase the carrying value of outstanding preferred stock and do
not involve the payment of cash.
LIQUIDITY AND CAPITAL RESOURCES
From its inception in February 1989 through June 30, 1998, the Company has
financed its operations primarily through private and public offerings of its
equity securities, raising net proceeds of approximately $102.0 million. At
June 30, 1998, the Company's balances of cash, cash equivalents and
investments totaled $19.5 million, compared to $13.0 million at December 31,
1997.
On June 8, 1998, the Company issued 8,000 shares of Series E Convertible
Preferred Stock with a stated value of $1,000 per share for an aggregate of
$8 million in a private placement pursuant to Regulation D of the Securities
Act of 1933, as amended. See Part II, Item 2 "Changes in Securities," below
and Part I, Note 8 of the Notes to Condensed Financial Statements "Private
Placement of Preferred Stock," above.
Since its inception in February 1989 through June 30, 1998, the Company had
invested $7.5 million in leasehold improvements, laboratory and computer
equipment and office furnishings and
13
<PAGE>
COCENSYS, INC.
(A development stage company)
equipment. The Company has financed $3.6 million of these capital additions
through capital lease lines. In addition, the Company leases its laboratory
and office facilities under operating leases. While additional equipment will
be needed as the Company increases its research and development activities,
the Company has no material commitments for the acquisition of property and
equipment.
Pursuant to an agreement with Watson, in October 1997, the Company sold it
sales and marketing division, related co-promotion agreements and certain
other assets to Watson for $8.0 million in cash with an additional $1.0
million due to CoCensys contingent upon the occurrence of specified events.
Of this contingent amount, Watson paid the Company $750,000 was in April 1998
with the balance due in October 1998 subject to Watson's ability to retain a
specified percentage of employees of the sales and marketing division.
Pursuant to the 1995 collaboration agreement with Warner-Lambert Company, as
amended and extended in October 1997, Warner-Lambert is obligated to make
certain milestone payments for each compound selected for development, as
well as pay for its share of development costs. Under the terms of the 1995
agreement, Warner-Lambert purchased $2.0 million of CoCensys Common Stock in
October 1995 and an additional $2.0 million of CoCensys Common Stock in March
1997. Under the terms of the 1997 amendment, Warner-Lambert purchased
preferred stock with a face value of $7.0 million, of which Warner-Lambert
paid the Company $1.0 million in October 1997 and $6.0 million in January
1998. Of this $7.0 million in total proceeds, the Company has allocated $1.6
million to be recognized as co-development revenue during fiscal 1998, $4.4
million as preferred stock and $1.0 million as a liability (payable in common
stock) due to Warner Lambert in January 1999. The preferred stock accrues an
imputed non-cash dividend at 12 percent per annum until its mandatory
conversion date in October 2001.
Pursuant to the May 1997 Development and Commercialization Agreement with
Wyeth-Ayerst, Wyeth-Ayerst paid the Company a $5.0 million license fee and
purchased 100,000 shares of the Company's Series C Convertible Preferred
stock for $5.0 million. Furthermore, Wyeth-Ayerst is obligated to pay all
development costs associated with Co 2-6749, as well as make milestone
payments upon the occurrence of certain agreed upon events and pay the
Company $3.0 million per year for up to three years to identify back-up
compounds. However, if Co 2-6749 fails to meet certain criteria, and the
back-up program fails to produce a back-up compound that meets other certain
criteria, Wyeth-Ayerst has the right to terminate the back-up program and
require CoCensys to reimburse them for a portion of the back-up funding.
Pursuant to the Development and Commercialization Agreement G.D. Searle &
Co., both companies were obligated to pay a portion of the development costs
of CCD 3693 and its back-up compounds for the U.S. market. In addition,
Searle purchased 100,000 shares of the Company's Series B Convertible
Preferred Stock for $7.0 million during 1996. In May 1998, the preferred
stock converted, in accordance with its terms, into 1.6 million shares of
common stock at a conversion price of $4.375 per share. In July 1998, Searle
notified CoCensys that it had decided not to participate further in the
development of the Company's proprietary compounds for the treatment of
insomnia. CoCensys intends to continue research and development of its
compounds to treat insomnia and will consider seeking a new partner for the
program in the future.
14
<PAGE>
COCENSYS, INC.
(A development stage company)
CoCensys' operations to date have consumed substantial amounts of cash. The
negative cash flow from operations is expected to continue and will likely
increase over the foreseeable future, subject to the Company's ability to
mitigate such negative cash flows with revenues, if any, derived from license
fees and milestone payments from research and development collaborations for
its proprietary products and additional sales of equity. The Company
anticipates that its existing capital resources, including funding expected
to be available through current partner collaborations, will be adequate to
satisfy its capital needs for at least the next 12 months.
The Company will need to obtain substantial additional funds to conduct the
costly and time-consuming research, preclinical development and clinical
trials necessary to bring its products to market. The Company intends to
seek additional funding through additional research and development
collaborations with suitable corporate partners and/or through public or
private financing. There can be no assurance that additional financings or
suitable collaborations will be available on favorable terms, if at all.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license
third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself.
The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development programs,
the scope and results of preclinical testing and clinical trials, the time
and costs involved in obtaining regulatory approvals, the rate of
technological advances, determinations as to the commercial potential of the
Company's products under development, the status of competitive products, the
establishment of third-party manufacturing arrangements and the establishment
of additional collaborative relationships.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions or engage in normal business activities.
The Company has completed a preliminary assessment and will have to modify or
replace portions of its software and hardware so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
However, the majority of software and hardware used by the Company consists
of commercially available, off-the-shelf programs and equipment that have
already been modified, or are soon to be modified, by their manufacturers to
handle the year 2000 correctly. As such, management believes that the year
2000 issue does not pose a significant problem for the Company and it is
expected that this project will be completed not later than December 31, 1998
at a total cost of less than $50,000. The Company has incurred minimal costs
to date. However, if such modifications and conversions are not made, or are
not completed timely, the year 2000 issue could have a material impact on the
operations of the Company.
15
<PAGE>
COCENSYS, INC.
(A development stage company)
Additional Risks
In addition to those discussed above, the Company is subject to the following
risks:
The Company's products are in an early stage of development and face a high
degree of technological, regulatory and competitive risks. Drug discovery
and development are capital intensive activities, and there can be no
assurance the Company will be able to raise the additional capital necessary
to develop and commercialize products. The Company's strategy for the
development, clinical testing and commercialization of its products includes
entering into various collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be
able to negotiate further collaborative arrangements on acceptable terms, if
at all, or that the current collaborative efforts will be continued or
successful. Human clinical trials require considerable time and funding, and
results from any stage of testing may not predict results of later stages.
In addition, if results of any clinical trial fail to meet the Company's
requirements, the study plan for such compound may be adjusted or another
compound may be substituted, either of which may result in delays in future
clinical studies. Unfavorable clinical trials could result in cancellation
of future clinical studies. Inherent in the fact that CoCensys is an early
stage biopharmaceutical company are a range of additional risks, including
those associated with obtaining and enforcing patents and protecting
proprietary technology and the risk of regulatory change, among others.
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. The market prices of the common stock of many publicly
traded biopharmaceutical companies have in the past been, and can in the
future be expected to be, especially volatile due to various external
factors, including but not limited to, announcements of technological
innovations or new products by the Company or its competitors, developments
or disputes concerning patents or proprietary rights, publicity regarding
actual or potential results relating to products under development,
regulatory developments in both the United States and foreign countries and
public concern as to the safety of biotechnology products.
16
<PAGE>
COCENSYS, INC.
(A development stage company)
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
On June 8, 1998 (the "Closing Date"), the Company issued 8,000 shares
of Series E Convertible Preferred Stock with a stated value of $1,000 per
share (the "Preferred Stock") for an aggregate of $8 million in a private
placement. The Preferred Stock was sold to three investors (the
"Investors"): RGC International Investors, LDC; Themis Partners L.P.; and
Heracles Fund. The issuance was exempt from registration pursuant to
Regulation D of the Securities Act of 1933, as amended.
Each share of Preferred Stock is convertible into the number of shares of
the Company's common stock equal to (i) the stated value ($1,000) plus any
accrued and unpaid dividends on the date of conversion divided by (ii) the
"Conversion Price," which equals the lesser of (x) the average of the
three lowest trading prices during the fifteen trading day period ending
one trading day prior to the conversion, multiplied by 100% (until October
8, 1998) or 90% (after October 8, 1998), or (y) $3.93.
In connection with sale of the Preferred Stock, the Company granted to the
Investors five-year warrants to purchase an aggregate of 350,000 shares of
Common Stock at $4.50 per share (the "Warrants").
On July 8, 1998, the Company filed a registration statement with the
Securities and Exchange Commission on Form S-3 to register the resale of
the shares of common stock issuable upon conversion of the Preferred Stock
and exercise of the Warrants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting on Stockholders on June 10, 1998.
The stockholders elected the Board's nominees as Class II directors by the
votes indicated:
<TABLE>
<CAPTION>
Nominee Votes in Favor VOTES WITHHELD
------- -------------- --------------
<S> <C> <C>
Kelvin W. Gee, Ph.D. 16,669,286 102,738
Robert L. Roe, M.D. 16,671,486 100,538
Lowell E. Sears 16,671,486 100,538
</TABLE>
A 200,000 share increase in the number of shares available for issuance
under the Company's 1995 Employee Stock Purchase Plan was approved with
15,582,892 votes in favor, 840,791 against and 152,649 abstentions.
17
<PAGE>
COCENSYS, INC.
(A development stage company)
The selection of Ernst & Young, LLP as the Company's independent auditors
was ratified with 16,579,392 votes in favor, 66,292 against and 126,340
abstentions.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders must provide specified
information to the Company by January 2, 1999 if such matters are to be
brought before the stockholders at the Company's 1999 annual meeting of
stockholders (unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934,
as amended).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE START
------- ----------- ----------
<C> <S> <C>
4.1 Securities Purchase Agreement dated June 8, 1998, *
among the Company and the purchasers set forth therein.
4.2 Certificate of Powers, Designation, Preferences, Rights *
and Limitations of Series E Convertible Preferred Stock.
4.3 Form of Stock Purchase Warrant (Initial Warrants). *
4.4 Registration Rights Agreement dated June 8, 1998, *
among the Company and the purchasers set forth therein.
4.5 Form of Stock Purchase Warrant (Additional Warrants). *
27 Financial Data Schedule **
--------------------------
* Incorporated by reference to the Company's Current Report on Form 8-K
dated June 8, 1998.
** Filed with EDGAR version only.
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 22, 1998 reporting under Item 5 that
on June 8, 1998, the Company issued 8,000 shares of Series E Convertible
Preferred Stock with a stated value of $1,000 per share for an aggregate of
$8 million in a private placement pursuant to Regulation D of the
Securities Act of 1933, as amended. See Part II, Item 2 "Changes in
Securities," above.
18
<PAGE>
COCENSYS, INC.
(A development stage company)
The Company filed a Form 8-K on August 5, 1998, reporting under Item 5 that
G.D. Searle & Co. decided not to participate further in the development of
CCD 3693, CoCensys' lead compound for the treatment of insomnia.
19
<PAGE>
COCENSYS, INC.
(A development stage company)
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CoCensys, Inc.
Date: August 11, 1998 By: /s/ F. Richard Nichol, Ph.D.
--------------------- -----------------------------------
F. Richard Nichol, Ph.D.
President and Chief Executive
Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 11, 1998 By: /s/ Peter E. Jansen
--------------------- -----------------------------------
Peter E. Jansen
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,388
<SECURITIES> 14,587
<RECEIVABLES> 20
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,350
<PP&E> 6,743
<DEPRECIATION> (3,973)
<TOTAL-ASSETS> 22,839
<CURRENT-LIABILITIES> 6,076
<BONDS> 425
0
16,530
<COMMON> 105,864
<OTHER-SE> (106,586)
<TOTAL-LIABILITY-AND-EQUITY> 15,808
<SALES> 0
<TOTAL-REVENUES> 1,561
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (44)
<INCOME-PRETAX> (6,753)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,753)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
