-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BuJU7phX7DsCO6IdvQlxZ9Qnb6DATv1cVxLjLDFsD9/9IzomLam6ntWAZ41PnZC4 xes/pvM9XSwPv1NZFlWV1Q== 0001047469-99-020947.txt : 19990518 0001047469-99-020947.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-020947 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COCENSYS INC CENTRAL INDEX KEY: 0000895034 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330538836 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20954 FILM NUMBER: 99625895 BUSINESS ADDRESS: STREET 1: 201 TECHNOLOGY DR CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497536100 MAIL ADDRESS: STREET 1: 201 TECHNOLOGY DRIVE STREET 2: 201 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92618 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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 March 31, 1999 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 4,258,829 (CLASS OF COMMON STOCK) (OUTSTANDING AT MAY 10, 1999) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COCENSYS, INC. TABLE OF CONTENTS
PAGE NUMBER PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Balance Sheets as of March 31, 1999 and December 31, 1998 3 Condensed Statements of Operations for the three-month periods ended March 31, 1999 and 1998 and the period from inception (February 15, 1989) through March 31, 1999 4 Condensed Statements of Cash Flows for the three-month periods ended March 31, 1999 and 1998 and the period from inception (February 15, 1989) through March 31, 1999 5 Notes to Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 22 SIGNATURES 23
2 1 COCENSYS, INC. (A development stage company) CONDENSED BALANCE SHEETS (In thousands, except share and par value amounts)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,802 $ 2,222 Short-term investments 6,150 9,973 Other current assets 323 321 ----------- ----------- TOTAL CURRENT ASSETS 9,275 12,516 Property and equipment, net 2,256 2,466 Other assets, net 124 117 ----------- ----------- $ 11,655 $ 15,099 ----------- ----------- ----------- ----------- LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 619 $ 534 Accrued compensation and benefits 444 748 Due to corporate partners 1,340 1,322 Other accrued liabilities 832 1,326 Deferred revenue 3,000 2,955 Capital lease obligation - current portion 425 316 ----------- ----------- TOTAL CURRENT LIABILITIES 6,660 7,201 Capital lease obligation, less current portion 289 366 Other liabilities 25 26 Commitments and contingencies Stockholders' equity: Preferred stock - $.001 par value, 5,000,000 shares authorized; 205,035 shares issued and outstanding at March 31, 1999 and 206,445 at December 31, 1998 15,261 16,386 Common stock - $.001 par value, 75,000,000 shares authorized; 4,258,543 shares issued and outstanding at March 31, 1999 and 3,422,773 at December 31, 1998 108,868 107,381 Deficit accumulated during the development stage (119,309) (116,151) Deferred compensation (118) (138) Accumulated comprehensive income (21) 28 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 4,681 7,506 ----------- ----------- $ 11,655 $ 15,099 ----------- ----------- ----------- -----------
See accompanying notes. COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
PERIOD FROM INCEPTION (FEBRUARY 15, THREE MONTHS ENDED 1989) TO MARCH 31, MARCH 31, --------------------------- 1999 1998 1999 ---------- ---------- ------------ REVENUES Co-promotion revenues from corporate partners $ - $ 540 $ 30,705 Co-development revenues from corporate partners 805 596 19,544 ---------- ---------- ----------- Total revenues 805 1,136 50,249 ---------- ---------- ----------- OPERATING EXPENSES Research and development 2,915 3,359 109,589 Marketing, general and administrative 803 1,148 52,853 Acquired research and development - - 14,879 ---------- ---------- ----------- Total operating expenses 3,718 4,507 177,321 ---------- ---------- ----------- OPERATING LOSS (2,913) (3,371) (127,072) Gain on disposition of sales division - - 5,728 Interest income 149 202 5,510 Interest expense (35) (24) (1,174) ---------- ---------- ----------- NET LOSS (2,799) (3,193) (117,008) Dividends on preferred stock 359 134 2,301 ---------- ---------- ----------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (3,158) $ (3,327) $ (119,309) ---------- ---------- ----------- ---------- ---------- ----------- Basic and fully-diluted loss per common share $ (0.82) $ (1.16) ---------- ---------- ---------- ---------- Shares used in computing net loss per share 3,854 2,861 ---------- ---------- ---------- ----------
See accompanying notes. 4 COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) PERIOD FROM INCEPTION (FEBRUARY 15, THREE MONTHS ENDED 1989) TO MARCH 31, MARCH 31, --------------------------- 1999 1998 1999 ---------- ---------- --------------- OPERATING ACTIVITIES Net loss $ (2,799) $ (3,193) $ (117,008) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 224 212 7,956 Amortization of deferred compensation 20 42 3,771 Issuance of stock, stock options and warrants for services 3 185 2,579 Loss on sale of fixed assets - - 100 Gain on disposition of sales division - - (5,728) Acquired research and development - - 12,279 Increase in other current assets (25) (60) (390) Decrease (increase) in receivables from partners 23 349 (5) Increase in amounts due to partners 18 952 1,340 Increase in deferred revenue 45 - 3,000 Increase (decrease) in accounts payable and other accrued liabilities (714) (284) 268 --------------- --------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (3,205) (1,797) (91,838) --------------- --------------- ------------- INVESTING ACTIVITIES Decrease (increase) in investments 3,774 (3,700) (6,171) Purchase of property and equipment (14) (211) (7,680) Decrease (increase) in other assets and notes receivable from officers (7) 18 (1,280) Cash received on sale of fixed assets - - 36 Cash received on disposition of sales division - - 9,000 Increase in deferred costs - - (2,475) Acquisition of Acea Pharmaceuticals, net of cash acquired - - (62) --------------- --------------- ------------- NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES 3,753 (3,893) (8,632) --------------- --------------- ------------- FINANCING ACTIVITIES Net cash proceeds from issuance of common stock - 25 61,428 Net cash proceeds from issuance of preferred stock - 3,429 40,701 Proceeds from sale/leaseback of fixed assets and notes payable 139 106 5,655 Payments on capital lease obligations and notes payable (107) (72) (4,512) --------------- --------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 32 3,488 103,272 --------------- --------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 580 (2,202) 2,802 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,222 3,410 - --------------- --------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,802 $ 1,208 $ 2,802 --------------- --------------- ------------- --------------- --------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 35 $ 24 $ 936 --------------- --------------- ------------- --------------- --------------- -------------
5 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The interim financial information for the three-month periods ended March 31, 1999 and 1998 is unaudited but includes all adjustments (consisting only of normal recurring entries) which the Company's management 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 1998 Annual Report on Form 10-K for the year ended December 31, 1998. 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-month period ended March 31, 1999, are not necessarily indicative of operating results to be expected for the full year. REVENUE AND EXPENSE RECOGNITION See Notes 4, 5, 6 and 7 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. COMPREHENSIVE INCOME Comprehensive loss was $2,848,000 for the three-month period ended March 31, 1999 and $3,224,000 for the three-month period ended March 31, 1998. 6 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS 2. SUBSEQUENT EVENTS REVERSE STOCK SPLIT At the Special Meeting of Stockholders held on January 27, 1999, stockholders authorized the Board of Directors to effect a reverse stock split within a range of one new share of common stock for every six, seven or eight outstanding shares of stock. The Board subsequently approved a reverse split of one-for-eight effective April 15, 1999. All share and per share amounts have been restated to reflect this reverse stock split. RESTRUCTURING PLAN On April 27, 1999, the Company announced a restructuring plan intended to reduce its cash burn rate and focus resources on its drug discovery efforts in the neurology area. The restructuring resulted in a layoff of 34 employees in the drug development and administrative areas. The Company retained all members of its research and discovery staff. As a result of the restructuring, CoCensys will recognize a charge of approximately $1.1 to $1.4 million in the second quarter of fiscal 1999. Approximately $700,000 of this reserve will relate to severance costs for terminated employees, with the balance to reserve for fixed assets and facility lease costs that will no longer be of economic benefit to the Company. SALE OF CYTOVIA, INC. STOCK; REPURCHASE OF SERIES E CONVERTIBLE PREFERRED STOCK By agreement dated May 6, 1999, the Company agreed to sell to certain entities affiliated with Domain Associates, L.L.C., all of the Company's stock holdings in Cytovia, Inc., for an aggregate purchase price of $3,325,500. James C. Blair, Ph.D., a director of the Company, is a managing memeber of Domain Associates, L.L.C. The transaction is subject to certain conditions to close, including the waiver of rights held by other investors in Cytovia that would allow those investors to sell a portion of their shares of Cytovia stock to the purchasers in place of sale of a portion of the Company's shares of Cytovia stock (the "Co-Sale Rights"). The Company anticipates closing the transaction in May 1999. By agreements dated April 30, 1999, the Company agreed to repurchase up to 3,180 shares of its Series E Convertible Preferred Stock, using proceeds from its sale of the Cytovia shares. The repurchase price for each share equals the face value ($1,000) plus accrued dividends at 7.5% per annum, plus a 5% premium. As of April 30, 1999, the aggregate repurchase obligation equaled approximately $3.6 million. As part of the repurchase agreements with the holders of the Company's Series E Convertible Preferred Stock, the holders agreed not to convert additional shares of Series E Convertible Preferred Stock prior to July 29, 1999, unless any of the following conditions are applicable: (i) the Company's common stock is trading above $1.00 per share or at least 120% of the then-applicable conversion price for the Series E Convertible Preferred Stock; (ii) the Company's common stock no longer is trading on the Nasdaq National Market or Nasdaq SmallCap Market; (iii) the Company has 7 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS announced that it is being sold pursuant to a merger or sale of all or substantially all of its assets; (iv) after a material adverse change in the Company's business; or (v) if the SEC does not declare effective by June 14, 1999, the Company's Registration Statement on Form S-3 filed with the SEC to register additional shares of common stock issuable on conversion of the Series E Convertible Preferred Stock. Based on the anticipated receipt of proceeds from sale of the portion of the Company's Cytovia shares that will not be affected by the Co-Sale Rights, the Company repurchased 1,154 shares on April 30, 1999 for $1,295,000, and repurchased an additional 437 shares on May 6, 1999 for $491,100. The Company has the right to repurchase the additional 1,589 shares on or before May 20, 1999, upon consummation of the sale of its Cytovia shares. Based on the shares repurchased as of May 7, 1999, 3,444 shares of Series E Convertible Preferred Stock remain outstanding; if the Company is able to repurchase the additional 1,589 shares, 1,855 shares will remain outstanding at that time. NASDAQ LISTING Nasdaq notified the Company by letter dated December 1, 1998, that it was not in compliance with the $1.00 minimum closing bid price requirement for the continued listing of the Company's common stock. Nasdaq provided the Company until February 28, 1999 to correct the non-compliance; otherwise, Nasdaq stated that the Company's common stock would be delisted from the Nasdaq National Market on March 2, 1999. By letter dated February 19, 1999, the Company requested a hearing with Nasdaq to consider the continued listing issue. Based on Nasdaq procedures, the request for hearing stayed delisting of the Company's common stock based on non-compliance with the minimum closing bid price until the date of the hearing, which was held April 29, 1999. As of May 7, 1999, Nasdaq had not delisted the Company's common stock nor notified the Company of the results of the hearing. As of May 7, 1999, the minimum closing bid price for the Company's common stock remains below $1.00 per share. In addition, the market value of the Company's common stock held by non-affiliates of the Company has fallen below the $5 million minimum requirement to remain listed on the Nasdaq National Market. Based on the outcome of the hearing, the Company's shares may continue to trade on the Nasdaq National Market, the Company may be granted a further temporary stay of delisting, the Company's shares may be moved temporarily or permanently to the Nasdaq SmallCap Market or the shares may be delisted from Nasdaq. If the shares are delisted, they likely would be quoted in the "pink sheets" maintained by the National Quotation Bureau, Inc. or the NASD Electronic Bulletin Board. 3. PRIVATE PLACEMENT OF PREFERRED STOCK In June 1998, the Company raised $8.0 million through the private placement of Series E Convertible Preferred Stock (the "Series E Preferred"). The Series E Preferred is convertible into COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS common stock on June 8, 2001, or earlier at the holder's option at a price which is discounted from the fair market value of the Company's common stock at the time of conversion, subject to a maximum price of $31.44 per share. The terms of the private placement included the issuance of warrants to purchase 43,750 shares of common stock at $36.00 per share issued in June 1998 and 12,500 shares at $5.00 per share in November 1998. The Series E Preferred 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 Series E Preferred. 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 starting 122 days after issuance. These two allocated amounts have been credited to additional paid in capital and will be treated as issuance discounts. Accordingly, the $890,000 was amortized over the first 122 days and the $390,000 will be amortized over three years, in the form of additional noncash preferred dividends. During fiscal 1998, the holders of the Series E Preferred converted approximately $1.6 million, including accrued dividends, into approximately 320,000 shares of common stock. Through May 10 of fiscal 1999, the holders of the Series E Preferred converted an additional approximately $1.5 million, including accrued dividends, into approximately 825,000 shares of common stock. As discussed more fully in Note 2 above, the Company has agreed to repurchase up to 3,180 shares of the Series E Preferred for an aggregate of approximately $3.6 million. 4. 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 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 received 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 1998 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, Watson paid CoCensys $750,000 in April 1998 and $250,000 in October 1998. 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 this total, the Company paid $1.0 million in October 1997. Additionally, $1.0 million of the $8.0 million of proceeds from the sale of the Division was placed into an escrow account to satisfy the future obligations related to these acquisitions. In October 1998, the Company made the first $500,000 payment against this obligation and will make the final $500,000 payment in October 1999. 9 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS 5. 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 two years, with an option to extend for a third year, 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 it for a portion of the back-up funding. As of March 31, 1999, the Company had $3.0 million recorded as deferred revenue related to the Wyeth-Ayerst back-up program; this deferred amount 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. Wyeth-Ayerst and the Company 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 the election of Wyeth-Ayerst, at a conversion price based on the market price of the common stock at that time, subject to a minimum conversion price of $35.00 per share. 6. MARKETING AND DEVELOPMENT COLLABORATION WITH WARNER-LAMBERT COMPANY In October 1995, the Company entered into a 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 consisted 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 October 1997, the 1995 Warner Collaboration Agreement was amended, restated and extended until October 1999 (the "1997 Amended Warner Collaboration Agreement"). Under the 1997 Amended Warner Collaboration Agreement, the parties are obligated to devote the time of a specified number of scientists to conduct research directed toward the identification of SSNRAs as drug development candidates. Warner-Lambert 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-Lambert is also obligated to 10 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS pay for all costs to promote any product developed under the 1997 Amended Warner Collaboration Agreement, subject to CoCensys' right to co-promote in the United States (including sharing promotion costs) any product for which CoCensys re-engaged development rights. CoCensys will receive royalties on sales of any products developed under the 1997 Amended 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-Lambert will make nonrefundable milestone payments to CoCensys. 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. Pursuant to the 1997 Amended Warner Collaboration Agreement extension of the Warner Collaboration Agreement, Warner-Lambert purchased 14,286 shares of the Company's Series C Convertible Preferred Stock for $1.0 million in October 1997 and an additional 85,714 shares of the same series of convertible preferred stock for $6.0 million in January 1998. As part of the extension of the Warner Collaboration Agreement in October 1997, the companies agreed to expand the collaboration to allow the companies to analyze and consider for collaborative development each company's AMPA modulator technologies. In January 1998, the parties agreed to return the focus of their collaboration agreement solely to SSNRAs. Each party retained all rights to its respective AMPA modulator technology. In addition, as part of removal of the AMPA modulator technology from the Warner Collaboration Agreement, the Company is obligated to pay to Warner-Lambert $1 million on December 31, 1999. The due date for this amount, which originally was January 1999, has been extended to December 31, 1999 and is payable in common stock (based on the then current stock price) or cash at the election of Warner-Lambert and is secured by the Company's assets. 7. 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 200,000 shares of common stock at a conversion price of $35.00 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 seek a new partner for the program in the future. 11 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS 8. SEGMENT INFORMATION Historically, the Company has operated in two business segments, drug promotion and drug development. Promotion revenues arise from contractual agreements under which the Company promotes other pharmaceutical companies' products in return for commissions. Development revenues arise from contractual agreements with large pharmaceuticals companies pursuant to which the Company licenses various commercialization or development rights relating to compounds or performs research activities in exchange for licensing fees, milestone payments or research funding. In October 1997, the Company sold its sales and marketing force to Watson and ceased all drug promotion activities, although some residual revenue was recognized in the first quarter of fiscal 1998. The accounting policies of these segments are the same as those described in the summary of significant accounting policies except that interest income and certain expenses are not allocated to the segments. Assets allocated to the segments include only other current and noncurrent assets and net property and equipment.
THREE MONTHS ENDED MARCH 31, ------------------ 1999 1998 ------------- ------------- REVENUES FROM EXTERNAL PARTNERS Drug promotion segment $ - $ 540 Drug development segment 805 596 ------------- ------------- $ 805 $ 1,136 ------------- ------------- ------------- ------------- OPERATING INCOME Drug promotion segment $ - $ 540 Drug development segment (2,913) (3,911) ------------- ------------- $ (2,913) $ (3,371) ------------- ------------- ------------- ------------- ASSETS Drug promotion segment $ - $ - Drug development segment 2,703 3,588 ------------- ------------- $ 2,703 $ 3,588 ------------- ------------- ------------- -------------
12 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 1998 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 March 31, 1999, the Company's accumulated deficit was approximately $119.3 million. RESULTS OF OPERATIONS The Company had no co-promotion revenues for the three-month period ended March 31, 1999, compared to $540,000 during the same period in fiscal 1998. The 1998 co-promotion revenue is attributable to a bonus for fiscal 1997 activity that was received and recognized in March 1998. 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 Company recognized $805,000 in co-development revenues for the three-month period ended March 31, 1999 compared to $596,000 for the same period of 1998. In the first quarter of 1999, co-development revenues were mainly associated with the anxiolytic backup program with Wyeth-Ayerst and the SSNRA (subtype-selective NMDA receptor antagonists) program with Warner-Lambert. In 1998, co-development revenues were solely related to the SSNRA program. Research and development expenses decreased to $2.9 million for the three-month period ended March 31, 1999, from $3.4 million in the first quarter of the prior year. This decrease reflects a lower level of external clinical activity in the current period compared to the same period a year earlier. 13 Marketing, general and administrative expense decreased to $803,000 in the first quarter of 1999 from $1.1 million in the first quarter of 1998. The first quarter of the prior fiscal year had higher headcount levels resulting in higher compensation costs and included certain nonrecurring expenses associated with the formation of Cytovia, Inc., an independent company involved in the commercialization of patented drug screening technology. Interest income was $149,000 for the three-month period ended March 31, 1999 compared to $202,000 for the same quarter in 1998. This decrease was due to lower cash and short-term investment balances in the current year and to a general decline in interest rates. Preferred dividends were $359,000 in the quarter ended March 31, 1999 compared to $134,000 in the same quarter a year earlier. The preferred dividends for the first quarter of fiscal 1999 include dividends on the Series E convertible preferred and on the Series D convertible preferred issued to Warner-Lambert, whereas the first quarter of the prior year only includes dividends on the Series D convertible preferred. LIQUIDITY AND CAPITAL RESOURCES From its inception in February 1989 through March 31, 1999, the Company has financed its operations primarily through private and public offerings of its equity securities, raising net proceeds of approximately $102.1 million through sales of securities. At March 31, 1999, the Company's balances of cash, cash equivalents and investments totaled $9.0 million, compared to $12.2 million at December 31, 1998. As of March 31, 1998, the Company had invested $7.7 million in leasehold improvements, laboratory and computer equipment and office furnishings and 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. 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 Note 2 and 3 of the Notes to Financial Statements "Subsequent Events" and "Private Placement of Preferred Stock," above. Pursuant to an agreement with Watson, in October 1997, the Company sold it sales and marketing force, 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 in April 1998 and $250,000 in October 1998. Pursuant to the 1995 collaboration agreement with Warner-Lambert, 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 14 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 cash or common stock at the election of Warner-Lambert) due to Warner Lambert on December 31, 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 two 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. As of March 31, 1999, the Company had $3.0 million of deferred revenue recorded on its balance sheet related to the Wyeth-Ayerst back-up program. Pursuant to the Company's Development and Commercialization Agreement with Searle, 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 200,000 shares of common stock at a conversion price of $35.00 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. CoCensys' operations to date have consumed substantial amounts of cash. While the Company's cash forecasts for the twelve months ending December 31, 1999, project a positive cash balance, certain cash inflows included in these forecasts are estimates and are not guaranteed. Should the Company not receive these anticipated payments, or should the timing or amount of these payments differ substantially from the forecasted amounts, or should the Company incur expenses in excess of those currently forecasted, the ability of the Company to continue funding its operations could be jeopardized. Given the context of these financial uncertainties, the restructuring plan announced on April, 27, 1999, is intended to reduce the Company's cash burn rate and re-focus the Company on drug discovery and away from drug development. The restructuring resulted in the termination of 34 employees in the development and administration areas and should produce annualized operating expense savings of $3.5 million. Additionally, the Company will reduce the amount of external clinical trials that it conducts on its own behalf. In the future, clinical development will be primarily paid for and performed by corporate partners after licensing agreements have been signed. 15 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. There are no assurances that the Company will available to it the substantial capital resources necessary to continue product development and other Company operations. 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 developed a plan to address the Year 2000 issues. The plan is segregated into four phases: Information collection. Risk assessment and testing of mission critical systems. Remediation. Monitoring and contingency planning The Company has completed the first two phases of the project and has tested, upgraded or developed plans to upgrade all individual software and hardware applications that fall within the mission critical category. All of the Company's major software applications and hardware systems are purchased from major vendors and the Company performs little or no customizations to those applications and systems. The Company's major software providers have attested to Year 2000 compliance. The Company has reviewed other equipment for embedded technologies which may be Year 2000 susceptible and has already upgraded or developed plans to upgrade all mission critical systems. The Company has spent less than $50,000 to date on hardware and software upgrades to ensure Year 2000 compliance and it anticipates that further upgrades will cost less than $100,000, most of which will be spent acquiring a Year 2000 compliant telephone system. The funds for these upgrades will come from current cash or new capital lease lines. The Company expects to be fully Year 2000 compliant by June 1999. A contingency plan will also be developed by that date. RISK FACTORS SOME OF THE STATEMENTS IN THIS 10-Q ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT MAY CAUSE OUR RESULTS, LEVEL OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVEL OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. 16 THESE FACTORS INCLUDE, AMONG OTHERS, THOSE DISCUSSED BELOW AND THOSE SET FORTH IN OUR MOST RECENT ANNUAL REPORT ON FORM 10-K FILED WITH THE SEC. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "COULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVEL OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE DO NOT ASSUME RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE FORWARD-LOOKING STATEMENTS. WE DO NOT INTEND TO UPDATE THIS 10-Q AFTER IT IS FILED SO THAT THE FORWARD-LOOKING STATEMENTS CONFORM TO ACTUAL RESULTS. OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND THERE IS A HIGH RISK OF FAILURE. We have no products that have received regulatory approval for commercial sale. All of our drug candidates are in the early stages of development, and our technology is unproven. The physiology of brain disorders is highly complex, and the causes of these disorders are not fully known. We will have to conduct significant research and pre-clinical (animal) and clinical (human) tests that demonstrate that our products are safe and effective before we can file applications for approval with the United States Food and Drug Administration and foreign regulatory authorities. Any of our products may fail in the testing phase or may fail to attain market acceptance. Competitors may develop superior products. Third parties may have proprietary rights that preclude us from marketing our products. If research and testing is not successful, our products are not commercially viable or we cannot compete effectively, our business, financial condition and results of operations will be materially adversely affected. THE OUTCOME OF CLINICAL DEVELOPMENT IS HIGHLY UNCERTAIN. Clinical trials, including pre-clinical testing, are lengthy, expensive and uncertain. Failure can occur at any stage. We have no products that have successfully completed all necessary clinical testing. Three of our drug candidates have undergone some clinical testing, and three currently are in pre-clinical testing. We do not know whether the FDA will allow us to begin human testing of our drug candidates that have not been tested in humans or to continue human testing of those candidates that have undergone some human testing. We cannot rely on interim results of trials to predict their final results, nor can we count on acceptable results at early stages of testing to be repeated at later stages. Any of our drug candidates could have undesirable or unintended side effects or other problems that may prevent or limit future testing, approval or use of the product. We have experienced safety and efficacy problems with drug candidates. In a clinical trial of licostinel, our drug candidate to treat stroke, crystals of what we presume to be licostinel occurred in the urine of some subjects, a potential dose-limiting side effect. Although the crystal formation occurred only in subjects with at least four times the blood plasma level of licostinel that was necessary for the drug to be effective in animals, our development partner, Novartis Pharma A.G., ceased its participation in the development of licostinel. In addition, in October 1998 we announced 17 that ganaxolone, our drug candidate to treat migraine and epilepsy, was not effective in providing relief to patients suffering migraine headaches. The results of a clinical trial in which 325 migraine patients received either ganaxolone or a placebo drug did not show a statistically significant difference in migraine headache relief between those patients receiving ganaxolone and those patients receiving the placebo. We cannot assure you that any of our clinical trials will be completed successfully or at all, or that they will result in marketable products. Any significant delay or failure in the clinical development of our products will materially adversely affect our business, financial condition and results of operations. WE HAVE NEVER BEEN PROFITABLE, AND WE EXPECT TO CONTINUE TO GENERATE SIGNIFICANT LOSSES. Since we started business in 1989, we have spent over $177 million researching and developing our drug candidates. We have raised this money by selling stock in CoCensys to private investors and the public, licensing drugs and technologies to other companies and selling assets that we have developed at CoCensys. We have never been profitable and, through March 31, 1999, we have incurred a cumulative deficit of approximately $119.3 million. We expect to continue to incur substantial and increasing losses over the next several years as we continue our research and development programs. To achieve and sustain profitable operations in the long term, we must successfully develop, obtain regulatory approval for, manufacture, introduce, market and sell drugs from our technologies. Failure to do so will materially adversely affect our business, financial conditions and results of operations. WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS. Drug development is capital intensive and requires significant funding commitments. We will need a substantial amount of funds to continue our operations both in the near term and over the next several years. If we do not raise additional funds by the end of 1999, we will be forced to curtail our operations. Our cash needs beyond 1999 will vary depending on a number of factors, including the following: - the size and progress of our research and development programs; - the results of our animal and human testing of our drugs; - the time and costs of obtaining regulatory approvals for our drugs (if approvals can be achieved); - how good our drugs are compared to other drugs on the market that treat the same disorders; - the time, costs and success of establishing sales and marketing capabilities; and - the time, costs and success of establishing manufacturing capabilities. We do not know if we will be able to raise funds on terms that are acceptable to us. If we sell additional stock, you may experience substantial dilution. If we raise cash through licensing additional drugs and technologies to collaboration partners, we will be required to relinquish rights to some of our drugs and technologies. 18 If we cannot raise enough cash to fund our operations, we may be forced to delay, reduce the scope of or eliminate one or more of our research or development programs. We may have to cease all operations if we are not successful in obtaining funds. WE DEPEND ON THIRD PARTIES TO FUND OUR DRUG DEVELOPMENT. In order to fund the development, clinical testing, manufacturing and commercialization of our products, we have entered into various collaborations with corporate partners, licensors, licensees and others. Currently, we are a party to a collaboration agreement with Warner-Lambert Company for research and development of subtype-selective NMDA receptor antagonists and with Wyeth-Ayerst Laboratories, a division of American Home Products Corporation, for the development of epalons to treat anxiety. Under each agreement, we depend on the collaboration partner to provide the funding to develop drug candidates for potential approval and commercialization. WE MAY BE UNABLE TO FULFILL OUR OBLIGATIONS UNDER THE COLLABORATION AGREEMENTS. We do not know if we will have the substantial resources needed to fulfill our research and development obligations under each collaboration agreement. If we cannot fulfill our obligations, we may be required to terminate early one or both of the agreements and forfeit many of our rights under the agreements. In particular, our collaboration agreement with Wyeth-Ayerst provides that if the lead compound under development to treat anxiety fails to meet certain criteria, and if at that time we have not yet produced a back-up compound that meets another set of criteria, Wyeth-Ayerst can demand repayment of a portion of the funds paid to us under our collaboration agreement. Currently, the amount that we may be required to pay back could be as much as $3 million, in cash or common stock. Although we hope to fulfill our obligations under the collaboration agreement so that Wyeth-Ayerst will not be able to demand repayment, we cannot assure we will be able to do so. EITHER OF OUR COLLABORATION PARTNERS MAY CANCEL ITS COLLABORATION AGREEMENT WITH US AT ANY TIME. Each of our collaboration agreements allows either CoCensys or our collaboration partner to voluntarily terminate its participation in the collaboration at any time. If either of our current collaboration partners terminates its agreement with us, that partner would lose its right to further develop or sell drugs under that collaboration; however, that partner also no longer would be required to fund development of those drugs. If either Warner-Lambert or Wyeth-Ayerst cancels its agreement with us, we would have to find a new collaboration partner to pay for further development of our drug candidates. We cannot assure you that we would be able to do so. Collaboration partners have, in the past, terminated their agreements with us. In 1994, we entered into a development agreement with Novartis Pharma A.G. to develop licostinel to treat stroke patients. In 1997, Novartis terminated its participation in the development agreement based on side effects seen in human trials of licostinel. Also, in 1996, we entered into an agreement with G.D. Searle & Co. to develop epalons to treat insomnia. In July 1998, Searle terminated its participation in that agreement, stating that the program no longer met its needs in light of its entire product pipeline. Since termination of those two agreements, we have not yet found new collaboration partners to develop those drugs, and we do not have the money to complete development of those drugs. We do not know if we will be able to find new collaboration partners for those drugs. 19 WE MAY BE UNABLE TO ENTER INTO COLLABORATION AGREEMENTS IN THE FUTURE. We plan to continue to enter into collaboration agreements with pharmaceutical companies to develop, market and sell our drug candidates. We do not know if we will be able to find additional potential partners interested in developing our drugs. Also, even if we find potential partners interested in our drugs, we do not know if we will be able to enter into collaboration agreements with these partners on terms and conditions that we find acceptable. Even if we do enter into additional collaboration agreements, we do not know if the collaborations will successfully develop drugs for marketing and sale. If we are unable to secure collaboration partners, we will not be able to develop our drug candidates. OUR STOCK PRICE IS VERY VOLATILE. 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. In addition, the market prices of the common stock of many publicly traded biopharmaceutical companies, including ours, have in the past been, and can in the future be expected to be, especially volatile. Our stock price may fluctuate greatly as a result of a number of factors, including: - announcements of technological innovations or new products by us or by our competitors; - developments or disputes concerning patents or proprietary rights; - publicity regarding actual or potential medical results relating to drug products that we or our competitors are developing; - regulatory developments in both the United States and foreign countries; - public concern as to the safety of biotechnology products; and - economic and other external factors, as well as period-to- period fluctuations in our financial results. THE SALE OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK MAY FURTHER DEPRESS OUR STOCK PRICE. The sale of a large number of shares of our common stock in the public could depress the market price of our common stock. Substantially all of the outstanding shares of our common stock may be sold at any time in the public markets. Approximately 650,000 million freely tradable additional shares may be issued on exercise of vested options to purchase CoCensys stock. Current and former employees, consultants, officers and directors of CoCensys hold these options. We may be required to issue millions of additional shares of CoCensys common stock upon conversion of Series E Convertible Preferred Stock. As of May 7, 1999, 3,444 shares of our Series E Convertible Preferred Stock remained issued and outstanding. Each share of the Series E Convertible Preferred Stock is convertible into shares of CoCensys common stock at discount to the current market price of our common stock. If converted on May 7, 1999, based on the then-applicable conversion price of $0.52 per share, the remaining Series E Convertible Preferred Stock would have been convertible into approximately 7.1 million additional shares of CoCensys common stock. The number of shares of common stock that may be issued could prove to be significantly 20 greater if the market price of our common stock declines. CoCensys stockholders could experience substantial dilution from issuance of additional common stock on conversion of the Series E Convertible Preferred Stock. In addition, we may be required to issue additional shares of CoCensys common stock on fulfillment of our obligation to Warner-Lambert Company. Under our collaboration agreement with Warner-Lambert, we owe Warner-Lambert $1 million on December 31, 1999. The $1 million is payable in common stock or cash, at the election of Warner-Lambert. If the amount had been paid on April 30, 1999, and Warner-Lambert elected to receive the payment in stock, we would have had to issue to Warner-Lambert approximately 1.2 million shares of common stock. The number of shares of common stock that may be issued could prove to be significantly greater if the market price of our common stock declines. CoCensys stockholders could experience substantial dilution from issuance of additional common stock in satisfaction of our obligation to Warner-Lambert. FAILURE TO MAINTAIN OUR LISTING ON THE NASDAQ NATIONAL MARKET MAY ADVERSELY AFFECT THE LIQUIDITY OF OUR COMMON STOCK AND OUR FINANCIAL CONDITION. Our common stock is traded on the Nasdaq National Market under the symbol "COCN." In order to maintain our listing on the Nasdaq National Market, we must meet a number of listing requirements established by Nasdaq. Currently, we meet all Nasdaq National Market requirements other than the minimum bid price and the market value of publicly-held shares. Generally, we must maintain a minimum bid price of $1.00 per share; however, our bid price is significantly below $1.00 per share and has been below $1.00 per share since October 1998. In addition, the market value of our common stock shares held by stockholders who are not affiliated with CoCensys must be at least $5 million; currently, we are below that amount. On December 1, 1998, Nasdaq informed us that our common stock would be delisted on March 1, 1999 if we failed to have a closing bid price of at least $1.00 per share for ten consecutive days on or before February 28, 1999. We have been unable to achieve that closing bid price; however, we applied for a hearing before Nasdaq to discuss our delisting, which was held April 29, 1999. Nasdaq has not informed us as to the result of that hearing. If we cannot maintain continued listing of our common stock on the Nasdaq National Market or the Nasdaq SmallCap Market, our common stock could trade on the OTC Bulletin Board or in the over-the-counter market in what is commonly referred to as the "pink sheets." If this occurs, a stockholder will find it more difficult to dispose of the securities or to obtain accurate quotations as to the price of the securities. In addition, our common stock could become subject to the "penny stock" regulations of the SEC, which impose additional restrictions on broker-dealers who trade in such stock and could severely limit the liquidity of our common stock. If we do not maintain our listing on the Nasdaq National Market or Nasdaq SmallCap, we may be required to redeem our Series E Convertible Preferred Stock. Redemption of the Series E Convertible Preferred Stock would significantly deplete our cash reserves and materially adversely affect our operations and financial condition. 21 COCENSYS, INC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Promissory Note dated January 4, 1999, made by the Company in favor of Warner-Lambert Company 27.1 Financial Data Schedule (b) REPORTS ON FORM 8-K. The Company did not file any current reports on Form 8-K for the quarterly period ended March 31, 1999. Subsequent to quarter end, the Company filed the following documents: (i) The Company filed a current report on Form 8-K, dated April 8, 1999, reporting that Nasdaq had halted trading of the Company's common stock on the Nasdaq National Market pending receipt and review of certain information. (ii)The Company filed a current report on Form 8-K, dated April 15, 1999, reporting that the Company announced a one share for eight shares reverse split of its common stock effective April 15, 1999. 22 COCENSYS, INC. 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: May 10, 1999 By: /s/ F. Richard Nichol, Ph.D. ------------------- ---------------------------------------------------- F. Richard Nichol, Ph.D. Chairman, President and Chief Executive Officer (PRINCIPAL EXECUTIVE OFFICER) Date: May 10, 1999 By: /s/ Robert R. Holmen ------------------- ---------------------------------------------------- Robert R. Holmen Vice President and General Counsel (PRINCIPAL FINANCIAL OFFICER) Date: May 10, 1999 By: /s/ Thomas B. Miller ------------------- ---------------------------------------------------- Thomas B. Miller Director of Finance and Controller (PRINCIPAL ACCOUNTING OFFICER)
23 EX-10.1 2 EX 10.1 EXHIBIT 10.1 PROMISSORY NOTE $1,000,000 January 4, 1999 Ann Arbor, Michigan FOR VALUE RECEIVED the undersigned ("Payor") promises to pay to the order of Warner-Lambert Company, a Delaware corporation, ("Payee") at Payee's option, either (a) the principal sum of One Million ($1,000,000) Dollars with interest thereon at the per annum rate equal to 2% plus the prime commercial lending rate of Citibank of New York, in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment (the "Principal Amount Plus Interest"), or (b) the number of shares of common stock of Payor equal to the Principal Amount Plus Interest divided by the average closing price of the common stock of Payor (on the nationally recognized stock exchange on which such shares are then traded) for the 30 days prior to the required date of payment. The principal and accrued interest shall be due and payable in full on or before December 31, 1999 in one of the two following forms chosen by Payee as described above. The Payor shall be entitled to prepayment at any time without penalty provided Payee shall have the right to choose the method of payment from the two options set forth above. Payor hereby waives grace, notice, protest, demand, presentment for payment, and diligence in the collection of this Note, and in filing suit hereon, and agrees that its liability for the payment hereof shall not be affected or impaired by any release or change in the security, or by any extension of the time for any payment. Should any default be made in any type of payment of either interest or principal as previously provided and continue for thirty (30) days thereafter, then the full unpaid principal of this obligation and all interest accrued thereon and/or unpaid shall, in the discretion of the Payee become due and payable, and may be collected forthwith regardless of the stipulated date of maturity, time being of the essence. Further, all costs and reasonable attorney fees incurred by the Payee hereof in collecting or enforcing payment shall be paid upon demand by the Payor. Any failure of the Payee to exercise such options to accelerate shall not constitute waiver of the right to exercise such options to accelerate at any future time. If it be determined that the legal authority to charge or reserve the rate of interest hereinbefore specified has expired, or if such rate of interest reserved or charged under this Note is for any reason determined, held, declared, stated or adjudicated to be usurious, in whole or in part or in any manner, the highest legal rate then permitted to be charged, unless otherwise stipulated in writing between the Payee and Payor of this Note, shall be, at the option of the Payee, immediately due, payable and collectible in full, without notice to any party. The undersigned hereby waives demand, presentment for payment, notice of dishonor, protest and notice of protest, and diligence in collection or bringing suit. The Payee hereof may extend the time for payment or accept partial payment without discharging or releasing the undersigned. The Payor acknowledges that this Note is made and delivered in the State of Michigan and does consent to the jurisdiction over it of the Courts of the State of Michigan in connection with all proceedings to enforce the Note. PAYOR: CoCensys, Inc. By: /s/ F. Richard Nichol, PH.D. ------------------------------------- Name: F. Richard Nichol, PH.D. ------------------------------------- Title: President and Chief Executive Officer ------------------------------------- EX-27.1 3 EX-27-1
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,802 6,150 0 0 0 9,275 6,898 (4,642) 11,655 6,600 0 0 15,261 108,868 (119,448) 4,681 0 805 0 0 0 0 35 0 0 (2,799) 0 0 0 (2,799) (0.82) (0.82)
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