-----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, BtPZmZkcbLKibPMsI4oKP5pgFwkfE4lkamI/P5ZAqZD9q0tGaEIj8WytBdqXtDhM qPkyclvTXJZ4j42SQ4qSag== 0001047469-99-032554.txt : 19990817 0001047469-99-032554.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032554 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693410 BUSINESS ADDRESS: STREET 1: 213 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497536100 MAIL ADDRESS: STREET 1: 213 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92618 10-Q 1 FORM 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 June 30, 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) 213 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 4,873,480 (CLASS OF COMMON STOCK) (OUTSTANDING AT AUGUST 10, 1999) =============================================================================== COCENSYS, INC. TABLE OF CONTENTS
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Balance Sheets as of June 30, 1999 and December 31, 1998 3 Condensed Statements of Operations for the three- and six-month periods ended June 30, 1999 and 1998 and the period from inception (February 15, 1989) through June 30, 1999 4 Condensed Statements of Cash Flows for the six-month periods ended June 30, 1999 and 1998 and the period from inception (February 15, 1989) through June 30, 1999 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 25 SIGNATURES 26
2 COCENSYS, INC. (A development stage company) CONDENSED BALANCE SHEETS (In thousands, except share and par value amounts)
JUNE 30, DECEMBER 31, 1999 1998 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,000 $ 2,222 Short-term investments 4,616 9,973 Other current assets 321 321 ----------- ---------- TOTAL CURRENT ASSETS 5,937 12,516 Property and equipment, net 1,433 2,466 Notes receivable from officers - 56 Other noncurrent assets 75 61 ----------- ---------- $ 7,445 $ 15,099 =========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 500 $ - Accounts payable 279 534 Accrued compensation and benefits 312 748 Restructuring reserve 929 - Due to corporate partners 1,371 1,322 Other accrued liabilities 852 1,326 Deferred revenue 3,000 2,955 Capital lease obligation - current portion 408 316 ----------- ---------- TOTAL CURRENT LIABILITIES 7,651 7,201 Capital lease obligation, less current portion 186 366 Other liabilities - 26 Commitments and contingencies - - Stockholders' (deficit) equity: Preferred stock - $.001 par value, 5,000,000 shares authorized; 201,159 shares issued and outstanding at June 30, 1999 and 206,445 at December 31, 1998 11,472 16,386 Common stock - $.001 par value, 9,375,000 shares authorized; 4,872,480 shares issued and outstanding at June 30, 1999 and 3,422,773 at December 31, 1998 109,022 107,381 Deficit accumulated during the development stage (120,851) (116,151) Deferred compensation - (138) Accumulated comprehensive income (35) 28 ----------- ---------- TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (392) 7,506 ----------- ---------- $ 7,445 $ 15,099 =========== ==========
See accompanying notes. 3 COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
PERIOD FROM INCEPTION THREE MONTHS ENDED SIX MONTHS ENDED (FEBRUARY 15, -------------------------------------------------- 1989) TO JUNE 30, JUNE 30, JUNE 30, 1999 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- REVENUES Co-promotion revenues from corporate partners $ - $ - $ - $ 540 $ 30,705 Co-development revenues from corporate partners 572 425 1,377 1,021 20,116 ----------- ----------- ----------- ----------- ----------- Total revenues 572 425 1,377 1,561 50,821 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES Research and development 2,070 4,063 4,985 7,422 111,659 Marketing, general and administrative 819 884 1,622 2,032 53,672 Restructuring charges 2,196 - 2,196 - 2,196 Acquired research and development - - - - 14,879 ----------- ----------- ----------- ----------- ----------- Total operating expenses 5,085 4,947 8,803 9,454 182,406 ----------- ----------- ----------- ----------- ----------- OPERATING LOSS (4,513) (4,522) (7,426) (7,893) (131,585) Gain on disposition of sales force - 750 - 750 5,728 Gain on disposition of interest in Cytovia, Inc. 3,326 - 3,326 - 3,326 Interest income 95 232 245 434 5,605 Interest expense (50) (20) (85) (44) (1,224) ----------- ----------- ----------- ----------- ----------- NET LOSS (1,142) (3,560) (3,940) (6,753) (118,150) Accretion of preferred stock for beneficial conversion feature - 168 - 168 890 Dividends on preferred stock 400 189 760 323 1,811 ----------- ----------- ----------- ----------- ----------- NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,542) $ (3,917) $ (4,700) $ (7,244) $ (120,851) =========== =========== =========== =========== =========== Basic and diluted loss per share $ (0.34) $ (1.32) $ (1.13) $ (2.49) =========== =========== =========== =========== Shares used in computing basic and diluted loss per share 4,489 2,968 4,170 2,915 =========== =========== =========== ===========
See accompanying notes. 4 COCENSYS, INC. (A development stage company) CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
PERIOD FROM INCEPTION SIX MONTHS ENDED (FEBRUARY 15, JUNE 30, 1989) TO --------------------------- JUNE 30, 1999 1998 1999 ---------- ---------- ------------- OPERATING ACTIVITIES Net loss $ (3,940) $ (6,753) $ (118,149) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 412 437 8,144 Amortization of deferred compensation 138 86 3,889 Issuance of stock, stock options and warrants for services 5 199 2,581 Impairment of property, plant and equipment 585 - 585 Loss on sale of fixed assets 38 - 138 Gain on disposition of sales force - (750) (5,728) Gain on disposition of interest in Cytovia, Inc. (3,326) - (3,326) Increase in restructuring reserve 929 - 929 Acquired research and development - - 12,279 Decrease (increase) in other current assets (9) 129 (374) Decrease (increase) in receivables from partners 9 394 (19) Increase in amounts due to partners 49 751 1,371 Increase in deferred revenue 45 - 3,000 Increase (decrease) in accounts payable and other accrued liabilities (1,191) 146 (209) ---------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (6,256) (5,361) (94,889) ---------- ----------- ----------- INVESTING ACTIVITIES Decrease (increase) in investments 5,294 (5,565) (4,651) Purchase of property and equipment (17) (384) (7,683) Decrease (increase) in other assets and notes receivable from officers 42 16 (1,231) Cash received on sale of fixed assets 15 - 51 Cash received on disposition of sales force - 750 9,000 Cash received on disposition of interest in Cytovia, Inc. 3,326 - 3,326 Increase in deferred costs - - (2,475) Acquisition of Acea Pharmaceuticals, net of cash acquired - - (62) ---------- ----------- ----------- NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES 8,660 (5,183) (3,725) ---------- ----------- ----------- FINANCING ACTIVITIES Net cash proceeds from issuance of common stock 2 154 61,430 Net cash proceeds from issuance of preferred stock - 11,320 40,701 Redemptions of preferred stock (4,039) - (4,039) Proceeds from line of credit 500 - 500 Proceeds from sale/leaseback of fixed assets and notes payable 209 150 5,725 Payments on capital lease obligations and notes payable (298) (102) (4,703) ---------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES (3,626) 11,522 99,614 ---------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,222) 978 1,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,222 3,410 - ---------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,000 $ 4,388 $ 1,000 ========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 85 $ 44 $ 986 ========== =========== ===========
See accompanying notes. 5 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The interim financial information for the three and six-months periods ended June 30, 1999 and 1998 is unaudited but includes all adjustments (consisting only of normal recurring entries) which the CoCensys, Inc.'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 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 and six-month periods ended June 30, 1999 are not necessarily indicative of operating results to be expected for the full year. REVENUE AND EXPENSE RECOGNITION See Notes 6 and 7 for revenue recognition policies related to 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. REVERSE STOCK SPLIT On April 15, 1999, the Company effected a one-for-eight reverse split of its outstanding common stock. All share and per share amounts have been adjusted to reflect this reverse stock split. 6 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS COMPREHENSIVE INCOME Comprehensive loss was $1,556,000 and $3,980,000 for the three and six-month periods ended June 30, 1999, respectively, and $3,557,000 and 6,781,000 for the comparable periods in the prior year. SHORT-TERM BORROWING ON LINE OF CREDIT In March of 1999 the Company established a short-term borrowing facility with Wells Fargo Bank under which the Company can borrow up to $1,000,000. Borrowings under this facility are secured in full by the Company's investments and bear interest at 0.5% below Wells Fargo's prime rate. At June 30, 1999, $500,000 was outstanding under this facility. This amount was repaid on July 2, 1999. 2. SUBSEQUENT EVENTS DEFINITIVE ACQUISITION AGREEMENT On August 5, 1999, the Company, Purdue Pharma L.P. ("Purdue Pharma"), and Purdue Acquisition Corporation, an indirect wholly owned subsidiary of Purdue Pharma, entered into a definitive merger agreement (the "Merger Agreement"). On August 12, 1999, Purdue Acquisition Corporation commenced a tender offer to purchase for cash all of the outstanding shares of common stock of the Company. Subject to the conditions set forth in the Merger Agreement, upon successful completion of the tender offer, Purdue Acquisition Corporation will acquire any shares of common stock of the Company that are not tendered into the offer in a second-step merger. The board of directors of the Company has unanimously approved the transaction and has recommended that the Company's stockholders accept the offer. Purdue Acquisition Corporation has also entered into a Purchase Agreement, dated as of August 5, 1999 (the "Series E Purchase Agreement"), with the holder of the Series E Convertible Preferred Stock of the Company (the "Series E Preferred"). Under the Series E Purchase Agreement, the holder of the Series E Preferred has agreed to sell, and Purdue Acquisition Corporation has agreed to purchase, all of the Series E Preferred beneficially owned by it for an aggregate purchase price of $2,200,000. The obligation of the holder of the Series E Preferred to sell, and the obligation of Purdue Acquisition Corporation to purchase, the Series E Preferred under the Series E Purchase Agreement, are subject to Purdue Acquisition Corporation having accepted Shares for payment under the Offer in accordance with the Merger Agreement. Purdue Acquisition Corporation has indicated that it plans to convert the Series E Preferred into common stock of the Company immediately following consummation of the tender offer. When converted, the Series E Preferred will represent approximately 31% of the Company's fully diluted shares. Purdue Acquisition Corporation's tender offer is conditioned upon, among other things, there being validly tendered and not withdrawn such number of shares that, when added to the number of shares of common stock to be received by Purdue Acquisition Corporation upon conversion of the Series E Preferred, equals at least ninety percent of the fully diluted outstanding common shares of the Company. After the consummation of the tender offer, Purdue Acquisition Corporation has agreed to acquire any of the remaining outstanding shares of the Company pursuant to a second-step merger at the same price per share paid for shares tendered. If Purdue Acquisition Corporation acquires 90% or more of the outstanding shares of each class of voting stock of the Company pursuant to the tender offer or otherwise, Purdue Acquisition Corporation would be able to effect the merger described above pursuant to the short-form merger provisions of the Delaware General Corporation Law, without prior notice to, or any action by, any other stockholder of the Company. In such event, Purdue Acquisition Corporation could, and intends to, effect the merger without prior written notice to, or any action by, any other stockholder of the Company. 7 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS NASDAQ DELISTING Effective with the close of business on July 13, 1999, the Nasdaq Stock Market delisted the Company's common stock from the Nasdaq National Market, citing a stock price below $1.00 per share and an insufficient public float among the primary reasons for the delisting. The Company's common stock is now traded on the OTC Bulletin Board under the symbol COCN. 3. 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. On that date 34 employees in the drug development and administrative areas were terminated, and in June 1999 the Company terminated another 19 employees. As a result of the restructuring, CoCensys recognized a charge of $2.2 million in the second quarter of fiscal 1999. Approximately $1.5 million of this charge relates to severance and outplacement costs for terminated employees, with the balance primarily for fixed assets that were either abandoned, disposed of or will no longer be of economic benefit to the Company. With respect to the fixed assets, the Company abandoned certain leasehold improvements in a leased building that was vacated as of June 30, 1999. The Company has no future lease commitments related to this vacated facility. The Company also disposed of certain furniture and office equipment that was in excess of its current needs. Finally, certain computer hardware and software that were utilized solely by the Company's terminated development staff has been fully reserved for. After this restructuring the Company has 38 employees, of whom 31 are involved in drug discovery and 7 are in administration. As of June 30, 1999, the plan was essentially complete, except for the payment of severance over the remaining severance terms. 4. PRIVATE PLACEMENT OF PREFERRED STOCK In June 1998, the Company raised $8.0 million through the private placement of the Series E Preferred and associated warrants to purchase common stock. The Series E Preferred carries an annual dividend of 7.5 percent of the value of the outstanding shares payable quarterly either in cash or by adding the amount of the dividend to the conversion value of the Series E Preferred. All dividends have been paid by adding the amount to the conversion value. Additionally, $390,000 of the $8.0 million in proceeds was allocated to certain warrants that were issued to the holders of the Series E Preferred, 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. 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 as an accretion to preferred stock and the $390,000 will be amortized over three years in the form of a non-cash dividend. 8 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS Since June 1998, the holders of the Series E Preferred have converted $3,253,000, plus accrued dividends, of the original $8.0 million in face value of preferred stock into approximately 1.8 million common shares. The Company has repurchased an additional $3,588,000, plus accrued dividends, for approximately $4.0 million in cash. The holder of the outstanding Series E Preferred has agreed to sell the remaining $1,159,000 of Series E Preferred, plus accrued dividends, to Purdue Pharma for $2.2 million in cash contingent on the successful completion of the tender offer described in Note 2 above. 5. SALE OF CYTOVIA, INC. STOCK In May 1999, the Company sold 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 member of Domain Associates, L.L.C. The Company used the proceeds from this sale to repurchase shares of the Series E Preferred as discussed in Note 4 above. 6. 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 criteria, Wyeth-Ayerst has the right to terminate the back-up program and require CoCensys to reimburse it for fifty percent of the back-up funding. Accordingly, As of June 30, 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 if and 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. 9 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS 7. 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 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. 10 COCENSYS, INC. (A development stage company) NOTES TO CONDENSED FINANCIAL STATEMENTS In connections with the execution of the Merger Agreement, the Company elected to convert Warner-Lambert's $7.0 million of preferred stock into 227,425 shares of common stock of the Company. Additionally, contingent upon the successful completion of the tender offer described in Note 2 above, the Company will prepay in cash its outstanding $1.0 million note payable to Warner-Lambert. 8. SEGMENT INFORMATION Historically, the Company operated in two business segments, drug promotion and drug development. Promotion revenues have arisen from contractual agreements under which the Company promoted 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 SIX MONTHS ENDED JUNE 30 JUNE 30 1999 1998 1999 1998 ------------- ------------- -------------- ------------- REVENUES FROM EXTERNAL PARTNERS Drug promotion segment $ - $ - $ - $ 540,000 Drug development segment 572,000 425,000 1,377,000 1,021,000 ------------- ------------- -------------- ------------- $ 572,000 $ 425,000 $ 1,377,000 $ 1,561,000 ============= ============= ============== ============= OPERATING INCOME Drug promotion segment $ - $ - $ - $ 540,000 Drug development segment (4,513,000) (4,522,000) (7,426,000) (8,433,000) -------------- -------------- --------------- -------------- $ (4,513,000) $ (4,522,000) $ (7,426,000) $ (7,893,000) ============== ============== =============== ============== ASSETS Drug promotion segment $ - $ - $ - $ - Drug development segment 1,830,000 3,343,000 1,830,000 3,343,000 ------------- ------------- -------------- ------------- $ 1,830,000 $ 3,343,000 $ 1,830,000 $ 3,343,000 ============= ============= ============== =============
11 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 June 30, 1999, the Company's accumulated deficit was approximately $120.9 million. On August 5, 1999, the Company, Purdue Pharma L.P. ("Purdue Pharma"), and Purdue Acquisition Corporation, an indirect wholly owned subsidiary of Purdue Pharma, entered into a definitive merger agreement (the "Merger Agreement"). On August 12, 1999, Purdue Acquisition Corporation commenced a tender offer to purchase for cash all of the outstanding shares of common stock of the Company. Subject to the conditions set forth in the Merger Agreement, upon successful completion of the tender offer, Purdue Acquisition Corporation will acquire any shares of common stock of the Company that are not tendered into the offer in a second-step merger. The board of directors of the Company has unanimously approved the transaction and has recommended that the Company's stockholders accept the offer. See Note 2 of the Notes to Condensed Financial Statements for additional information with respect to the proposed acquisition by Purdue Pharma. RESULTS OF OPERATIONS The Company had no co-promotion revenues for the six-month period ended June 30, 1999, compared to $540,000 in the first quarter of 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 force to Watson Pharmaceuticals, Inc. ("Watson") and is no longer involved in co-promotional activities. The Company recognized $572,000 and 1,377,000 in co-development revenues for the three and six-month periods ended June 30, 1999, respectively, compared to $425,000 and $1,021,000 for the 12 same periods of 1998. In 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 primarily related to the SSNRA program. Research and development expenses decreased to $2.1 and $5.0 million for the three and six-month periods ended June 30, 1999, respectively, from $4.1 and $7.4 million in the same periods of the prior year. This decrease reflects a lower level of external clinical activity in the current year compared to the same periods a year earlier and, beginning in May, savings from the restructuring. Marketing, general and administrative expense decreased to $819,000 and $1.6 million in the three and six-month periods ended June 30, 1999, respectively, from $884,000 and $2.0 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 $95,000 and $245,000 for the three and six-month periods ended June 30, 1999 compared to $232,000 and 434,000 for the comparable periods in the prior year. This decrease is due to lower cash and short-term investment balances in the current year. Accretion of preferred stock for beneficial conversion feature was $168,000 in the second quarter of fiscal 1998 whereas there was none in the current year. The beneficial conversion feature allows holders of the Company's Series E stock to convert into common stock at a discount of 10% below the market price of the common stock starting on October 8, 1998. At the time the Series E stock was issued in June 1998, $890,000 of the $8.0 million in proceeds was allocated to the beneficial conversion feature. This amount was amortized over the 122-day period ended October 8, 1998. Dividends on preferred stock increased to $400,000 and $760,000 for the three and six-month periods ended June 30, 1999, respectively, compared to $189,000 and 323,000 for the same periods in the prior year. These preferred dividends related to both the Series E and the convertible preferred held by Warner-Lambert. This increase is attributable to the fact that the Series E was outstanding for the entire six months of fiscal 1999 while it was outstanding for only the last three weeks of the first six months of fiscal 1998. The referred stock held by Warner-Lambert was outstanding for essentially the whole six-month period in both years. LIQUIDITY AND CAPITAL RESOURCES From its inception in February 1989 through June 30, 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 June 30, 1999, the Company's balances of cash, cash equivalents and investments totaled $5.6 million, compared to $12.2 million at December 31, 1998. As of June 30, 1999, 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 13 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 $8.0 million in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended. During the second quarter of fiscal 1999, the Company repurchased approximately $3.6 million of the original $8.0 million in face value for approximately $4.0 million in cash. Additionally, the remaining holder of the Series E has agreed to sell the currently outstanding $1,159,000 in face value to Purdue Pharma for $2.2 million in cash contingent on the successful closing of the tender offer as described above. See Note 4 of the Notes to Condensed Financial Statements 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 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 June 30, 1999, the Company had $3.0 million of deferred revenue recorded on its balance sheet related to the Wyeth-Ayerst back-up program. 14 CoCensys' operations to date have consumed substantial amounts of cash and will continue to consume cash in the foreseeable future. As of June 30, 1999, the Company had $5.6 million in cash remaining, negative working capital of $1.7 million and a negative net worth of $392,000. Given the context of the current financial uncertainties, the Company restructured its operations in the second quarter in an attempt to reduce the its cash burn rate and re-focus itself on drug discovery and away from drug development. The restructuring resulted in the termination of 54 employees mainly 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. 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 find available to it the substantial capital resources necessary to continue product development and other Company operations. As discussed above, the Company has entered into Merger Agreement with Purdue Pharma, whereby Purdue Acquisition Corporation will acquire all of the outstanding shares of the Company. In the absence of this transaction, or other transaction that would result in the infusion of a significant amount of capital into the Company, there can be no assurance that the Company will be able to meet its financial obligations in the foreseeable future. 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: 1. Information collection. 2. Risk assessment and testing of mission critical systems. 3. Remediation. 4. 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 15 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. In addition to risks associated with the Company's own computer systems and equipment, the Company has relationships with, as is to a varying degrees dependent upon, a large number of third parties, that do not share information systems with the Company (external agents), who provide information, services and goods. These external agents include financial institutions, suppliers, vendors, research partners and governmental agencies. The Company has instituted programs, including internal records review and use of external questionnaires, to identify third parties, assess their level of Year 2000 compliance, update contracts and address potential non-compliance issues. To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. Based upon its efforts to date, the Company believes that the vast majority of both its IT and its non-IT systems, including all critical and important systems, will remain up and running after January 1, 2000.Accordingly, the Company does not currently anticipate that internal systems failures will result in any material adverse effect to its operations or financial condition. During 1999, the Company will also continue and expand its efforts to ensure that major third-party businesses and public and private providers of infrastructure services will also be prepared for the year 2000,and to develop contingency plans to address any failures on their part to becomeY2K compliant. At this time, the Company believes that the most likely "worst-case" scenario involves potential disruptions in areas in which the Company's operations must rely on such third parties whose systems may not work properly after January 1, 2000. While such failures could affect important operations of the Company, either directly or indirectly, in a significant manner, the Company cannot at present estimate either the likelihood or the potential cost of such failures. RISK FACTORS Any of the following risk factors could materially adversely affect our business, operating results and financial condition. THE PROPOSED ACQUISITION OF THE COMPANY BY PURDUE PHARMA L.P. IS SUBJECT TO A NUMBER OF CONDITIONS, AND THERE IS NO ASSURANCE THAT THE TRANSACTION WILL BE COMPLETED. The closing of the sale of CoCensys' common stock to Purdue Pharma L.P. is subject to conditions not completely within the control of CoCensys, as described in the Merger Agreement. Among other conditions, we cannot predict whether the required percentage of the outstanding shares of CoCensys common stock will be tendered in the tender offer that has been commenced pursuant to the Merger Agreement. OUR DRUG CANDIDATES ARE IN AN EARLY STAGE OF DEVELOPMENT USING UNPROVEN TECHNOLOGY, AND THERE IS A SIGNIFICANT RISK THAT THEY MAY NEVER BECOME COMMERCIAL PRODUCTS. 16 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 must 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. 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, and could force us to cease operations. THE OUTCOME OF CLINICAL TRIALS IS HIGHLY UNCERTAIN; IF ANY OF OUR DRUG CANDIDATES EXPERIENCE CLINICAL FAILURES, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED. 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 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 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. IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER ACHIEVE PROFITABILITY. Since we started business in 1989, we have spent over $182 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 17 developed at CoCensys. We have never had operating revenues and have never commercially introduced a product. Through June 30, 1999, we have incurred a cumulative deficit of approximately $120.8 million. We expect to continue to incur substantial and increasing losses over the next several years as we continue our research and development programs. Our ability to achieve and sustain profitable operations in the long term will depend on our ability to, among other things: - establish collaborative relationships; - complete our product development; - obtain regulatory approvals; and - achieve market acceptance for our products. We need significant additional funds and may have to sell additional stock or relinquish rights to some of our drug candidates and technology to obtain funding; if we do not obtain funding, we may be unable to continue our business. 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, stockholders 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. 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; if funds from those third parties are not available to us in the future, we may be forced to cease operations. 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 18 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 be able 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 $3.0 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. 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 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 19 sale. If we are unable to secure collaboration partners, we will not be able to develop our drug candidates. IF WE DO NOT OBTAIN FDA APPROVAL FOR OUR PRODUCT CANDIDATES, WE WILL NOT BE ABLE TO SELL PRODUCTS AND GENERATE REVENUES. Our drug candidates are subject to extensive and rigorous regulation by the FDA and state and local bodies in the United States and by foreign regulatory authorities. These regulations cover, among other things, product development, testing, manufacturing, labeling, sales, advertising and promotion. The process of obtaining FDA and other required regulatory approvals is long, expensive and uncertain. In order to market and sell our drugs in the United States and other countries, we must successfully complete rigorous testing in animals and humans to prove that the drugs are safe for human use and are effective in treating one or more specific brain disorders. We must conduct these tests in a large number of people, including both healthy volunteers and people who suffer from the disorder for which the drug is intended. All of our testing must be conducted strictly in accordance with standards set up by the FDA and foreign regulators. If we successfully complete those tests for one of our drugs, we then must go through an extensive regulatory approval process with the FDA, and with foreign regulators, before we can begin marketing and selling the drug. Even if our drugs are approved for marketing and sale, the FDA and foreign regulators may place limitations on the marketing and sale of our drugs or require that we conduct additional testing on any or all of our drugs after the drugs are approved for marketing and sale. In addition, each drug, the manufacturer of that drug and the manufacturing facilities in which the drug is made are subject to continual review and periodic inspections. The FDA and regulatory agencies in other countries have the right to withdraw approval for a drug later if, for example, patients taking our drug experience serious side effects or we have problems in manufacturing the drug. We do not know if we will successfully complete the required testing with any of our drug candidates. Any of our drugs may have unacceptable side effects or may not be effective in treating the targeted brain disorder. We may have difficulty recruiting healthy or sick volunteers for our trials. Either CoCensys or the FDA can halt a trial at any time if either of us believes that the participants in the trial are being exposed to unacceptable health risks. Even if we do successfully complete the testing for one or more of our drugs and prove that our drug is safe for human use and is effective in treating one or more specific brain disorders, we do not know if the FDA or any other country's regulatory agency will approve the drug for marketing and sale in that country. We cannot be sure that our drug candidates will receive FDA approval in a timely manner, if at all. Regulatory agencies may limit the uses, or indications, for which any of our products is approved. Even if approvals are obtained, the marketing and manufacturing of drug products are subject to continuing FDA and other regulatory requirements, such as requirements to comply with good manufacturing practices. The failure to comply with such requirements could result in enforcement action, which could adversely affect us and our business. Later discovery of problems with a product, manufacturer or facility may result in additional restrictions on the product or manufacturer, including withdrawal of the product from the market. The government may impose new regulations which could further delay or preclude regulatory approval of our drug candidates. We cannot predict the impact of adverse governmental regulation which might arise from future legislative or 20 administrative action. Also, we conduct testing on our drugs both in the United States and in other countries (principally European countries). The FDA in the United States and regulatory agencies in other countries may be unwilling to accept the results from trials not conducted in that agency's "home" country. FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY OR TO AVOID INFRINGING THE RIGHTS OF OTHERS COULD IMPAIR OUR COMPETITIVE POSITION. Our success depends in part on our ability to protect our technology from unauthorized use by obtaining patents in the United States and other countries and maintaining our trade secrets. Also, our drug candidates must not infringe on the patent and other proprietary rights of others in the United States and other countries where we may market and sell them. We work hard to obtain appropriate patents and to maintain our trade secrets; however, patents can be highly uncertain and involve complex legal and factual questions. We do not know if our patent protection and trade secret protection will be sufficient to allow CoCensys and our development partners to develop, market and sell our drug candidates. We file and prosecute patent applications on our own behalf and in connection with technology that we have licensed from third parties. We have been issued 23 patents in the United States for our technologies, with expiration dates ranging from June 9, 2009 to February 11, 2017, and another 21 filed patents are pending. We have also filed for patent protection in selected foreign countries. We will continue to file and prosecute patent applications in the United States and in other countries to protect our drug candidates, but we do not know if we will be issued additional patents for our technologies, either in the United States or in other countries. We also do not know if we will invent any new products or processes for which we can receive patent protection in the future. The United States Patent and Trademark Office and similar agencies in other countries have substantial backlogs of patent applications waiting for consideration. In the United States, patent applications remain secret until the patent is issued; in other countries, patent applications remain secret for at least six months after filing. Therefore, we do not know whether any of our competitors has filed patents that may interfere with our ability to gain patent protection for our discoveries. We do not know whether our competitors may have invented some of our technology prior to the time that we invented the technology. Generally, only the person who first invents technology is entitled to a patent for that technology. Even if we are the first to invent certain technology and we have filed a patent application, we do not know when that application will be considered by the United States Patent and Trademark Office or any agency in other countries where we may have filed a patent application for the technology. Patents that have been issued to us are always subject to being challenged, invalidated or circumvented; we do not know if any of our patents or patents in which we have rights will provide adequate protection for CoCensys. Also, we may have to participate in litigation or interference proceedings to determine whether one or more of our patents is valid. Even if we win the litigation or interference proceeding, we may be required to spend substantial amounts of money defending the validity of our patents. We do not know if we will have sufficient money to defend all of our patents if they are challenged. 21 Our success will also depend, in part, on our not infringing patents issued to others. We do not know if any patents held or patent applications filed by other people or companies will force us to alter our drug candidates or processes, stop development of one or more of our drug candidates or obtain licenses, if possible, from those other people or companies. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents that may be competitive with the our patents and patent applications. We do not know the effect that those patents and patent applications may have on our ability to continue to develop and, eventually, market and sell our drug products. If we attempt to obtain licenses to use patents held by other people, we do not know if we will be granted licenses or whether the terms of those licenses, if granted, will be fair and acceptable to CoCensys. If we infringe another person's patent, or we fail to obtain an appropriate license to use any other person's technology that is required to develop, market and sell our drug products, we may have to participate in interference proceedings or litigation, which could result in substantial costs, fines and penalties assessed against CoCensys and we may be forced to cease all use of the other person's technology. In fact, we are aware of a patent that has issued that contains claims that may, if valid, block us from selling certain compounds for one particular indication. Although we are not currently pursing that indication for those compounds, if we do decide to pursue that indication, we will have to either institute an interference proceeding to determine the validity of the other patent or attempt to license rights to the patent from the holder. We do not know if we will be successful if we decide to institute an interference proceeding. Also, we do not know if the patent holder would be willing to license us rights to the patent, whether or not on terms acceptable to CoCensys. We have developed a substantial amount of information constituting our trade secrets. We rely on confidentiality agreements with our employees, consultants and certain contractors to protect these trade secrets. We do not know if the other parties to these agreements will abide by the agreements or breach them. If any agreement is breached, we do not know whether we will be able to adequately protect CoCensys from damage caused by our trade secrets being disclosed to the public or to a competitor. WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER FINANCIAL RESOURCES AND EXPERTISE; IF WE CANNOT COMPETE SUCCESSFULLY WITH THESE COMPANIES, THE VALUE OF OUR COMPANY AND OUR STOCK MAY BE GREATLY REDUCED. We are engaged in a highly competitive, rapidly changing field. Existing products and therapies, as well as those under development by other companies, will compete directly with products that we are seeking to develop and market. Competition from fully integrated pharmaceutical companies, including larger biotechnology companies and our collaboration partners, is intense and is expected to increase. Most of these companies have significantly greater financial resources and expertise than we do in research and development, manufacturing, pre-clinical and clinical testing, obtaining regulatory approvals, marketing and distribution. Many of our competitors also have significant products to treat neurological and/or psychiatric disorders approved or in development and operate large, well-funded research and development programs. Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent 22 protection and establish collaborative arrangements for product and clinical development and marketing. Further, we face competition based on product efficacy, safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, price and patent position. We do not know whether our competitors will be able to develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than us. If we are unable to compete successfully, our business, financial condition and results of operations will be materially adversely affected. IF OUR PRODUCTS ARE NOT COMMERCIALLY SUCCESSFUL OR REIMBURSED BY THIRD-PARTY PAYORS, WE WILL BE UNABLE TO GENERATE SUFFICIENT REVENUES TO SUSTAIN OUR BUSINESS. Even if one or more of our products prove safe and effective, we do not know if the products will be successful commercially. For example, our products may be too difficult or expensive to make, or our products may not be acceptable to patients, health care providers and third-party payors. In both the United States any many foreign countries, sales of our products, if any, will depend in part on the availability of reimbursement from third-party payors, such as government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. We do not know whether our drug products will be considered cost effective or that adequate third-party reimbursement will be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. In certain foreign countries, our products may be subject to governmentally mandated prices. If governments and third-party payors do not provide adequate reimbursement for our potential drug products or if foreign governments force unreasonably low pricing for our drugs, our business, financial condition and results of operations may be materially adversely affected. A PRODUCT LIABILITY CLAIM AGAINST US COULD CAUSE US TO INCUR SIGNIFICANT LOSSES. Our business exposes us to potential product liability risks if any of our compounds or future products cause illness, injury or death. Although we currently have liability insurance covering our clinical trials, our coverage may not be sufficient to cover all potential claims. We do not know if we will be able to obtain and maintain such insurance for all of our clinical trials and future products. We will need to increase our insurance coverage in the future if we begin to market and sell any of our drug products under development. However, we do not know if we will be able to obtain or maintain product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities. A liability claim, regardless of merit or eventual outcome, could cause us to incur significant losses and materially adversely affect our business, financial condition and results of operations. OUR STOCK PRICE IS VERY VOLATILE, AND EXTREME PRICE FLUCTUATIONS COULD MATERIALLY ADVERSELY AFFECT THE VALUE OF ANY INVESTMENT IN COCENSYS COMMON STOCK. 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, 23 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, WHICH COULD MATERIALLY ADVERSELY AFFECT THE VALUE OF ANY INVESTMENT IN COCENSYS COMMON STOCK. The sale of a large number of shares of our common stock in the public market 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 775,000 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. If the prosposed merger with Purdue Pharma is not consummated, we may be required to issue millions of additional shares of CoCensys common stock upon conversion of the Series E convertible preferred stock. As of August 13, 1999, 1,159 shares of the preferred stock remained issued and outstanding. Each share of the preferred stock is convertible into shares of CoCensys common stock at discount to the current market price of our common stock. If converted on August 9, 1999, based on the then-applicable conversion price of $0.49 per share, the remaining preferred stock, including accrued dividends, would have been convertible into approximately 2.6 million additional shares of CoCensys 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. Stockholders may experience substantial dilution in their investment from issuance of additional common stock on conversion of the preferred stock. OUR DELISTING FROM THE NASDAQ NATIONAL MARKET MAY MATERIALLY ADVERSELY AFFECT THE LIQUIDITY OF OUR COMMON STOCK AND THE VALUE OF COCENSYS COMMON STOCK. Effective with the close of business on July 13, 1999, the Nasdaq Stock Market delisted the Company's common stock from the Nasdaq National Market, citing a stock price below $1.00 per share and an insufficient public float among the primary reasons for the delisting. The Company's common stock is now traded on the OTC Bulletin Board under the symbol COCN. The liquidity and value of the Company's common stock has been adversely impacted by the delisting of the common stock from the Nasdaq National Market, and the liquidity and value would likely be further adversely impacted by the failure of the Company to meet the requirements for inclusion on the OTC Bulletin Board. We cannot predict whether the Company will continue to meet all listing requirements for the OTC Bulletin Board in the future. 24 COCENSYS, INC. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held an Annual Meeting on Stockholders on June 9, 1999. The stockholders elected the Board's nominees as directors by the votes indicated:
Nominee Votes in Favor Votes Withheld ------- -------------- -------------- Blair 3,350,584 77,635 Mendelson 3,350,590 77,629 Weber 3,349,852 78,367
The selection of Ernst & Young, LLP as the Company's independent auditors was ratified with 3,396,227 votes in favor, 18,381 against and 13,610 abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 27 Financial Data Schedule (b) REPORTS ON FORM 8-K. (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. (iii) The Company filed a current report on Form 8-K, dated May 18, 1999, reporting that it had sold it interest in Cytovia, Inc. for $3.3 million and had used the proceeds to redeem a portion of its Series E Convertible Preferred Stock. (iv) The Company filed a current report on Form 8-K, dated July 13, 1999, reporting that its common stock had been delisted from the Nasdaq National Market effective with the close of business on that date. (v) The Company filed a current report on Form 8-K, dated August 10, 1999, reporting that it had entered into an agreement to be purchased by Purdue Pharma LLP. 25 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: August 13, 1999 By: /s/ F. Richard Nichol, Ph.D. ---------------------- ------------------------------------- F. Richard Nichol, Ph.D. Chairman, President and Chief Executive Officer (PRINCIPAL EXECUTIVE OFFICER) Date: August 13, 1999 By: /s/ Thomas B. Miller ---------------------- ------------------------------------- Thomas B. Miller Senior Director of Finance and Controller (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 26 EX-27 2 EXHIBIT 27
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,000 4,616 0 0 0 5,937 6,175 (4,742) 7,445 7,651 0 0 11,472 109,022 (120,886) 7,445 0 1,377 0 0 0 0 85 (3,940) 0 (3,940) 0 0 0 (3,940) (1.13) (1.13)
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