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, 1998 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)
701 GEORGE WASHINGTON HIGHWAY
LINCOLN, RI 02865
-----------------
(Address of principal executive offices including zip code)
(401) 288-1000
--------------
(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, 1998, there were 18,379,475 shares of Common Stock, $.01 par
value, issued and outstanding. There were no issued and outstanding shares of
Preferred Stock.
Page 1 of 14
CYTOTHERAPEUTICS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
- ----------------------------- -----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited)
Three and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Page 2 of 14
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31, 1997
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents $9,289,600 $15,941,701
Marketable securities 7,596,571 13,108,497
Receivables from collaborative agreement 196,908 150,880
Other current assets 1,211,891 978,314
----------- -----------
Total current assets 18,294,970 30,179,392
Property, plant and equipment, net 8,766,945 7,922,751
Other assets 6,473,198 6,199,323
----------- -----------
Total assets $33,535,113 $44,301,466
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $2,969,686 $4,109,351
Deferred revenue 8,448 16,144
Current maturities of capitalized lease obligations 305,000 419,095
Current maturities of long term debt 1,000,000 658,986
----------- -----------
Total current liabilities 4,283,134 5,203,576
Capitalized lease obligations, less current maturities 3,326,250 3,552,500
Long term debt, less current maturities 750,000 555,525
Redeemable common stock 5,248,610 5,583,110
Common stock to be issued 48,375 506,600
Stockholders' equity
Common stock 177,586 175,262
Additional paid in capital 122,690,018 121,472,844
Accumulated deficit (101,470,844) (91,036,254)
Deferred compensation (1,528,991) (1,702,820)
Unrealized gain (loss) on marketable securities 10,975 (8,877)
----------- -----------
Total stockholders' equity 19,878,744 28,900,155
----------- -----------
Total liabilities and stockholders' equity $33,535,113 $44,301,466
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 3 of 14
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ------------ ------------ ------------
Revenue from collaborative arrangements $2,539,557 $1,798,552 $6,289,120 $8,740,038
Operating expenses:
Research and development 4,282,313 4,636,541 13,699,332 13,735,768
Acquired research and development -- 8,312,422 -- 8,312,422
General and administrative 1,281,076 1,377,468 3,692,331 4,858,815
----------- ------------ ------------ ------------
5,563,389 14,326,431 17,391,663 26,907,005
----------- ------------ ------------ ------------
Loss from operations (3,023,832) (12,527,879) (11,102,543) (18,166,967)
Other income (expense):
Investment income 280,965 409,900 1,026,461 1,526,299
Interest expense (124,813) (51,047) (358,508) (297,141)
Other income (expense) -- 21,420 -- (89,360)
----------- ------------ ------------ ------------
156,152 380,273 667,953 1,139,798
----------- ------------ ------------ ------------
Net loss ($2,867,680) ($12,147,606) ($10,434,590) ($17,027,169)
=========== ============ ============ ============
Net loss per share ($0.16) ($0.73) ($0.57) ($1.03)
=========== ============ ============ ============
Shares used in calculation 18,275,784 16,629,152 18,224,748 16,533,152
=========== ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
Page 4 of 14
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
(unaudited) September 30,
1998 1997
---------------------------
Cash flows from operating activities:
Net earnings (loss) ($10,434,590) ($17,027,169)
Adjustments to reconcile net earnings (loss) to
net cash used for operating activities:
Depreciation and amortization 1,617,494 1,452,212
Acquired research and development -- 8,312,422
Compensation expense relating to the grant
of stock options 405,739 39,515
Loss on sale of fixed assets -- 1,434
Changes in operating assets and liabilities (1,352,414) (1,225,959)
------------ ------------
Net cash used in operating activities (9,763,771) (8,447,545)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 20,701,919 15,020,093
Purchases of marketable securities (15,183,133) (12,576,903)
Purchase of property, plant and equipment (2,101,121) (6,452,886)
Proceeds from the sale of fixed assets -- 3,926
Acquisition of other assets (696,002) (611,479)
------------ ------------
Net cash provided by (used in) investing activities 2,721,663 (4,617,249)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 194,863 577,673
Proceeds from financing transactions 1,259,300 --
Principal payments under capitalized lease obligations
and mortgage payable (1,064,156) (807,677)
------------ ------------
Net cash provided by (used in) financing activities 390,007 (230,004)
------------ ------------
Effect of exchange rate on cash and cash equivalents -- (232,264)
------------ ------------
Decrease in cash and cash equivalents (6,652,101) (13,527,062)
Cash and cash equivalents, January 1 15,941,701 19,921,584
------------ ------------
Cash and cash equivalents, September 30 $9,289,600 $6,394,522
============ ============
See accompanying notes to condensed financial statements.
Page 5 of 14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998 and 1997
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,
1998 are not necessarily indicative of the results that may be expected
for the entire fiscal year ended December 31, 1998.
The December 31, 1997 information is derived from the audited financial
statements and footnotes 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 and foreign currency
translation adjustments, which prior to adoption were reported separately
in shareholders' equity to be included in other comprehensive income.
For the three months ended September 30, 1998 and 1997, total
comprehensive loss amounted to $2,853,000 and $12,138,000. For the
first nine months of 1998 and 1997, total comprehensive loss amounted
to $10,415,000 and $17,100,000.
Page 6 of 14
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, 1998 and 1997
should be read in conjunction with the accompanying unaudited, condensed
consolidated financial statements and the related footnotes thereto.
This report may contain certain forward-looking statements regarding, among
other things, the Company's 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, 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 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
expects that its research and development expenditures will increase in future
years 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 revenues from collaborative research
arrangements with corporate sponsors, and upon external financing from equity
and debt offerings to finance its operations. The Company's results of
operations have varied significantly from year to year and from 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 and milestone payments.
Page 7 of 14
Results of Operations
Three months ended September 30, 1998 and 1997
Revenues from collaborative arrangements for the third quarter of 1998 totaled
$2,540,000, which included $750,000 of increased support from Astra AB for the
Company's pain program, compared to $1,799,000 in the corresponding quarter of
1997.
Research and development expenses totaled $4,282,000 for the three months ended
September 30, 1998, compared with $4,637,000 for the same period in 1997.
Acquired research and development consists of a one-time charge of $8,312,000
related to the acquisition of StemCells, Inc. in the third quarter of 1997.
General and administrative expenses were $1,281,000 for the three months ended
September 30, 1998, compared with $1,377,000 for the same period in 1997.
Interest income for the three months ended September 30, 1998 and 1997 was
$281,000 and $410,000, respectively. The decrease in interest income in 1998 is
attributable to the lower average investment balances, $19,478,000 vs.
$28,612,000 in the third quarter of 1998 and 1997, respectively.
Interest expense was $125,000 for the three months ended September 30, 1998,
compared with $51,000 for the same period in 1997. The increase from 1997 to
1998 is attributable to the capitalization of interest for the new facility in
1997 in the amount of $112,000.
Net loss for the three months ended September 30, 1998 was $2,868,000, or $0.16
per share, as compared to net loss of $12,148,000, or $0.73 per share, for the
comparable period in 1997. The consolidated results for the third quarter of
1998 reported above include a $690,000 net loss attributable to StemCells, Inc.,
the Company's wholly owned subsidiary. The consolidated results for the third
quarter of 1997 reported include a $485,000 net loss for the quarter
attributable to Modex Therapeutiques SA, the Company's partially owned
subsidiary, as well as a one-time charge of $8,312,000 related to the Company's
acquisition of StemCells, Inc.
Page 8 of 14
Results of Operations
Nine months ended September 30, 1998 and 1997
Revenues from collaborative arrangements for the nine months ended September 30,
1998 and 1997 were $6,289,000 and $8,740,000, respectively. Revenues for the
first nine months of 1997 included a one-time milestone payment of $3,000,000
from Astra AB, the Company's collaborator on its pain management program.
Research and development expenses totaled $13,699,000 for the nine months ended
September 30, 1998, compared with $13,736,000 for the same period in 1997.
Acquired research and development consists of a one-time charge of $8,312,000
related to the acquisition of StemCells, Inc. in the third quarter of 1997.
General and administrative expenses were $3,692,000 for the nine months ended
September 30, 1998, compared with $4,859,000 for the same period in 1997. The
decrease of $1,166,000 or 24%, from 1997 to 1998 was primarily attributable to a
reduction in legal fees, recruiting and relocation expenses and fewer employees.
StemCells, Inc., the Company's wholly owned subsidiary, contributed $24,000 of
general and administrative expenses for the period ended September 30, 1998,
while Modex Therapeutiques SA, the Company's formerly 50% owned subsidiary,
contributed $410,000 for the same period in 1997.
Interest income for the nine months ended September 30, 1998 and 1997 was
$1,026,000 and $1,526,000, respectively. The average investment balances were
$25,769,000 and $34,608,000 for the first nine months of 1998 and 1997,
respectively.
Interest expense was $359,000 for the nine months ended September 30, 1998,
compared with $297,000 for the same period in 1997.
Net loss for the nine months ended September 30, 1998 was $10,435,000, or $0.57
per share, as compared to a net loss of $17,027,000, or $1.03 per share, for the
comparable period in 1997.
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.
Page 9 of 14
The Company had unrestricted cash, cash equivalents and marketable securities
totaling $16,886,000 at September 30, 1998. Cash equivalents and marketable
securities are invested in agencies of the U.S. government, investment grade
corporate bonds and money market funds.
In May 1996, the Company secured an equipment loan facility with a bank in the
amount of $2,000,000. The Company has borrowed $2,000,000 under this agreement
as of September 30, 1998. The loan required interest-only payments for the first
two years; principal payments are payable over a three-year period which began
in August 1998. The loan is secured by equipment purchased with the proceeds of
the credit facility.
In November 1996, the Company signed collaborative development and licensing
agreements with Genentech, Inc. relating to the development of products using
the Company's technology to deliver certain of Genentech's proprietary growth
factors to treat Parkinson's disease, Huntington's disease and amyotrophic
lateral sclerosis ("ALS").
Under the terms of the agreement for Parkinson's disease, Genentech purchased
829,171 shares of common stock for $8,300,000 to fund development of products to
treat Parkinson's disease. Additional equity purchases and other funding by
Genentech is available for future clinical development as determined by the
parties. Genentech has the right, in its discretion, to terminate the
Parkinson's program at specified milestones in the program. If the Parkinson's
program is terminated and the funds the Company received from the sale of stock
to Genentech pursuant to the Parkinson's agreement exceed the expenses incurred
by the Company in connection with such studies by more than $1 million,
Genentech has the right to require the Company to repurchase from Genentech
shares of Company Common Stock having a value equal to the amount of the
overfunding, based upon the share price paid by Genentech. As such, the Common
Stock purchased by Genentech is classified as Redeemable Common Stock until such
time as the related funds are expended on the program. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
are currently underway to determine the balance of Redeemable Common Stock to be
redeemed in accordance with the agreement.
In March 1995, the Company signed a collaborative research and development
agreement with Astra AB for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, nonrefundable
payment of $5,000,000, a milestone payment of $3,000,000 in the first quarter of
1997 which was recognized as revenue in the second quarter of 1997 and may make
up to $13,000,000 in additional payments subject to the achievement of certain
development milestones. Under the agreement, the Company is
Page 10 of 14
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 expects to receive annual research payments from Astra of $5 million
to $7 million. Subject to the successful development of such products and
obtaining necessary regulatory approvals, Astra is obligated to conduct all
clinical trials of products arising from the collaboration and to seek approval
for their sale and use. Astra has the exclusive worldwide right to market
products covered by the agreement. Until the later of either the last to expire
of all patents included in the licensed technology or a specified fixed term,
the Company is entitled to a royalty on the worldwide net sales of such products
in return for the license granted to Astra and the Company's obligation to
manufacture and supply such products. Astra has the right to terminate the
original agreement at any time after April 1, 1998. In May 1998, Astra AB agreed
to increase the annual research and development payments from $7 million to $8.5
million for the calendar year 1998. This increase in funding is being recognized
as revenue in the 3rd and 4th quarters of 1998.
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,
expansion of laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Until the Company's
operations generate significant revenues from product sales, cash reserves and
proceeds from equity and debt offerings, and funding from collaborative
arrangements will be used to fund 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
equity market conditions, interest rates and, more specifically, on the
Company's continued progress in its exploratory, preclinical and clinical
development programs. There can be no assurance that such funds will be
available on favorable terms, if at all.
The Company expects that its existing capital resources, revenues from
collaborative agreements and income earned on invested capital will be
sufficient to fund its operations into the second half 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 reduce its
capital expenditures; and/or license its potential products or technologies to
third parties.
Page 11 of 14
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 is also testing the status of its facilities systems such as phones,
voice mail, heating/air conditioning, electricity and security systems and its
laboratory and manufacturing equipment to determine if they are year 2000
compliant. The Company expects to complete this testing in the first quarter of
1999. If any of the 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 is also polling
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. There can be
no assurance that the failure of one or more of the Company's major supplier's
to be year 2000 compliant will not have an adverse effect on the Company's
operations or financial results.
Page 12 of 14
PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99 - Cautionary Factors Relevant to Forward-Looking-Information.
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on August 3, 1998 with
respect to the adoption of a Shareholder Rights Plan.
Page 13 of 14
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 13, 1998 /s/ John S. McBride
- ----------------- -------------------
(Date) Executive Vice President and Chief
Financial Officer
(principal financial officer and
principal accounting officer)
Page 14 of 14