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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 June 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 JULY 31, 1996, 28,755,341 SHARES OF COMMON STOCK OF THE REGISTRANT
WERE OUTSTANDING.
This filing, without exhibits, contains 15 pages.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 ........................... 3
Consolidated Statements of Operations for the quarter and six months
ended June 30, 1996 and 1995................................... 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995........................ 5
Notes to Consolidated Financial Statements ............................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ............................................. 15
Item 6 - Exhibits and Reports on Form 8-K .............................. 15
Signatures ............................................................. 16
</TABLE>
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,699,141 $ 1,009,878
Accounts receivable:
Trade 443,972 23,850
Other 55,195 533,989
Inventories 1,521,284 1,148,506
Prepaid expenses 736,619 143,755
------------ ------------
Total current assets 11,456,211 2,859,978
------------ ------------
Property and equipment, net 1,632,745 1,425,020
Convertible debenture issuance costs, net 37,370 278,711
============ ============
Total assets $ 13,126,326 $ 4,563,709
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 862,613 $ 892,501
Accrued compensation 300,095 456,939
Accrued liabilities 431,685 672,488
Senior convertible debentures -- 1,500,000
Current portion of notes payable 26,821 26,821
------------ ------------
Total current liabilities 1,621,214 3,548,749
------------ ------------
Convertible debentures 400,000 1,345,000
Notes payable, net of current portion 13,852 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, 28,755,341 and 18,693,595 shares at
June 30, 1996 and December 31, 1995 575,107 373,872
Additional paid-in capital 59,206,371 43,143,000
Deferred compensation (1,482,575) --
Accumulated deficit (47,376,393) (44,041,634)
------------ ------------
Total stockholders' equity (deficit) 10,922,510 (524,762)
============ ============
Total liabilities and stockholders' equity (deficit) $ 13,126,326 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 588,057 $ 1,044,018 $ 605,733 $ 4,060,481
Interest income 128,061 35,338 248,355 62,419
------------ ------------ ------------ ------------
716,118 1,079,356 854,088 4,122,900
------------ ------------ ------------ ------------
Costs and expenses:
Production costs 211,233 611,676 460,136 1,058,279
Sales and marketing 108,957 79,507 161,000 668,583
Research and development 663,811 746,453 1,091,044 1,721,558
General and administrative 845,619 496,247 1,805,770 1,095,974
Purchased in process research
and development -- 625,000 -- 625,000
Interest expense 8,231 79,537 33,598 155,934
Restructuring expense (Note 7) 11,935 -- 453,611 --
Debt conversion expense (Note 8) -- -- 183,688 --
------------ ------------ ------------ ------------
1,849,786 2,638,420 4,188,847 5,325,328
------------ ------------ ------------ ------------
Net loss (Note 4) $ (1,133,668) $ (1,559,064) $ (3,334,759) $ (1,202,428)
============ ============ ============ ============
Net loss per share $ (0.04) $ (0.09) $ (0.12) $ (0.07)
============ ============ ============ ============
Shares used in computing net loss
per share 28,728,276 17,148,679 27,171,713 17,084,964
============ ============ ============ ============
</TABLE>
See accompanying notes.
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,334,759) $ (1,202,428)
Adjustments to reconcile net loss to net cash (used) provided
by operating activities:
Depreciation and amortization 88,512 208,308
Stock option compensation expense 217,880 --
Debt conversion expense 183,688 --
(Gain) loss of disposal of fixed assets (11,110) 17,705
Common Stock issued to 401(k) plan 57,935 85,839
Common Stock issued for services and expenses 28,963 87,545
Purchased in process research and development -- 625,000
Accounts Receivable allowance 29,145 --
Changes in current assets and liabilities, net (1,887,095) (1,026,894)
------------ ------------
Net cash used by operating activities (4,626,841) (1,204,925)
------------ ------------
INVESTING ACTIVITIES
Purchase of equipment (219,922) (703,777)
Proceeds from sale of fixed assets 10,735 --
------------ ------------
Net cash used by investing activities (209,187) (703,777)
------------ ------------
FINANCING ACTIVITIES
Payment of capital lease obligation and notes payable (12,120) (21,534)
Net proceeds from issuance of Common Stock 12,109,340 --
Proceeds from issuance of convertible debentures 500,000 --
Debt issuance costs (71,929) --
------------ ------------
Net cash provided (used) by financing activities 12,525,291 (21,534)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,689,263 (1,930,236)
Cash and cash equivalents at beginning of period 1,009,878 3,670,616
------------ ------------
Cash and cash equivalents at end of period $ 8,699,141 $ 1,740,380
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 5,591 $ 312,884
============ ============
</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 products applicable to the treatment and diagnosis
of certain types of immune-mediated diseases, transplantations and cancers.
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/mm3.
The Company continues to devote most of its efforts to obtaining FDA
marketing approval for additional autoimmune diseases, transplantations and
certain cancers. The Company is currently conducting a controlled clinical trial
using the PROSORBA(R) column for therapy in 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>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw materials and components $ 363,131 $ 513,883
Work in process 1,091,196 557,222
Finished goods 66,957 77,401
---------- ----------
$1,521,284 $1,148,506
========== ==========
</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. An additional $170,000
of bonuses are payable upon certain events which may occur in 1996.
The Agreements provide for the granting of options 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. Options to purchase 3,025,327 and 1,134,497 shares of Common Stock at
$1.50 per share were granted in January 1996 and approved by the stockholders of
the Company on April 15, 1996. Options to purchase 25% of the total amount
granted 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.
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6. DISTRIBUTION AGREEMENT
On February 15, 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.
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 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 June 30, 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 restructuring is not yet completed and there can be
no assurance that such a restructuring will be completed.
The Company estimates it will incur approximately $300,000 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 will be recorded as
general and administrative expenses as incurred in 1996. As of June 30, 1996,
approximately $20,000 had been incurred and charged to general and
administrative expense. In addition, the Company estimates it will incur
approximately $1,000,000 of capital expenditures to consolidate its two
Washington manufacturing facilities.
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
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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. 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.
The Company also charged $84,000 to additional paid-in capital for the
six months ended June 30, 1996, for the unamortized deferred debt issuance costs
related to the 7% Convertible Debentures.
Allen & Company, the Company's largest stockholder, purchased $500,000
of the Debentures. Upon the closing of the Private Placement, the Debentures
purchased by Allen & Company automatically converted into 333,333 shares of
Common Stock of the Company.
Allen & Company 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. The Company paid Allen & Company 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.
9
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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
$112,000 and $218,000 was recorded as compensation expense for the quarter and
six months ended June 30, 1996, respectively.
10. SUBSEQUENT EVENT
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.
On July 31, 1996, the Company announced that it had extended the term
of its outstanding warrants dated August 29, 1991, (the "Warrants") to December
31, 1996. In connection with the extension of the term of the 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 August 14, 1996, there were outstanding
Warrants to purchase 1,850,000 shares of Common Stock of the Company.
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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 form 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
Effective April 2, 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. These minimums were subject to the Company having FDA
product approval for immune thrombocytopenic purpura.
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 six months ended June 30, 1996 was $588,000
and $606,000, respectively. This represents international sales for the entire
six-month period and domestic sales for May and June 1996 (the period
subsequent to the termination of the Baxter agreement). It is anticipated
that the Company's domestic sales force will be fully staffed by the third
quarter of 1996. The domestic sales recorded for the quarter and six months
ended June 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 decreased to $1.8 million and $4.2 million for
the quarter and six months ended June 30, 1996, respectively, from $2.6 million
and $5.3 million for the same periods in 1995. This decline was 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
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manufacturing during the remodeling and subsequent FDA re-approval process of
the Redmond, Washington, manufacturing facility, the Company increased
production during the second quarter in order to build its inventories.
Production costs of $211,000 and $460,000 for the quarter and six months ended
June 30, 1996, respectively, therefore, reflect this unusual activity. During
1995, the Company was shipping primarily to Baxter and incurred production costs
of $612,000 and $1.1 million for the quarter and six months ended June 30, 1995.
Sales and marketing expenses were $109,000 and $161,000 for the quarter
and six months ended June 30, 1996, respectively, compared to $80,000 and
$669,000 for the same periods of 1995. This significant decrease for the six
months 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 six months ended June 30, 1996, research and
development expenses were $660,000 and $1.1 million, respectively. For the same
periods in 1995, such expenses were $750,000 and $1.7 million, respectively. The
decrease is primarily a result of a temporary decline in clinical trial activity
associated with the January 1996 restructuring and a reduction of costs
associated with the restructuring. As 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 significantly in the near future.
General and administrative expenses were $846,000 and $1.8 million for
the quarter and six months ended June 30, 1996, compared to $496,000 and $1.1
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 $218,000 was recorded as compensation expense during the six
months ended June 30, 1996, for stock options granted at less than the closing
sales price on the date of grant.
Interest expense of $8,000 and $34,000 for the quarter and six months
ended June 30, 1996, respectively, compares to interest expense of $80,000 and
$156,000 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
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immediately as part of the restructuring. Such positions were from all
departments of the Company. In March 1996, the Company's Chief Scientific
Officer and Chairman of the Board resigned as part of the restructuring. Costs
related to these terminations were approximately $440,000 and were recorded as a
restructuring expense in the six months ended June 30, 1996.
The Company recorded a non-cash expense of approximately $184,000 for
debt conversion expense in the six months ended June 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). $845,000 in outstanding principal was tendered for exchange, leaving
an outstanding principal balance of $400,000 as of June 30, 1996.
The decrease in revenues was only partially offset by a decrease in
total operating expenses thereby resulting in a net loss of $1.1 million for the
quarter ended June 30, 1996, compared to a net loss of $1.6 million for the same
period in 1995. For the six months ended June 30, 1996 and 1995, the Company
recorded net losses of $3.3 million and $1.2 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of June 30, 1996, was $9.8 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
completed a pilot clinical study for this indication September 1995.
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, 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
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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 restructuring 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 Placement, coupled with the Company's
restructuring, will provide the resources necessary to fund operations,
including clinical trials, through the third quarter 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.
14
<PAGE> 15
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
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE> 16
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.
August 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)
August 14, 1996 /s/ Susan E. Feiner
- ------------------------------- --------------------------------------------
Date Susan E. Feiner
Director of Finance, Controller
(Principal Accounting and Financial Officer)
16
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