SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 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 22-2389839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(619) 452-2323
(Registrant's telephone number including area code)
------------------------------------
Indicate by check (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At May 10, 1999, 45,747,472 shares of Common Stock of the Registrant were
outstanding.
This filing, without exhibits, contains 13 pages.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and December 31, 1998........... 3
Consolidated Statements of Operations for the quarters ended
March 31, 1999 and 1998 (unaudited)....................... 4
Consolidated Statements of Cash Flows for the
quarters ended March 31, 1999 and 1998 (unaudited)......... 5
Notes to Consolidated Financial Statements (unaudited)......... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................... 13
Item 6 - Exhibits and Reports on Form 8-K............................ 13
Signatures........................................................... 13
2
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998 (1)
-------------------- -------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,479,564 $ 5,619,568
Accounts receivable:
Trade 301,060 408,902
Other 223,793 175,298
Inventories 1,262,588 1,014,443
Prepaid expenses 191,244 254,891
-------------------- -------------------
Total current assets 11,458,249 7,473,102
Property and equipment, net 1,728,780 1,789,976
Restricted cash 35,000 35,000
Convertible debenture issuance costs, net 16,016 17,957
-------------------- -------------------
Total assets $ 13,238,045 $ 9,316,035
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,153,952 $ 778,061
Accrued compensation 155,637 164,832
Accrued liabilities 910,857 952,448
Current portion of capital lease obligations 11,222 9,823
-------------------- -------------------
Total current liabilities 2,231,668 1,905,164
Convertible debentures 400,000 400,000
Note payable to corporate partner 4,050,000 -
Notes payable 140,775 144,804
Deferred rent 29,136 -
Capital lease obligations, net of current portion 17,904 21,496
Stockholders' equity:
Series A convertible preferred stock, $.02 par value;
3,333,333 shares authorized, issued and outstanding, none
and 1,156,832 shares at March 31, 1999 and December 31, 1998,
respectively - 23,136
Common stock, $.02 par value; 60,000,000 shares authorized,
43,311,806 and 41,402,045 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 866,236 828,041
Additional paid-in capital 88,621,596 86,238,466
Deferred compensation (11,452) (239,446)
Accumulated deficit (83,107,818) (80,005,626)
-------------------- -------------------
Total stockholders' equity 6,368,562 6,844,571
-------------------- -------------------
Total liabilities and stockholders' equity $ 13,238,045 $ 9,316,035
=================== ====================
See accompanying notes.
(1) 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.
3
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
1999 1998
----------------- -----------------
Product sales $ 588,120 $ 498,354
Grant income - 50,564
----------------- -----------------
Total revenue 588,120 548,918
Costs and expenses:
Production costs 519,485 350,816
Sales and marketing 1,086,248 280,562
Research and development 681,293 1,211,249
General and administrative 1,443,711 740,072
----------------- -----------------
Total costs and expenses 3,730,737 2,582,699
Other income (expense):
Interest income 52,316 109,356
Interest expense (11,891) (8,585)
----------------- -----------------
40,425 100,771
----------------- -----------------
Net loss $(3,102,192) $(1,933,010)
================= =================
Net loss per share (basic and diluted) $ (0.07) $ (0.05)
================= =================
Shares used in computing net loss
per share (basic and diluted) 42,364,408 38,684,410
================= =================
See accompanying notes.
4
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
1999 1998
--------------- ---------------
Operating Activities
Net loss $(3,102,192) $(1,933,010)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 127,256 160,374
Amortization of deferred compensation 227,994 80,039
Loss on disposal of property and equipment 58 -
Changes in operating assets and liabilities, net 229,090 109,187
--------------- ---------------
Net cash used by operating activities (2,517,794) (1,583,410)
Investing Activities
Purchase of equipment (64,277) (35,398)
Proceeds from sale of assets 100 -
Purchase of short-term investments - (1,000,900)
Proceeds from sale of short-term investments - 974,333
--------------- ---------------
Net cash used by investing activities (64,177) (61,965)
Financing Activities
Payment of notes payable (4,029) -
Proceeds from exercise of stock options and 898,189 439,295
warrants
Proceeds from notes payable 4,050,000 23,783
Proceeds from private placement of common stock
and warrants 1,500,000 -
Payment of capital lease obligations (2,193) (3,599)
--------------- ---------------
Net cash provided by financing activities 6,441,967 459,479
Increase (Decrease) in cash and cash equivalents 3,859,996 (1,185,896)
Cash and cash equivalents at beginning of period 5,619,568 7,541,320
--------------- ---------------
Cash and cash equivalents at end of period $ 9,479,564 $ 6,355,424
=============== ===============
Supplemental disclosure of cash flow information
Interest paid $ 4,982 $ 1,722
=============== ===============
See accompanying notes.
5
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Formation and Business of the Company
The accompanying consolidated financial statements have been prepared by
Cypress Bioscience, Inc. (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the SEC. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated. In the opinion of the Company's management, all adjustments
necessary for a fair presentation of the accompanying unaudited financial
statements are reflected herein. All such adjustments are normal and recurring
in nature. Interim results are not necessarily indicative of results for the
full year. For more complete financial information, these consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's 1998 Annual Report on Form 10-K
filed with the SEC.
The Company researches, develops, manufactures and markets medical devices
and therapeutics for the treatment of certain types of immune system disorders
and is engaged in the development of novel therapeutic agents for the treatment
of blood platelet disorders. The Prosorba(R) column, a therapeutic medical
device was approved by the U.S. Food and Drug Administration in March 1999 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"). Sales for the RA indication
commenced in April 1999. The Prosorba column was previously approved in 1987 for
use in idiopathic thrombocytopenic purpura ("ITP"), an immune-mediated bleeding
disorder. The Company is also developing Cyplex(TM), a platelet alternative,
previously known as Infusible Platelet Membranes ("IPM"), as an alternative to
traditional platelet transfusions.
2. Fresenius Agreements
In March 1999, Cypress entered into an agreement with Fresenius AG 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 certain other 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 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
6
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.
In April 1999, Fresenius AG exercised an option to acquire the Prosorba
column manufacturing facility and related assets, located in Redmond, Washington
for approximately $5.2 million. The assets purchased by Fresenius consisted of
fixed assets of approximately $3.2 million and inventory of approximately
$2.0 million. The purchase price consisted of $1.2 million cash and an offset
of the $4.0 million draw down from the interest-free line of credit provided by
Fresenius in March 1999. In April 1999, the Company recorded a gain of
approximately $1.9 million from the sale of the facility and related assets.
3. Inventories
Inventories are comprised of the following:
March 31, 1999 December 31, 1998
---------------- -------------------
Raw materials and components $ 350,448 $ 536,513
Work in process 747,260 288,930
Finished goods 164,880 189,000
---------- ----------
$1,262,588 $1,014,443
========== ==========
In connection with the acquisition of the Prosorba column manufacturing
facility and related assets by Fresenius AG in April 1999, all inventory on hand
was transferred to Fresenius.
3. Net Loss Per Share
The computation of net loss per share is based on the weighted average
number of shares of common stock outstanding for each period. Common stock
equivalents related to options, warrants and convertible debentures are
excluded, as their effect is antidilutive.
4. Equity
In March 1999, Cypress received proceeds of approximately $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.
7
5. Recently Issued Accounting Standards
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131 "Segment Information" ("SFAS 131").
Comprehensive loss is not different from the net losses disclosed on the
consolidated statements of operations. The adoption of SFAS 131 did not affect
results of operations or financial position and did not affect the disclosure of
segment information because SFAS 131 is not required to be applied to interim
financial statements in the initial year of adoption and because the Company
believes it operates in one business segment. Therefore, the adoption of SFAS
130 and SFAS 131 did not affect the consolidated statements of operations,
consolidated balance sheets, or disclosure of segment information.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 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
Total revenues for the first quarter of 1999 were approximately $588,000
compared to $549,000 for the same period in 1998. Sales of the Prosorba column
totaled approximately $588,000 and $498,000 for the quarters ended March 31,
1999 and 1998, respectively. During 1998, the Company had an NIH Small Business
Innovation Research (SBIR) grant which generated revenues of $51,000 during the
first quarter. This grant expired at the end of 1998 and is not expected to be
renewed. Sales for the quarter ended March 31, 1999 are at a level consistent
with the Company's expectations.
In March 1999, the Company entered into an agreement with Fresenius
Fresenius AG of Bad Homburg, Germany and its U.S. subsidiary, Fresenius
Hemotechnology, Inc. (collectively, "Fresenius"). The Company granted to
Fresenius the exclusive right to co-market and distribute the Prosorba column in
the U.S. and to register and distribute the Prosorba column in Europe, Latin
America, and subject to certain conditions, Japan and certain other 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 outside the U.S. In addition, the Company is entitled to receive up to $54
million in license payments upon the achievement of certain cumulative net sales
of the Prosorba column. In the U.S., the license payments are payable in some
cases in cash and in others in equity investments by Fresenius at market prices.
Outside the U.S., the license payments are payable in cash. In the future, the
Company will no longer record revenues from the sale of the Prosorba column.
Instead, Cypress will recognize revenue based on its share of net profits from
the sale of the Prosorba column by Cypress and Fresenius. Cypress's share of net
losses from the sale of the Prosorba column will be recorded as expense in
future quarters.
Production costs for the first quarter of 1999 were approximately $519,000
compared to $351,000 for the same period in the prior year. The 48% increase in
production costs were attributable to increased production of the Prosorba
column. In March 1999, the FDA approved the Prosorba column for the treatment of
moderate to severe RA in adult patients with long standing disease who have
failed or are intolerant of DMARDs. In April 1999, Fresenius AG exercised an
option to acquire the Prosorba column manufacturing facility and related assets,
located in Redmond, Washington. In connection with this transaction, Fresenius
purchased from the Company inventory of approximately $2.0 million. As a result
of the Fresenius agreement, the Company will not incur production costs with
respect to the Prosorba column in the future.
Sales and marketing expenses for the quarters ended March 31, 1999 and 1998
were approximately $1.1 million and $281,000, respectively. The 287% increase
in sales and marketing expenses was primarily due to the hiring of a sales force
and other activities
9
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 period are allocated to the Company in the U.S. and 5% to
Fresenius. Sales and marketing expenses of up to 20% of net sales are allocated
to Fresenius outside the U.S. During the first two years of the partnership, the
Company expects to spend up to $9 million in sales and marketing expenses in
excess of the 15% of net sales allocated to the Company due to product launch
costs. If net sales during the first two years are higher than expected, the
Company may be able to recover all or a portion of its unreimbursed sales and
marketing expenses under the agreement. The Company expects to incur
substantially higher sales and marketing expenses in 1999 due to the commercial
launch of the Prosorba column for RA.
For the quarter ended March 31, 1999, the Company incurred research and
development expenses of approximately $681,000 compared to $1.2 million for the
same period in 1998. The 44% decrease in research and development expenses was
attributable to the completion of the Phase III clinical trials the Prosorba
column for RA in January 1998. In addition, expenses associated with the
development of Cyplex during the first quarter of 1999 were lower that incurred
during the same period in 1998. Cypress and Fresenius will share in 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 using the Prosorba column in combination with methotrexate, a DMARD.
Cypress and Fresenius will share in the funding of these clinical studies.
General and administrative expenses were approximately $1.4 million and
$740,000 for the quarters ended March 31, 1999 and 1998, respectively. The 95%
increase in general and administrative expenses was primarily due to increased
business development activity associated with the Company's agreement with
Fresenius. In addition, the Company incurred higher general and administrative
expenses in the first quarter of 1999 due to the hiring of its President and
Chief Operating Office. General and administrative expenses are expected to
continue to increase during 1999.
The Company expects to incur operating losses until it and Fresenius
successfully market the Prosorba column for RA in the U.S., or until sales for
its existing indication of ITP increase significantly. 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 or increase sales in the ITP indication. There can be no assurance
that the Company will be able to obtain FDA approval for or be able to
successfully commercialize Cyplex(TM). The Company has spend 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. Any net profits or losses from the sale of the
Prosorba column are shared with Fresenius. The successful launch of the Prosorba
column for use in RA will depend upon but is not limited to, acceptance of the
product by physcians and medical groups, availability and convenience of
treatment centers, availability of third party reimbursements, the effectiveness
of the Company's and Fresenius' marketing strategy and competition.
Liquidity and Capital Resources
In March 1999, Cypress entered into an agreement with Fresenius for the
Prosorba column. 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 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.
10
The Company's working capital as of March 31, 1999 was $9.2 million
compared to $5.6 million at December 31, 1998. The increase in working capital
was attributable to proceeds from the sale of common stock and warrants to
Fresenius totaling $1.5 million. In addition, the Company had drawn down $4.0
million from a interest-free line of credit provided by Fresenius to fund the
launch of the Prosorba column for RA by Cypress. Further, in the first quarter
of 1999, the company received proceeds of approximately $845,000 from the
exercise of warrants and stock options to purchase 435,649 shares of common
stock. The increase in working capital was offset by a net loss from operations
of approximately $3.1 million during the first quarter of 1999.
In April 1999, Fresenius AG exercised an option to acquire the Prosorba
column manufacturing facility and related assets, located in Redmond, Washington
for approximately $5.2 million. The purchase price consisted of $1.2 million
cash and an offset of the $4.0 million draw down from the interest-free line of
credit provided by Fresenius in March 1999.
During March and April 1999, the Company received additional proceeds of
approximately $5.2 million from the exercise of warrants to purchase 2,619,860
shares of common stock.
The Company recently hired a sales force for the commercial launch of the
Prosorba column for RA. The Company's original sales force has experience in
selling the Prosorba column for use in the treatment of ITP. The Company's
current sales force is composed of predominately new employees and has had no
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
11
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.
As a condition to FDA approval of the Pre-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. Depending
upon the number of patients and the rate of enrollment, 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 is 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 expects that existing cash resources will be sufficient to fund
operations to profitability.
The Company is selectively seeking opportunities to raise additional
capital to fund the development of new and the completion of existing research,
including additional clinical trials for the Prosorba column. To the extent the
Company decides to develop products other than the Prosorba column or Cyplex, it
will be required to raise additional capital. The amount of capital required by
the Company is dependent upon many factors, including the following: results of
clinical trials, results of current research and development efforts, the FDA
regulatory process, the Company's and its partner's ability to successfully
market the Prosorba column in the RA market, costs of commercialization of
products and potential competitive and technological advances and levels of
product sales. 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 additional equity or debt 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 may be required to
delay, scale back or eliminate some or all of its research and development and
marketing activities, 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.
12
PART II
Item 1 - Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1/(1)/ License and Distribution Agreement dated March 26, 1999
10.2 Asset Purchase Option Agreement dated March 26, 1999
10.3 Registration Agreement dated March 26, 1999
10.4 Securities Purchase Agreement dated March 26, 1999
10.5 Common Stock Purchase Warrant dated March 26, 1999
------------
/(1)/ Confidential treatment has been requested from the Securities
and Exchange Commission for portions of this exhibit
27. Financial Data Schedule
(b) Reports on Form 8-K
On March 23, 1999 the Company filed a Current Report on Form 8-K dated
March 22, 1999 which indicated the following: (i) the Company had signed a
definitive agreement covering its partnership with Fresenius and FHI; (ii) the
U.S. Food and Drug Administration had approved the Prosorba column for the use
in the treatment of moderate to severe rheumatoid arthritis; and (iii) the
Company had called for redemption approximately 2.7 million outstanding publicly
traded warrants that if not exercised by April 12, 1999 would be redeemed by the
Company at 10 cents per warrant on April 19, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cypress Bioscience, Inc.
May 17, 1999 /s/ Jay D. Kranzler
- ------------------------------------------ ------------------------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer, Chief Scientific
Officer and Chairman of the Board
(Principal Executive Officer and Acting
Principal Accounting and Financial Officer)
13