1
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, 1997, 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)
(619) 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 1, 1997, 34,573,111 SHARES OF COMMON STOCK OF THE REGISTRANT
WERE OUTSTANDING.
This filing, without exhibits, contains 12 pages.
2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1 - Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 ..................................... 3
Consolidated Statements of Operations for the quarters ended
March 31, 1997 and 1996................................................... 4
Consolidated Statements of Cash Flows for the
quarters ended March 31, 1997 and 1996.................................... 5
Notes to Consolidated Financial Statements ...................................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ................................................................. 11
Item 6 - Exhibits and Reports on Form 8-K .................................................. 11
Signatures ................................................................................. 12
2
3
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
---------------------- ---------------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 4,838,050 $ 8,045,508
Short-term investments 3,922,600 2,890,160
Accounts receivable:
Trade 490,408 344,041
Other 132,433 150,954
Inventories 796,590 973,767
Prepaid expenses 135,960 171,231
---------------------- ---------------------
Total current assets 10,316,041 12,575,661
Property and equipment, net 2,314,299 2,351,928
Convertible debenture issuance costs, net 31,546 33,487
---------------------- ---------------------
Total assets $ 12,661,886 $ 14,961,076
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 342,175 $ 999,442
Accrued compensation 296,517 485,751
Accrued liabilities 1,392,715 902,090
Current portion of notes payable 21,576 27,208
---------------------- ---------------------
Total current liabilities 2,052,983 2,414,491
Convertible debentures 400,000 400,000
Notes payable, net of current portion 9,985 12,020
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value; authorized 60,000,000 shares;
issued and outstanding, 34,573,111 and 34,573,111 shares
at March 31, 1997 and December 31, 1996, respectively. 691,462 691,462
Additional paid-in capital 70,062,301 70,062,301
Deferred compensation (1,210,395) (1,313,276)
Accumulated deficit (59,344,450) (57,305,922)
---------------------- ---------------------
Total stockholders' equity 10,198,918 12,134,565
---------------------- ---------------------
Total liabilities and stockholders' equity $ 12,661,886 $ 14,961,076
====================== =====================
See accompanying notes.
Note: The balance sheet at December 31, 1996, 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
4
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
------------------------ ----------------------
Product sales $ 816,458 $ 17,676
Grant income 31,634 -
------------------------ ----------------------
848,092 17,676
------------------------ ----------------------
Costs and expenses:
Production costs 601,334 248,903
Sales and marketing 315,166 52,043
Research and development 1,490,247 427,233
General and administrative 574,373 960,151
Restructuring expense - 441,676
Debt conversion expense - 183,688
------------------------ ----------------------
Loss from Operations 2,981,120 2,313,694
------------------------ ----------------------
Other income (expense):
Interest income 102,806 120,294
Interest expense (8,306) (25,367)
------------------------ ----------------------
94,500 94,927
------------------------ ----------------------
Net loss $ (2,038,528) $(2,201,091)
======================== ======================
Net loss per share $ (0.06) $ (0.08)
======================== ======================
Shares used in computing net loss
per share 34,573,111 26,001,036
======================== ======================
See accompanying notes.
4
5
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1997 1996
--------------------- --------------------
OPERATING ACTIVITIES
Net loss $ (2,038,528) $ (2,201,091)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 82,521 44,862
Amortization of deferred compensation 102,881 111,686
Debt conversion expense - 183,688
Loss on disposal of property and equipment 292 -
Changes in operating assets and liabilities, net (271,274) (273,388)
--------------------- --------------------
Net cash used by operating activities (2,124,108) (2,134,243)
INVESTING ACTIVITIES
Purchase of equipment (43,243) (43,038)
Purchase of short-term investments (1,032,440) -
--------------------- --------------------
Net cash used by investing activities (1,075,683) (43,038)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 12,109,340
Proceeds from issuance of convertible debentures - 500,000
Payment of notes payable (7,667) (5,980)
Debt issuance costs - (71,929)
--------------------- --------------------
Net cash (used by) provided by financing activities (7,667) 12,531,431
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,207,458) 10,354,150
Cash and cash equivalents at beginning of period 8,045,508 1,009,878
===================== ====================
Cash and cash equivalents at end of period $ 4,838,050 $ 11,364,028
===================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,172 $ 4,334
===================== ====================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Stock issued for debt conversion $ - $ 2,351,607
===================== ====================
See accompanying notes.
5
6
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 Cypress Bioscience, Inc. (the "Company") 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 the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been
eliminated. In the opinion of the Company's 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 the Company's 1996 Annual Report on Form 10-K filed with
the SEC.
The Company researches, develops, manufactures and markets medical
devices and therapeutics for the treatment of certain types of immune disorders
and is engaged in the development of novel therapeutic agents for the treatment
of blood platelet disorders. The Company's first product, the PROSORBA(R)
column, a medical device, treats a patient's defective immune system so that it
can more effectively respond to certain diseases. Through its acquisition of
PRP, Inc. in November 1996, the Company acquired rights to Infusible Platelet
Membranes (IPM), which is positioned to become a substitute for traditional
platelet transfusions.
The Company commenced business activities in January 1982. The U.S.
Food and Drug Administration ("FDA") approved the PROSORBA(R) column for
commercial sale in December 1987 for the treatment of patients with idiopathic
thrombocytopenic purpura ("ITP"), an immune-mediated bleeding disorder. The
Company continues to devote most of its efforts to obtaining FDA marketing
approval for the use of the PROSORBA(R) column for the treatment of additional
autoimmune diseases as well as to the continued development of IPM. The Company
is currently conducting a Phase III pivotal clinical trial using the PROSORBA(R)
column for therapy for rheumatoid arthritis as a follow-on to a pilot clinical
trial completed in September 1995. Clinical trials for certain platelet
disorders are being planned for 1997.
6
7
2. INVENTORIES
Inventories are comprised of the following:
March 31, 1997 December 31, 1996
---------------------------- ---------------------------
Raw materials and components $ 198,920 $ 214,632
Work in process 470,230 700,815
Finished goods 127,440 58,320
---------------------------- ---------------------------
$ 796,590 $ 973,767
============================ ===========================
3. PER SHARE INFORMATION
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 have not
been considered in the calculation of net loss per share inasmuch as their
effect would have been antidilutive.
4. COMMITMENTS AND CONTINGENCIES
The Company has been served with a complaint alleging that the Company
has been and is infringing one or more claims of a certain patent issued to a
third party in the manufacture, use and sale of its PROSORBA(R) column. The
Company believes the claims to be without merit and intends to vigorously
contest the claims. The Company further believes that any final resolution of
the claims will not have a material adverse effect on the Company's financial
position or results of operations.
5. RESTRUCTURING EXPENSE
The Company has incurred approximately $1.3 million of capital
expenditures through March 31, 1997 in connection with the consolidation of its
two Washington manufacturing facilities. That consolidation was completed in
April 1997 with the Company receiving FDA GMP approval of the facility.
7
8
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 Exchange Act that involve risks and uncertainties. The Company's actual
results could differ materially from those discussed below and elsewhere in this
Report. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section, as well as other sections
of this report, and those discussed in the Company's Form 10-K for the year
ended December 31, 1996.
RESULTS OF OPERATIONS
Revenues associated with shipments of the Company's PROSORBA(R) column
were $816,458 and $17,676 for the quarters ended March 31, 1997 and 1996,
respectively. The significant increase is a result of the Company regaining from
Baxter Healthcare Corporation ("Baxter") the distribution rights to the
PROSORBA(R) column in May 1996 and initiating direct sales and marketing efforts
thereafter.
Consolidated operating expenses of $3.0 million for the quarter ended
March 31, 1997 compare to $2.3 million for the same period in 1996. This
increase reflects a significant expansion in the Company's research and
development activities, offset, in part, by a reduction in general and
administrative expenses. As a percent of total revenues, operating expenses
decreased significantly.
During the first half of 1996, production was impacted by both the
termination of the Baxter distribution agreement and the consolidation of the
Company's manufacturing facilities undertaken in connection with the Company's
restructuring. There were very few PROSORBA(R) columns shipped during the first
four months of 1996 as the Company did not resume direct shipments to domestic
customers until May 1996. Production costs of $601,334 and $248,903 for the
quarters ended March 31, 1997 and 1996, respectively, reflect this unusual
activity.
Sales and marketing expenses for the quarters ended March 31, 1997 and
1996 were $315,166 and $52,043, respectively. This increase was anticipated and
is related to the $800,000 increase in sales resulting from the Company's
initiation of direct sales and marketing efforts.
For the quarter ended March 31, 1997, research and development expenses
were approximately $1.5 million. For the same period in 1996, such expenses were
$427,233. The significant increase in 1997 is attributable to the Company's
efforts to establish a stronger scientific base for its products. The majority
of these efforts are directed to the Company's ongoing controlled clinical trial
for use of the PROSORBA(R) column in rheumatoid arthritis. The Company expects
further increases in research and development expenses in future periods as the
aforementioned trial continues and with the expected launch of two clinical
trials for Infusible Platelet Membranes (IPM) scheduled to begin later in 1997.
8
9
The Company's efforts to control costs were reflected in considerably
lower general and administrative expenses. General and administrative expenses
were $574,373 and $960,151 for the quarters ended March 31, 1997 and 1996,
respectively. The decline of $386,000, or 40%, over the comparable period in
1996 is a result of both a reduction in spending as well as non recurring
expenses in 1996 associated with the Company's new Chief Executive Officer, and
President and Chief Operating Officer, both of who joined the Company in
December 1995, and severance payments paid to the Company's former Chief
Scientific Officer in connection with his resignation in March 1996.
Interest expense of $8,306 for the quarter ended March 31, 1997,
compares to interest expense of $25,367 for the same period in 1996. The decline
relates to the September 1995 and March 1996 conversions of the majority of the
Company's outstanding 7% Convertible Debentures.
In January 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being eliminated immediately as part of the restructuring. Such positions
were from all departments of the Company. Costs related to these elimination's
were approximately $441,000 and were recorded as a restructuring expense in the
three months ended March 31, 1996.
The Company recorded a non-cash expense of approximately $184,000 for
debt conversion expense in the quarter ended March 31, 1996. Such expense
represented the fair market value of the increased number of shares issued by
the Company under the terms of an exchange offering to holders of the Company's
7% Convertible Debentures to exchange one share of common stock of the Company
for each $2.25 of outstanding principal (including any accrued and unpaid
interest on such principal) of the 7% Convertible Debentures. Outstanding
principal of $845,000 was tendered for exchange, leaving an outstanding
principal balance of $400,000 as of both March 31, 1996 and March 31, 1997.
The increase in total operating expenses was only partially offset by
the increase in revenues, thereby resulting in a net loss of approximately $2.0
million for the quarter ended March 31, 1997, compared to a net loss of
approximately $2.2 million for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of March 31, 1997, was $8.3 million
compared to $10.2 million at December 31, 1996. The decrease in working capital
is attributable to the net loss for the quarter ended March 31, 1997.
The Company expects to incur operating losses until it can obtain
marketing approval from the FDA for additional disease indications for the
PROSORBA(R) column, or obtain FDA approval for IPM, or until sales for the
PROSORBA(R) column for its existing indication of
9
10
idiopathic thrombocytopenic purpura ("ITP") increase significantly, in each
case, if at all. A clinical trial is currently being conducted using the
PROSORBA(R) column for rheumatoid arthritis therapy to obtain the necessary
clinical data to apply to the FDA to obtain marketing approval. The Company
expects to perform an interim analysis for this trial in mid-1997. There can be
no assurance that the Company will be able to obtain FDA approval to market the
PROSORBA(R) column for disease indications other than ITP. In addition, there
can be no assurance that the interim data regarding the use of the PROSORBA(R)
column for the therapy of rheumatoid arthritis will be favorable.
During 1996, the Company implemented a restructuring plan which
included consolidating its manufacturing facilities to one location in the state
of Washington and moving all other operations of the Company to San Diego,
California. The Company has incurred approximately $1.3 million of capital
expenditures through March 31, 1997 to consolidate its two Washington
manufacturing facilities. In April 1997, the Company's Redmond, Washington
facility successfully completed the FDA GMP re-approval process, signifying the
successful completion of the consolidation. The Company believes that the funds
resulting from the private placements completed in 1996, coupled with the
Company's reduction in expenses as a result of the restructuring, will provide
the resources necessary to fund operations, including clinical trials, until
early 1998.
10
11
PART II
Item 1 - Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
The Company has been served with a complaint alleging that the Company
has been and is infringing one or more claims of a certain patent
issued to a third party in the manufacture, use and sale of its
PROSORBA(R) column. The Company believes the claims to be without merit
and intends to vigorously contest the claims. The Company further
believes that any final resolution of the claims will not have a
material adverse effect on the Company's financial position or results
of operations.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
11
12
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.
Cypress Bioscience, Inc.
May 14, 1997 /s/ Jay D. Kranzler
- --------------------- ----------------------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer, Chief Scientific Officer
and Vice Chairman of the Board
(Principal Executive Officer)
May 14, 1997 /s/ Susan E. Feiner
- --------------------- -----------------------------------------------------
Date Susan E. Feiner
Director of Finance, Controller
(Principal Accounting and Financial Officer)
12