UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30347
-------------------------------
CURIS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3505116
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
61 Moulton Street, Cambridge, Massachusetts 02138
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 503-6500
-------------------------------------
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.
[ x ] Yes [ ] No
As of April 30, 2002, there were 32,329,228 shares of the Registrant's Common
Stock, $0.01 par value per share, and there were 1,000 shares of the
Registrant's Series A Convertible Exchangeable Preferred Stock, $0.01 par value
per share, outstanding.
CURIS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Operations and Comprehensive Loss for
the Three Months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2002 and 2001 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Item 1. Financial Statements
CURIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
2002 2001
--------------------------------------------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 33,556,763 $ 38,938,062
Marketable securities 9,224,202 12,278,916
Marketable securities--restricted - 890,350
Notes receivable--Officer 700,000 500,000
Due from joint venture 1,420,673 957,798
Other current assets 1,042,727 1,155,619
------------------- -------------------
Total current assets 45,944,365 54,720,745
------------------- -------------------
Property and Equipment, net 5,276,481 11,060,711
------------------- -------------------
Other Assets:
Notes receivable--Officer - 200,000
Goodwill, net 73,080,344 73,080,344
Other intangible assets, net (Note 3) 666,376 726,781
Deposits and other assets 4,964,986 4,967,636
------------------- -------------------
Total other assets 78,711,706 78,974,761
------------------- -------------------
$ 129,932,552 $ 144,756,217
=================== ===================
Liabilities And Stockholders' Equity
- ------------------------------------
Current Liabilities:
Debt and lease obligations, current portion $ 2,873,753 $ 3,109,613
Accounts payable 1,765,977 1,967,260
Accrued liabilities 8,944,527 5,942,511
Deferred revenue, current portion 517,092 81,688
Due to joint venture 1,154,478 772,097
------------------- -------------------
Total current liabilities 15,255,827 11,873,169
Debt and Lease Obligations, net of current portion 4,410,307 4,951,324
------------------- -------------------
Convertible Notes Payable 3,354,026 2,506,852
------------------- -------------------
Deferred Revenue, net of current portion (Note 4) 11,547,570 12,063,845
------------------- -------------------
Preferred stock, $0.01 par value, 5,000,000 shares authorized-Series A
redeemable preferred stock-1,426 shares authorized; 1,000 shares
issued and outstanding at March 31, 2002 and December 31, 2001 12,523,608 12,341,381
------------------- -------------------
Commitments (Note 4)
Stockholders' Equity:
Common stock, $0.01 par value-
Authorized--125,000,000 shares at March 31, 2002 and
December 31, 2001
Issued and outstanding - 32,329,228 shares
at March 31, 2002 and December 31, 2001 323,292 323,292
Additional paid-in capital 660,983,776 664,889,578
Notes receivable (1,314,422) (1,291,932)
Deferred compensation (5,013,533) (9,616,795)
Accumulated deficit (572,137,948) (554,135,679)
Accumulated other comprehensive income 49 851,182
------------------- -------------------
Total stockholders' equity 82,841,214 101,019,646
------------------- -------------------
$ 129,932,552 $ 144,756,217
=================== ===================
See accompanying notes to unaudited consolidated financial statements
3
CURIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Three Months Ended
March 31,
----------------------------------------
2002 2001
------------------ ------------------
REVENUES:
Royalty revenue $ 77,760 $ 29,064
Research and development contract revenue 80,872 220,101
------------------ ------------------
158,632 249,165
COSTS AND EXPENSES (A):
Research and development 4,834,762 8,108,708
General and administrative 2,711,339 2,582,391
Stock-based compensation 697,462 3,831,439
Amortization of intangible assets 60,405 5,823,660
Impairment of property and equipment 5,171,945
Realignment expenses (Note 2) 3,490,000 -
------------------ ------------------
Total costs and expenses 16,965,913 20,346,198
------------------ ------------------
Net loss from operations (16,807,281) (20,097,033)
------------------ ------------------
Equity in loss of joint venture (1,161,684) -
Other income, net 148,924 2,289,804
------------------ ------------------
NET LOSS $(17,820,041) $(17,807,229)
Accretion of preferred stock dividend (182,228) -
------------------ ------------------
Net loss applicable to common stockholders $(18,002,269) $(17,807,229)
================== ==================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.56) $ (0.57)
================== ==================
WEIGHTED AVERAGE COMMON SHARES-BASIC AND DILUTED 32,329,228 31,434,120
================== ==================
NET LOSS $(17,820,041) $(17,807,229)
UNREALIZED LOSS ON MARKETABLE SECURITIES (249,841) (248,511)
------------------ ------------------
COMPREHENSIVE LOSS $(18,069,882) $(18,055,740)
================== ==================
(A) The following summarizes the
departmental allocation of the
stock-based compensation charge:
Research and development $ 338,467 $ 2,407,366
General and administrative 358,995 1,424,073
------------------ ------------------
Total stock-based compensation $ 697,462 $ 3,831,439
================== ==================
See accompanying notes to unaudited consolidated financial statements
4
CURIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three-Month Period Ended
March 31,
---------------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,820,041) $ (17,807,229)
------------------ ------------------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 588,226 616,903
Stock-based compensation expense 697,462 3,831,439
Amortization of lease discount 17,568 6,088
Issuance of common stock in lieu of cash for license fee - 98,003
Amortization of intangible assets 60,405 5,823,660
Non-cash interest on notes payable 54,550 8,913
Interest on notes receivable (22,490) (20,970)
Equity in loss from joint venture 1,161,684 -
Impairment of property and equipment 5,171,945 -
Changes in current assets and liabilities:
Other current assets 112,892 301,888
Due from joint venture (462,875) -
Accounts payable and accrued liabilities 2,800,733 603,674
Deferred contract revenue (80,872) -
------------------ ------------------
Total adjustments 10,099,228 11,269,598
------------------ ------------------
Net cash used for operating activities (7,720,813) (6,537,631)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (3,220,700) (5,858,959)
Sale of marketable securities, net 6,314,631 8,362,327
Decrease (increase) in other assets 2,650 (181,975)
Dispositions of property and equipment 89,415 -
Purchases of property and equipment (65,355) (524,255)
------------------ ------------------
Net cash provided by investing activities 3,120,641 1,797,138
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 262,583
Repayments of obligations under capital leases (781,127) (290,030)
------------------ ------------------
Net cash used in by financing activities (781,127) (27,447)
------------------ ------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,381,299) (4,767,940)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,938,062 52,414,312
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,556,763 $ 47,646,372
================== ==================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under line of credit $ - $ 415,253
================== ==================
Issuance of convertible promissory note payable to Elan Pharma
International, Ltd. to fund the Company's 80.1% in joint venture
(Note 5) $ 779,306 $ -
================== ==================
See accompanying notes to unaudited consolidated financial statements
5
CURIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation -
---------------------
The accompanying consolidated financial statements of Curis, Inc. (the
"Company") have been prepared in accordance with accounting principles
generally accepted in the United States applicable to interim periods.
These statements, however, are condensed and do not include all disclosures
required by accounting principles generally accepted in the United States
for complete financial statements and should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31,
2001, as filed with the Securities and Exchange Commission on March 29,
2002.
In the opinion of the Company, the unaudited financial statements contain
all adjustments (all of which were considered normal and recurring)
necessary to present fairly the Company's financial position at March 31,
2002 and the results of operations and cash flows for the three-month
periods ended March 31, 2002 and 2001. The preparation of the Company's
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and disclosure
of certain assets and liabilities at the balance sheet date. Such estimates
include the carrying value of property and equipment and intangible assets
and the value of certain liabilities. Actual results may differ from such
estimates.
These interim results are not necessarily indicative of results to be
expected for a full year or subsequent interim periods.
2. Corporate realignment -
---------------------
In the first quarter of 2002, the Company announced a realignment (the
"Realignment") of its research and development programs and a re-focusing
of its resources on its proprietary signaling pathways and stem cell
technologies, including the Bone Morphogenic Protein (BMP) and the Hedgehog
(Hh) family of product candidates. As part of the Realignment, the Company
suspended clinical development efforts for Vascugel in coronary artery
disease based on the cost of further clinical development for cell-based
therapies. The Company will seek a partner before continuing further
development of this product opportunity. The Company also terminated
clinical development efforts for Chondrogel in vesicoureteral reflux due to
the recent approval and pricing of a competitive non-cell-based product.
Further development of Chondrogel for other indications will require the
implementation of partnering initiatives that are currently being
evaluated. In addition, the Company suspended its clinical IND program in
oncology for basal cell carcinoma in favor of developing an improved
topical formulation and is seeking a partnership for re-entering clinical
development.
Realignment expenses of $3,490,000 were recorded in the three-month period
ended March 31, 2002. These charges relate to: (i) costs of approximately
$1,139,000 associated with workforce reductions of 46 people, including 4
officers, (ii) costs of approximately $2,306,000 associated with the
closing of clinical programs and decommissioning of a manufacturing and
development facility and (iii) other costs of approximately $45,000. As of
March 31, 2002, the Company had spent approximately $1,480,000 of the
projected $3,490,000 realignment expenses. The Company has included the
remaining realignment liability of $2,010,000 in "Accrued liabilities" on
its Condensed Consolidated Balance Sheet as of March 31, 2002. The Company
expects to spend the remaining realignment liability of $2,010,000 by the
end of the third quarter of 2002.
Impairment charges of property and equipment assets for the three-month
period ended March 31, 2002 of approximately $5,172,000 relate to
impairment on assets at the Company's manufacturing and development
facility located at 21 Erie Street in Cambridge, Massachusetts (the "Erie
Street Facility"). Total carrying value of property and equipment assets at
the Erie Street Facility before the impairment charge was approximately
$5,482,000. Such property and equipment assets were used to
6
support the suspended and terminated clinical programs and have been deemed
to be unlikely to be used in the future operations of the Company.
$4,596,000 of the impairment charge relates to the write-off of tenant
improvements made to the Erie Street Facility since such improvements are
affixed to the facility and therefore cannot be sold separately from the
facility. The remaining $576,000 of impairment charge represents the
Company's estimate of loss on disposition of the furniture and equipment
assets held at the Erie Street Facility.
3. Goodwill and Other Intangible Assets -
------------------------------------
Other intangible assets consisted of approximately the following as of
March 31, 2002 and December 31, 2001:
March 31, December 31,
2002 2001
--------------- ---------------
Patents $ 1,297,000 $ 1,297,000
Less: accumulated amortization (631,000) (570,000)
--------------- ---------------
$ 666,000 $ 727,000
=============== ===============
Through December 31, 2001, goodwill totaling $105,477,000 and assembled
workforce of $500,000 were being amortized over their estimated useful
lives of four to five years. At January 1, 2002, net goodwill, including
assembled workforce was $73,080,000. Beginning January 1, 2002, the Company
adopted SFAS No. 142 and reclassified assembled workforce as goodwill and
ceased amortization of goodwill. In 2002, goodwill is subject to both a
transitional goodwill impairment test as of January 1, 2002 and an annual
assessment for impairment based on fair value. In conjunction with the
adoption of SFAS No. 142, the Company completed the transitional goodwill
impairment test in the first quarter of 2002 and determined that no
impairment of goodwill had occurred as of January 1, 2002.
In addition to requiring transitional and annual assessments of goodwill
impairment, SFAS No. 142 also requires that a goodwill impairment review be
performed whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Because key employees were
terminated and certain development programs were suspended or terminated as
part of the Realignment, the Company determined that an impairment
indicator had arisen requiring the Company to reevaluate the carrying value
of goodwill. As a result of this reevaluation, the Company concluded that
no goodwill impairment had occurred.
7
4. Long-Term Debt, Capital Lease Obligations and Operating Leases -
--------------------------------------------------------------
Long-term debt and capital lease obligations consisted of approximately
the following at March 31, 2002 and December 31, 2001:
March 31, December 31,
2002 2001
------------------------------------
Notes payable to financing agencies for capital purchases $ 5,020,000 $ 5,450,000
Obligations under capital leases, net of $44,000 and $49,000
discount at March 31, 2002 and December 31, 2001,
respectively 2,263,000 2,611,000
Convertible subordinated note payable to Becton Dickinson, net of
$226,000 and $240,000 discount, including $107,000 and
$72,000 of capitalized interest at March 31, 2002 and
December 31, 2001, respectively 1,881,000 1,832,000
Convertible promissory note agreement with Elan Pharma
International, Ltd., including $20,000 and $1,000 of accrued
interest at March 31, 2002 and December 31, 2001,
respectively 1,474,000 675,000
------------------------------------
10,638,000 10,568,000
Less current portion (2,874,000) (3,110,000)
------------------------------------
Total long-term debt and capital lease obligations $ 7,764,000 $ 7,458,000
====================================
5. Curis Newco, Ltd. -
-----------------
In July 2001, the Company formed a joint venture, Curis Newco, Ltd. ("Curis
Newco"), with affiliates of Elan Corporation, plc ("Elan") for the purpose
of researching and developing molecules that stimulate the Hh signaling
pathway. Curis Newco is focused upon the development of therapeutics
targeting a number of neurological disorders, including Parkinson's Disease
and Diabetic Neuropathy.
Curis Newco incurred expenses of approximately $1,451,000 during the three
months ended March 31, 2002. The Company incurred expenses of approximately
$1,421,000 on behalf of Curis Newco during the three months ended March 31,
2002 and recorded a corresponding receivable from Curis Newco at March 31,
2002. In addition, approximately $30,000 in expenses was incurred directly
by Curis Newco and Neuralab Limited, an affiliate of Elan, on behalf of
Curis Newco. The Company's 80.1% share of Curis Newco's aggregate expenses
for the three-month period ended March 31, 2002 was approximately
$1,162,000 and is presented as "Equity in loss of joint venture" in the
Company's Consolidated Statement of Operations. In addition, the Company
considers itself to be liable to Curis Newco for 80.1% of Curis Newco's
expenses until these expenses have been funded under a convertible
promissory note agreement ("Note Agreement") with Elan Pharma
International, Ltd. ("EPIL"). Accordingly, the Company has recorded a
payable to Curis Newco at March 31, 2002 of approximately $1,154,000
representing the Company's 80.1% share of Curis Newco's loss, net of $8,000
in 2002 Curis Newco expenses that were funded in 2001.
The Company received approximately $779,000 under the Note Agreement with
EPIL during the three-month period ended March 31, 2002. As of March 31,
2002, there was approximately $1,474,000, including approximately $20,000
in capitalized interest, outstanding under the Note Agreement.
8
The Company recorded a charge to accumulated deficit of $182,000 for the
three-month period ended March 31, 2002 for the accretion of a mandatory 6%
dividend on the convertible exchangeable preferred stock issued to Elan
International Service, Ltd., an affiliate of Elan, in July 2001. Such
amounts are included in the net loss applicable to common stockholders in
the three months ended March 31, 2002.
6. New Accounting Standards -
------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. SFAS No. 142 requires that goodwill and certain other
intangible assets existing at the date of adoption be reviewed for possible
impairment and that impairment tests be periodically repeated, with
impaired assets written down to fair value. Additionally, existing goodwill
and intangible assets must be assessed and classified within the SFAS No.
142's criteria. Intangible assets with finite useful lives will continue to
be amortized over those periods. Effective January 1, 2002, the Company
adopted the provisions of SFAS No. 142 and amortization of goodwill and
intangible assets with indeterminable lives ceased.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS No. 144 further refines the requirements of SFAS No. 121
that companies (1) recognize an impairment loss only if the carrying amount
of a long-lived asset is not recoverable based on its undiscounted future
cash flows and (2) measure an impairment loss as the difference between the
carrying amount and fair value of the asset. In addition, SFAS No. 144
provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The Company adopted SFAS No.
144 on January 1, 2002. The adoption of this statement is not expected to
have a material impact on the Company's financial position or results of
operations.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
On July 31, 2000, Creative BioMolecules, Inc. ("Creative"), Ontogeny, Inc.
("Ontogeny") and Reprogenesis, Inc. ("Reprogenesis") merged with and into Curis,
Inc.("the Company) pursuant to an Agreement and Plan of Merger dated as of
February 14, 2000 (the "Merger"). The Company is engaged in the discovery of
drug targets and the development of therapeutics based upon the pathways used by
the body which control proliferation and differentiation and, therefore, tissue
formation, maintenance and repair. The Company has identified key regulators
responsible for turning on the mechanisms for tissue repair in response to
trauma, injury or disease. The Company believes this approach has been validated
with the approval of OP-1 Implant(TM) for bone repair in four major markets
(United States Humanitarian Device Exemption, Europe, Australia and Canada).
Independently and in strategic alliances, the Company is focusing its research
efforts on identifying and elucidating key regulators of tissue repair having
application for diseases such as kidney disease, cancer and neurological
disorders, which it believes represent large market opportunities that are
underserved by current therapeutic alternatives.
The Company's technology platform and product development pipeline is based on
developmental biology, signaling pathways, adult stem cells and cell-based
therapies. The Company's research program is conducted both internally and
through alliances, partnerships and joint ventures with companies and
organizations including Aegera Therapeutics and McGill University, Montreal,
Canada; Micromet AG, Munich, Germany ("Micromet"); and Elan Corporation, Dublin,
Ireland ("Elan").
Results of Operations
Quarters Ended March 31, 2002 and March 31, 2001
Revenues
Total revenues decreased to $159,000 for the three-month period ended March 31,
2002 from $249,000 for the three-month period ended March 31, 2001. Revenues for
the three-month period ended March 31, 2002 include $78,000 in royalty revenues
received from Stryker Corporation ("Stryker") and $81,000 in revenue recognized
under the Company's 2001 agreements with Micromet AG. Revenues for the
three-month period ended March 31, 2001 were primarily derived from $220,000
received under two government grants, which were suspended in January 2002 and
terminated in April 2002.
Operating Expenses
Research and development expenses decreased by $3,274,000, or 40%, to $4,835,000
for the three-month period ended March 31, 2002 from $8,109,000 for the
three-month period ended March 31, 2001. The decrease was primarily due to a
reduction in ongoing operating costs as a result of the Realignment and the
allocation of $1,420,000 of research and development expenses for the three
months ended March 31, 2002 that were charged by the Company to Curis Newco.
However, 80.1% of these costs are included in Equity in loss from joint venture
in the Company's consolidated statement of operations.
Research and development expenses for the three-month period ended March 31,
2002 include the cost of employees involved in research and development of
$1,428,000, external lab services including clinical trials, medicinal
chemistry, consulting and sponsored research collaborations of $1,077,000,
occupancy and depreciation charges of $827,000, lab and clinical trial
manufacturing supplies of $549,000 and legal fees associated with the Company's
intellectual property of $574,000.
10
Research and development expenses for the three-month period ended March 31,
2001 include the cost of employees involved in research and development of
$2,300,000, external lab services including clinical trials, medicinal
chemistry, consulting and sponsored research collaborations of $2,700,000,
occupancy and depreciation charges of $639,000, lab and clinical trial
manufacturing supplies of $919,000 and legal fees associated with the Company's
intellectual property of $349,000.
General and administrative expenses increased by $129,000, or 5%, to $2,711,000
for the three-month period ended March 31, 2002 from $2,582,000 for the
three-month period ended March 31, 2001. General and administrative expenses for
the three-month period ended March 31, 2002 include the cost of employees of
$823,000, occupancy and depreciation charges of $328,000, legal and professional
fees of $608,000 and consulting expense of $140,000. General and administrative
expenses for the three-month period ended March 31, 2001 include the cost of
employees of $925,000, occupancy and depreciation charges of $285,000, legal and
professional fees of $557,000 and consulting expense of $122,000.
Stock-based compensation decreased by $3,134,000 to $697,000 for the three-month
period ended March 31, 2002 as compared to $3,831,000 for the three-month period
ended March 31, 2001. The decrease was primarily attributable to the Company's
stock-based compensation expense related to deferred compensation resulting from
the Merger which was amortized over the vesting period of the underlying options
through August 1, 2001. Stock-based compensation related to these options was
approximately $2,813,000 for the three-month period ended March 31, 2001.
Amortization of intangible assets was $60,000 for three-month period ended March
31, 2002 as compared to $5,824,000 for the three-month period ended March 31,
2001. The decrease was primarily due to the adoption of SFAS 142, which requires
companies to stop amortizing goodwill and certain other intangible assets. The
Company is currently amortizing only capitalized patent and technology costs.
Amortization of goodwill totaling $5,778,000 was recorded for the three-month
period ended March 31, 2001.
Realignment expenses of $3,490,000 were recorded in the three-month period ended
March 31, 2002. These charges relate to: (i) costs of approximately $1,139,000
associated with workforce reductions of 46 people, including 4 officers, (ii)
costs of approximately $2,306,000 associated with the closing of clinical
programs and decommissioning of a manufacturing and development facility and
(iii) other costs of approximately $45,000. As of March 31, 2002, the Company
had spent approximately $1,480,000 of the projected $3,490,000 realignment
expenses. The Company has included the remaining realignment liability of
$2,010,000 in "Accrued liabilities" on its Condensed Consolidated Balance Sheet
as of March 31, 2002. The Company expects to spend the remaining realignment
liability of $2,010,000 by the end of the third quarter of 2002.
Impairment charges of property and equipment assets for the three-month period
ended March 31, 2002 of approximately $5,172,000 relate to impairment on assets
at the Company's manufacturing and development facility located at 21 Erie
Street in Cambridge, Massachusetts (the "Erie Street Facility"). Total carrying
value of property and equipment assets at the Erie Street Facility before the
impairment charge was approximately $5,482,000. Such property and equipment
assets were used to support the suspended and terminated clinical programs and
have been deemed to be unlikely to be used in the future operations of the
Company. $4,596,000 of the impairment charge relates to the write-off of tenant
improvements made to the Erie Street Facility since such improvements are
affixed to the facility and therefore cannot be sold separately from the
facility. The remaining $576,000 of impairment charge represents the Company's
estimate of loss on disposition of the furniture and equipment assets held at
the Erie Street Facility.
Equity in Loss from Joint Venture
During the three-month period ended March 31, 2002, the Company incurred an
equity loss in Curis Newco of $1,162,000, which represented 80.1% of the total
net loss incurred by Curis Newco for the same period. The Company anticipates
financing its 80.1% share of the development funding of Curis Newco through July
18, 2003 with drawdowns, which are subject to Elan's consent, under the Note
Agreement entered into between the Company and EPIL.
11
Other Income, Net
Interest and other income for the three-month period ended March 31, 2002 was
$359,000 compared to approximately $2,494,000 for the same period in 2001, a
decrease of $2,135,000. The decrease was mainly attributed to a gain of
$1,466,000 resulting from the sale of marketable securities during the first
quarter of 2001 and higher interest income for the three-month period ended
March 31, 2001 that resulted primarily from a higher available investment
balance as compared to the three-month period ended March 31, 2002.
Interest expense for the three-month period ended March 31, 2002 was $210,000
compared to $204,000 for the same period in 2001, an increase of $6,000 or 3%.
Interest expense remained reasonably consistent despite an increase in the
average debt outstanding to approximately $10,600,000 for the three-month period
ended March 31, 2002 from approximately $6,200,000 for the three-month period
ended March 31, 2001, largely because the average interest rate payable on the
Company's debt and lease obligations has decreased significantly.
Accretion of Preferred Stock Dividend
The Company recorded a charge to accumulated deficit for the accretion of the 6%
Series A preferred stock dividend of approximately $182,000. Such amounts are
included in the net loss applicable to common shareholders in the three-months
ended March 31, 2002.
Net Loss Applicable to Common Stockholders
As a result of the foregoing, the Company incurred a net loss of $17,820,000 for
the three-month period ended March 31, 2002 compared to a net loss of
$17,807,000 for the three-month period ended March 31, 2001.
Liquidity and Capital Resources
At March 31, 2002, the Company's principal sources of liquidity consisted of
cash, cash equivalents and marketable securities of $42,781,000. The Company
financed its operations primarily through placements of equity securities,
payments received under agreements with collaborative partners and government
grants, amounts received under debt and capital lease agreements, manufacturing
contracts and the sale of certain of our OP-1 manufacturing rights and
facilities to Stryker.
Net cash used in operating activities was $7,721,000 for the three-month period
ended March 31, 2002 compared to $6,538,000 for the three-month period ended
March 31, 2001. Cash used in operating activities during the three-month period
ended March 31, 2002 was primarily the result of the Company's net loss for the
period partially offset by non-cash charges including impairment charges on the
Company's intangible and tangible assets, stock-based compensation and
depreciation. The Company's net loss was further offset by the Company's equity
in loss of Curis Newco and an increase in operating cash as a result of changes
in current assets and liabilities. Net cash used in operating activities for the
three-month period ended March 31, 2001 was primarily the result of the
Company's net loss for the period offset by non-cash charges including
stock-based compensation, amortization of intangible assets and depreciation.
Net cash provided by investing activities was $3,121,000 and $1,797,000 for the
three-month periods ended March 31, 2002 and 2001, respectively. Cash provided
by investing activities during the three-month period ended March 31, 2002 was
primarily the result of net proceeds from the sale of marketable securities
totaling $3,094,000. Cash provided by investing activities during the
three-month period ended March 31, 2001 was primarily the result of net proceeds
from the sale of marketable securities totaling $2,503,000, partially offset by
expenditures for property and equipment totaling $524,000.
Financing activities used approximately $781,000 of cash for the three-month
period ended March 31, 2002, resulting from repayments of obligations under
capital lease and debt arrangements. Financing activities used approximately
$27,000 of cash for the three-month period ended March 31, 2001, resulting from
$290,000 in repayments of obligations under capital lease and debt arrangements
offset in part from proceeds under the issuance of shares from the exercise of
options and warrants totaling approximately $263,000.
12
On February 25, 2002 the Company received approximately $779,000 under its
$8,010,000 Convertible promissory note agreement with EPIL. These funds
represented the Company's funding of its 80.1% portion of Curis Newco expenses
in the fourth quarter of 2001. The Company has drawn a total of $1,454,000 under
this note and expects to draw the remaining $6,556,000 to fund its 80.1% share
of anticipated expenses of Curis Newco through July 2003.
As of December 31, 2001, the Company owned 53,571 shares of Exelixis, Inc.
("Exelixis") common stock which are included on the Condensed Consolidated
Balance Sheet under the category "Marketable securities -- restricted." During
the first quarter of 2002, the restriction on these shares expired and the
Company sold all 53,571 shares of Exelixis common stock at an average price of
$12.22 per share, for total net proceeds of approximately $655,000. The fair
market value of the shares as of December 31, 2001 was $890,000.
On October 5, 2000, the Company announced the receipt of its second $2,000,000
grant from NIST to support the development of a new class of biomaterials
designed to enable surgical procedures that augment, repair or regenerate lost
structural tissue or physiological function. The grant period is from January 1,
2001 to December 31, 2003. Previously, Reprogenesis had been awarded a
$2,000,000 grant from NIST to support the development of its cardiovascular
products, Vascugel and Vascuject. The grant period for the NIST grant made to
Reprogenesis is from November 1, 1999 to October 31, 2002. During the first
quarter of 2002, the Company requested that these awards be suspended while the
Company reviewed its desire to continue development efforts on these projects.
On April 14, 2002, the Company notified NIST of its intention to terminate the
awards and is currently completing its procedural obligations under the award
terminations.
As of March 31, 2002, the Company had future payments required under contractual
obligations and other commitments approximately as follows:
Remainder of
Total 2002 2003-2004 2005-2006
--------------- -------------- --------------- --------------
Long-term debt $ 7,601,000 $ 1,270,000 $ 3,750,000 $ 2,581,000
Capital lease obligations 2,647,000 1,331,000 1,316,000 -
Operating lease obligations 10,836,000 1,603,000 6,348,000 2,885,000
Sponsored research obligations 3,612,000 2,352,000 1,260,000 -
Licensing obligations 450,000 450,000 - -
--------------- -------------- --------------- --------------
Total future obligations $ 25,146,000 $ 7,006,000 $ 12,674,000 $ 5,466,000
--------------- -------------- --------------- --------------
The Company anticipates that existing capital resources, royalties to be
received from Stryker for the sale of OP-1, and amounts to be received pursuant
to the EPIL Note Agreement should enable it to maintain current and planned
operations into the fourth quarter of 2003. In the fourth quarter of 2003 and
beyond, the Company expects to incur substantial additional research and
development and other costs, including costs related to preclinical studies and
clinical trials. The Company's ability to continue funding planned operations is
dependent upon its ability to generate sufficient cash flows from its royalty
arrangements with Stryker, its collaboration with Elan, its other collaborative
arrangements and from additional funds raised through equity or debt financings,
or from other sources of financing, as may be required. With respect to the
Stryker royalty arrangements, as with the Company's other collaborative
arrangements, the Company's ability to generate sufficient cash flows depends on
a number of factors, including the ability to obtain regulatory approval to
market and commercialize products to treat additional indications in major
commercial markets. The Company is seeking additional collaborative arrangements
and may seek to raise funds through one or more financing transactions, if
conditions permit. Over the longer term, because of the Company's significant
long-term capital requirements, it intends to raise funds through the sale of
debt or equity securities when conditions are favorable, even if the Company
does not have an immediate need for additional capital at such time. There can
be no assurance that additional financing will be available or that, if
available, it would be available on favorable terms. In addition, the sale of
additional debt or equity securities could result in dilution to the Company's
stockholders. If OP-1 is not approved for commercial sale in the United States
beyond its limited approval under the Humanitarian Device Exemption provision
and the Company does not receive significant royalties from Stryker for product
sales and/or if substantial additional funding is not available, the Company's
13
ability to fund research and development and other operations will be
significantly affected and, accordingly, the Company's business will be
materially and adversely affected.
Cautionary Factors with Respect to Forward-Looking Statements
Readers are cautioned that certain statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations that
are not related to historical results are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Statements
that are predictive, that depend upon or refer to future events or conditions,
or that include words such as "expects," "anticipates," "seeks," "intends,"
"plans," "believes," "estimates," "hopes," and similar expressions constitute
forward-looking statements. In addition, any statements concerning future
financial performance (including future revenues, cash flows, earnings, funding
or growth rates), ongoing business strategies or prospects, and possible future
Company actions are also forward-looking statements.
Forward-looking statements are based on current expectations, projections and
assumptions regarding future events that may not prove to be accurate. Actual
results may differ materially from those projected or implied in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, dependence on significant
collaborative partners, changes in or an inability to execute on the Company's
realigned business strategy, uncertainties related to the Company's ability to
raise additional capital, failure or delay in obtaining necessary regulatory
approvals, the ability to protect the Company's intellectual property rights,
the ability to manage future indebtedness and liquidity and the ability to
compete effectively. For a discussion of these and certain other factors, please
refer to Item 1. "Business-Risk Factors" contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No. 000-30347)
filed with the Securities and Exchange Commission on March 29, 2002. Please also
refer to the Company's other filings with the Securities and Exchange
Commission.
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Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term marketable securities, generally corporate debt and government
securities with an average maturity of less than one year. All marketable
securities are considered available for sale. At March 31, 2002, the fair market
value of these securities amounted to approximately $9,224,000 with net
unrealized gains of approximately $1,000 included as a component of
stockholders' equity. Because of the quality of the investment portfolio and the
short-term nature of the marketable securities, the Company does not believe
that interest rate fluctuations would impair the principal amount of the
securities. The Company's investments are investment grade securities and
deposits are with investment grade financial institutions. The Company believes
that the realization of losses due to changes in credit spreads is unlikely as
the Company expects to hold the debt to maturity.
As of March 31, 2002, the Company held assets denominated in EUROS on its
balance sheet totaling $3,540,000. The underlying assets are expected to a have
holding period in excess of one year. The value of these assets could fluctuate
based on changes in the exchange rate between the dollar and EURO. The Company
has not entered into any hedging agreements relating to this risk.
As of March 31, 2002, the Company had approximately $2,597,000 outstanding under
fixed-rate capital leases and term notes which are not subject to fluctuations
in interest rates and approximately $4,688,000 outstanding under a term loan
agreement with an adjustable rate equal to prime or the current LIBOR rate plus
two and one-half basis points, whichever is lower. In addition, approximately
$2,107,000, including accrued interest of $107,000, was outstanding under a
convertible subordinated note payable to Becton Dickinson. Lastly, approximately
$1,474,000, including accrued interest of $20,000, was outstanding under a
convertible promissory note payable to an affiliate of Elan in connection with
Curis Newco.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
(i) On February 15, 2002, the Company filed a Current Report on
Form 8-K to report under Item 5 (Other Events) that the
Company had restructured its operations. No financial
statements were required to be filed with this Report.
(ii) On April 30, 2002, the Company filed a Current Report on
Form 8-K to report under Item 5 (Other Events) that the
Company had dismissed Arthur Andersen LLP and appointed
PricewaterhouseCoopers LLP as its independent accountants.
No financial statements were required to be filed with this
Report.
(iii) On May 10, 2002, the Company filed an amendment on Form
8-K/A to the Current Report previously filed on April 30,
2002 in order to include an additional exhibit concerning
the dismissal of Arthur Andersen LLP as its independent
accountants. No financial statements were required to be
filed with this Report.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned, thereunto duly authorized.
CURIS, INC.
Date: May 15, 2002 By: /s/ George A. Eldridge
------------ ----------------------
Vice President, Finance and
Chief Financial Officer
17