FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 30 1999, 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 22-238983
(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 November 1, 1999, 46,163,385 shares of Common Stock of the Registrant
were outstanding.
This filing, without exhibits, contains 18 pages.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998......... 3
Consolidated Statements of Operations for the quarter and nine
months ended September 30, 1999 and 1998 (unaudited)......... 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited).... 5
Notes to Consolidated Financial Statements....................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Item 3 - Quantitative and Qualitative Disclosure About Market Risk..... 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 16
Item 4 - Submission of Matters to a Vote of Security Holders........... 16
Item 6 - Exhibits and Reports on Form 8-K.............................. 17
Signature.............................................................. 18
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
-------------- ---------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 12,909,759 $ 5,619,568
Accounts receivable:
Trade and other -- 584,200
From agreement with Fresenius 361,616 --
Inventories -- 1,014,443
Assets of business transferred to Fresenius 1,359,020 --
Prepaid expenses 202,848 254,891
Deferred financing costs - current 140,266 --
-------------- ---------------
Total current assets 14,973,509 7,473,102
Property and equipment, net 238,147 1,789,976
Restricted cash -- 35,000
Deferred financing costs - non-current 115,338 --
Debt issuance costs, net 12,133 17,957
-------------- ---------------
Total assets $ 15,339,127 $ 9,316,035
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 496,437 $ 778,061
Accrued compensation 108,334 164,832
Accrued liabilities 646,738 952,448
Liabilities of business transferred to Fresenius 3,216,667 --
Notes payable - current 374,229 --
Current portion of capital lease obligations 6,003 9,823
-------------- ---------------
Total current liabilities 4,848,408 1,905,164
Convertible debentures 400,000 400,000
Notes payable - long term 1,742,370 144,804
Capital lease obligations, net of current portion 10,925 21,496
Stockholders' equity:
Series A convertible preferred stock, $.02 par value; authorized 3,333,333
shares; issued and outstanding, none and 1,156,832 at September 30, 1999
and December 31, 1998, respectively -- 23,136
Common stock, $.02 par value; authorized 60,000,000 shares; issued and
outstanding, 46,163,385 shares at September 30, 1999 and 41,402,045
shares at December 31, 1998 923,268 828,041
Additional paid-in capital 94,374,010 86,238,466
Deferred compensation -- (239,446)
Accumulated deficit (86,959,854) (80,005,626)
-------------- ---------------
Total stockholders' equity 8,337,424 6,844,571
-------------- ---------------
Total liabilities and stockholders' equity $ 15,339,127 $ 9,316,035
============== ===============
See accompanying notes
Notes: 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
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
Revenues:
Product sales -- $ 603,060 $ 588,120 $ 1,592,830
Revenue from Fresenius agreement $ 330,681 -- 709,991 --
Grant income -- 38,542 -- 242,777
----------- ----------- ----------- -----------
Total revenue 330,681 641,602 1,298,111 1,835,607
Costs and expenses:
Production costs 47,059 628,202 836,685 1,398,390
Sales and marketing 1,478,683 811,431 3,880,903 1,563,992
Research and development 373,142 824,585 1,513,610 3,521,900
General and administrative 672,378 719,443 3,003,750 2,538,477
------------ ----------- ----------- -----------
Total cost and expenses 2,571,262 2,983,661 9,234,948 9,022,759
Other income (expense):
Interest income 147,884 60,144 340,326 248,484
Interest expense (28,411) (12,116) (51,092) (27,951)
Gain on sale of assets, net 150 -- 693,375 --
------------ ----------- ----------- -----------
119,623 48,028 982,609 220,533
------------ ----------- ----------- -----------
Net loss (2,120,958) (2,294,031) (6,954,228) (6,966,619)
Undeclared, imputed dividend on preferred
stock -- (2,078,431) -- (2,078,431)
------------ ----------- ----------- -----------
Net loss applicable to common shareholders $(2,120,958) $(4,372,462) $(6,954,228) $(9,045,050)
------------ ----------- ----------- -----------
Net loss per share $ (0.05) $ (0.11) $ (0.16) $ (0.23)
============ =========== =========== ===========
Shares used in computing net loss
per share 46,111,452 39,265,768 44,652,133 38,961,261
============ =========== =========== ===========
See accompanying notes.
4
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1999 1998
--------------------- -----------------------
Operating activities:
Net loss $(6,954,228) $(6,966,619)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 221,720 426,549
Amortization of deferred compensation 239,446 330,081
Gain (loss) on disposal of property and equipment 94,477 (6,610)
Common stock issued for services and expenses 121,750 109,206
Stock options and warrants issued as compensation 239,354 --
Changes in operating assets and liabilities, net 645,238 (303,075)
--------------------- -----------------------
Net cash used in operating activities (5,392,243) (6,410,468)
Investing activities:
Purchase of equipment (132,612) (236,768)
Restricted cash 35,000 (35,000)
Proceeds from business transferred to Fresenius 3,216,667 --
Proceeds from sale of assets 15,050 7,500
Short-term investments -- (26,567)
--------------------- -----------------------
Net cash provided by (used in) investing activities 3,134,105 (290,835)
Financing activities:
Net proceeds from exercise of stock options and warrants 6,346,529 1,405,119
Net proceeds from issuance of Series A convertible preferred stock -- 4,282,332
Proceeds from notes payable 2,000,000 166,479
Deferred financing costs (255,604) --
Payment of notes payable (28,205) --
Payment of capital lease obligations (14,391) --
Sale of common stock and warrants to Fresenius 1,500,000 --
--------------------- -----------------------
Net cash provided by financing activities 9,548,329 5,853,930
Net increase (decrease) in cash and cash equivalents 7,290,191 (847,373)
Cash and cash equivalents at beginning of period 5,619,568 7,541,320
--------------------- -----------------------
Cash and cash equivalents at end of period $12,909,759 $ 6,693,947
===================== =======================
See accompanying notes
5
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Cypress Bioscience, Inc. and its subsidiaries (the "Company") researches,
develops and markets medical devices and therapeutics for the treatment of
certain types of immune system disorders and is engaged in the development of
novel therapeutic agents for the treatment of blood platelet disorders. In April
1999, the Company launched the PROSORBA/(R)/ column, a therapeutic medical
device, for the treatment of moderate to severe rheumatoid arthritis ("RA") in
adult patients with long standing disease who have failed or are intolerant to
disease-modifying anti-rheumatic drugs ("DMARDS"). The PROSORBA column was
previously approved for use in idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. The Company is also developing Cyplex, a
platelet alternative, previously known as Infusible Platelet Membranes, as an
alternative to traditional platelet transfusions.
2. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements have been prepared
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 as permitted by
the rules and regulations of the SEC for interim financial reporting. 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 1998 Annual Report on Form 10-K filed with
the SEC.
3. Fresenius Agreements
In March 1999, Cypress entered into an agreement with Fresenius AG
("Fresenius") of Bad Homburg, Germany and its U.S. subsidiary, Fresenius
Hemotechnology, Inc. ("FHI"). The agreement provides Fresenius with an exclusive
license to distribute the PROSORBA column in the U.S., Europe, Latin America,
and subject to certain conditions, Japan and select Asian countries. Upon
signing of the agreement, Cypress received a total of $1.5 million from
Fresenius consisting of the purchase of 297,530 shares of Cypress common stock
for $1.0
6
million, and $500,000 for the purchase of three-year warrants to buy 342,466
shares of Cypress common stock at $7.50 per share.
In the U.S., Cypress and FHI will jointly market the PROSORBA column.
Cypress and FHI will share in clinical trials and sales and marketing expenses
in the U.S., subject to certain annual dollar limits. Fresenius will have
exclusive distribution rights and responsibility for clinical trials and
registration of the product overseas. In the U.S., net profit will be split
50/50 until PROSORBA column revenue reaches a pre-determined sales threshold,
after which time Cypress will receive 60% of the profits and Fresenius will
receive 40%. Net profits will be split 50/50 outside the U.S.
Revenue from the Fresenius arrangement for the second and third quarter of
1999 consisted of Cypress's pro rata share of sales by FHI. Until profits are
generated, Cypress will recognize revenue based on the payments from Fresenius,
which are generally determined as the ratio of allowable expenses incurred for
production, research and development and sales and marketing by Cypress compared
to allowable expenses incurred by Cypress and Fresenius under the agreement.
Until April 1999, Cypress recorded total PROSORBA column sales. As such, current
year revenues are not directly comparable to revenues recorded in the prior
periods.
In April 1999, Fresenius exercised its option to acquire the PROSORBA
column manufacturing facility and related assets, located in Redmond,
Washington, for $5.2 million. The purchase price paid to Cypress consisted of
cash of $1.2 million and an offset of $4.0 million from the previous draw down
of an interest-free line of credit provided by Fresenius. In connection with
this transaction, Fresenius purchased from the company inventory for $2.0
million that resulted in a gain to Cypress of $693,000.
The purchase price of the manufacturing facility and related assets may result
in a gain to Cypress. The potential gain was deferred since the Company is
responsible for reimbursing Fresenius for operating losses associated with this
facility during 1999. The net book value of the property and equipment sold to
Fresenius totaling $1.4 million was recorded on the balance sheet as "Assets of
Business Transferred to Fresenius". The purchase price of the property and
equipment sold totaling $3.2 million was recorded as "Liabilities of Business
Transferred to Fresenius". As the Company becomes obligated to reimburse
Fresenius, such amounts will be charged to "Liabilities of Business Transferred
to Fresenius". When the obligation to Fresenius lapses at year end, the assets
sold will be removed from the Company's balance sheet and the excess of the
purchase price over the net book value of the assets sold plus reimbursement of
certain operating costs will be recorded as a gain from sale of assets, if any.
In October 1999, Fresenius notified the Company that it appears that there will
be an operating loss for the plant this year. The amount of such losses has not
yet been determined.
4. Term Loan
In September 1999, Cypress signed a $5.0 million term loan agreement with a
financing company of which $2.0 million was drawn down immediately. The initial
loan is repayable in six monthly installments of interest only at 13.29% per
annum. Thereafter, the loan is payable in twenty-four equal monthly payments of
principal and interest. Under the terms of the
7
loan agreement, Cypress may draw down an additional $1.0 million prior to the
end of 1999. The remaining $2.0 million in available loans may be drawn down at
the option of the Company and only if the Company meets certain financial
conditions. Repayment terms for the remaining loan tranches are similar to the
initial loan. The loan is secured by certain assets of the Company. In
connection with this agreement, Cypress granted the lender a five-year warrant
to purchase 168,851 shares of the company's common stock at an exercise price of
$2.96 per share. The warrant was valued in accordance with SFAS No.12 and is
amortized as additional interest expense over the term of the loan.
5. Inventories
Inventories at December 31, 1998 were comprised of the following:
Raw materials and components $ 536,513
Work in process 288,930
Finished goods 189,000
-------------------
$1,014,443
===================
In connection with the acquisition of the PROSORBA column manufacturing
facility and related assets by Fresenius in April 1999, all inventory on hand
was sold to Fresenius. The Company will not incur production costs for the
PROSORBA column after April 1999. Accordingly, production costs for 1999 are not
comparable to prior periods.
6. 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.
7. Equity
In March 1999, Cypress received proceeds of $600,000 from the exercise of
warrants to purchase 332,944 shares of common stock. During April 1999, the
Company received additional proceeds of approximately $4.6 million from the
exercise of warrants to purchase 2,286,916 shares of common stock. The warrants
were exercised at $2.00 per share.
During the third quarter of 1998, the Company recognized a one-time, non-
cash charge for imputed dividend of $2.1 million from the sale and issuance of
Series A convertible preferred stock that raised $4.6 million.
8
PART I - FINANCIAL INFORMATION
ITEM 2 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 Annual Report on Form 10-K
for the year ended December 31, 1998.
Results of Operations
In March 1999, the Company entered into an agreement with Fresenius and
FHI. The Company granted to Fresenius the exclusive right to co-market and
distribute the PROSORBA/(R)/ column in the U.S. and to register and distribute
the PROSORBA column in Europe, Latin America, and subject to certain conditions,
Japan and select Asian countries. In the U.S., net profits will be split 50/50
until PROSORBA column revenue reaches a pre-determined sales threshold, after
which time Cypress will receive 60% of the profits and Fresenius will receive
40%. Net profits will be split 50/50 in countries outside the U.S. In addition,
the Company may be entitled to receive milestone payments upon the achievement
of certain cumulative net sales of the PROSORBA column.
Product sales by Cypress for the third quarter of 1998 totaled $603,000.
Product sales by Cypress for the nine months ended September 30, 1999 totaled
$588,000 compared to $1.6 million for the comparable period in 1999. As of April
1999, the Company no longer recorded revenues from the sale of the PROSORBA
column. Instead, Cypress recognizes revenue based on a pro rata share of the net
sale of the PROSORBA column by Fresenius. Accordingly, product sales for the
third quarter and nine months ended September 30, 1999 are not directly
comparable to prior periods.
Sales of the PROSORBA column by Fresenius for the third quarter of 1999
totaled $886,000 compared to product sales of Cypress of $603,000 in the
comparable period in 1998. Sales of the PROSORBA column by Cypress or Fresenius
for the nine months ended September 30, 1999 totaled $2.1 million compared to
$1.6 million for the same period in 1998. The increase in PROSORBA column sales
was attributed to sales of the product for use in RA offset in part by a decline
in sales for use in the Idiopathic Thromboeytopenic Purpura ("ITP") indication.
Until profits are generated from the arrangement with Fresenius, Cypress
will recognize revenue based on payments due from Fresenius, which are generally
determined as the ratio of allowable expenses incurred for production, research
and development and sales and marketing by Cypress compared to allowable
expenses incurred by Cypress and Fresenius under the agreement. Revenue from the
Fresenius arrangement totaled $331,000 and $710,000 for the third quarter and
nine months ended September 30, 1999, respectively.
9
During 1998, the Company had a NIH Small Business Innovation Research grant
that generated revenues of $39,000 and $243,000 for the third quarter and nine
months ended September 30, 1998, respectively. This grant expired at the end of
1998 and will not be renewed.
Production costs were $47,000 and $837,000 for the quarter and nine months
ended September 30, 1999, respectively, compared to $628,000 and $1.4 million
for the comparable periods of 1998. In April 1999, Fresenius purchased the
PROSORBA column manufacturing facility and related assets from Cypress. As of
May 1999, production costs represent royalties incurred by the Company for
PROSORBA column sales payable to third parties. The decrease in production costs
of 93% and 40% for the quarter and nine months ended September 30, 1999 compared
to the same periods in 1998 were primarily attributable to the sale of this
facility. In connection with the sale of the manufacturing plant, Fresenius
purchased from the Company inventory of $2.0 million that resulted in a gain to
the Company of $693,000. This gain was recorded as a gain on sale of assets in
the statement of operations.
Sales and marketing expenses were $1.5 million and $3.9 million for the
quarter and nine months ended September 30, 1999, respectively, up from $811,000
and $1.6 million for the same periods of 1998. The increases in sales and
marketing expenses of approximately 85% and 144% for the quarter and nine months
ended September 30, 1999 compared to the same periods in 1998 primarily resulted
from the hiring of a sales force and other activities associated with the launch
of the PROSORBA column for RA in April 1999. In the U.S., Cypress and Fresenius
will jointly market the PROSORBA column. Under its agreement with Fresenius,
sales and marketing expenses of up to 15% of net sales for the applicable
periods may be incurred by the Company in the U.S. Fresenius may incur sales and
marketing expenses of up to 5% of net sales. Fresenius may incur sales and
marketing expenses of up to 20% of net sales outside the U.S. During the first
two years of the partnership, the Company expects to spend approximately $11.0
million in sales and marketing expenses due to launch costs. This is expected to
be in excess of the 15% of net sales Cypress is allowed under the agreement. If
net sales beginning in March 1999 and ending in March 2001, are higher than
expected, the Company may be able to recover a portion of its excess
unreimbursed sales and marketing expenses up to $9.0 million under the
agreement. The Company expects to incur substantially higher sales and marketing
expenses during 1999 due to the commercial launch of the PROSORBA column for RA.
Research and development expenses were $373,000 and $1.5 million for the
quarter and nine months ended September 30, 1999, respectively, down from
approximately $825,000 and $3.5 million for the corresponding periods of 1998.
The decrease in research and development expenses of approximately 55% and 57%
for the quarter and nine months ended September 30, 1999 compared to the same
periods in 1998 was primarily attributable to the completion of the Phase III
clinical trials for the PROSORBA column for RA in January 1998. In addition,
expenses associated with the development of Cyplex decreased with the closing of
a facility in Boston in June 1998. Effective April 1999, Cypress and Fresenius
will share in future clinical trial expenses in the U.S. Fresenius will have
exclusive responsibility for clinical trials and registration of the product in
certain other markets. The Company expects to incur significant ongoing research
and development expenses in connection with the mandatory Phase IV U.S. clinical
trials for the treatment of RA
10
using the PROSORBA column in combination with methotrexate, a disease-modifying
anti-rheumatic drug ("DMARD"). Cypress and Fresenius will share in the funding
of these clinical studies.
General and administrative expenses totaled $672,000 and $3.0 million for
the quarter and nine months ended September 30, 1999, respectively, compared to
$719,000 and $2.5 million for the comparable periods in 1998. The 7% decrease in
general and administrative expenses for the third quarter of 1999 compared to
1998 was due to completion of business development efforts associated with the
Company's agreement with Fresenius. The 20% increase in general and
administrative expenses for the nine months ended September 30, 1999 compared to
the same period in 1998 was primarily the result of business development
activities with Fresenius in the first quarter of 1999.
The purchase price of the manufacturing facility and related assets by
Fresenius may result in a gain to Cypress. The potential gain was deferred since
the Company is responsible for reimbursing Fresenius for operating losses
associated with this facility during 1999. The net book value of the property
and equipment sold to Fresenius totaling $1.4 million is recorded on the balance
sheet as "Assets of Business Transferred to Fresenius". The purchase price of
the property and equipment sold totaling $3.2 million was recorded as
"Liabilities of Business Transferred to Fresenius". As the Company becomes
obligated to reimburse Fresenius, such amounts will be charged to "Liabilities
of Business Transferred to Fresenius". When the obligation to Fresenius lapses
at year end, the assets sold will be removed from the Company's balance sheet
and the excess of the purchase price over the net book value of the assets sold
plus reimbursement of certain operating losses will be recorded as a gain from
sale of assets, if any. In October 1999, Fresenius notified the Company that it
appears that there will be an operating loss for the plant this year. The amount
of such losses has not been determined.
During the third quarter of 1998, the Company recognized a one-time, non-
cash charge for imputed dividend of $2.1 million from the sale and issuance of
Series A convertible preferred stock that raised $4.6 million.
The Company expects to incur operating losses until it and Fresenius
successfully market the PROSORBA column for RA in the U.S There can be no
assurance that the Company can achieve or sustain profitability. There can be no
assurance that the Company and Fresenius will be able to successfully market the
PROSORBA column for RA in the U.S. There can be no assurance that the Company
will be able to obtain FDA approval for or be able to successfully commercialize
Cyplex. The Company has spent considerable time and expense in obtaining FDA
approval of the PROSORBA column for the RA indication. Pursuant to the Company's
agreement with Fresenius, the Company must incur significant additional expense
and assume the majority of the risk associated with the commercial launch and
ongoing sales and marketing of the PROSORBA column in the U.S., and the on-going
clinical trials. Any net profits from the sale of the PROSORBA column are shared
with Fresenius and the Company depends upon Fresenius to reimburse it for
expenses from net sales. The successful launch of the PROSORBA column for use in
RA will depend without limitation on the following factors; acceptance of the
product by physicians, medical groups and patients, availability and convenience
of treatment centers,
11
availability of third party reimbursements, the effectiveness of the Company's
and Fresenius' marketing strategy, competition and effectiveness and
availability of alternative treatments.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents of $12.9
million compared to $5.6 million at December 31, 1998. The Company's working
capital as of September 30, 1999 was approximately $10.1 million compared to
$5.6 million at December 31, 1998. The increase in working capital was partially
attributable to proceeds from the sale of common stock and warrants to Fresenius
totaling $1.5 million. In addition, the Company sold the PROSORBA manufacturing
facility and related assets to Fresenius for $5.2 million. The purchase price
consisted of cash of $1.2 million and an offset of a draw down in March 1999 of
$4.0 million from an interest-free line of credit provided by Fresenius during
the same period. Further, during 1999, the Company received proceeds of $6.3
million from the exercise of warrants and stock options to purchase 3.3 million
shares of the Company's common stock. In September 1999, the Company signed a
$5.0 million term loan with a financing company of which $2.0 million was
immediately drawn down. The increase in working capital was partially offset by
cash used in operations of approximately $5.4 million during the first nine
months of 1999.
In September 1999, the Company signed a $5.0 million term loan agreement
with a financing company of which $2.0 million was drawn down immediately. The
initial loan is repayable in six monthly installments of interest only at 13.29%
per annum. Thereafter, the loan is payable in twenty-four equal monthly payments
of principal and interest. Under the terms of the loan agreement, Cypress may
draw down an additional $1.0 million prior to the end of 1999. The remaining
$2.0 million in available loans may be drawn down at the option of the Company
and only if the Company meets certain financial conditions. There can be no
assurance that the Company will be able to satisfy the financial criteria
required to draw down the final $2.0 million of the loan. Repayment terms for
the remaining loan tranches are similar to the initial loan. The loan is secured
by certain assets of the Company. In connection with this agreement, Cypress
granted the lender a five-year warrant to purchase 168,851 shares of the
company's common stock at an exercise price of $2.96 per share. The warrant was
valued in accordance with SFAS No.12 and is amortized as additional interest
expense over the term of the loan.
During the fourth quarter of 1998, the Company hired a sales force for the
commercial launch of the PROSORBA column for RA. The Company's sales force has
had only limited experience in marketing the PROSORBA column for use in the
treatment of RA. There can be no assurance that the Company's sale force will be
successful in marketing the PROSORBA column for RA or any other use. The
Company's marketing strategy includes gaining medical association support and
the support of opinion leaders in the rheumatology community. There can be no
assurance that the Company's sales force will succeed in gaining this
acceptance. Any such failure to successfully market the PROSORBA column for RA,
or any other disease indication other than ITP, could have a material adverse
effect on the Company's business, cash flow and financial position. The failure
of sales to increase at expected rates may adversely affect the Company's cash
flow, its results of operations and its profit share from the Fresenius
agreement.
12
In both domestic and foreign markets, sales of the Company's product
depends in part on the availability of reimbursement of third-party payors such
as government health administration authorities, private health insurers and
other organizations. Third-party payors are increasingly challenging the price
and cost-effectiveness of medical products and services. There can be no
assurance that the Company's proposed products will be considered cost effective
or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development. Legislation and regulations affecting the
pricing of medical devices may change over time. Any such changes could further
limit reimbursement for medical products and services.
As a condition to FDA approval of the Post Marketing Application for the
PROSORBA column for RA, the Company is obligated to conduct a Phase IV clinical
trial on the use of the PROSORBA column in combination with a DMARD. The Company
expects this study will require enrollment of a significant number of patients
and take approximately two years to four years to complete. The cost of the
Phase IV trial will be shared with Fresenius and will result in lower profits
for the Company. There can be no assurance that the outcome of the Phase IV
clinical trials will be indicative of earlier clinical trial results or generate
positive results. Any of these occurrences could have a material adverse on the
Company including changes to the product labeling for the RA indication,
reduction of the potential sales of the PROSORBA column and/or withdrawal of FDA
approval.
The Company is actively seeking opportunities to raise additional capital
to fund sales and marketing efforts, post-marketing studies and additional
clinical trials for the PROSORBA column in RA and other indications; and the
further development of Cyplex. To the extent the Company decides to develop
products other than the PROSORBA column, it will be required to raise additional
capital. The amount of capital required by the Company is dependent upon many
factors, including the following: the timing and volume of PROSORBA sales,
selling and marketing costs, the profitability of the Fresenius agreement,
results of clinical trials, results of current research and development efforts,
the FDA regulatory process, costs of commercialization of products and potential
competitive and technological advances. Because the Company is unable to predict
the outcome of the foregoing factors, some of which are beyond the Company's
control; the Company is unable to estimate with certainty its mid- to long-term
capital needs. Although the Company may seek to raise additional capital through
a combination of equity sources, there can be no assurance the Company will be
able to raise additional capital through such sources or the funds raised
thereby will allow the Company to maintain its current and planned operations.
If the Company is unable to obtain additional capital, it will be required to
delay, scale back or eliminate some or all of its sales and marketing and
research and development activities. The Company expects that existing cash
resources, and if necessary, a reduction of its expenditure rate will be
sufficent to fund operations through the end of 2000. In addition, the Company
may be required to license to third parties technologies that the Company would
otherwise seek to develop itself, to seek financing through the debt market at
potentially higher costs to the Company or to seek additional methods of
financing.
13
Year 2000 Compliance
Cypress's business hardware, telecommunication and software systems are
generally new, therefore, the Company believes that most of these systems are
already year 2000 compliant and will not be adversely affected by the year 2000
issue.
The Company has evaluated the corporate systems and operations that could
be affected by the year 2000 problem. The following areas were reviewed:
information technology infrastructure; non-information technology systems; and
third-party compliance.
Information Technology Infrastructure
Cypress's year 2000 plan required the year 2000 team to assess and evaluate
the information technology systems, including computers, hardware, and software
systems. The year 2000 team identified critical computer, hardware, or software
information technology systems that required replacement, upgrade, or
modification. The Company has made the required replacements, upgrades, or
modifications, and believes that all the critical information technology systems
are year 2000 compliant.
Non-Information Technology Systems
Some non-information technology systems used in the business, including air
conditioning, fire sprinkler, telephone systems, and other equipment, may
contain software that is vulnerable to year 2000 problems. The year 2000 problem
could cause failures in these systems which could disrupt operations. The
Company has assessed the year 2000 readiness of many of these systems and
equipment internally and with third parties. Cypress believes that all of the
critical non-information technology systems are year 2000 compliant.
Third-Party Compliance
Cypress's material third party business relationships include: a third
party manufacturer of the PROSORBA column, contract research organizations who
assist with the management of clinical trials and clinical data, and vendors and
suppliers who provide goods and services. The Company has evaluated the year
2000 compliance of all significant third party vendors and is satisfied that
they have taken all the necessary steps to ensure their year 2000 compliance.
Costs
The year 2000 assessment, remediation and testing activities were conducted
by internal personnel, and the amount of employee time expended on these tasks
was not tracked. Therefore, the Company is unable to determine the cost of
employee time devoted to year 2000 matters. Cypress estimates that the cost of
year 2000 readiness efforts, including any necessary modifications, upgrading or
replacement of computer equipment or software, has not been material.
14
Contingency Plan
The Company does not believe that a contingency plan is needed for the
information technology infrastructure. However, despite the efforts of the year
2000 team, the Company cannot guarantee that the year 2000 problem will not
adversely affect the financial condition or results of operations. Should the
third party manufacturer be unable to manufacture PROSORBA columns due to a year
2000 problem, it will adversely affect the financial condition and results of
operations of Cypress.
PART I - FINANCIAL INFORMATION
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders (the "Annual Meeting") of the
Company was held on September 14, 1999.
(b) Philip O'Reilly was elected as directors to serve until the 2002
annual meeting, or until such directors' earlier death, resignation or
removal. The Company's Board of Directors is comprised of the
individual elected this year and the following directors completing
the following terms: Jay D. Kranzler, M.D., Ph.D., Richard M. Crooks,
Jr. and David Golde, M.D., whose terms expire in 2000, Jack Vaughn and
Samuel D. Anderson whose terms expire in 2001.
(c) The following sets forth a brief description of each matter voted upon
at the Annual Meeting and the results of the voting on each such
matter:
(1) For the election of the nominee as director:
Withheld Authority or
For Against
------------------------ ------------------------
Philip O'Reilly 31,933,427 519,521
(2) To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to (i) effect, at any time prior to
the 1999 Annual Meeting of Stockholders, a reverse stock split,
whereby the Company would issue one (1) new share of Common Stock
of the Company in exchange for between two (2) and four (4) shares
of outstanding Common Stock and (ii) after giving effect to the
aforesaid reverse stock split, establish the number of authorized
shares of (A) Common Stock at 50,000,000 shares and (B) Preferred
Stock at 15,000,000 shares;
For Against Abstained Non-votes
-------------------------------- ------------------- ------------------ -------------------
31,162,225 1,214,536 76,187 13,636,681
16
(3) To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the Company's authorized number of
shares of Common Stock from 60,000,000 share to 75,000,000 shares;
For Against Abstained Non-votes
-------------------------------- ------------------- ------------------ -------------------
31,180,397 1,166,661 105,890 13,636,681
(4) To ratify the selection of Ernst & Young LLP as the Company's
independent auditors for its fiscal year ending December 31,
1999:
For Against Abstained Non-votes
-------------------------------- ------------------- ------------------ -------------------
32,194,534 141,799 116,615 -
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan and Securities Agreement between Cypress Biosciences, Inc.,
PRP, Inc. and Transamerica Business Credit Corporation
10.2 Stock Subscription Warrant to Purchase Common Stock of Cypress
Bioscience, Inc. between the Company and TBCC Funding Trust II
or its Registered Assigns
27. Financial Date Schedule
Reports on Form 8-K
None
17
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.
November 15, 1999 /s/ Jay D. Kranzler
- -------------------------- -------------------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer and Acting
Principal Accounting and Financial Officer)
18