SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Mark One:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27324
SYNAPTIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2859704
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
215 College Road 07652
Paramus, NJ (Zip Code)
(Address of principal executive offices)
(201) 261-1331
(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, as amended, 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
As of November 1, 2002, there were 10,977,790 shares of the registrant's
Common Stock outstanding.
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited):
Balance Sheets at September 30, 2002 and December 31, 2001... 1
Statements of Operations and Comprehensive Income (Loss) for
the three months ended September 30, 2002 and 2001 and for
the nine months ended September 30, 2002 and 2001.......... 2
Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001................................. 3
Notes to Financial Statements................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 13
Item 4. Controls and Procedures.......................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 16
Signatures....................................................... 17
Certifications Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002..................................................... 18
(i)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(in thousands, except share information)
September 30, December 31,
Assets 2002 2001
-------------------------------------------------------------------------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 26,234 $ 45,552
Marketable securities--current maturities 1,529 2,553
Deferred tax assets - 256
Other current assets 803 431
-------------------------------------------------------------------------------
Total current assets 28,566 48,792
Property and equipment, net 4,610 4,268
Marketable securities - 1,545
Other assets 214 228
-------------------------------------------------------------------------------
$ 33,390 $ 54,833
===============================================================================
Liabilities, Redeemable Convertible Preferred Stock
and Stockholders' (Deficit) Equity
-------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,380 $ 1,441
Accrued liabilities 1,462 1,104
Accrued compensation 403 550
Deferred revenue 734 107
-------------------------------------------------------------------------------
Total current liabilities 3,979 3,202
Deferred rent obligation 1,056 845
Series B senior redeemable convertible preferred
stock; authorized, issued and outstanding--11,056 shares
liquidation preference--$11,056 10,529 10,206
Series C senior redeemable convertible preferred
stock; authorized, issued and outstanding--29,944 shares
liquidation preference--$29,944 27,761 27,613
Stockholders' (deficit) equity:
Series A preferred stock, $.01 par value;
authorized--1,000,000 shares - -
Common Stock, $.01 par value; authorized--25,000,000
shares issued and outstanding--10,977,790 shares in
2002 and 10,953,353 shares in 2001 109 109
Additional paid-in capital 99,428 99,376
Accumulated other comprehensive income--net unrealized 28 87
gains on securities
Accumulated deficit (109,230) (86,605)
-------------------------------------------------------------------------------
Total stockholders' (deficit) equity (9,665) 12,967
-------------------------------------------------------------------------------
$ 33,390 $ 54,833
===============================================================================
See notes to financial statements.
1
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share information)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
2002 2001 2002 2001
--------------------------------------------------------------------------------
Revenues:
Contract revenue $ 293 $ 290 $ 879 $ 867
License revenue 83 84 1,854 250
--------------------------------------------------------------------------------
Total revenues 376 374 2,733 1,117
Expenses:
Research and development 6,339 4,677 19,574 12,777
General and administrative 2,446 1,605 6,822 5,152
--------------------------------------------------------------------------------
Total expenses 8,785 6,282 26,396 17,929
--------------------------------------------------------------------------------
Loss from operations (8,409) (5,908) (23,663) (16,812)
Other income, net:
Interest income 161 315 618 1,093
Other 121 118 362 372
--------------------------------------------------------------------------------
Other income, net 282 433 980 1,465
--------------------------------------------------------------------------------
Net loss before benefit
from income taxes (8,127) (5,475) (22,683) (15,347)
Income tax benefit - - 58 -
--------------------------------------------------------------------------------
Net loss (8,127) (5,475) (22,625) (15,347)
Accretion to redemption
value of mandatorily redeemable
convertible preferred stock (68) (4,316) (201) (4,316)
--------------------------------------------------------------------------------
Net loss applicable to
common stockholders $(8,195) $(9,791) $(22,826) $(19,663)
================================================================================
Comprehensive loss:
Net loss $(8,127) $(5,475) $(22,625) $(15,347)
Unrealized (losses) gains
arising during period (13) 75 (60) 334
--------------------------------------------------------------------------------
Comprehensive loss $(8,140) $(5,400) $(22,685) $(15,013)
================================================================================
Basic and diluted net loss
per share $(0.75) $(0.89) $(2.08) $(1.80)
================================================================================
Shares used in computation
of net loss per share 10,977,614 10,942,755 10,973,345 10,939,822
================================================================================
See notes to financial statements.
2
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the nine months ended September 30, 2002 and 2001
2002 2001
--------------------------------------------------------------------------------
Operating activities:
Net loss $ (22,625) $ (15,347)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation 856 1,037
Amortization of premiums on securities 10 262
Deferred rent, net 225 125
Non-cash stock compensation 139 -
Changes in operating assets and liabilties:
Increase in other current assets (116) 100
Increase in accounts payable,
accrued liabilities and accrued compensation 150 3,324
Increase in deferred revenue 624 44
--------------------------------------------------------------------------------
Net cash (used in) operating activities (20,734) (10,455)
Investing activities:
Proceeds from sale or maturity of investments 2,500 22,240
Purchases of property and equipment (1,198) (540)
Purchase of investments - (2,000)
Proceeds from sale of equipment - 16
--------------------------------------------------------------------------------
Net cash provided by investing activities 1,302 19,916
Financing activities:
Issuance of common stock 114 38
Issuance of common stock -- 37,745
--------------------------------------------------------------------------------
Net cash provided by financing activities 114 37,783
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (19,318) 47,244
Cash and cash equivalents at beginning of period 45,552 2,037
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,234 $ 49,281
================================================================================
See notes to financial statements.
3
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2002
Note 1 -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and may not include all
information and footnotes required for a presentation in accordance with
accounting principles generally accepted in the United States. In the opinion of
the management of Synaptic Pharmaceutical Corporation (the "company"), these
financial statements include all normal and recurring adjustments necessary for
a fair presentation of the financial position and the results of operations and
cash flows of the company for the interim periods presented. For more complete
financial information, these financial statements should be read in conjunction
with the audited financial statements for the fiscal year ended December 31,
2001, and notes thereto included in the company's 2001 Annual Report on Form
10-K. The results of operations for the fiscal quarter ended September 30, 2002,
are not necessarily indicative of the results of operations to be expected for
the full year.
Note 2 - Senior Redeemable Convertible Preferred Stock
On August 3, 2001, the company sold to investors (the "purchasers"), 9,438
shares of Series B Preferred Stock in a private placement for $9,438,000. On
September 26, 2001, the company sold 1,618 shares of Series B Preferred Stock
and 29,944 shares of Series C Preferred Stock for $31,562,000. Net proceeds,
after giving effect to placement fees and offering expenses, were approximately
$37,745,000. The purchasers were granted certain subscription and registration
rights in connection with their acquisition of the Preferred Stock.
The Series B and Series C Convertible Preferred Stock (the "Preferred
Stock") are two series of senior redeemable convertible preferred stock having
identical terms, except that the Series B Preferred Stock has an initial
conversion price of $4.3358 and the Series C Preferred Stock has an initial
conversion price of $5.9713. Each share of Preferred Stock may be converted at
any time at the option of the holder thereof into a number of shares of common
stock determined by dividing $1,000 by the conversion price, as appropriately
adjusted for any stock splits, stock dividends, combinations or similar events.
All shares of Preferred Stock shall automatically be converted into common stock
upon the vote to so convert of holders of a majority of the Preferred Stock then
outstanding, voting together as a separate class. The Preferred Stock is
currently convertible into an aggregate of 7,564,584 shares of common stock.
Holders of Preferred Stock are entitled to receive dividends on a pari
passu basis, if and when dividends are declared on the common stock, in an
amount equal to the dividends that would have been payable had their shares been
converted to common stock immediately prior to the record date for the dividend.
Upon any liquidation of the company, each holder of Preferred Stock is
entitled to receive $1,000, plus declared but unpaid dividends, if any, for each
share held, prior to the holders of any common stock or junior preferred stock
receiving any assets of the company available for distribution.
Holders of Preferred Stock, voting together as a separate class, are
entitled to elect two members of the board of directors, as long as 60% of the
Preferred Stock issued and outstanding as of September 26, 2001 remains
outstanding.
The holders of the Preferred Stock are entitled to vote together with the
holders of the common stock on all matters presented to our stockholders for
consideration, except that as long as the holders of the Preferred Stock are
entitled to vote as a separate class to elect members of the board of directors,
they will not be entitled to vote for the remaining directors. Each share of
Preferred Stock has a number of votes equal to the number of shares of common
stock into which it may then be converted.
The company may redeem all outstanding shares of Preferred Stock at any
time after August 3, 2003, provided that the company can redeem these shares
prior to August 3, 2009, only if the market price of the common stock is at
least 200% of the conversion price then in effect for any 20 consecutive trading
days ending within 10 trading days of the redemption date. The company must
redeem all outstanding shares of Preferred Stock in two annual installments
beginning on August 3, 2009. On any redemption, the redemption price will be
$1,000 per share, as appropriately adjusted for any stock splits, stock
dividends, combinations or similar events, plus declared but unpaid dividends.
During 2001, the company recorded an adjustment to net loss applicable to
common stockholders of $4,226,000 relating to the beneficial conversion feature
inherent in the issuances of the Series B Preferred Stock. This amount was
determined based upon the excess of the fair value of the company's common stock
into which the Series B Preferred Stock was immediately convertible less the
initial conversion price of $4.3358 per share in accordance with Emerging Issues
Task Force No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios." For the
nine-month period ended September 30, 2002, the company recorded an adjustment
to net loss applicable to common stockholders of approximately $201,000
representing the accretion of the Series B Preferred Stock and Series C
Preferred Stock to their respective redemption values.
Note 3 - Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS no. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. The company does not
anticipate that SFAS 146 will have a material affect on the Company's financial
position or results of operations.
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Synaptic is a drug discovery company using G protein-coupled receptors as
the basis for developing new drugs for the treatment of a variety of human
disorders.
We currently collaborate with Grunenthal GmbH ("Grunenthal") and Kissei
Pharmaceutical Co., Ltd. ("Kissei"). In connection with our collaborative
arrangement with Grunenthal, we have licensed some of our technology and patent
rights to them. We have also granted licenses to some of our technology and
patent rights to other pharmaceutical companies.
Since our inception, we have financed our operations primarily through the
sale of our stock, through contract and license revenue under license
agreements, and through interest income and capital gains resulting from the
investment of the proceeds of our financing activities pending use of these
funds for operational activities. We have also received funds through government
grants under the Small Business Innovative Research ("SBIR") program of the
National Institutes of Health and through the sale of our New Jersey state tax
net operating loss ("NOL") carryforwards.
To date, our expenditures have been for research and development related
expenses, general and administrative related expenses, fixed asset purchases and
various patent related expenditures incurred in protecting our technologies.
Historically, we have not been profitable, and at September 30, 2002 we had an
accumulated deficit of $109,230,000. We incurred net losses applicable to common
stockholders of $26,118,000, $13,859,000 and $15,121,000 for the fiscal years
ended 2001, 2000 and 1999, respectively. We expect to continue to incur
operating losses for a number of years, and we will not become profitable unless
and until we receive royalty revenue or revenue from sales of drugs developed
with the use of our technology or patent rights.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States that require us to make
estimates and assumptions. We believe that of our significant accounting
policies, the following may involve a higher degree of judgment and complexity:
Revenue
-------
Revenues that we receive, or may receive, are derived from either
multi-element revenue arrangements or from research services that we perform.
Historically, virtually all revenue that has been recorded has been under
multi-element revenue arrangements. Generally, revenue is realized or realizable
and earned when all of the following criteria are met: (1) an arrangement
exists, (2) services have been rendered, (3) prices of services are fixed or
determinable and (4) collectibility is reasonably assured. As the structures of
our arrangements are unique and may contain several different revenue
components, each is reviewed on a case-by-case basis in order to determine the
appropriate amount and term over which to recognize revenues.
Under these multi-element revenue arrangements, we may receive one or more
of the following types of revenue: license revenue, research funding revenue,
milestone revenue, royalty revenue and revenue derived from sales of drugs.
License revenue represents non-refundable payments for a license to one or
more of our patents and/or a license to our technology. Payments for licenses
are recognized as they are received or, if earlier, when they become guaranteed,
provided they are independent of any continuing research activity on the related
project. Otherwise, they are recognized pro-rata during the term of the related
research agreement in accordance with Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements."
Research funding revenue includes payment to support a specified number of
Synaptic's scientists. Such revenue is recognized ratably over the period in
which the research is performed.
Milestone revenue represents non-refundable payments for the achievement of
a specified milestone under either an existing arrangement or under a license
that has been granted to one or more of our patents and/or our technology. Such
payments typically coincide with the achievement of a substantial element in a
multi-element arrangement or measure substantive stages of progress toward
completion under a long-term contract. The recognition of such payments as
revenue is determined based upon the nature of the underlying arrangement.
Milestone payments received under contracts where the company is performing
related ongoing research, and which are deemed to have multi-element financial
arrangements, will be recognized as revenue over the remaining life of the
contract. Milestone payments received under license agreements are recognized as
revenue as they are received or, if earlier, when they become guaranteed,
provided they are independent of any research activity.
Royalty revenue represents payments that may be received from the sales of
drugs that may be developed using the technology or the patent rights that have
been licensed. We are entitled to receive royalty payments under most of our
license agreements. To date, we have not received royalty payments and we do not
expect to receive such payments for a number of years, if at all.
Revenue derived from the sales of drugs would be recognized if the company
markets drugs. The company may develop drugs on its own or in partnership with
others. As part of the agreement with Grunenthal, we have development and
marketing rights in certain geographic areas with respect to any drugs that are
jointly identified under the agreement. Accordingly, we may receive revenue from
sales of drugs in our designated geographic areas if we market them
independently, or we may receive royalty payments if we license our marketing
rights to a third party. To date, we have not received revenue from the sales of
drugs. The collaboration with Grunenthal is scheduled to expire on January 11,
2003.
Income Taxes
------------
We account for income taxes using the liability method. Under this method,
deferred income tax assets and liabilities reflect tax carryforwards and the net
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes, as determined under
currently enacted tax rates. Deferred tax assets are recorded if future
realization is more likely than not.
Deferred taxes are recorded primarily for Federal and state net operating
loss carryforwards, research and development credit carryforwards and
depreciation and amortization, which are reported in different periods for
Federal income tax purposes than for financial reporting purposes. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amounts expected to be realized.
At December 31, 2001, we had approximately $29,625,000 of Federal and state
net operating loss carryforwards and approximately $1,610,000 research and
development credit carryforwards. We
have a history of operating losses and expect these losses to increase as a
result of our strategy of increasing our internal drug development efforts.
These losses would remain available to us on a carryforward basis to offset any
future earnings; however, deferred tax assets attributable to these net
operating losses have been fully offset by a valuation allowance in the
financial statements, as their future realization is uncertain.
Research and Development
We perform research for ourselves and for our current collaborators, Kissei
and Grunenthal. As this research progresses, we designate some projects for
preclinical and clinical development. Until a lead compound is chosen for
development, all costs associated with that compound are considered to be
research expense. Costs incurred during the research phase are not separately
identifiable by project. At this preliminary or investigational stage, research
is performed within a broad family of receptors with the objective of
identifying lead compounds. Once a lead compound enters the preclinical
development stage, costs are accumulated for each project associated with that
compound. Currently, the only project for which a lead compound has been chosen
is the company's depression program. The lead compound in this program was
selected during the second quarter of 2000. Costs incurred on the depression
program for the nine-month and inception-to-date periods ended September 30,
2002 approximated $5,543,000 and $8,093,000, respectively. Total research costs
for the nine-month period ended September 30, 2002 amounted to $19,574,000.
In general, from the time a lead compound is chosen until that compound
reaches the market, many years may elapse. During this time, the compound must
undergo clinical trials that include Phase I, Phase II and Phase III trials, the
results of which are subject to review and approval by the U.S. Food & Drug
Administration and other regulatory agencies. Successful completion of each
trial carries its own set of risks and may cost many millions of dollars. At
this stage of Phase I clinical development of the depression program, completion
costs and dates cannot be estimated.
Net Loss Applicable to Common Stockholders
During the third quarter of 2001, we sold shares of two series of senior
redeemable convertible preferred stock the Series B Convertible Preferred Stock
and Series C Convertible Preferred Stock, in a private equity placement. In
connection with these issuances, we recorded an adjustment to net loss
applicable to common stockholders for the year ended December 31, 2001 of
approximately $4,226,000 relating to the beneficial conversion feature inherent
in the issuances of the Series B Convertible Preferred Stock. This amount was
determined based upon the excess of the fair value of the company's common stock
into which the Series B Convertible Preferred Stock was immediately convertible
less the initial conversion price of $4.3358 per share in accordance with
Emerging Issues Task Force No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios."
For the nine-month period ended September 30, 2002, we recorded an adjustment to
net loss applicable to common stockholders of approximately $201,000
representing the accretion of the Series B and Series C Convertible Preferred
Stock to their respective redemption values.
Results of Operations
Comparison of the Three Months Ended September 30, 2002 and 2001
Revenues. We recognized license and contract revenue of $376,000 and
$374,000 for the three months ended September 30, 2002 and 2001, respectively.
Research and Development Expenses. We incurred research and development
expenses of $6,339,000, and $4,677,000 for the three months ended September 30,
2002 and 2001, respectively. The increase of $1,662,000, or 36%, was
attributable primarily to increases in: clinical and preclinical testing costs
associated with the company's depression program; research and development
salaries and fringe benefits resulting from a net increase in headcount; and
preclinical testing costs associated with moving compounds in other programs
towards development.
General and Administrative Expenses. We incurred general and administrative
expenses of $2,446,000 and $1,605,000 for the three months ended September 30,
2002 and 2001, respectively. The increase of $841,000, or 52%, was attributable
primarily to increases in: severance costs incurred in complying with the terms
of the separation agreement entered into with our president and chief executive
officer; costs incurred in attracting a new president and chief executive
officer; and an increase in legal expenses as a result of a suit filed by the
company (See "Legal Proceedings" in PART II, Item 1).
Other Income, Net. We recorded other income of $282,000 and $433,000 for
the three months ended September 30, 2002 and 2001, respectively. The decrease
of $151,000 was primarily due a decrease in interest income related to lower
cash, cash equivalent and marketable securities balances during 2002 as a result
of the utilization of these resources to fund the company's operations and an
overall reduction in interest rates.
Net loss applicable to common stockholders. Our net loss applicable to
common stockholders was $8,195,000 ($0.75 per share), and $9,791,000 ($0.89 per
share) for the three months ended September 30, 2002 and 2001, respectively. The
decrease in net loss per share of $0.14 resulted primarily from the $4,226,000
adjustment in 2001, described in the section entitled "Net Loss Applicable to
Common Stockholders," partially offset by higher expenses during the third
quarter of 2002 as described above.
Comparison of the Nine Months Ended September 30, 2002 and 2001
Revenues. We recognized revenue of $2,733,000 and $1,117,000 for the nine
months ended September 30, 2002 and 2001, respectively. The increase in revenue
of $1,616,000 resulted primarily from an increase in license revenue resulting
from the grant of licenses for certain patent rights to two separate
pharmaceutical companies.
Research and Development Expenses. We incurred research and development
expenses of $19,574,000, and $12,777,000 for the nine months ended September 30,
2002 and 2001, respectively. The increase of $6,797,000, or 53%, was
attributable primarily to increases in: clinical and preclinical testing costs
associated with the company's depression program; research and development
salaries and fringe benefits resulting from a net increase in headcount; and
preclinical testing costs associated with moving compounds in other programs
towards development.
General and Administrative Expenses. We incurred general and administrative
expenses of $6,822,000 and $5,152,000 for the nine months ended September 30,
2002 and 2001, respectively. The increase of $1,670,000, or 32%, was
attributable primarily to increases in: severance costs associated with the
separation agreement entered into with our president and chief executive
officer; costs incurred in attracting a new president and chief executive
officer; an increase in patent expenses and an increase in legal expenses as a
result of a suit filed by the company (See "Legal Proceedings" in PART II, Item
1).
Other Income, Net. We recorded other income of $980,000 and $1,465,000 for
the nine months ended September 30, 2002 and 2001, respectively. The decrease of
$485,000 was primarily due a decrease in interest income related to lower cash,
cash equivalent and marketable securities balances during 2002 as a result of
the utilization of these resources to fund the company's operations and an
overall reduction in interest rates.
Income tax benefit. During the nine months ended September 30, 2002, we
recorded a $58,000 income tax benefit related to the sale of a portion of our
New Jersey state net operating loss carryforwards.
Net loss applicable to common stockholders. Our net loss applicable to
common stockholders was $22,826,000 ($2.08 per share), and $19,663,000 ($1.80
per share) for the nine months ended September 30, 2002 and 2001, respectively.
The increase in net loss per share of $0.28 resulted primarily from higher
expenses partially offset by higher revenues during the second quarter of 2002
as described above.
Operating Trends. Our revenues may vary from period to period depending on
numerous factors, including the timing of revenue earned under license
agreements and revenue that may be earned under future collaborative and/or
license agreements. During 2001 and for the nine-month period ended September
30, 2002, we recognized revenue under our research and licensing agreement with
Kissei Pharmaceutical Co., Ltd. and will continue to recognize additional
revenues under this agreement during the remainder of 2002. Also during the
second quarter of 2002 we recognized revenue relating to the licensing of
certain of the company's patent rights to Procter and Gamble Pharmaceuticals and
Ranbaxy Laboratories Limited. Under the terms of some of our license agreements,
revenues may be recognized if specified milestones are achieved. We continue to
monitor our spending level in order to ensure that we have enough cash to last
through the second quarter of 2003. We continue to assess the opportunity for
obtaining additional funding under new collaborative and/or license agreements
as well as through equity financings.
Since late 2000, we have been pursuing a new business strategy of
increasing our internal drug development efforts. This new strategy requires us
to hire additional employees with drug development expertise and to incur
additional preclinical expenses as well as expenses associated with clinical
trials. We expect to sign a contract for clinical services that may result in
approximately $2,800,000 of expenditures for the services provided under the
contract.
Legal expenses are expected to continue to be a significant expense as a
result of a suit filed by the company. See "Legal Proceedings" in PART II, Item
1.
Other income, net is expected to decrease during 2002 because of less
favorable short-term interest rates. This decrease will, however, be somewhat
mitigated by an increase in rental income that we expect to recognize under our
existing sublease agreements.
We are pursuing further sales of our state tax NOL carryforwards and our
state research and development credits under the State of New Jersey's
Technology Business Tax Certificate Transfer Program (the "Program"). No
assurance can be given, however, as to the amount of NOL carryforwards that may
be sold under the Program in any one year. External factors that may have an
effect on future NOL sales include limitations imposed by State law and
availability of buyers and related demand.
Property and equipment spending may vary from period to period depending on
numerous factors, including the level of drug development efforts, the number of
collaborations in which we are involved at any given time, and replacement due
to normal wear and obsolescence. Equipment spending in 2002 has increased from
that of 2001.
At September 30, 2002, we held marketable securities with an estimated fair
value of $1,529,000. Our primary interest rate exposure results from changes in
short-term interest rates. We do not purchase financial instruments for trading
or speculative purposes. All of the marketable securities we hold are classified
as available-for-sale securities. The following table provides information about
marketable securities that we held at September 30, 2002:
Principal Amount and Stated Rate by Estimated Fair
Expected Maturity Value
------------------------------------------------------ -----------------
(000's) 2003 (000's)
------------------------------------------------------ ------------------
Principal $1,500 $1,529
Stated Rate 6.20% --
------------------------------------------------------ ------------------
The stated rates of interest expressed in the above table may not
approximate the actual yield of the securities that Synaptic currently holds
since we have purchased some marketable securities at other than face value.
Additionally, the securities represented in the above table may be called or
redeemed, at the option of the issuer, prior to their expected due dates. If
early redemptions occur, we may reinvest the proceeds realized on such calls or
redemptions in marketable securities with stated rates of interest or yields
that are lower than those of current holdings, affecting both future cash
interest streams and future earnings.
In addition to investments in marketable securities, we place some of our
cash in money market funds in order to keep cash available to fund operations
and to hold cash pending investments in marketable securities. Fluctuations in
short term interest rates will affect the yield on monies invested in such money
market funds. Such fluctuations can have an impact on future cash interest
streams and future earnings, but the impact of such fluctuations are not
expected to be material.
We do not believe that inflation has had a material impact on our results
of operations.
Liquidity and Capital Resources
At September 30, 2002 and December 31, 2001, cash, cash equivalents and
marketable securities aggregated $27,763,000 and $49,650,000, respectively. This
decrease was primarily the result of the utilization of these resources to fund
our operations. We intend to utilize our cash primarily for research,
preclinical and clinical development costs, for patent related expenditures, for
general corporate purposes, for leasehold improvements to our facilities and for
the purchase of property and equipment. We expect to continue to incur operating
losses for a number of years. Additionally, we expect to sign a contract for
clinical services that may result in approximately $2,800,000 of expenditures
for the services provided under the contract. We believe that cash, cash
equivalents and marketable securities on hand, and interest payments on
investments, will be sufficient to fund operations, as well as to support our
share of certain development costs under the Grunenthal Agreement, if any,
through the second quarter of 2003. We are considering various alternatives as
to how best to raise cash and in what amount. The alternatives we are
considering include an equity financing, partnerships and collaborations with
pharmaceutical and biotech companies, and possible M & A activities.
To date, we have met our cash requirements through the sale of our stock,
through contract and license revenue, through interest income and gains
resulting from our investments, through SBIR grants and through sales of
portions of our state research and development credits and state NOL
carryforwards.
As of December 31, 2001, we had NOL carryforwards of approximately
$76,000,000 for Federal income tax purposes that will expire principally in the
years 2002 through 2021. In addition, we had Federal research and development
credit carryforwards of approximately $1,610,000 that will expire principally in
2002 through 2018. Also at December 31, 2001, we had NOL carryforwards of
approximately $61,000,000 for state income tax purposes and state research and
development credit carryforwards of $311,000. For financial reporting purposes,
a valuation allowance has been recognized to offset the deferred tax assets
related to these carryforwards.
We lease laboratory and office facilities under an agreement expiring on
December 31, 2015. The minimum annual payment under the lease is currently
$1,835,000. The lease provides for fixed escalations in rent payments in the
years 2005 and 2010.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk (i.e., interest
rate risk) are included in Item 2 of this Report.
13
Item 4. Controls and Procedures
The Company's chief executive officer and principle accounting officer
performed an evaluation of the Company's disclosure controls and procedures as
of a date within 90 days prior to the filing of this quarterly report on Form
10-Q. Based on this evaluation, the Company believes that such controls and
procedures effectively ensure that information required to be disclosed in this
quarterly report on Form 10-Q is appropriately recorded, processed and reported.
There have been no significant changes in the Company's disclosure controls and
procedures or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 5, 2000, we filed suit in the United States District Court for the
District of New Jersey against M.D.S. Panlabs, Inc., a Washington corporation,
and Panlabs Taiwan Ltd., a Taiwanese corporation (collectively, "Panlabs"). The
suit alleges that Panlabs has infringed several issued U.S. Patents owned by
Synaptic that relate to cloned human receptors and their use in binding assays.
The suit also alleges that Panlabs has been importing, selling and offering to
sell products of our patented binding assay processes to pharmaceutical
companies and others in the United States, particularly in New Jersey.
On December 14, 2001, we filed a suit in the United States District Court
for the District of New Jersey against Euroscreen, S.A., a Belgian corporation
("Euroscreen"). The suit alleges that Euroscreen has infringed numerous issued
U.S. Patents owned by us, which relate to cloned human receptors and their use
in binding assays. The suit alleges that Euroscreen has been importing, selling
and offering to sell products of our patented binding assay processes to
pharmaceutical companies and others in the United States, particularly in New
Jersey, and that Euroscreen has conspired with Panlabs to infringe our patents.
The suits seek injunctions against the infringing activities of Euroscreen
and Panlabs, damages, the destruction of data obtained by the infringement of
patents and other relief.
We believe that our complaint against Panlabs and Euroscreen is well
founded and necessary to protect the value of our intellectual property assets.
We believe that an adverse resolution of the above matters would not have a
material adverse effect on our ongoing business.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment agreement, dated as of September 9, 2002,between the Company
and Dr. Errol B. De Souza, filed herewith
10.2 Incentive Stock Option Agreement, dated as of September 9, 2002,between
the Company and Dr. Errol B. De Souza, filed herewith
10.3 Nonqualified Stock Option Agreement, dated as of September 9, 2002,
between the Company and Dr. Errol B. De Souza, filed herewith
10.4 Nonqualified Stock Option Agreement relating to non-plan options, dated
as of September 9, 2002, between the Company and Dr. Errol B. De Souza,
filed herewith
99.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K during the fiscal quarter
ended September 30, 2002 relating to a Certification Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 certifying information in the June 30, 2002 10-Q.
---------------
Safe Harbor Statement
This Report on Form 10-Q contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Such statements include, but are not limited
to, those relating to future cash and spending plans, amounts of future research
funding, and any other statements regarding future growth, future cash needs,
future operations, business plans and financial results, and any other
statements which are not historical facts. When used in this document, the words
"expects," "may," "believes," and similar expressions are intended to be among
the words that identify forward-looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those risks and
uncertainties detailed in the company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (the "2001 Form 10-K"), including in Item 1
of the 2001 Form 10-K under the captions "Patents, Proprietary Technology and
Trade Secrets," "Competition" and "Government Regulation" as well as in the
section entitled "Risk Factors" or detailed from time to time in filings the
company makes with the SEC. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated. Although the company believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
16
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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.
SYNAPTIC PHARMACEUTICAL CORPORATION
Date: November 14, 2002 By: /s/ Errol B. De Souza
-------------------------------
Name: Errol B. De Souza
Title: President and Chief Executive Officer
By: /s/ Edmund M. Caviasco
--------------------------------
Name: Edmund M. Caviasco
Title: Controller (Principal Accounting Officer)
17
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Errol B. De Souza, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synaptic
Pharmaceutical Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others within
Synaptic Pharmaceutical Corporation, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Errol B. De Souza
-------------------------------
Name: Errol B. De Souza
Title: President and Chief Executive Officer
18
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Edmund M. Caviasco, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synaptic
Pharmaceutical Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others within
Synaptic Pharmaceutical Corporation, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Edmund M. Caviasco
-------------------------------
Name: Edmund M. Caviasco
Title: Controller and Principal Accounting Officer
19