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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 March 31, 1998, 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 APRIL 15, 1998, 38,790,948 SHARES OF COMMON STOCK OF THE REGISTRANT
WERE OUTSTANDING.
This filing, without exhibits, contains 12 pages.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1 - Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 ............................. 3
Consolidated Statements of Operations for the quarters ended
March 31, 1998 and 1997........................................... 4
Consolidated Statements of Cash Flows for the
quarters ended March 31, 1998 and 1997............................ 5
Notes to Consolidated Financial Statements ........................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ..................................................... 11
Item 6 - Exhibits and Reports on Form 8-K ...................................... 11
Signatures ..................................................................... 12
</TABLE>
2
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997(1)
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,355,424 $ 7,541,320
Short-term investments 1,000,900 974,333
Accounts receivable:
Trade 280,337 372,741
Other 82,279 140,487
Inventories 705,794 628,004
Prepaid expenses 142,884 114,382
------------ ------------
Total current assets 8,567,618 9,771,267
Property and equipment, net 1,874,713 1,991,777
Convertible debenture issuance costs, net 23,781 25,722
------------ -------------
Total assets $ 10,466,112 $ 11,788,766
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 522,327 $ 530,132
Accrued compensation 169,894 175,929
Accrued liabilities 1,223,400 1,144,692
Current portion of capital lease obligation 6,083 4,286
------------ ------------
Total current liabilities 1,921,704 1,855,039
Convertible debentures 400,000 400,000
Notes payable 23,783 --
Capital lease obligations, net of current portion 8,309 7,735
Stockholders' equity:
Common stock, $.02 par value; 60,000,000 shares authorized,
38,709,948 and 38,545,808 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 775,819 770,916
Additional paid-in capital 78,476,028 78,041,636
Deferred compensation (424,276) (504,315)
Accumulated deficit (70,715,255) (68,782,245)
------------ ------------
Total stockholders' equity 8,112,316 9,525,992
------------ ------------
Total liabilities and stockholders' equity $ 10,466,112 $ 11,788,766
============ ============
</TABLE>
See accompanying notes.
(1) The balance sheet at December 31, 1997, 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
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Product sales $ 498,354 $ 816,458
Grant income 50,564 31,634
------------ ------------
548,918 848,092
Costs and expenses:
Production costs 350,816 601,334
Sales and marketing 280,562 315,166
Research and development 1,211,249 1,490,247
General and administrative 740,072 574,373
------------ ------------
Total costs and expenses 2,582,699 2,981,120
Other income (expense):
Interest income 109,356 102,806
Interest expense (8,585) (8,306)
------------ ------------
100,771 94,500
------------ ------------
Net loss $ (1,933,010) $ (2,038,528)
============ ============
Net loss per share (basic and diluted) $ (0.05) $ (0.06)
============ ============
Shares used in computing net loss
per share (basic and diluted) 38,684,410 34,573,111
============ ============
</TABLE>
See accompanying notes.
4
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,933,010) $(2,038,528)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 160,374 82,521
Amortization of deferred compensation 80,039 102,881
Loss on disposal of property and equipment -- 292
Changes in operating assets and liabilities, net 109,187 (271,274)
----------- -----------
Net cash used by operating activities (1,583,410) (2,124,108)
INVESTING ACTIVITIES
Purchase of equipment (35,398) (43,243)
Purchase of short-term investments (1,000,900) (1,032,440)
Proceeds from sale of short-term investments 974,333 --
----------- -----------
Net cash used by investing activities (61,965) (1,075,683)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants 439,295 --
Proceeds from notes payable 23,783 --
Payment of capital lease obligations (3,599) (7,667)
----------- -----------
Net cash provided by (used by) financing activities 459,479 (7,667)
DECREASE IN CASH AND CASH EQUIVALENTS (1,185,896) (3,207,458)
Cash and cash equivalents at beginning of period 7,541,320 8,045,508
----------- -----------
Cash and cash equivalents at end of period $ 6,355,424 $ 4,838,050
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,722 $ 1,172
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 1997 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 Company's first product, the
Prosorba(R) column, a medical device, treats a patient's defective immune system
so that it can more effectively respond to certain diseases. The Company
received marketing approval from the U.S. Food and Drug Administration ("FDA")
in December 1987 to distribute the Prosorba(R) column for the treatment of
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.
In January 1998, the Company announced that its Phase III pivotal
trial evaluating the efficacy of the Prosorba(R) column in the treatment of
rheumatoid arthritis ("RA") had been stopped early due to achieving favorable
safety and statistically significant efficacy results. The Company has begun its
efforts to prepare an application for Pre-Market Approval ("PMA") to the FDA's
Medical Device Division. The Company expects to file the PMA by mid-1998 and,
assuming FDA approval, anticipates selling the Prosorba(R) column for the
treatment of RA in 1999.
6
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2. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials and components $ 99,599 $166,714
Work in process 567,675 354,010
Finished goods 38,520 107,280
-------- --------
$705,794 $628,004
======== ========
</TABLE>
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. 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 loss 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. 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.
7
<PAGE> 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 Exchange Act that involve risks and uncertainties. The Company's actual
results could differ materially from those discussed below and elsewhere in this
Report. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section, as well as other sections
of this report, and those discussed in the Company's Annual Report Form 10-K for
the year ended December 31, 1997.
RESULTS OF OPERATIONS
Revenues associated with shipments of the Company's Prosorba(R) column
were approximately $498,000 and $816,000 for the quarters ended March 31, 1998
and 1997, respectively. The decrease in sales reflects the Company's decision to
utilize its existing sales staff to conduct pre-launch planning activities in
the rheumatoid arthritis ("RA") market at the expense of decreasing their time
spent marketing the Prosorba(R) column to hematologists for the treatment of
ITP. The Company believes pre-launch planning is critically important to the
overall success of the Company and that its sales team's in-depth knowledge of
the Prosorba(R) column makes them best equipped to perform this key function.
Sales for the quarter ended March 31, 1998 are at a level consistent with the
Company's expectations for sales for the remainder of 1998, and the Company
believes that the long-term benefits of the market intelligence gathered in
connection with pre-launch planning activities for the RA market will outweigh
any short-term reduction in revenues relative to 1997.
Consolidated operating expenses were approximately $2.6 million for
the quarter ended March 31, 1998 compared to approximately $3.0 million for the
same period in 1997. The decrease of approximately $400,000 or 13% is partly the
result of the Company's decrease in production costs from approximately $601,000
in 1997 to approximately $351,000 in 1998 due to costs incurred in 1997 related
to the consolidation of the Company's two manufacturing facilities into one.
Sales and marketing expenses for the quarters ended March 31, 1998 and
1997 were approximately $281,000 and $315,000, respectively. The decrease is
primarily a result of a reduction in sales personnel and the corresponding
decrease in salary related expense.
For the quarter ended March 31, 1998, research and development
expenses were approximately $1.2 million compared to approximately $1.5 million
for the same period in 1997. The decrease in research and development expenses
of approximately $279,000 is the direct result of stopping the RA trial in
January 1998 as previously mentioned. The Company anticipates increases in
research and development expenses as the open label phase of the RA trial is
finalized, the PMA application process moves forward, and enrollment increases
in its recently initiated Cyplex(TM) Phase II trial.
8
<PAGE> 9
General and administrative expenses were approximately $740,000 and
$574,000 for the quarters ended March 31, 1998 and 1997, respectively. The
increase of approximately $166,000 is primarily a result of an increase in
administrative personnel and professional services incurred.
The decrease in total operating expenses of approximately $398,000 for
the three month period ended March 31, 1998 compared to the same period in 1997
was partially offset by a decrease in revenues of approximately $299,000,
thereby resulting in a net loss of approximately $1.9 million for the quarter
ended March 31, 1998, compared to a net loss of approximately $2.0 million for
the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of March 31, 1998 was $6.6 million
compared to $7.9 million at December 31, 1997. The decrease of approximately
$1.3 million in working capital is attributable to the net loss for the quarter
ended March 31, 1998, which decrease was offset, in part, by cash proceeds
received from stock options and warrants exercised.
The Company expects to incur operating losses unless and until it
obtains marketing approval from the FDA and successfully markets the Prosorba(R)
column for additional disease indications, or until sales for its existing
indication of ITP increase significantly, or until it obtains FDA approval for
and successfully commercializes Cyplex(TM). There can be no assurance that the
Company will be able to obtain FDA approval to market the Prosorba(R) column for
disease indications other than ITP and, if it does, whether the Company will be
able to successfully market the Prosorba(R) column for such indications,
increase sales in the area of ITP or obtain FDA approval for or be able to
successfully commercialize Cyplex(TM).
In January 1998, the Company announced that its Phase III pivotal
study of the Prosorba(R) column in the treatment of RA was stopped. The study
was halted based on the recommendation of an independent Data Safety and
Monitoring Board ("DSMB") after an analysis of the available data showed that
the Prosorba(R) column had achieved both statistically significant efficacy and
favorable safety results. The Company has begun its efforts to prepare a PMA
application to be filed with the FDA's Medical Device Division and is expected
to be completed in mid-1998. The PMA application will request new labeling for
the Prosorba(R) column to incorporate the RA indication. However, there can be
no assurance that the Company will file its PMA application on a timely basis,
if at all, or that FDA approval to market the Prosorba(R) column for the
treatment of RA will be received on a timely basis, if at all. Even if FDA
approval is received, there can be no assurance that the Company will be
successful in marketing the Prosorba(R) column for the treatment of RA. Any such
failure to successfully market the Prosorba(R) column for use in the treatment
of RA could have a material adverse effect on the Company's business.
The Company expects that existing cash resources will be sufficient to
fund operations through at least December 31, 1998.
The Company is actively seeking opportunities to raise additional
capital to fund the proposed commercial launch of the Prosorba(R) column for the
treatment of RA, the development of new and the completion of existing research,
additional clinical trials for the Prosorba(R)
9
<PAGE> 10
column for other indications, and the further development and marketing of
Cyplex(TM). To the extent the Company decides to develop products other than the
Prosorba(R) column and Cyplex(TM), 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 and receiving FDA
approval for the use of the Prosorba(R) column in the treatment of RA in a
timely manner, the Company's ability to successfully market the Prosorba(R)
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 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 and/or to seek additional methods of financing.
10
<PAGE> 11
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, 1997.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
11
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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 13, 1998 /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)
12
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