SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2001, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_________________
Commission File Number 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 22-2389839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(858) 452-2323
(Registrant's telephone number including area code)
__________________________________
Indicate by check (X) 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 May 9, 2001, 6,199,100 shares of Common Stock of the Registrant were
outstanding.
This filing, without exhibits, contains 13 pages.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Consolidated Balance Sheets as of
March 31, 2001 (unaudited) and December 31, 2000........................ 3
Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 (unaudited)..................................... 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 (unaudited).................. 5
Notes to Consolidated Financial Statements (unaudited).................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.................. 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.......................................................... 12
Item 2 - Changes in Securities and Use of Proceeds.................................. 12
Item 3 - Defaults Upon Senior Securities............................................ 12
Item 4 - Submission of Matters to a Vote of Security Holders ....................... 12
Item 5 - Other Information.......................................................... 12
Item 6 - Exhibits and Reports on Form 8-K........................................... 12
Signatures.......................................................................... 13
2
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
----------------------- -----------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 11,134,698 $ 7,102,317
Restricted cash 1,779,002 -
Accounts receivable from agreement with Fresenius 51,046 439,315
Prepaid expenses 69,159 104,178
Assets held for sale - 26,739
Debt acquisition costs 55,456 76,612
----------------------- -----------------------
Total current assets 13,089,361 7,749,161
Restricted cash deposit, long term portion 143,898 -
Property and equipment, net 112,741 102,048
Other assets 31,971 40,062
----------------------- -----------------------
Total assets $ 13,377,971 $ 7,891,271
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 423,415 $ 936,251
Accrued compensation 73,029 171,360
Accrued liabilities 524,954 267,182
Current portion of deferred revenue from restructured Fresenius
agreement 1,600,000 -
Current portion of convertible debentures - 275,000
Current portion of long-term obligations 1,581,936 1,578,562
----------------------- -----------------------
Total current liabilities 4,203,334 3,228,355
Long term portion of deferred revenue from restructured Fresenius
agreement 6,000,000 -
Long-term obligation, net of current portion 140,212 563,688
Stockholders' equity:
Common stock, $.02 par value; 75,000,000 shares authorized,
6,199,100 and 6,105,350 shares issued and outstanding at
March 31, 2000 and December 31, 2000, respectively 123,982 122,107
Additional paid-in capital 100,383,014 100,269,714
Accumulated deficit (97,472,571) (96,292,593)
----------------------- -----------------------
Total stockholders' equity 3,034,425 4,099,228
----------------------- -----------------------
Total liabilities and stockholders' equity $ 13,377,971 $ 7,891,271
======================= =======================
See accompanying Notes to Consolidated Financial Statements.
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles.
3
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
2001 2000
-------------- --------------
Revenue:
Revenue from restructured Fresenius
agreement $ 400,000 $ -
Revenue from Fresenius agreement - 566,867
----------- -------------
Total revenue 400,000 566,867
Costs and expenses:
Production costs - 63,709
Sales and marketing - 1,922,608
Research and development 171,223 847,100
General and administrative 1,442,284 731,836
----------- -------------
Total costs and expenses 1,613,507 3,565,253
Other income (expense):
Interest and other income, net 132,290 153,701
Interest expense (98,761) (136,724)
----------- -------------
33,529 16,977
----------- -------------
Net loss $(1,179,978) $ (2,981,409)
=========== =============
Net loss per share $ (.19) $ (0.50)
=========== =============
Shares used in computing net loss
per share 6,107,433 5,949,782
=========== =============
See accompanying Notes to Consolidated Financial Statements.
4
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2001 2000
----------- -----------
Operating Activities
Net loss $(1,179,978) $(2,981,409)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 21,174 28,112
Gain on sale of asset to Fresenius 16,714 -
Assets held for sale (26,739) -
Stock and stock options issued for services 115,175 -
Deferred revenue from Fresenius (400,000) -
Changes in operating assets and liabilities, net 95,747 218,483
----------- -----------
Net cash used by operating activities (1,357,907) (2,734,814)
Investing Activities
Proceeds from restructured Fresenius agreement 8,000,000 -
Proceeds from sale of assets to Fresenius 12,000 -
Purchase of equipment (3,710) (4,016)
----------- -----------
Net cash used by investing activities 8,008,290 (4,016)
Financing Activities
Payment of notes payable (695,102) (12,087)
Cash restricted for debt repayment (1,922,900) -
Deferred financing costs - 38,403
Proceeds from exercise of stock options and - 4,453,094
warrants
Payment of capital lease obligations - (1,481)
----------- -----------
Net cash provided by financing activities (2,618,002) 4,477,929
Increase in cash and cash equivalents 4,032,381 1,739,099
Cash and cash equivalents at beginning of period 7,102,317 11,569,966
----------- -----------
Cash and cash equivalents at end of period $11,134,698 $13,309,065
=========== ===========
Supplemental disclosure of cash flow information
Interest paid $ 83,863 $ 70,963
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
5
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Formation and Business of the Company
The accompanying consolidated financial statements have been prepared by us
(the management of Cypress Bioscience Inc.) without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the SEC. The
consolidated financial statements include our accounts and those of our wholly
owned subsidiaries. All intercompany accounts and transactions have been
eliminated. In the opinion of our management, all adjustments necessary for a
fair presentation of the accompanying unaudited financial statements are
reflected herein. All such adjustments are normal and recurring in nature.
Interim results are not necessarily indicative of results for the full year.
For more complete financial information, these consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in our 2000 Annual Report on Form 10-K filed with the SEC.
We are focusing our expertise and resources on developing therapeutics for
the treatment of the fibromyalgia syndrome (FMS) and other rheumatologic pain
disorders. We have begun a program directed at the development or acquisition of
drug candidates for the treatment of FMS. In addition, we are developing
Cyplex(TM), a platelet alternative, as an alternative to traditional platelet
transfusions. We have in the past evaluated various possible strategic
transactions, including the potential acquisitions of products, technologies and
companies, and we expect to continue to do so in the future.
2. Fresenius Agreements
Effective January 1, 2001, Cypress restructured its PROSORBA column
partnership agreement with Fresenius AG of Bad Homburg, Germany and its U.S.
subsidiary, Fresenius HemoCare, Inc. (Fresenius). Under the revised agreement,
Fresenius is responsible for all PROSORBA column research and development,
sales, marketing and clinical efforts worldwide. Cypress received an upfront
payment of $8.0 million for certain assets and a partial prepayment of royalties
related to the PROSORBA column. Cypress has the opportunity to receive
additional royalty payments for the life of the PROSORBA column. The
restructured agreement eliminates the profit and expense sharing arrangement
with Fresenius for PROSORBA column sales and substitutes royalty provisions.
Revenues from the first quarter of 2000 consisted of reimbursement to Cypress by
Fresenius of its allowable expenses under the original agreement, as no profits
were realized by the partnership during the period. As a result, revenues for
the two periods are not directly comparable. Revenues for the first quarter of
2001 consisted of the amortization of the upfront payment from the restructured
Fresenius agreement on a straight-line basis over a five year term. The
unamortized upfront payment amount is being recorded as deferred revenue from
restructured Fresenius agreement.
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3. Net Loss Per Share
The computation of net loss per share is based on the weighted average
number of shares of common stock outstanding for each period. Common stock
equivalents related to options, warrants and convertible debentures are
excluded, as their effect is antidilutive.
4. Long Term Obligation
The long-term obligation and current portion of long-term obligations
consist of a fully amortizing term loan that will be repaid June 2002. Prior to
the sale of PROSORBA related assets to Fresenius, the loan was secured by
certain assets of the Company. In January 2001, the debt covenants were
restructured and the loan was secured with a $2.1 million interest bearing
restricted cash account held as collateral by the lender. This interest bearing
restricted cash will be used to repay the loan over its term. The 7% convertable
debentures which were due this quarter were repaid in full, in accordance with
the terms of the debenture agreement, in the amount of $275,000.
5. Equity
In March 2000, we received proceeds of approximately $4.5 million from the
exercise of options to purchase approximately 2,284,000 shares of common stock.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties. Our
actual results could differ materially from those discussed below and elsewhere
in this 10Q. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section, as well as other sections
of this 10Q, and those discussed in the our Annual Report on Form 10-K for the
year ended December 31, 2000.
Company Overview
We are focusing our expertise and resources on developing therapeutics for
the treatment of the fibromyalgia syndrome (FMS) and other rheumatologic pain
disorders. We have begun a program directed at the development or acquisition of
drug candidates for the treatment of FMS. In addition, we are developing
Cyplex(TM), a platelet alternative, as an alternative to traditional platelet
transfusions. We have in the past evaluated various possible strategic
transactions, including the potential acquisitions of products, technologies and
companies, and we expect to continue to do so in the future.
As of March 31, 2001, we had working capital of approximately $8.9 million
and an accumulated deficit of approximately $97.5 million. Our future success
depends on our ability to develop and market new products for the treatment of
FMS or other rheumatologic pain disorders as well as the success of Fresenius in
marketing the PROSORBA column.
On January 19, 2001, we sold to Fresenius Hemocare, Inc. (Fresenius) the
United States Food and Drug Administration (FDA) pre-market approvals and
applications for the PROSORBA column as well as our furniture and equipment used
in connection with research and development, clinical trials, quality control,
and sales and marketing efforts associated with the PROSORBA column. In
addition, Fresenius assumed our liability under a lease for a facility in
Redmond, Washington and our obligations under contracts relating to the PROSORBA
column, including our royalty obligations under assigned patent licenses. We
also assigned a distribution agreement for the territory of Canada to Fresenius.
We retained ownership of the patents and trademarks for the PROSORBA column.
In connection with the sale of assets, we restructured the existing license
agreement with Fresenius so that Fresenius assumed responsibility for the
research and development, clinical trials and sales and marketing of the
PROSORBA column in addition to the manufacturing responsibility that Fresenius
has had since April 1999. The restructured agreement eliminates the profit
sharing and expense sharing provisions and substitutes royalty provisions. At
the closing, Fresenius paid us a license fee, which represents a prepayment of
royalties for 10,000 columns in each of the five years beginning with 2001. In
addition, we are entitled to receive royalties on any sales of columns in excess
of the 10,000 columns within any of the five years and for all column sales
beyond the five-year period. The license fee is not refundable to Fresenius
under any circumstances. Fresenius paid approximately $8.0 million in cash for
the assets, including the pre-marketing approval, and the license fee upon
consummation of the transaction.
Prior to the amendment of the license and distribution agreement, the
agreement between us and Fresenius entered into in March 1999 governed our
relationship with Fresenius. The original agreement provided for the co-
marketing and distribution of the PROSORBA column in the United States, and for
the registration and distribution of the PROSORBA column in Europe, Latin
America and subject to certain conditions, Japan and select Asian countries. The
terms of the agreement with Fresenius specified joint efforts to introduce and
market the PROSORBA column in the United States, with Fresenius having exclusive
distribution rights and responsibility for clinical trials and registration
overseas. The agreement included a 50/50 profit split in the territories other
than the United States. The profit sharing was 50/50 in the United States for
both the PROSORBA column and disposables sold by Fresenius for use with the
PROSORBA column.
Revenue from March 1999 when we entered into the original agreement with
Fresenius and prior to the January 2001 revised agreement consisted of our
8
pro rata share of PROSORBA column sales by Fresenius. Our pro rata share of
PROSORBA column sales was determined as the total of allowable expenses incurred
by us for royalty, research and development and sales and marketing expenses
plus our share of any remaining net profit generated under the agreement. Our
share of remaining net profit was calculated as the gross profit from PROSORBA
column sales less reimbursed expenses incurred by Fresenius and us.
Results of Operations
Total revenues for the quarter ended March 31, 2001 totaled $400,000
compared to $567,000 in the same period of 2000. Total revenues for the first
quarter of 2001 consisted of amortization of the upfront payment of $8.0 million
we received under the restructured agreement with Fresenius. This upfront
payment is being recognized as revenues on a straight-line basis over a five-
year term. The unamortized amount of the upfront payment is recorded as deferred
revenues. In contrast, total revenues for the first quarter of 2000 consisted of
reimbursement to Cypress by Fresenius of its allowable expenses under the
original agreement, as no profits were realized by the partnership during the
period. As a result, revenues for the two periods are not directly comparable.
Total operating expenses for the quarters ended March 31, 2001 and 2000
totaled $1.6 million and $3.6 million, respectively. The decrease in operating
expenses was primarily due to the assumption of research, development, sales and
marketing expenses associated with the PROSORBA column by Fresenius beginning
January 1, 2001. This decrease was partially offset by increased general and
administrative expenses in connection with business development expenses
associated with executing the research agreement with Georgetown University and
efforts to in-license drug candidates for the treatment of fibromyalgia syndrome
(FMS). In January 2001, we began a strategic initiative towards the development
or acquisition of drug candidates for the treatment of FMS.
Production costs incurred in 2000 were a result of royalties paid by us to
third parties based on total PROSORBA column sales. We are no longer responsible
for royalty payments to these third parties under the restructured agreement
with Fresenius.
We incurred no sales and marketing expenses for the quarter ended March 31,
2001 compared to approximately $1.9 million for the same period in 2000. The
decrease in sales and marketing expenses for the first quarter of 2001 compared
to the same period in 2000 was due to the assumption of the sales and marketing
efforts associated with the PROSORBA column by Fresenius, in accordance with the
restructured agreement.
Research and development expenses decreased to $171,000 for the quarter
ended March 31, 2001 from $847,000 for the same period in 2000. The decrease was
due to the assumption of the research and development activities related to the
PROSORBA column by Fresenius. Research and development expenses incurred for the
quarter ended March 31, 2001 consisted only of expenditures for FMS and
Cyplex(TM) programs. We anticipate that research and development costs will
remain near the current levels until we are able to license potential drug
candidates for our FMS program.
General and administrative expenses for the quarter ended March 31, 2001
totaled approximately $1.4 million, compared to $732,000 for the same period in
2000. The increase of $704,000 in general and administrative expenses was due
primarily due to increased business development activity in the first quarter of
2001 associated with programs related to the licensing of potential drug
candidates for the treatment of the FMS.
Liquidity and Capital Resources
Our cash and cash equivalents balance at March 31, 2001 totaled $11.1
million, compared to $7.1 million at December 31, 2000. The net increase in cash
and cash equivalents was due to the upfront payment from the restructured
agreement with Fresenius, partially offset by cash used in operations and
repayments made on its equipment lease. Working capital at March 31, 2001
totaled $8.9 million, compared to $4.5 million at December 31, 2000.
We believe our cash and cash equivalents balance on March 31, 2001, is
sufficient to fund operations through early 2002. We are actively seeking
financing and considering possible strategic transactions to
increase our cash position. In order to successfully acquire or develop products
for our FMS and Cyplex programs, we will be required to raise additional
9
capital. The amount of capital we require is dependent upon many factors,
including the following: costs of in-licensing drug candidates for our FMS
program, the costs and results associated with the clinical trials designed for
any new developed and/or acquired product, results of research and development
efforts, the FDA regulatory process, costs of commercialization of products and
potential competitive and technological advances and levels of product sales,
and the ability of Fresenius to successfully market the PROSORBA column for the
treatment of RA. Because we are unable to predict the outcome of the foregoing
factors, some of which are beyond our control, we are unable to estimate with
certainty our mid to long-term capital needs. Although we may seek to raise
additional capital through a combination of additional equity or debt sources,
we cannot assure you that we will be able to raise additional capital through
such sources or the funds raised thereby will allow us to maintain our current
and planned operations. If we are unable to obtain additional capital, we will
be required to delay, scale back or eliminate some or all of our planned
research and development activities related to additional product opportunities.
10
Quantitative and Qualitative Disclosure About Market Risk
We invest our excess cash in United States government securities and money
market funds with strong credit ratings. As a result, our interest income is
most sensitive to changes in the general level of United States interest rates.
We do not use derivative financial instruments, derivative commodity instruments
or other market risk sensitive instruments, positions or transactions in any
material fashion. Accordingly, we believe that while the investment-grade
securities we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
11
PART II
Item 1 - Legal Proceedings
From time to time we are involved in certain litigation arising out of
our operations. We are not currently engaged in any legal proceedings
that we expect would materially harm our business or financial
condition.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 - Other Information
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cypress Bioscience, Inc.
May 15, 2001 /s/ Jay D. Kranzler
--------------------------
Chief Executive Officer, Chief Financial Officer
and Chairman of the Board (Principal Executive
Officer and Principal Financial and Accounting
Officer)
13