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Draft 4/30/98
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: MARCH 31, 1998 Commission File No. 0-19193
CAMBRIDGE NEUROSCIENCE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3319074
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
ONE KENDALL SQUARE, BUILDING 700
CAMBRIDGE, MA 02139
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(Address of principal executive offices including zip code)
617-225-0600
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(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
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At April 30, 1998, 17,923,491 shares of Common Stock, par value $.001 per share,
were issued and outstanding.
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CAMBRIDGE NEUROSCIENCE, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
at March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 - 11
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
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CAMBRIDGE NEUROSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 29,882 $ 12,020
Marketable securities 6,000 26,561
Prepaid expenses and other current assets 673 1,575
--------- ---------
TOTAL CURRENT ASSETS 36,555 40,156
Equipment, Furniture and Fixtures, net 652 735
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$ 37,207 $ 40,891
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,087 $ 3,668
Dividend payable 17,907 -
Research and development advances 2,650 2,900
--------- ---------
TOTAL CURRENT LIABILITIES 23,644 6,568
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01, 10,000
shares authorized; none issued - -
Common stock, par value $.001, 30,000
shares authorized; 17,907 shares issued
and outstanding at March 31, 1998;
17,858 at December 31, 1997 18 18
Additional paid-in capital 119,971 137,787
Accumulated deficit (106,426) (103,482)
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TOTAL STOCKHOLDERS' EQUITY 13,563 34,323
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$ 37,207 $ 40,891
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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CAMBRIDGE NEUROSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- ---------
Revenues
Research and development $ 301 $ 1,094
Operating expenses
Research and development 2,332 4,539
General and administrative 513 734
Restructuring cost 921 -
-------- --------
3,766 5,273
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Loss from operations (3,465) (4,179)
Interest income 521 529
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Net loss $ (2,944) $ (3,650)
======== ========
Basic and diluted net loss per common share $ (0.16) $ (0.22)
======== ========
Number of shares outstanding for purposes of
computing basic and diluted net loss per share 17,891 16,614
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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CAMBRIDGE NEUROSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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OPERATING ACTIVITIES
Net loss $ (2,944) $ (3,650)
Expenses not requiring cash:
Depreciation and amortization 93 222
Common stock issued pursuant to an
employee benefit plan 53 66
-------- --------
(2,798) (3,362)
Changes in current assets and liabilities:
Prepaid expenses and other current assets 902 558
Accounts payable and accrued expenses (581) (313)
Research and development advances (250) (1,093)
-------- --------
71 (848)
-------- --------
Cash used for operating activities (2,727) (4,210)
INVESTING ACTIVITIES
Purchase of marketable securities (4,977) -
Sale of marketable securities 25,538 -
Purchase of equipment, furniture and
fixtures, net of disposals (10) (35)
-------- --------
Cash used for investing activities 20,551 (35)
FINANCING ACTIVITIES
Sales of common stock, net of offering
costs and repurchases 38 28,198
-------- --------
Cash provided by financing activities 38 28,198
-------- --------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 17,862 23,953
Cash and cash equivalents at beginning of period 12,020 26,664
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 29,882 $ 50,617
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
as of March 31, 1998 and for the three-month periods ended March 31, 1998 and
1997 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented. The results of
operations for the interim period ended March 31, 1998 are not necessarily
indicative of the results expected for the full fiscal year.
The consolidated financial statements presented as of December 31, 1997
are derived from the audited financial statements and footnotes included in the
Company's Annual Report on Form 10-K (file number 0-19193).
Cambridge NeuroScience, Inc. (the "Company") is engaged in the
development of proprietary pharmaceuticals to prevent, reduce or reverse damage
caused by severe disorders and injuries of the nervous system.
2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted-average number of
common shares outstanding during each of the periods. Common equivalent shares
from stock options are excluded as their effect is antidilutive.
3. DIVIDEND PAYABLE
On March 9, 1998, the Company announced the declaration of an
extraordinary dividend in the amount of $1.00 per common share, or $17.9
million. This dividend was accrued at March 31, 1998 and was paid on April 14,
1998.
4. RESEARCH AND DEVELOPMENT REVENUE
The Company recognizes research and development revenue as earned and
such revenue represents reimbursement of the Company's expenditures pursuant to
the terms of two collaboration agreements. In November 1996, the Company entered
into a collaboration agreement with Allergan, Inc. ("Allergan") for the
development of treatments for ophthalmic disorders, including glaucoma. Pursuant
to this agreement, Allergan provides $1.0 million in research funding per year
through November 1999. Revenue pursuant to this agreement is recognized as
payments are received, on a quarterly basis.
Pursuant to the Company's agreement with Boehringer Ingelheim
International GmbH ("BI"), the Company is obligated to fund approximately 25% of
the development expenses for CERESTAT(1) in the United States and Europe.
Revenue earned pursuant to this agreement represents reimbursement by
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CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BI of expenditures by the Company in excess of the 25% required under the
agreement. The Company accounts for research and development revenue from BI
using the percentage of completion method, based on the relationship between
estimated costs incurred to date compared with total estimated costs for the
year. Total estimated costs for the year are reviewed quarterly and revenue
earned in the current period is adjusted for the impact of revisions to the
estimated reimbursable costs. As a result, revenue earned by the Company may
fluctuate on a quarterly basis. Cash received in advance of research and
development performed is designated as research and development advances.
5. RESTRUCTURING COSTS
On March 9, 1998, the Company announced the implementation of a cost
reduction plan which included a reduction in headcount from approximately 60 to
30 employees. Included in operating expenses in the quarter ended March 31, 1998
is the one-time cost of $921,000 associated with this reduction in staff,
consisting primarily of severance and related benefits. Included in accounts
payable and accrued expenses at March 31, 1998 is an accrual for unpaid
severance and related benefits of $634,000.
6. ADOPTION OF NEW ACCOUNTING PRINCIPLE
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income (FAS 130), which establishes standards
for the reporting and display of comprehensive income and its components. On
January 1, 1998, the Company adopted FAS 130. The adoption of FAS 130 had no
impact on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues
Research and development revenues in the three months ended March 31,
1998 were $301,000, compared to $1.1 million in the same period in 1997. This
decrease of $793,000 is due to a decrease in revenue earned pursuant to the
collaboration agreement with Boehringer Ingelheim International, GmbH (BI) for
the development of CERESTAT. Revenue pursuant to the BI agreement represents
reimbursement of the excess of the Company's expenditures over its funding
obligation under the agreement (see Note 4 to the Condensed Consolidated
Financial Statements). In the second half of 1997, the Company and BI
discontinued enrollment into the Phase III clinical trials of CERESTAT in both
stroke and traumatic brain injury (TBI). Substantially all of the remaining
costs associated with the completion of these trials was recognized in the
fourth quarter of 1997. In the first quarter of 1998, the Company has not made
material expenditures for further development of CERESTAT under the BI
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
agreement. Pending a decision by the partners about the future development of
CERESTAT, the Company has not recognized any revenue pursuant to this
collaboration in the first quarter of 1998. There can be no assurance that the
Company will decide to go forward with additional development of CERESTAT or, if
the Company elects to continue development, that BI will concur with that
decision. There can be no assurance, therefore, that the Company will have
revenue pursuant to this agreement in future periods.
Revenue of $250,000 earned in the first quarter of 1998 pursuant to the
agreement with Allergan, which was signed in November 1996, was comparable to
that earned in the first quarter of 1997. Revenue in the first quarter of 1998
included $50,000 from a phase I Small Business Innovation Research grant, which
began in the fourth quarter of 1997 and was completed in March 1998.
Operating Expenses
Total operating expenses were $3.8 million in the first three months of
1998, compared to $5.3 million in the same period in 1997, a decrease of $1.5
million or 29%. Total operating expenses in the first quarter of 1998 included
restructuring costs of $921,000, relating to a reduction in headcount on March
9, 1998 and consisting primarily of severance and related benefits. Research and
development expenses were $2.3 million, compared to $4.5 million in the first
quarter of 1997, a decrease of $2.2 million or 49%. This decrease is due
primarily to the decrease in costs associated with the development of CERESTAT,
as a result of the discontinuation of enrollment into the Phase III clinical
trials in 1997. Compensation and other headcount-related costs have also
decreased as a result of the reduction in headcount on March 9, 1998. General
and administrative expenses were $513,000 in the first quarter of 1998, compared
to $734,000 in the same period in 1997, a decrease of $221,000 or 30%. This
decrease reflects primarily the reduction in headcount as well as a decrease in
costs associated with the use of outside consultants for business development
purposes.
Interest Income
Interest income for the quarter ended March 31, 1998 was comparable to
that in the same period in 1997.
Net Loss Per Share
For the quarter ended March 31, 1998, the Company had a net loss of $2.9
million or $0.16 per share, compared to a net loss of $3.7 million or $0.22 per
share in the same period in 1997. The decrease in net loss and net loss per
share reflects a decrease in operating expenses, offset in part by a decrease in
revenue pursuant to the BI agreement. The net loss per share also reflects an
increase in the number of weighted average shares outstanding in the first
quarter of 1998, compared to the same period in 1997, as a result of the public
offering of 2.8 million shares in February 1997.
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents and
marketable securities of $35.9 million, compared to cash and cash equivalents
and marketable securities of $38.6 million at December 31, 1997. In the first
quarter of 1998, the Company used $2.7 million for operating activities. On
March 9, 1998, the Company declared a dividend in the amount of $1.00 per share,
or $17.9 million. This dividend was accrued at March 31, 1998 and was paid on
April 14, 1998.
On March 9,1998, the Company implemented a cost reduction plan which
included a reduction in headcount from approximately 60 to 30 employees. The
one-time cost of $921,000 associated with this reduction in staff, consisting
primarily of severance and related benefits was recognized as restructuring
costs in the first quarter of 1998. Severance and related costs remaining unpaid
as of March 31, 1998 were fully accrued at that date. In an effort to reduce
facilities-related costs, the Company intends to pursue opportunities to
sub-lease approximately half of its office and laboratory facilities to a third
party. The Company is continuing to evaluate alternatives for maximizing
shareholder value, which may include the sale of some or all of the Company's
technology and other assets. On May 6, 1998, the Company announced that, in
keeping with its near-term strategic plan to maximize shareholder value, the
Company will focus its resources on its three lead research and development
programs: CERESTAT; glial growth factor 2 (GGF2); and the ion-channel blocker
program, which includes the collaboration with Allergan. Effective May 6, 1998,
Harry W. Wilcox, III, the former Senior Vice President of Business Development
and Chief Financial Officer, was appointed President and Chief Executive Officer
of the Company. Mr. Wilcox will also join the Company's Board of Directors.
Elkan R. Gamzu, the former President and Chief Executive Officer, will serve as
a consultant to the Company, responsible for the ongoing data analysis and
potential future development of CERESTAT.
Pursuant to the collaboration agreement with BI for the development of
CERESTAT, the Company is obligated to pay 25% of the development costs incurred
in the United States and Europe. BI is obligated to pay the remaining 75% of
such costs and all of the development costs in Japan. Any costs incurred in
excess of one party's contractual obligation will be reimbursed by the other
party. The cash reimbursement and revenue earned pursuant to this agreement are
therefore subject to each party's relative expenditures and may fluctuate in
each fiscal period. (See Note 4 to the Condensed Consolidated Financial
Statements.) The agreement provides that BI will advance cash to the Company in
the event that it is expected that the Company's expenditures will exceed its
contractual obligation. On an annual basis, actual spending is reconciled with
the budget and may result in the Company's repayment to BI of any excess
advances. No advances were received in 1997 or in the first quarter of 1998. As
of March 31, 1998, the Company estimates that it had received approximately $2.3
million in excess advances from BI and anticipates repaying that amount to BI in
the near future.
In the second half of 1997, the Company and BI discontinued enrollment
of patients into the clinical trials of CERESTAT in both stroke and TBI.
Substantially all of the costs associated with the completion of the trials and
analysis of the data were recognized by the Company in 1997. The
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Company and BI are expending additional efforts to further evaluate the data
from the stroke trial and to determine if additional clinical studies in the
stroke indication will be pursued, either together or by the Company
independently. There can be no assurance that there will be a basis for
continued development of CERESTAT, nor that BI and the Company will agree on the
course of future development. If BI and the Company fail to agree on future
development, there could be a significant impact on the Company's ability to
develop CERESTAT, and the Company would earn no further revenue under the
collaboration agreement. If the Company were to elect to go forward with
additional clinical trials of CERESTAT and BI elected not to go forward, the
Company would retain all commercial rights to CERESTAT but would likely not have
sufficient funds available to complete development of the drug.
Pursuant to the agreement signed in November 1996 with Allergan, the
Company may receive up to $3.0 million in research and development funding
through 1999. At March 31, 1998, the Company had received $1.4 million pursuant
to this funding arrangement, of which $250,000 was recognized as revenue in the
first quarter of 1998. Under this agreement, Allergan is responsible for the
development of potential products and will bear all associated costs. The
collaboration also provides that the Company may receive up to an additional
$18.5 million upon the achievement of certain milestones. However, there can be
no assurance as to when or if these milestones will be achieved. Allergan may
terminate the agreement at any time after May 1998 upon six months prior written
notice.
In December 1996, the Company formed a subsidiary, Cambridge
NeuroScience Partners, Inc. (CNPI), to pursue the development of treatments for
Alzheimer's disease and other neurological disorders. CNPI entered into a
collaboration agreement with the J. David Gladstone Institutes (Gladstone).
Pursuant to this collaboration, Gladstone is conducting a research program over
a three year period, for which CNPI is providing at least $1.25 million in
funding per year. The Company owns 80% of the outstanding stock of CNPI and has
guaranteed CNPI's obligations with respect to its collaboration with Gladstone.
The Company believes that the cash and cash equivalents and investments
in marketable securities remaining after the payment of the dividend on April
14, 1998 will be sufficient to maintain operations into 1999.
In the event the Company and BI decide to continue development of
CERESTAT, the Company will be obligated to pay no more than 25% of the future
development expenses related to this program. Although the Company believes that
it has adequate resources to pursue the development of CERESTAT with BI, if
warranted, the reduction in headcount which took place in March and the dividend
payment in April will result in fewer resources being devoted to the Company's
other research and development programs. If the Company was to elect to continue
the development of CERESTAT and BI elected not to continue, the Company would
likely not have sufficient funds available to complete development of the drug.
Insufficient funds may require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license third
parties to commercialize products or technologies that the Company might
otherwise undertake itself.
The Company does not believe that inflation has had a material impact on
its results of operations.
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The discussion contained in this section as well as elsewhere in this
Quarterly Report on Form 10-Q may contain forward-looking statements based on
the current expectations of the Company's management. The Company cautions
readers that there can be no assurance that the actual results or business
conditions will not differ materially from those projected or suggested in the
forward-looking statements as a result of various factors, including but not
limited to the following: uncertainties relating to the completion of clinical
trials of the Company's product candidates, particularly with respect to the
Company's lead product, CERESTAT; uncertainties as to the Company's ability to
continue operations and achieve profitability; the early stage of development of
all of the Company's product candidates; the Company's reliance on current and
prospective collaborative partners to supply funds for research and development
and to commercialize its products; technical risks associated with the
development of new products; and the competitive environment of the
biotechnology industry. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
(1) CERESTAT is a registered trademark of Boehringer Ingelheim International
GmbH.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the interim year-to-date period
ended March 31, 1998 (for electronic filing only)
(b) Reports on Form 8-K
March 9, 1998: News release announcing the reduction in headcount and
the declaration of a dividend payable on April 14, 1998.
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CAMBRIDGE NEUROSCIENCE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBRIDGE NEUROSCIENCE, INC.
Date May 7, 1998 /s/ Harry W. Wilcox, III
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Harry W. Wilcox, III
President and Chief Executive Officer
(Principal Executive Officer;
Acting Principal Financial Officer)
Date MAY 7, 1998 /s/ Glenn A. Shane
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Glenn A. Shane
(Principal Accounting Officer)
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CAMBRIDGE NEUROSCIENCE, INC.
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule for the interim year-to-date period ended
March 31, 1998 (for electronic filing only)
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