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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 September 30,
1996, 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 NOVEMBER 1, 1996, 34,551,410 SHARES OF COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.
This filing, without exhibits, contains 18 pages.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
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<S> <C>
ITEM 1
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the quarter and nine months
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,287,639 $ 1,009,878
Accounts receivable:
Trade 378,252 23,850
Other 181,592 533,989
Inventories 1,283,968 1,148,506
Prepaid expenses 348,746 143,755
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Total current assets 8,480,197 2,859,978
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Property and equipment, net 2,141,107 1,425,020
Convertible debenture issuance costs, net 35,429 278,711
----------- -----------
Total assets $10,656,733 $ 4,563,709
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 135,237 $892,501
Accrued compensation 101,869 456,939
Accrued liabilities 569,818 672,488
Senior convertible debentures - 1,500,000
Current portion of notes payable 30,128 26,821
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Total current liabilities 837,052 3,548,749
----------- -----------
Convertible debentures 400,000 1,345,000
Notes payable, net of current portion 14,349 25,972
Accrued compensation 168,750 168,750
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, $.02 par value; authorized 35,000,000 shares;
issued and outstanding, 28,777,841 and 18,693,595 shares
at September 30, 1996 and December 31, 1995, respectively 575,557 373,872
Additional paid-in capital 59,238,705 43,143,000
Deferred compensation (1,419,298) -
Accumulated deficit (49,158,382) (44,041,634)
Total stockholders' equity (deficit) 9,236,582 (524,762)
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Total liabilities and stockholders' equity (deficit) $10,656,733 $ 4,563,709
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1995, 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.
See accompanying notes.
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 671,816 $ 34,559 $ 1,277,549 $ 4,095,040
Interest income 95,277 36,018 343,632 98,437
----------- ----------- ----------- -----------
767,093 70,577 1,621,181 4,193,477
----------- ----------- ----------- -----------
Costs and expenses:
Production costs 377,056 401,581 837,192 1,459,860
Sales and marketing 268,417 77,274 429,417 745,858
Research and development 1,049,615 719,749 2,140,659 2,441,307
General and administrative 835,278 440,708 2,641,048 1,536,682
Purchased in process research
and development -- -- -- 625,000
Interest expense 12,237 76,728 45,835 232,662
Restructuring expense (Note 7) 6,479 -- 460,090 --
Debt conversion expense (Note 8) -- 810,386 183,688 810,386
----------- ----------- ----------- -----------
2,549,082 2,526,426 6,737,929 7,851,755
----------- ----------- ----------- -----------
Net loss (Note 4) $(1,781,989) $(2,455,849) $(5,116,748) $(3,658,278)
=========== =========== =========== ===========
Net loss per share $ (0.06) $ (0.14) (0.19) (0.21)
=========== =========== =========== ===========
Shares used in computing net loss
per share 28,760,966 17,665,314 27,649,052 17,284,155
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,116,748) $(3,658,278)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 132,647 302,481
Stock option compensation expense 337,651 -
Debt conversion expense 183,688 810,386
(Gain) loss of disposal of fixed assets (11,110) 16,242
Common stock issued to 401(k) plan 57,935 85,839
Common stock issued for services and expenses 29,203 87,545
Purchased in process research and development - 625,000
Accounts receivable allowance 29,145 -
Changes in operating assets and liabilities, net (2,067,897) 174,563
----------- -----------
Net cash used by operating activities (6,425,486) (1,556,222)
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INVESTING ACTIVITIES
Purchase of equipment (842,243) (711,437)
Proceeds from sale of fixed assets 36,735 7,000
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Net cash used by investing activities (805,508) (704,437)
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FINANCING ACTIVITIES
Payment of capital lease obligation and notes payable (18,706) (30,127)
Net proceeds from issuance of common stock 12,099,380 -
Proceeds from issuance of convertible debentures 500,000 -
Debt issuance costs (71,919) ( 7,500)
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Net cash provided (used) by financing activities 12,508,755 (37,627)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,277,761 (2,298,286)
Cash and cash equivalents at beginning of period 1,009,878 3,670,616
----------- -----------
Cash and cash equivalents at end of period $ 6,287,639 $ 1,372,330
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 10,682 $ 7,116
=========== ===========
</TABLE>
See accompanying notes.
5
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CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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. 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 1995 Annual Report on Form 10K/A
filed with the SEC.
The Company is engaged in the business of developing, manufacturing
and marketing medical devices and therapeutics for the treatment of certain
types of immune disorders. The U. S. Food and Drug Administration ("FDA")
approved the Company's PROSORBA(R) column for commercial sale in December 1987,
for the treatment of patients with idiopathic thrombocytopenic purpura ("ITP"),
an immune-mediated bleeding disorder. The PROSORBA(R) column is approved for
the removal of immunoglobulin G (IgG) and circulating immune complexes
containing IgG from plasma of patients with ITP with platelet counts below
100,000/mm(cubed).
The Company continues to devote most of its efforts to obtaining FDA
marketing approval for additional autoimmune disease indications. The Company
is currently conducting a multi-center controlled clinical trial using the
PROSORBA(R) column for treatment of rheumatoid arthritis as a follow-on to a
pilot clinical trial completed in September 1995.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
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3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
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<S> <C> <C>
Raw materials and components $ 335,856 $ 513,883
Work in process 686,392 557,222
Finished goods 261,720 77,401
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$ 1,283,968 $ 1,148,506
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</TABLE>
4. PER SHARE INFORMATION
The computation of net loss per share is based on the weighted average
number of shares of Common Stock outstanding for each period. Common stock
equivalents related to options, warrants and convertible debentures have not
been considered in the calculation of net loss per share inasmuch as their
effect would have been antidilutive.
5. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company entered into employment agreements (the "Agreements") as
of December 28, 1995, with a new Chief Executive Officer and a new President,
Chief Operating Officer. The Agreements are each for five year terms, ending
on December 31, 2000, unless they are earlier terminated by the parties. The
Agreements provide for specified compensation that includes base salary,
signing bonuses, annual performance bonuses, stock options, and a lump sum
payment in the event of a termination of employment, without cause, as defined
in the Agreements. Signing bonuses of $100,000 were paid in December 1995 and
charged to expense in 1995. In January 1996, an additional $100,000 in signing
bonuses were paid and were included in general and administrative expenses in
the accompanying 1996 Consolidated Statements of Operations. In addition,
milestone payments of $170,000 are payable if and when certain events occur in
1996.
The Agreements provide for the granting of options to Drs. Kranzler
and Blank to purchase 8% and 3%, respectively, of the fully diluted shares of
Common Stock then outstanding (including the options to be issued under the
Agreements), at an exercise price equal to the fair market value of the
Company's Common Stock upon the date of grant. To satisfy the Company's
obligations, options to purchase 3,025,327 and 1,134,497 shares of Common Stock
at $1.50 per share were granted, respectively, in January 1996 and approved by
the stockholders of the Company on April 15, 1996. Options to purchase 25% of
the total amount granted to each of Drs. Kranzler and Blank vested on the date
of grant with the remainder to vest ratably and daily over a four year period.
The vesting of such options will accelerate and the options will become fully
exercisable upon a merger of the Company or in the event of a termination of
employment without cause, as defined in the Agreements.
7
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6. DISTRIBUTION AGREEMENT
In February, 1994, the Company entered into a 10-year exclusive
distribution agreement with Baxter Healthcare Corporation ("Baxter") granting
distribution rights to its PROSORBA(R) column in the United States and Canada
for the treatment of thrombocytopenia and the first right to negotiate for new
PROSORBA(R) column indications. Baxter assumed its sales and distribution
responsibilities on April 2, 1994. The agreement provided for an annual "take
or pay" commitment, under certain circumstances, from Baxter to the Company for
the first two sales years.
In March, 1996, the Company and Baxter entered into a termination
agreement terminating the exclusive distribution agreement. Under the
termination agreement, effective May 1, 1996, the Company began to, among other
things, sell its PROSORBA(R) column directly to customers who had previously
purchased PROSORBA(R) columns through Baxter as well as to any other potential
customers who wish to purchase PROSORBA(R) columns.
7. RESTRUCTURING EXPENSE
In December 1995, the Company recorded a restructuring charge
aggregating $645,000 relating to the Company's plan to consolidate its
manufacturing facilities into one location in the state of Washington and to
move all other operations to San Diego, California. This charge included
approximately $350,000 related to write-downs of equipment and leasehold
improvements for the manufacturing facility expected to be vacated in 1996,
$200,000 related to abandonment of leases in Seattle and Princeton with the
remainder related to a severance commitment with its former Executive Vice
President who resigned on December 28, 1995. There were no significant changes
in these estimates as of September 30, 1996.
The Company incurred approximately $150,000 in costs associated with
moving the administration, research and medical departments to San Diego, with
most costs being attributable to relocation costs of the few members of
management moving to San Diego. Such costs were recorded as general and
administrative expenses in 1996. In addition, the Company estimates it will
incur approximately $1,000,000 of capital expenditures to consolidate its two
Washington manufacturing facilities, of which approximately $700,000 has been
incurred to date.
In January 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being terminated immediately as part of the restructuring. Such positions
were from all departments of the Company. The Company's Chief Scientific
Officer and Chairman of the Board resigned in March 1996 as part of the
restructuring. Costs related to these terminations were approximately $440,000
and were recorded as a charge to operations as a restructuring expense in the
quarter ending March 31, 1996. Also as part of the restructuring, in May 1996
the Company's Chief Financial Officer resigned. Costs relating to such
termination were not material to the consolidated financial statements.
8
<PAGE> 9
In April 1996, the Company entered into a sub-lease agreement for its
existing Seattle facility effective May 1, 1996. The Company has an existing
lease obligation for its Seattle facility through October 13, 1999, with a
current monthly rent expense, including operating expenses, of approximately
$26,500. The sub-lease agreement provides for the Company to receive monthly
rent, beginning May 1, 1996, in an amount equal to the Company's current lease
commitment, including operating expenses, through October 13, 1999. The
Company intends to remain an occupant in a small portion of its existing
Seattle facility through December 31, 1996, and will be obligated to pay
approximately $8,000 a month of rent through December 31, 1996.
8. FINANCING
In December 1995, the Company completed an offering of $1,500,000 of
Senior Convertible Debentures (the "Debentures") to certain accredited
investors (the "Debenture Offering"). In January 1996, the Company completed a
private placement of 8,540,702 shares of the Company's Common Stock (the
"Private Placement") with certain accredited investors at a per share sales
price of $1.50. Upon the closing of the Private Placement, the Debentures were
automatically converted into 1,000,000 shares of Common Stock of the Company
and $140,000 of debt issuance costs were charged to additional paid-in capital.
In March 1996, the Company completed an exchange offering whereby the
Company offered to exchange one share of its Common Stock for each $2.25 of
outstanding principal amount of the Company's 7% Convertible Debentures
(including interest accrued on the 7% Convertible Debentures up to, but not
including, the date such securities were accepted for exchange) (the "Exchange
Offering"). Of the $1,245,000 outstanding principal amount of the Company's 7%
Convertible Debentures, $845,000 in outstanding principal amount was tendered
for exchange, resulting in the issuance of 399,252 shares of Common Stock
(which amount includes 23,700 shares issued with respect to accrued interest on
the 7% Convertible Debentures). The Company recorded a non-cash expense of
approximately $184,000 recorded as debt conversion expense in the quarter
ending March 31, 1996, representing the fair market value of the increased
number of shares of Common Stock issued under the terms of the Exchange
Offering compared to the original conversion terms of $2.875 per share.
Allen & Company Incorporated, the Company's largest stockholder,
purchased $500,000 of the Debentures. Upon the closing of the Private
Placement, the Debentures purchased by Allen & Company Incorporated,
automatically converted into 333,333 shares of Common Stock of the Company.
Allen & Company Incorporated, acted as a non-exclusive placement agent
of the Company with respect to the Debenture Offering and the Private Placement,
receiving a placement fee of 6% of the gross proceeds attributable to securities
actually placed by Allen & Company Incorporated. The Company paid Allen &
Company Incorporated, a placement fee in the form of 20,000 shares of Common
Stock of the Company in connection with the Debenture Offering and a cash fee of
$225,000 in connection with the Private Placement. The Company did not employ a
placement agent to assist it in the Exchange Offering.
On July 31, 1996, the Company announced that it had extended the term
of its outstanding warrants dated August 29, 1991, (the "1991 Warrants") to
December 31, 1996. In
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connection with the extension of the term of the 1991 Warrants, the Company
filed with the Securities and Exchange Commission a Registration Statement on
Form S-3, which Registration Statement was declared effective by the Commission
on July 31, 1996. As of November 14, 1996, there were outstanding 1991
Warrants to purchase 1,850,000 shares of Common Stock of the Company.
9. STOCK COMPENSATION EXPENSE
During the quarter ended March 31, 1996, the Company issued certain
options to purchase approximately 4.7 million shares of the Company's Common
Stock with exercise prices that were less than closing sales price on the date
of grant (See Note 5). Accordingly, the Company has recorded the difference of
$1.7 million in stockholders' equity and will recognize this amount as
compensation expense over the vesting period of the stock options.
Approximately $ 106,000 and $ 338,000 was recorded as compensation expense for
the quarter and nine months ended September 30, 1996, respectively.
10. SUBSEQUENT EVENTS
In October, 1996, the Company completed a private placement of units
with each unit consisting of two shares of common stock and one common stock
purchase warrant priced at $4.00 per unit. Holders of each five-year warrant are
entitled to purchase one share of the Company's common stock at an exercise
price of $2.00 per share. A total of 1,734,000 units were sold for a total of
$6,936,000. In conjunction with the offering, the Company engaged several
non-exclusive placement agents. Each such placement agent received a placement
fee of 8% of the aggregate value of the units placed by such placement agent for
a total of $506,880.
On November 1, 1996, the Company acquired PRP, Inc., a Delaware
corporation ("PRP"). As a result of the merger, the Company assumed all of the
assets and liabilities of PRP. The transaction will be accounted for as a
purchase.
In connection with the merger, the Company issued to certain
debt-holders of PRP, in full satisfaction and settlement of such indebtedness,
units (of the same form as those units issued in the October 1996 private
placement), with a total value equal to $4,473,800 (based upon a price of $4.00
per unit).
In addition, the holders of PRP equity securities (including holders
of options and warrants of PRP) (the "Equity Holders") will be entitled to
receive earn-out payments, if any, on a pro rata basis, on net sales of
products developed using PRP's technology acquired by the Company in the
merger. In addition, in conjunction with obtaining approval from the FDA for
the use of Infusible Platelet Membranes ("IPM") for the treatment of
thrombocytopenia, the Company shall make a payment of $5,000,000 (the
"Milestone Payment") to the Equity Holders, with such payment being in the form
of, at the Company's discretion, cash, Company Common Stock or a combination of
the two.
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In consideration of certain investment banking advisory services
provided by EGS Securities Corp. ("EGS") to PRP in connection with the merger,
the Company issued to EGS units with a total value of approximately $120,000.
In addition, the Company is obligated to pay EGS an amount in cash equal to two
and one-half percent (2 1/2%) of the Milestone Payment and each earn-out
payment made to PRP Equity Holders at the time any such payments are made.
Pursuant to the terms of the merger agreement, subject to limited
exceptions, the Company is obligated to spend $4,000,000 to commercialize and
advance IPM as a principal product of the Company. The only circumstances
under which the Company may decrease or cease commercialization of IPM prior to
expending $4,000,000 would be if the Company encounters critical problems with
the commercialization of IPM, including problems related to IPM's safety,
efficacy or economic viability, such as would render IPM, on a stand-alone
basis, unsafe, ineffective or incapable of generating a reasonable, positive
cash flow. After the Company has expended $4,000,000 on the commercialization
of IPM, the Company has agreed to use commercially reasonable efforts to
optimize commercialization of IPM and other existing products of PRP.
11
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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 that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as
other sections of this report, and those discussed in the Company's Form 10-K/A
for the year ended December 31, 1995.
RESULTS OF OPERATIONS
In April, 1994, the Company entered into a 10-year exclusive
distribution agreement with Baxter granting distribution rights for the
treatment of thrombocytopenia and the first right to negotiate for new
PROSORBA(R) column indications. The agreement provided for an annual "take or
pay" commitment, under certain circumstances, from Baxter to the Company for
the first two sales years.
On March 18, 1996, the Company and Baxter entered into a termination
agreement terminating the exclusive distribution agreement. Under the
termination agreement, effective May 1, 1996, the Company may, among other
things, sell its PROSORBA(R) column directly to customers who had previously
purchased PROSORBA(R) columns through Baxter as well as to any other potential
customers who wish to purchase PROSORBA(R) columns.
Revenue for the quarter and nine months ended September 30, 1996 was
$672,000 and $1,278,000, respectively. Such amounts include international
sales for the entire nine-month period and domestic sales for May through
September, 1996 (the period subsequent to the termination of the Baxter
agreement). The domestic sales recorded for the quarter and nine months ended
September 30, 1996, primarily reflect both customer initiated orders and
customers referred by Baxter. For the comparable periods in 1995, revenues
reflect international sales and shipments to Baxter totalling approximately
$1.0 million, as well as the receipt of a $3.0 million take-or-pay payment from
Baxter.
Total operating expenses of $2.5 million and $6.7 million for the
quarter and nine months ended September 30, 1996, respectively, compare to $2.5
million and $7.9 million for the same periods in 1995. This decline is
primarily a result of the restructuring and the corresponding reduction in
costs, as well as the 1995 non-recurring expense of $625,000 reflecting the
Company's purchase of the minority interest of its former majority owned
subsidiary.
During the first half of 1996, production was impacted by both the
termination of the Baxter agreement and the consolidation of facilities. There
was very little product shipped during the first four months of the year as the
Company did not resume direct shipments to domestic customers until May 1,
1996. In anticipation of a temporary cessation of manufacturing during the
remodeling and subsequent FDA re- approval process of the Redmond, Washington
manufacturing facility, the Company increased production during the second and
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third quarters in order to build its inventories. Production costs of $377,000
and $837,000 for the quarter and nine months ended September 30, 1996,
respectively, therefore, reflect this unusual activity. During 1995, the
Company was shipping primarily to Baxter and incurred production costs of
$402,000 and $1.5 million for the quarter and nine months ended September 30,
1995.
Sales and marketing expenses were $268,000 and $429,000 for the
quarter and nine months ended September 30, 1996, respectively, compared to
$77,000 and $746,000 for the same periods of 1995. This significant decrease
for the nine months ended September, 30, 1996, is a result of the Company's
March 1995 renegotiation of its distribution agreement with Baxter. During the
first quarter of 1995, the Company was still obligated to provide marketing and
promotional support to Baxter. In March 1995, the Company was released from
that obligation and, thus, incurred significantly less expense through the May
1996 re-initiation of product sales directly to customers. As a result of that
termination, however, the Company anticipates an increase in sales and
marketing expenses in future quarters.
For the quarter and nine months ended September 30, 1996, research and
development expenses were $1.1 million and $2.1 million, respectively. For the
same periods in 1995, such expenses were $720,000 and $2.4 million,
respectively. The significant increase in the third quarter of 1996 is a result
of the recent commencement of the Company's controlled clinical trial using the
PROSORBA(R) column for therapy in rheumatoid arthritis. The Company expects
research and development expenses to increase in future periods.
General and administrative expenses were $835,000 and $2.6 million for
the quarter and nine months ended September 30, 1996, respectively, compared to
$440,000 and $1.5 million for the same periods in 1995. The increase is
principally a result of costs associated with the Company's new Chief Executive
Officer and President, Chief Operating Officer, both of which were hired in
December 1995, and the resignation of the Company's Chief Scientific Officer in
March 1996. During the same period in 1995, the Company's former President
resigned in early February resulting in only one month's salary expense and the
Chief Scientific Officer's salary was included as research and development
expense. The new Chief Executive Officer has assumed the Chief Scientific
Officer's duties. In addition, approximately $338,000 was recorded as
compensation expense during the nine months ended September 30, 1996, for stock
options granted at less than the closing sales price on the date of grant.
Interest expense of $12,200 and $45,800 for the quarter and nine
months ended September 30, 1996, respectively, compares to interest expense of
$77,000 and $233,000 for the same periods of 1995. The decline relates to the
September, 1995 and March, 1996 conversions of the majority of the 7%
Convertible Debentures due March 31, 2001.
In January, 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being terminated immediately as part of the restructuring. Such positions
were from all departments of the Company. Costs related to these terminations
were approximately $460,000 and were recorded as a restructuring expense in the
nine months ended September 30, 1996.
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The Company recorded a non-cash expense of approximately $184,000 for
debt conversion expense in the nine months ended September 30, 1996. Such
expense represents the fair market value of the increased number of shares
issued by the Company under the terms of an exchange offering to holders of the
Company's 7% Convertible Debentures to exchange one share of Common Stock for
each $2.25 of outstanding principal (including any accrued and unpaid interest
on such principal). Outstanding principal of $845,000 was tendered for
exchange, leaving an outstanding principal balance of $400,000 as of September
30, 1996.
The decrease in revenues was only partially offset by a decrease in
total operating expenses thereby resulting in a net loss of $1.8 million for
the quarter ended September 30, 1996, compared to a net loss of $2.5 million
for the same period in 1995. For the nine months ended September 30, 1996 and
1995, the Company recorded net losses of $5.1 million and $3.7 million,
respectively.
On November 1, 1996, the Company acquired PRP, Inc. ("PRP"), a
biopharmaceutical company engaged in development of novel agents to treat blood
and platelet disorders. PRP's operations will remain in Boston. As a result of
the merger, the Company assumed all of the assets and liabilities of PRP. The
transaction will be accounted for as a purchase.
In connection with the merger, the Company issued to certain
debt-holders of PRP, in full satisfaction and settlement of such indebtedness,
units (with each unit consisting of two shares of Common Stock of the Company
and one warrant to purchase one share of Common Stock of the Company), with a
total value equal to $4,473,000 (based upon a price of $4.00 per unit).
In addition, the holders of PRP equity securities (including holders
of options and warrants of PRP) (the "Equity Holders") will be entitled to
receive earn-out payments, if any, on a pro rata basis, on net sales of
products developed using PRP's technology acquired by the Company in the
merger. In addition, in conjunction with obtaining approval from the FDA of
the use of Infusible Platelet Membranes ("IPM") for the treatment of
thrombocytopenia, the Company shall make a payment of $5,000,000 (the
"Milestone Payment") to the Equity Holders, with such payment being in the form
of, at the Company's discretion, cash, Company Common Stock or a combination
the two.
In consideration of certain investment banking advisory services
provided by EGS Securities Corp. ("EGS") to PRP in connection with the Merger,
the Company issued to EGS Units with a total value of approximately $120,000.
In addition, the Company is obligated to pay EGS an amount in cash equal to two
and one-half percent (2 1/2%) of the Milestone Payment and each earn-out
payment made to PRP Equity Holders, at the time any such payments are made.
14
<PAGE> 15
Pursuant to the terms of the merger agreement, subject to limited
exceptions, the Company is obligated to spend $4,000,000 to commercialize and
advance IPM as a principal product of the Company. The only circumstances
under which the Company may decrease or cease commercialization of IPM prior to
expending $4,000,000 would be if the Company encounters critical problems with
the commercialization of IPM, including problems related to IPM's safety,
efficacy or economic viability, such as would render IPM, on a stand-alone
basis, unsafe, ineffective or incapable of generating a reasonable, positive
cash flow. After the Company has expended $4,000,000 on the commercialization
of IPM, the Company has agreed to use commercially reasonable efforts to
optimize commercialization of IPM and other existing products of PRP.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of September 30, 1996, was $7.6
million compared to a working capital deficit of $689,000 at December 31, 1995.
The significant increase in working capital is principally attributable to the
January 1996 Private Placement. In January 1996, the Company raised a total of
$14 million of new equity investment, making it the largest financing in the
Company's history. In the Private Placement, the Company raised nearly $12.5
million from a diverse group of investors, many of whom are new to the Company.
In connection with the Private Placement, the Company also converted $1.5
million of outstanding Senior Convertible Debentures into Common Stock.
The Company expects to incur further operating losses until the
Company can obtain marketing approval from the FDA for additional disease
indications for the PROSORBA(R) column or until sales for the PROSORBA(R)
column for its existing indication of idiopathic thrombocytopenic purpura
increase significantly. A clinical trial is currently being conducted using the
PROSORBA(R) column for rheumatoid arthritis therapy to obtain the necessary
clinical data to apply to the FDA to obtain marketing approval. The Company
anticipates that interim results of this trial will be available in mid-1997.
In October, 1996, the Company completed a private placement of units
with each unit consisting of two shares of common stock and one common stock
purchase warrant (the "1996 Warrants") collectively priced at $4.00 per unit.
Holders of each five-year warrant are entitled to purchase one share of the
Company's common stock at an exercise price of $2.00 per share. A total of
1,734,000 units were sold for a total of $6,936,000. In conjunction with the
offering, the Company engaged several non-exclusive placement agents. Each
such placement agent received a placement fee of 8% of the aggregate value of
the units placed by such placement agent for a total of $506,880.
In January 1996, the Company also began implementing a restructuring
plan which includes consolidating its manufacturing facilities to one location
in the state of Washington and moving all other operations of the Company to
San Diego, California. The Company estimates it will incur approximately $1.0
million of capital expenditures to consolidate its two Washington manufacturing
facilities. As part of the restructuring plan, the Company, in January 1996,
notified approximately twenty employees, which was slightly greater than half
of its work force,
15
<PAGE> 16
that their positions were being terminated immediately. In March 1996, the
Company's Chief Scientific Officer and Chairman of the Board resigned as part
of the restructuring. The annual salary savings from this reduction in the
work force is expected to be in excess of $1.0 million. In April 1996, the
Company entered into a sub-lease agreement for its existing Seattle facility
effective May 1, 1996. The sub-lease agreement provides for the Company to
receive monthly rent, beginning May 1, 1996, in an amount equal to the
Company's current lease commitment, including operating expenses, through
October 13, 1999. The Company intends to remain an occupant in a small portion
of its existing Seattle facility through December 31, 1996, and will be
obligated to pay approximately $8,000 per month of rent through December 31,
1996.
The Company believes that relocating its operations to San Diego,
recognized as the fourth largest biotechnology center in the United States,
will provide the Company with greater exposure within the industry and better
position the Company to market its products. In addition, in the event the
Company wishes to expand staffing, San Diego's highly skilled work force will
provide significant resources from which the Company may draw upon to fill any
future staffing needs. The relocation to San Diego was completed during the
quarter ended September 30, 1996. The remainder of the restructuring,
specifically the consolidation of the Washington manufacturing facilities, is
not yet completed and there can be no assurance that such a restructuring will
be completed. The Company believes that the funds resulting from the Private
Placements in January and October, 1996, coupled with the Company's
restructuring, will provide the resources necessary to fund operations,
including clinical trials, through the latter half of 1997.
The Company requires additional financing in order to fund the
completion of such clinical trials, initiate clinical trials using the
PROSORBA(R) column in other diseases and apply the Company's technology to
applications beyond the PROSORBA(R) column. The Company is seeking corporate
partners to fund additional trials in other immune disorders.
16
<PAGE> 17
PART II
Item 1 - Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1995.
In September, 1996, the Company reached a settlement of the
investigation commenced by the Securities and Exchange Commission
concerning the Company's quarterly report issued for the quarter ending
September 30, 1993. While neither admitting nor denying the
Commission's findings concerning that report, the Company agreed to the
entry of an administrative Cease and Desist Order which, among other
things, prohibits the Company from committing or causing any violation
and any future violation of Section 17(a) of the Securities Act of 1933
and Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Securities
Exchange Act of 1934 and Rules 10b-5, 12b-5, 12b-20 and 13a-13
thereunder.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger and Reorganization dated October
10, 1996, by and among Registrant, Cypress Acquisition Sub,
Inc. and PRP, Inc. (1)(2)
4.1 Warrant Agreement dated September 18, 1996, between Registrant
and American Stock Transfer & Trust Company. (1)
4.2 Warrant Certificate. (1)
4.2 Exchange of Bridge Debt and Warrant Termination Agreement
between Registrant and certain holders of indebtedness of PRP,
Inc. (1)
4.3 Modified Fee Agreement dated by and among Registrant, PRP, Inc.
and EGS Securities Corp. (1)
27 Financial Data Schedule
(B) Reports on Form 8-K
None
(1) Filed with the SEC as an exhibit to Registrant's Registration Statement
on Form S-3 (No. 333-15483) filed on November 4, 1996, and incorporated herein
by this reference.
(2) Schedules omitted pursuant to Rule 601(b)(2) of Regulation S-K of the
SEC. Registrant undertakes to furnish such schedules an attachments thereto to
the SEC upon request.
17
<PAGE> 18
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 14, 1996 /s/ Jay D. Kranzler
- ----------------- ------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer
and Vice Chairman of the Board
(Principal Executive Officer)
November 14, 1996 /s/ Susan E. Feiner
- ----------------- ------------------------------------
Date Susan E. Feiner
Director of Finance, Controller
(Principal Accounting and
Financial Officer)
18
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