UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: 0-19871
September 30, 1999 -------
Commission File Number
CYTOTHERAPEUTICS, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No)
525 DEL REY AVENUE SUITE C
SUNNYVALE, CA 94086
-------------------
(Address of principal executive offices including zip code)
(408) 731-8670
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
At October 31, 1999, there were 19,153,534 shares of Common Stock, $.01 par
value, issued and outstanding. There were no issued and outstanding shares of
Preferred Stock.
Page 1 of 16
CYTOTHERAPEUTICS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited)
Three and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Page 2 of 16
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 December 31, 1998
(unaudited) (footnote 1)
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 3,688,923 $ 7,864,788
Marketable securities 2,603,560 9,520,939
Receivables from collaborative agreement 224,210 206,609
Other current assets 698,472 841,674
------------- -------------
Total current assets 7,215,165 18,434,010
Property, plant and equipment, net 6,196,720 8,356,009
Other assets 5,797,696 6,075,663
------------- -------------
Total assets $ 19,209,581 $ 32,865,682
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,824,427 $ 1,730,741
Deferred revenue -- 2,500,000
Current maturities of capitalized lease obligations 315,000 317,083
Current maturities of long term debt -- 1,000,000
------------- -------------
Total current liabilities 2,139,427 5,547,824
Capitalized lease obligations, less current maturities 3,052,917 3,261,667
Long term debt, less current maturities -- 500,000
Deferred rent 371,121 222,673
Redeemable stock 5,248,610 5,248,610
Common stock to be issued 187,500 187,500
Stockholders' equity
Common stock 184,690 178,003
Additional paid in capital 123,483,420 122,861,606
Deferred compensation (1,308,858) (1,472,919)
Accumulated deficit (114,147,844) (103,664,084)
Unrealized loss on marketable securities (1,402) (5,198)
------------- -------------
Accumulated other comprehensive loss (114,149,246) (103,669,282)
------------- -------------
Total stockholders' equity 8,210,006 17,897,408
------------- -------------
Total liabilities and stockholders' equity $ 19,209,581 $ 32,865,682
============= =============
See accompanying notes to condensed consolidated financial statements.
Page 3 of 16
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenue from collaborative arrangements $ -- $ 2,539,557 $ 5,021,707 $ 6,289,120
Operating expenses:
Research and development 1,584,879 4,282,313 8,432,262 13,699,332
General and administrative 1,027,357 1,281,076 3,195,672 3,692,331
Wind-down 4,078,034 -- 4,078,034 --
------------ ------------ ------------ ------------
6,690,270 5,563,389 15,705,968 17,391,663
------------ ------------ ------------ ------------
Loss from operations (6,690,270) (3,023,832) (10,684,261) (11,102,543)
Other income (expense):
Investment income 97,783 280,965 504,114 1,026,461
Interest expense (51,782) (124,813) (236,836) (358,508)
Other loss (66,777) -- (66,777) --
------------ ------------ ------------ ------------
(20,776) 156,152 200,501 667,953
------------ ------------ ------------ ------------
Net loss ($ 6,711,046) ($ 2,867,680) ($10,483,760) ($10,434,590)
============ ============ ============ ============
Basic and diluted net loss per share ($ 0.36) ($ 0.16) ($ 0.56) ($ 0.57)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share 18,712,632 18,275,784 18,560,675 18,224,748
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
Page 4 of 16
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
(unaudited) September 30,
1999 1998
----------------------------
Cash flows from operating activities:
Net loss ($10,483,760) ($10,434,590)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 1,603,691 1,617,494
Write down of fixed assets 800,000 --
Compensation expense relating to the grant
of stock options 244,337 405,739
Loss on sale of fixed assets 66,777 --
Changes in operating assets and liabilities (1,978,807) (1,352,414)
------------ ------------
Net cash used in operating activities (9,747,762) (9,763,771)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 11,317,482 20,701,919
Purchases of marketable securities (4,397,676) (15,183,133)
Purchase of property, plant and equipment (131,660) (2,101,121)
Proceeds from the sale of fixed assets 84,450 --
Acquisition of other assets (138,090) (696,002)
------------ ------------
Net cash provided by investing activities 6,734,505 2,721,663
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 548,225 194,863
Proceeds from financing transactions -- 1,259,300
Principal payments under capitalized lease obligations
and mortgage payable (1,710,833) (1,064,156)
------------ ------------
Net cash (used in) provided by financing activities (1,162,608) 390,007
------------ ------------
Decrease in cash and cash equivalents (4,175,865) (6,652,101)
Cash and cash equivalents, January 1 7,864,788 15,941,701
------------ ------------
Cash and cash equivalents, September 30 $ 3,688,923 $ 9,289,600
============ ============
See accompanying notes to condensed financial statements.
Page 5 of 16
PART I - ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999 and 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying, unaudited, condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying financial
statements include all adjustments, consisting of normal recurring
accruals considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending December 31, 1999.
The balance sheet at December 31, 1998 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 for complete financial statements.
For further information, refer to the audited financial statements and
footnotes thereto as of December 31, 1998 included in the Company's Annual
Report to Stockholders and the Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded as their effect is antidilutive.
NOTE 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities, which prior to adoption were
reported separately in shareholders' equity to be included in other
comprehensive income.
For the three months ended September 30, 1999 and 1998, total
comprehensive loss amounted to $6,700,000 and $2,853,000, respectively.
For the first nine months of 1999 and 1998, total comprehensive loss
amounted to $10,480,000 and $10,415,000, respectively.
NOTE 4. REDEEMABLE STOCK
All such shares are held by Genentech, Inc. See Management's Discussion
and Analysis of Financial Condition and Results of Operations regarding
Genentech, Inc. and the impact on the Company's liquidity and capital
resources.
Page 6 of 16
NOTE 5. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY
In July 1999, the Company announced plans for the restructuring of its
operations to wind down operations relating to its encapsulated cell
technology and to focus its resources on the research and development of
its proprietary stem cell technology platform. The Company terminated
approximately 68 full time employees and, in October, relocated its
corporate headquarters to Sunnyvale, California. The Company has incurred
or accrued for approximately $4.1 million of employee separation, wind
down and relocation expenses during the third quarter. To date
substantially all of the Company's revenues and the substantial majority
of the Company's costs have been recognized or incurred in connection with
the Company's encapsulated cell technology programs. The costs of the
Company's stem cell programs are included in such costs and are not
accounted for separately.
Refer to the Management's Discussion and Analysis of Financial Condition
and Results of Operations section for additional discussion relating to
the Company's collaborative agreements and its liquidity and capital
resources.
The Company is currently negotiating for the sale and/or license of its
encapsulated cell technology intellectual property portfolio as well as
the sale of its excess fixed assets. Based on these activities, the
Company has recorded a valuation reserve for the fixed assets and has also
increased its patent reserve. The proceeds from these activities are
expected to be used to fund the Company's continuing operations, which
will be focused on stem cell research and development.
NOTE 6. CONTINGENCIES
In July 1999, the Rhode Island Partnership for Science and Technology
("RIPSAT") alleged that the Company is in default under a funding
agreement entered into with RIPSAT in 1989, and demanded payment of
approximately $2.6 million. RIPSAT has since notified the Company
demanding payment of the $2.6 million within thirty days (the notice
period). While the Company has responded to RIPSAT that the Company is not
in default under this agreement and expects to contest any attempt by
RIPSAT to realize on its demand, it may be necessary or desirable for the
Company to resolve its dispute with RIPSAT in connection with any possible
transaction involving disposition of the Company's Rhode Island based
assets, including, without limitation, the Company's pilot manufacturing
plant, which is financed by bonds insured by a Rhode Island state agency,
and the Company has therefore engaged in settlement discussions with
RIPSAT. There can be no assurance that this dispute will be resolved on a
basis satisfactory to the Company. Any settlement payment to RIPSAT could
have a material adverse effect on the Company's liquidity and capital
resources.
Page 7 of 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company for the three and nine months ended September 30, 1999 and 1998
should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements and the related footnotes thereto.
The statements contained in this report, other than statements of historical
fact, constitute forward-looking statements. Such statements include, without
limitation, all statements as to expectation or belief and statements as to the
Company's future results of operations, the progress of the Company's product
development and clinical programs, the need for, and timing of, additional
capital and capital expenditures, partnering prospects, resolution of disputed
claims, possible sales of assets or out-licensing of technology, the need for
additional intellectual property rights, effects of regulations, the need for
additional facilities and potential market opportunities. The Company's actual
results may vary materially from those contained in such forward-looking
statements because of risks to which the Company is subject, such as failure to
obtain a corporate partner or partners to support the Company's stem cell
programs, negotiations with Genentech, Inc. and RIPSAT, the Company's ability to
realize proceeds from the transfer or sale of its intellectual property rights,
equipment or facilities related to its encapsulated cell technology program,
risks of delays in research, development and clinical testing programs,
obsolescence of the Company's technology, lack of available funding, competition
from third parties, intellectual property rights of third parties, failure of
the Company's collaborators to perform, regulatory constraints, litigation and
other risks to which the Company is subject. See "Cautionary Factors Relevant to
Forward-Looking-Information" filed herewith as Exhibit 99 and incorporated
herein by reference.
Overview
Since its inception in August 1988, the Company has been primarily engaged in
research and development of human therapeutic products. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales for at least several years. The Company has
not commercialized any product and in order for the Company to commercialize any
product the Company must, among other things, substantially increase its
research and development expenditures as research and product development
efforts accelerate and clinical trials are initiated or broadened. The Company
has incurred annual operating losses since inception and expects to incur
substantial operating losses in the future. As a result, the Company is
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance its
operations. There can be no assurance that such financing or partnering revenues
will be available when needed or on terms acceptable to the Company. The
Company's results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material, nonrecurring events, including without limitation, the
receipt of one-time, nonrecurring licensing payments, the initiation or
termination of research collaborations and the winding-down of terminated
research and development programs.
Page 8 of 16
Results of Operations
Three months ended September 30, 1999 and 1998
For the quarters ended September 30, 1999 and 1998, revenues from collaborative
agreements totaled $0 and $2,540,000, respectively. The decrease in revenues
resulted from the June 1999 termination of a Development, Marketing and License
Agreement with AstraZeneca Group plc, which was signed in March 1995 (the "Astra
Agreement" ).
Research and development expenses totaled $1,585,000 for the three months ended
September 30, 1999, compared with $4,282,000 for the same period in 1998. The
decrease of $2,697,000, or 63%, from 1998 to 1999 was primarily attributable to
the wind-down of research activities relating to the Company's encapsulated cell
technology.
General and administrative expenses were $1,027,000 for the three months ended
September 30, 1999, compared with $1,281,000 for the same period in 1998. The
decrease of $254,000, or 20%, from 1998 to 1999 was primarily attributable to
the Company's reduction in general and administrative personnel.
Wind-down expenses totaled $4,100,000 for the three months ended September
30,1999, compared with $0 for the same period in 1998. The wind-down expenses
relate to the wind-down of the Company's encapsulated cell technology research
and the Company's other Rhode Island operations and the preparations for the
transfer of the Company's corporate headquarters to Sunnyvale, California.
Interest income for the three months ended September 30, 1999 and 1998 was
$98,000 and $281,000, respectively. The decrease in interest income in 1999 was
attributable to the lower average investment balances during such period,
$8,426,000 vs. $19,478,000 in the third quarter of 1999 and 1998, respectively.
Interest expense was $52,000 for the three months ended September 30, 1999,
compared with $125,000 for the same period in 1998. The decrease in 1999 was
attributable to lower outstanding debt and capital lease balances in 1999
compared to 1998.
Net loss for the three months ended September 30, 1999 was $6,711,000, or $0.36
per share, as compared to net loss of $2,868,000, or $0.16 per share, for the
comparable period in 1998. The increase in net loss of $3,843,000, or 134%, from
1998 to 1999 is primarily attributable to the elimination of revenue from the
Astra Agreement due to the June 1999 termination of this agreement, as well as
the Company's incurring substantial wind-down costs associated with the
restructuring of the Company's operations and preparations for the transfer of
the Company's corporate headquarters to Sunnyvale, California.
Results of Operations
Nine months ended September 30, 1999 and 1998
For the nine months ended September 30, 1999 and 1998, revenues from
collaborative agreements totaled $5,022,000 and $6,289,000. The decrease in
revenues of $1,267,000, or 20%, was attributable to the elimination of funding
from the Astra Agreement for the third quarter of 1999, which, as noted above,
was terminated in June 1999.
Page 9 of 16
Research and development expenses totaled $8,432,000 for the nine months ended
September 30, 1999, compared with $13,699,000 for the same period in 1998. The
decrease of $5,267,000, or 38%, from 1998 to 1999 was primarily attributable to
a reduction in spending on research agreements and a reduction in research and
development personnel expenses in the first half of the year and the wind-down
of research activities relating to the Company's encapsulated cell technology in
the third quarter as a result of the termination of the Astra Agreement in June
1999.
General and administrative expenses were $3,196,000 for the nine months ended
September 30, 1999, compared with $3,692,000 for the same period in 1998. The
decrease of $496,000 or 13%, from 1998 to 1999 was primarily attributable to the
Company's reduction in general and administrative personnel and the wind-down of
its encapsulated cell technology.
Wind-down expenses totaled $4,100,000 for the nine months ended September
30,1999, compared with $0 for the same period in 1998. The wind-down expenses
relate to the wind-down of the Company's encapsulated cell technology research
and the Company's other Rhode Island operations and the preparations for the
transfer of the Company's corporate headquarters to Sunnyvale, California.
Interest income for the nine months ended September 30, 1999 and 1998 was
$504,000 and $1,206,000, respectively. The decrease in interest income in 1999
was attributable to the lower average investment balance during such period. The
average investment balances were $12,350,000 and $23,192,000 for the first nine
months of 1999 and 1998, respectively.
Interest expense was $237,000 for the nine months ended September 30, 1999,
compared with $359,000 for the same period in 1998. The decrease in 1999 was
attributable to lower outstanding debt and capital lease balances in 1999
compared to 1998.
Net loss for the nine months ended September 30, 1999 was $10,484,000, or $0.56
per share, as compared to a net loss of $10,435,000, or $0.57 per share, for the
comparable period in 1998. However, as noted above, in the fourth quarter of
1999 the Company expects to receive no revenue from collaborative research; as a
result, results for the first nine months will not be indicative of results for
the balance of the year.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.
The Company had unrestricted cash, cash equivalents and marketable securities
totaling $6,292,000 at September 30, 1999. Cash equivalents and marketable
securities are invested in agencies of the U.S. government, investment grade
corporate bonds and money market funds.
The Company's liquidity and capital resources have been and will continue to be
significantly affected by the Company's relationship with corporate partners. In
March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to
Page 10 of 16
treat pain. AstraZeneca made an initial, nonrefundable payment of $5,000,000,
included in revenue from collaborative agreements in 1995, a milestone payment
of $3,000,000 in 1997 and was to remit up to an additional $13,000,000 subject
to achievement of certain development milestones. Under the agreement, the
Company was obligated to conduct certain research and development pursuant to a
four-year research plan agreed upon by the parties. Over the term of the
research plan, the Company originally expected to receive annual payments of $5
million to $7 million from AstraZeneca, which was to approximate the research
and development costs incurred by the Company under the plan. Subject to the
successful development of such products and obtaining necessary regulatory
approvals, AstraZeneca was obligated to conduct all clinical trials of products
arising from the collaboration and to seek approval for their sale and use.
AstraZeneca had the exclusive worldwide right to market products covered by the
agreement. Until the later of either the expiration of all patents included in
the licensed technology or a specified fixed term, the Company was entitled to a
royalty on the worldwide net sales of such products in return for the marketing
license granted to AstraZeneca and the Company's obligation to manufacture and
supply products. AstraZeneca had the right to terminate the original agreement
beginning April 1, 1998. On June 24, 1999 AstraZeneca, informed the Company of
the results of AstraZeneca's analysis of the double-blind, placebo-controlled
trial of the Company's encapsulated bovine cell implant for the treatment of
severe, chronic pain in cancer patients. AstraZeneca determined that, based on
criteria it established, the results from the 85-patient trial did not meet the
minimum statistical significance for efficacy established as a basis for
continuing worldwide trials for the therapy. AstraZeneca therefore indicated
that it did not intend to further develop the bovine cell-containing implant
therapy and executed its right to terminate the agreement.
In the third quarter of 1999, the Company announced plans for the restructuring
of its operations to wind down operations relating to its encapsulated cell
technology and to focus its resources on the research and development of its
proprietary stem cell technology platform. The Company terminated approximately
68 full time employees and in October 1999, relocated its corporate headquarters
to Sunnyvale, California. The Company has incurred or accrued for approximately
$4.1 million of employee separation, wind down and relocation expenses during
the third quarter of 1999.
The Company is currently engaged in discussions regarding the sale and/or
license of its encapsulated cell technology intellectual property portfolio as
well as the sale of its excess fixed assets. Based on these activities the
Company has recorded a valuation reserve on the fixed assets and has also
increased its patent reserve. However, there can be no assurance that the
Company will successfully conclude these negotiations. Any proceeds from these
activities are expected to be used to fund the Company's continuing operations,
which will be focused on stem cell research and development. Failure to achieve
the proceeds within currently anticipated time frames would have a material
adverse effect on the Company's liquidity and capital resources.
In July 1999, the Rhode Island Partnership for Science and Technology ("RIPSAT")
alleged that the Company is in default under a funding agreement entered into
with RIPSAT in 1989, and demanded payment of approximately $2.6 million. RIPSAT
has since notified the Company demanding payment of the $2.6 million within
thirty days
Page 11 of 16
(the notice period). While the Company has responded to RIPSAT that the Company
is not in default under this agreement and expects to contest any attempt by
RIPSAT to realize on its demand, it may be necessary or desirable for the
Company to resolve its dispute with RIPSAT in connection with any possible
transaction involving disposition of the Company's Rhode Island based assets,
including, without limitation, the Company's pilot manufacturing plant, which is
financed by bonds insured by a Rhode Island state agency, and the Company has
therefore engaged in settlement discussions with RIPSAT. There can be no
assurance that this dispute will be resolved on a basis satisfactory to the
Company. Any settlement payment to RIPSAT could have a material adverse effect
on the Company's liquidity and capital resources.
The Company's liquidity and capital resources have also been affected by the
termination of the Company's collaborative development and licensing agreement
with Genentech, Inc. relating to the development of products for the treatment
of Parkinson's disease. On May 21, 1998, Genentech exercised its right to
terminate the Parkinson's collaboration and demanded that the Company redeem, at
a price of $10.01 per share, shares of the Company's redeemable Common Stock
held by Genentech in an amount equal to the amount of funds invested by
Genentech to acquire such stock less the amount expended by the Company on the
terminated program. Any such redemption will have a material adverse effect on
the Company's liquidity and capital resources.
The Company continues to have substantial outstanding obligations in regard to
its facilities in Rhode Island, including lease payments and operating costs of
approximately $950,000 per year associated with its Science and Administration
Facility (the "SAF") in Lincoln, Rhode Island, and debt service payments and
operating costs of approximately $1,000,000 per year with respect to the
Company's pilot manufacturing facility, also located in Lincoln, Rhode Island.
The Company is currently seeking to sublicense the SAF and sell its pilot
manufacturing facility, but there can be no assurance that the Company will
succeed in these efforts. Failure to succeed in these efforts within a
reasonable time period will have a material adverse effect on the Company's
liquidity and capital resources.
In May 1996, the Company secured an equipment loan facility with a bank (the
"Lender") in the amount of $2,000,000 (the "Credit Facility"). The current
balance on this Credit Facility as of September 30, 1999 was $0. On August 5,
1999 the Company made a payment of approximately $752,000, of principal and
interest, to the Lender to retire the Credit Facility rather than seek a waiver
by the Lender of the Company's violation of a loan covenant requiring the
Company to maintain unrestricted liquidity in an amount equal to or in excess of
$10 million.
The Company has limited liquidity and capital resources and must obtain
significant additional capital resources in the near future in order to sustain
its product development efforts. Substantial additional funds will be required
to support the Company's research and development programs, for acquisition of
technologies and intellectual property rights, for preclinical and clinical
testing of its anticipated products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office facilities,
establishment of production capabilities and for general and administrative
expenses. The Company's ability to obtain additional capital will be
substantially dependent on the Company's ability to obtain partnering support
for its stem cell technology and, in the near term, on the Company's ability to
realize proceeds from the sale or out-licensing of its encapsulated cell
intellectual property portfolio and the sale of the Company's excess fixed
assets and the Company's pilot manufacturing facility, as well as on the
Company's ability to sublease the SAF. There can be no assurance that the
Company will succeed in any or all of these efforts, and failure to do so will
have a material effect on the Company's liquidity and capital resources. Until
the Company's operations generate significant revenues from product sales, the
Company must
Page 12 of 16
rely on cash reserves and proceeds from equity and debt offerings, proceeds from
the transfer or sale of its intellectual property rights, equipment or
facilities, government grants and funding from collaborative arrangements, if
obtainable, to fund its operations.
The Company intends to pursue opportunities to obtain additional financing in
the future through equity and debt financings, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing and availability of any future financing will depend principally upon
market conditions, interest rates and, more specifically, on the Company's
progress in its exploratory, preclinical and clinical development programs. Lack
of necessary funds may require the Company to delay, reduce or eliminate some or
all of its research and product development programs or to license its potential
products or technologies to third parties. No assurance can be given that
funding will be available when needed, if at all, or on terms acceptable to the
Company.
The Company expects that its existing capital resources, income earned on
invested capital, and, if available, proceeds from the sale of assets,
out-licensing of technology and subleasing of facilities described above, will
be sufficient to fund its operations into the first quarter of 2000. The
Company's cash requirements may vary, however, depending on numerous factors.
Lack of necessary funds may require the Company to delay, scale back or
eliminate some or all of its research and product development programs and/or
its capital expenditures or to license its potential products or technologies to
third parties.
Year 2000
The year 2000 problem results from the fact that computer programs were often
written using two digits rather than four to define the applicable year.
Computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. The Company has tested its
material software applications to determine whether each program is prepared to
accommodate date information for the year 2000 and beyond. The Company found all
of its material software programs to be year 2000 compliant and does not
anticipate any significant disruption of its operations as a result of the
failure of any of its software programs to be year 2000 compliant.
The Company has also tested the status of its facilities systems such as phones,
voice mail, heating/air conditioning, electricity and security systems and its
laboratory and manufacturing equipment and determined that they are year 2000
compliant. The Company completed this testing in the third quarter of 1999. If
any of the additional systems or equipment is found not to be year 2000
compliant, the Company intends to either seek to repair the systems or equipment
to cause it to be year 2000 compliant or replace such systems or equipment with
year 2000 compliant products. The cost to repair or replace any such system or
equipment that is not year 2000 compliant could be material. The Company has
also polled its major vendors and suppliers to determine if they are year 2000
compliant and to identify any potential issues. Each of the suppliers and
vendors that has responded to the Company's inquiry has confirmed either orally
or in writing that it does not believe that its sales of products or provision
of services to the Company will be interrupted as a result of the year 2000
issue. As a result of its investigations, the Company does not currently believe
that it is reasonably likely that its
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operations will be significantly impacted by the year 2000 issue. Although the
Company believes that the cost of remediation associated with achieving year
2000 compliance or the costs associated with system failures will not be
significant, there can be no assurance that the failure of one or more of the
Company's major suppliers to be year 2000 compliant will not have an adverse
effect on the Company's operations or financial results.
Election of New Director
The Company's Board of Directors elected Donald Kennedy, Ph.D., as a Director in
July 1999. Since 1960, Dr. Kennedy has held a number of academic research,
advisory and public policy positions related to health and the environment. Dr.
Kennedy currently co-directs the Center for Environmental Science and Policy in
the Institute for International Studies at Stanford University in Palo Alto,
California.
In addition to the election of Dr. Kennedy, the Company has also accepted the
resignations of two directors, Moses Goddard, M.D., and Richard Ramsden. With
the election of Dr. Kennedy and the resignation of Dr. Goddard and Mr. Ramsden,
the Company's Board includes five members.
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PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Cautionary Factors Relevant to Forward-Looking-Information.
(b) Reports on Form 8-K
On July 16, 1999, the Company filed a current report on Form 8-K to report
its intent to restructure its operations to focus its resources on the
research and development of its proprietary stem cell technology platform.
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SIGNATURE
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.
CYTOTHERAPEUTICS, INC.
----------------------
(Name of Registrant)
November 15, 1999 /s/ Richard M. Rose
- ----------------- -------------------
(Date) Chief Executive Officer and
Acting Chief Financial Officer
(principal financial officer and
principal accounting officer)
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