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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: SEPTEMBER 30, 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 [ ]
At October 31, 1998, 18,071,459 shares of Common Stock, par value $.001 per
share, were issued and outstanding.
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CAMBRIDGE NEUROSCIENCE, INC.
The Company has amended the Management's Discussion and Analysis of
Financial Condition and Results of Operations in response to comments received
from the Securities and Exchange Commission, dated November 30, 1998, relating
to the disclosure of the Company's year 2000 readiness.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Research and development revenues in the three months ended September 30,
1998 were $1.4 million, compared to $817,000 in the same period in 1997. Revenue
for the third quarter of 1998 included $1.2 million recognized pursuant to the
collaboration agreement with Boehringer Ingelheim International, GmbH ("BI") for
the development of aptiganel, compared to $527,000 in the same period in 1997.
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 3 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 aptiganel in both stroke and traumatic brain injury. As previously
reported, the Company and BI agreed to end this collaboration. In November 1998,
the two companies signed a termination agreement and have reached a final
settlement of costs subject to the collaboration. As a result, in the third
quarter of 1998, the Company recognized $1.2 million of revenue, representing
revenue earned in 1998 pursuant to this collaboration and an adjustment to
reduce the accrual for advances to be repaid to BI. Any future costs incurred
for the further development of aptiganel will not be subject to reimbursement
from BI and, as a result, the Company will not recognize any further revenue
pursuant to this collaboration. (See -"Liquidity and Capital Resources")
Revenue of $250,000 earned in the third quarter of 1998 pursuant to the
agreement with Allergan (see Note 3 to the Condensed Consolidated Financial
Statements), was comparable to the amount of revenue earned in the same period
in 1997.
Operating Expenses
Total operating expenses for the quarter ended September 30, 1998 were
$1.5 million, compared to $5.1 million in the same period in 1997, a decrease of
$3.6 million, or 70%. Research and development expenses decreased by $3.2
million, or 72%, to $1.2 million in the three months ended September 30, 1998,
compared to $4.4 million in the same period in 1997. This reduction in research
and development expenses was due to the discontinuation of the Phase III
clinical trial of aptiganel in traumatic brain injury ("TBI") in the second half
of 1997, as well as the decrease in costs as a result of the reduction in
workforce in March 1998 (see Note 4 to the Condensed Consolidated Financial
Statements). General and administrative expenses decreased by $382,000, or 57%,
to $288,000 in the quarter ended September 30, 1998, compared to $670,000 in the
same period in 1997, reflecting the reduction in workforce which occurred in
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
March 1998 as well as the resignation of the former Chief Executive Officer in
the second quarter of 1998.
Interest Income
Interest income for the third quarter of 1998 was $201,000, compared to $632,000
in the same period in 1997. This decrease was due to lower cash balances
available for investment in the third quarter of 1998, following the payment of
a dividend of $17.9 million in April 1998.
Net Income (Loss) Per Share
The Company had net income per share for the third quarter of 1998 of
$0.01, compared to a net loss per share of ($0.21) in the same period in 1997.
This fluctuation is a result of a decrease in operating expenses in the third
quarter of 1998, compared to the same period in 1997, and the recognition of
revenue pursuant to the BI collaboration, following the $1.2 million adjustment
to reduce the accrual for advances to be repaid to BI.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
In the nine months ended September 30, 1998, the Company had research and
development revenues of $2.0 million, compared to $3.0 million in the same
period in 1997, a decrease of $1.0 million, or 34%. Revenues in the first nine
months of 1998 included $1.2 million earned pursuant to the collaboration
agreement with BI, compared to $2.2 million in the first nine months of 1997.
This decrease in revenue pursuant to the BI agreement reflects the
discontinuation of the Phase III clinical trials of aptiganel in the second half
of 1997 as well as the termination of the collaboration agreement in 1998. (See
"--Liquidity and Capital Resources) Pursuant to the termination of the BI
collaboration, any future costs incurred for the further development of
aptiganel will not be subject to reimbursement from BI and, as a result, the
Company will not recognize any further revenue pursuant to this collaboration.
Revenues in both 1998 and 1997 included $750,000 earned pursuant to the Allergan
agreement.
Operating Expenses
In the first nine months of 1998, the Company had total operating expenses
of $7.3 million, compared to $16.0 million in the first nine months of 1997, a
decrease of $8.7 million, or 55%. Research and development expenses decreased by
$8.8 million, or 63%, to $5.2 million in the first nine months of 1998, compared
to $14.0 million in the same period in 1997, due primarily to the termination of
the Phase III clinical trial of aptiganel in TBI in the second half of 1997 as
well as to the reduction in workforce in March 1998.
General and administrative expenses decreased by $831,000, or 40%, to
$1.2 million in the first nine months of 1998, compared to $2.1 million in
the same period in 1997. This
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
decrease reflects primarily the reduction in salaries and benefits and related
costs associated with the reduction in workforce in March 1998. Operating
expenses for the nine months ended September 30, 1998 included restructuring
costs of $921,000, consisting primarily of severance and related benefits
associated with this reduction in staff (see Note 4 to the Condensed
Consolidated Financial Statements).
Interest Income
Interest income decreased by $829,000, or 46%, to $987,000 in the first
nine months of 1998, compared to $1.8 million in the same period in 1997. This
decrease was a result of the decrease in cash available for investment in 1998
following the payment of a dividend totaling $17.9 million in April 1998.
Net Loss Per Share
In the first nine months of 1998, the Company had a net loss of $4.3
million, or ($0.24) per share, compared to a net loss of $11.2 million, or
($0.64) per share in the same period in 1997. This decrease in net loss per
share reflects a 55% decrease in operating expenses, primarily as a result of
the discontinuation of the Phase III trials of aptiganel. This decrease in
operating expenses was offset in part by lower interest income and a decrease in
revenue earned pursuant to the BI agreement in 1998 due to the discontinuation
of the clinical trials of aptiganel and the decision to terminate the related
collaboration.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents and
marketable securities of $14.4 million, compared to $38.6 million at December
31, 1997. In the first nine months of 1998, the Company used $6.4 million for
operating activities. On April 14, 1998, the Company paid a dividend in the
amount of $1.00 per share, totaling $17.9 million.
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount from approximately 60 to 30 employees. The
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. In an effort to reduce facilities-related costs, in June
1998, the Company entered into an agreement to sub-lease approximately half of
its office and laboratory facilities.
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 or the merger with or acquisition of another
company. 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 also joined the
Company's Board of Directors at that time. Elkan R. Gamzu, the former President
and Chief
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Executive Officer, is now serving as a consultant to the Company in the areas of
clinical trial data analysis and strategy relating to the potential future
development of aptiganel.
In 1995, the Company entered into a collaboration with BI for the
development and commercialization of CERESTAT (aptiganel). Pursuant to the
collaboration agreement, the Company was obligated to fund approximately 25% of
the development expenses for aptiganel in the United States and Europe. BI was
obligated to pay the remaining 75% of such costs and all of the development
costs in Japan. Revenue earned pursuant to this agreement represents
reimbursement by BI of expenditures by the Company in excess of its contractual
obligations. (See Note 3 to the Condensed Consolidated Financial Statements). In
the second half of 1997, the Company and BI discontinued enrollment of patients
into the clinical trials of aptiganel in both stroke and traumatic brain injury.
The collaboration agreement provided that BI would advance cash to the
Company in the event that the Company's expenditures were expected to exceed its
contractual obligation. Such advances were received by the Company in 1995 and
1996. As previously reported, the Company and BI agreed to end this
collaboration. In November 1998, the two companies signed a termination
agreement and have reached a final settlement of costs subject to the
collaboration. As a result, in the third quarter of 1998, the Company recognized
$1.2 million of revenue, representing revenue earned in 1998 pursuant to this
collaboration and an adjustment to reduce the accrual for advances to be repaid
to BI. Included in Total Current Liabilities as of September 30, 1998 are
research and development advances relating to the BI collaboration of $1.5
million, which the Company will repay to BI in November 1998.
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 September 30, 1998, the Company had received $2.0 million
pursuant to this funding arrangement, of which $750,000 was recognized as
revenue in the first nine months 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 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 cash and cash equivalents and investments in
marketable securities available at September 30, 1998 will be sufficient to
maintain operations through 1999.
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Based on the continuing evaluations of the data from the clinical trials,
the Company may pursue further development of aptiganel through a new
collaboration, a business combination or government funding. There can be no
assurance, however, that any such further development will be undertaken or that
the Company will be successful in securing a new collaboration, effecting a
business combination or otherwise obtaining the funding necessary for such
further development. In addition, the Company has focused resources on the
Allergan/ion-channel blocker research program and the advancement of the Glial
Growth Factor 2 program. As a result of the reduction in headcount that took
place in March and the dividend payment in April, fewer resources are being
devoted to the Company's other research and development programs. 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.
As previously reported, the Company was notified that its common stock has
not been in compliance with the closing bid price requirements of the Nasdaq
Stock Market ("Nasdaq") and would be delisted. On September 25, 1998, the
Company requested an oral hearing to stay delisting, which hearing has been
scheduled for November 12, 1998. Pending the results of this hearing, the
Company's common stock will continue to trade on Nasdaq without restriction. If,
based on the outcome of this hearing, the Company is not granted a temporary
stay of delisting, it intends to commence trading on the OTC Bulletin Board.
YEAR 2000 READINESS
The Company is aware of the issues that many computer systems will face as
the year 2000 approaches. These issues are the result of computer programs
having been written using two digits rather than four digits to define the
applicable year. Any of the Company's and its service providers' hardware and
software (Information Technology or "IT"), and computer-aided systems ("Non-IT")
that have time-sensitive operating data may recognize a date of "00" as the year
1900 rather than the year 2000, resulting in system failures or miscalculations.
Internal Systems: The Company's internal IT and Non-IT systems are as follows:
-Accounting and administrative software and hardware
-Computer-aided laboratory equipment
-Office equipment, telephones and security systems
Service Providers: The Company's main service providers that utilize IT and
Non-IT systems are as follows:
-Banks and financial institutions
-Administrative services - Transfer Agent, Payroll Agency, and Shareholder
Services
-Utility services - Electricity, heat, water and phone and data services
-Facilities services - Elevators, Security and facility maintenance
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
State of Readiness
The following paragraphs address the Company's state of readiness relating
to the year 2000 issue, including the Company's plan to address the year 2000
issues associated with the Company's and its service providers' IT and non-IT
systems, and the status of each phase in the Company's plan. The Company's plan
to evaluate and resolve the year 2000 problem encompasses three phases:
inventory and assessment; remediation; and, testing and implementation.
Inventory and Assessment:
The Company is in the process of conducting the inventory and assessment
of its IT and Non-IT Systems and those of its service providers that may be
impacted by the year 2000 problem. The assessment process includes finding out
which systems may be impacted by the year 2000 problem by contacting each
manufacturer and service provider, reviewing their written documentation about
their year 2000 problem and plan for resolution, and identifying which systems
require upgrade, repair or replacement to become compliant.
At September 30, 1998, the Company was about 50% complete with this phase
of the year 2000 problem. It has completed the inventory and assessments of its
accounting and administrative functions and its administrative service
providers, and is in the process of gathering information about its
computer-aided laboratory equipment, office equipment, telephones and security
systems, banks and financial institutions, utility services, and facilities
services. The inventory and assessment of all systems and providers is expected
to be completed by January 1999.
Remediation:
Upon completion of the assessment of these systems, the Company will
adopt a formal plan to upgrade, repair or replace all internal systems that are
not year 2000 compliant and to obtain assurance of compliance from all IT and
Non-IT service providers. Remediation of any year 2000 problems identified may
include the upgrade of computer operating systems, the upgrade or replacement of
certain software programs and the replacement of equipment. The
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Company expects to have completed the remediation phase of its internal systems
by March 1999, and to have assurance of compliance from its service providers by
September 1999.
Testing and implementation:
This plan will include testing all repaired, replaced and new internal
systems and software, to ensure that they are working properly and adequately
address the year 2000 issues identified. The Company expects to have completed
testing of its internal systems and software and have all systems fully
operational by June 1999.
Third Party Service Providers:
To evaluate the readiness of its third party service providers, including
utility providers, financial institutions, vendors and other service providers,
the Company is in the process of phoning, writing and/or reviewing written
literature from each provider to ascertain whether the services they provide
are at risk of being non-compliant, whether the providers are addressing this
issue and what their plans are for resolving this issue. The Company plans to
complete this initial assessment of its third party providers by January 1999
and will monitor the progress of each service provider during 1999. The
identification of alternative vendors of services will be considered in the
course of this process and in the development and implementation of a
contingency plan. To-date, the Company has completed the assessment of
approximately 50% of these third party service providers.
Costs
Based on a preliminary assessment of existing systems, the Company does
not expect to incur material costs to evaluate and resolve any year 2000
problems. The Company may contract outside consultants at various times during
this process to ensure the timely completion of the project. The Company expects
to upgrade or replace certain systems supporting the administrative functions
and facilities and may have to replace some of the equipment used in its
research and development operations. Based on information available at this
time, the Company estimates that it will spend between $50,000 and $100,000 to
complete the process of resolving the year 2000 problem. These expenditures will
be funded from existing cash resources and will not have a material impact on
the amount of funds available for other operating purposes. The Company has not
incurred any costs to-date related to repairing, upgrading or replacing
equipment to become compliant. The actual costs to be incurred by the Company
will depend on a number of factors which cannot be accurately predicted,
including the availability and cost of consultants and the extent and difficulty
of the remediation and other work to be done.
Risks
In the event that the Company does not complete any additional tasks
relating to the year 2000 issue, the Company will experience interruptions or
inaccuracies in the processing of financial information and certain data
generated by the Company's research and development activities. The Company's
accounting software is not currently year 2000 compliant and is scheduled to be
upgraded for compliance in the second quarter of 1999. The Company would have
to rely on manual and less efficient means of accumulating and recording data
and would experience delays in processing financial data. The Company is aware
of certain pieces of computer-aided research and discovery equipment that are
not, or may not be compliant, causing the Company to abandon some of that
technology and revert to manual laboratory testing procedures and/or the
outsourcing of automated procedures. Certain of the Company's personal and
network computers may fail, resulting in the need to abandon those systems and
adversely impacting the Company's ability to operate its internal computer
network.
The Company expects to have completed all phases of this project before
the end of 1999 and does not believe that the existence of any unresolved year
2000 problems will result in the prolonged and material interruption of its
daily operations, including the conduct of its research and development
activities. However, there can be no assurance that the Company will complete
the remediation of any year 2000 problems on a timely basis or that any
unresolved problems would not have an adverse impact on the Company's ability to
continue operations and fulfill its obligations pursuant to research and
development collaboration agreements.
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CAMBRIDGE NEUROSCIENCE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The Company has certain relationships with third parties, including
utility providers, financial institutions, vendors and other service providers.
The Company believes that with the exception of its utility providers, its
relationships with service providers are not exclusive or material, and that,
in the event of a failure on the part of these third parties to become year
2000 compliant, it would be able to continue to maintain operations, including
the conduct of most of its research and development activities, utilizing
alternative vendors where necessary. An interruption of the Company's utility
services could materially affect the Company's research, development and
administrative operations until such time that those utility services are
resumed. There can be no assurance that any of its third parties will achieve
compliance on a timely basis, or that any lack of compliance on the part of the
third parties will not materially affect the Company's operations. The
identification of alternative vendors of services and supplies will be
considered in the course of this process and in the development and
implementation of a contingency plan.
Contingency Plan
The determination of the necessity for a contingency plan will be made once
the assessment and remediation phases of this project have been completed. Any
contingency plan implemented would include, to the extent deemed necessary, the
identification of third party service providers and vendors, the availability of
equipment to enable the Company to continue operations and the availability of
vendors for outsourcing research and development activities. The Company expects
to have identified and resolved any year 2000 problems by September 1999 and to
have established and tested a formal contingency plan, to the extent deemed
necessary, before the end of 1999.
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
aptiganel; uncertainties as to the Company's ability to continue operations and
achieve profitability; the early stage of development of many 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; the competitive environment of the biotechnology industry; and,
the Company's ability to identify and resolve potential year 2000 problems on a
timely basis. 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.
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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 December 18, 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 December 18, 1998 /s/ Glenn A. Shane
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Glenn A. Shane
(Principal Accounting Officer)
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