<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1999, or
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_________________
COMMISSION FILE NUMBER 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 22-2389839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 EXECUTIVE DRIVE, SUITE 325, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (zip code)
(858) 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 AUGUST 6, 1999, 46,089,629 SHARES OF COMMON STOCK OF THE REGISTRANT WERE
OUTSTANDING.
This filing, without exhibits, contains 16 pages.
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998.................... 3
Consolidated Statements of Operations for the quarter and six
months ended June 30, 1999 and 1998 (unaudited).................... 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 (unaudited)................ 5
Notes to Consolidated Financial Statements......................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.......... 11
Item 1 - Legal Proceeding................................................... 15
Item 6 - Exhibits and Reports on Form 8-K................................... 15
PART II - OTHER INFORMATION
Signature.......................................................... 16
2
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,958,683 $ 5,619,568
Accounts receivable:
Trade 6,580 408,902
Other 437,737 175,298
Inventories -- 1,014,443
Assets of business transferred to Fresenius 1,359,020 --
Prepaid expenses 131,427 254,891
------------ ------------
Total current assets 14,893,447 7,473,102
Property and equipment, net 247,155 1,789,976
Restricted cash 35,000 35,000
Debt issuance costs, net 14,074 17,957
------------ ------------
Total assets $ 15,189,676 9,316,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 624,404 778,061
Accrued compensation 122,951 164,832
Accrued liabilities 707,247 952,448
Liabilities of business transferred to Fresenius 3,216,667 --
Current portion of capital lease obligations 5,845 9,823
------------ ------------
Total current liabilities 4,677,114 1,905,164
Convertible debentures 400,000 400,000
Notes payable 128,687 144,804
Capital lease obligations, net of current portion 12,487 21,496
Stockholders' equity:
Series A convertible preferred stock, $.02 par value; 3,333,333 shares
authorized, issued and outstanding, none and 1,156,832 at June 30, 1999
and December 31, 1998, respectively -- 23,136
Common stock, $.02 par value; authorized 60,000,000 shares; issued and
outstanding, 46,036,508 shares at June 30, 1999 and 41,402,045 shares at
December 31, 1998 920,730 828,041
Additional paid-in capital 93,889,554 86,238,466
Deferred compensation -- (239,446)
Accumulated deficit (84,838,896) (80,005,626)
------------ ------------
Total stockholders' equity 9,971,388 6,844,571
------------ ------------
Total liabilities and stockholders' equity $ 15,189,676 $ 9,316,035
============ ============
</TABLE>
See accompanying notes
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements
3
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ -- $ 491,416 $ 588,120 $ 989,770
Revenue from Fresenius arrangement 379,309 -- 379,309 --
Grant income -- 153,671 -- 204,235
----------- ----------- ----------- -----------
Total revenue 379,309 645,087 967,429 1,194,005
Costs and expenses:
Production costs 270,141 419,372 789,626 770,188
Sales and marketing 1,315,971 471,999 2,402,219 752,561
Research and development 459,175 1,486,066 1,140,469 2,697,315
General and administrative 887,719 1,078,962 2,331,372 1,819,034
----------- ----------- ----------- -----------
Total cost and expenses 2,933,006 3,456,399 6,663,686 6,039,098
Other income (expense):
Interest income 140,126 78,984 192,442 188,340
Interest expense (10,790) (7,251) (22,680) (15,836)
Gain on sale of assets, net 693,283 -- 693,225 --
----------- ----------- ----------- -----------
822,619 71,733 862,987 172,504
Net loss $(1,731,078) $(2,739,579) $(4,833,270) $(4,672,589)
=========== =========== =========== ===========
Net loss per share $ (0.04) $ (0.07) $ (0.11) $ (0.12)
=========== =========== =========== ===========
Shares used in computing net loss
per share 43,013,276 38,922,607 42,690,634 38,805,521
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(4,833,270) $(4,672,589)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 190,505 292,858
Amortization of deferred compensation 239,446 200,425
(Gain) loss on disposal of property and equipment 94,625 (6,610)
Common stock issued for services and expenses 121,750 109,206
Changes in operating assets and liabilities, net 837,051 (258,114)
----------- -----------
Net cash used in operating activities (3,349,893) (4,334,824)
Investing activities:
Purchase of equipment (112,346) (165,626)
Restricted cash -- (58,783)
Proceeds from business transferred 3,216,667 --
Proceeds from sale of assets 14,900 7,500
Short-term investments -- (26,567)
----------- -----------
Net cash provided by (used in) investing activities 3,119,221 (243,476)
Financing activities:
Net proceeds from exercise of stock options and warrants 6,098,891 798,876
(Payment of) proceeds from notes payable (16,117) 23,783
Payment of capital lease (12,987) (8,260)
Sale of common stock and warrants to Fresenius 1,500,000 --
----------- -----------
Net cash provided by financing activities 7,569,787 814,399
Net increase (decrease) in cash and cash equivalents 7,339,115 (3,763,901)
Cash and cash equivalents at beginning of period 5,619,568 7,541,320
----------- -----------
Cash and cash equivalents at end of period $12,958,683 $ 3,777,419
=========== ===========
</TABLE>
See accompanying notes.
5
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CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS
Cypress Bioscience, Inc. (the "Company") researches, develops 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. In April 1999, the Company
launched sale of the Prosorba(R) column, a therapeutic medical device, for the
treatment of moderate to severe rheumatoid arthritis (RA) in adult patients with
long standing disease who have failed or are intolerant to disease-modifying
anti-rheumatic drugs (DMARDS). The Prosorba column was previously approved for
use in idiopathic thrombocytopenic purpura ("ITP"), an immune-mediated bleeding
disorder. The Company is also developing Cyplex(TM), a platelet alternative,
previously known as Infusible Platelet Membranes ("IPM"), as an alternative to
traditional platelet transfusions.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the SEC. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated. In the opinion of the Company's
management, all adjustments necessary for a fair presentation of the
accompanying unaudited financial statements are reflected herein. All such
adjustments are normal and recurring in nature. Interim results are not
necessarily indicative of results for the full year. For more complete financial
information, these consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's 1998 Annual Report on Form 10-K filed with the SEC.
3. FRESENIUS AGREEMENTS
In March 1999, Cypress entered into an agreement with Fresenius AG
("Fresenius") of Bad Homburg, Germany and its U.S. subsidiary, Fresenius
Hemotechnology, Inc. ("FHI"). The agreement provides Fresenius with an exclusive
license to distribute the Prosorba column in the U.S., Europe, Latin America,
and subject to certain conditions, Japan and certain other countries. Upon
signing of the agreement, Cypress received a total of $1.5 million from
Fresenius consisting of the purchase of 297,530 shares of Cypress common stock
for $1.0 million, and $500,000 for the purchase of three-year warrants to buy
342,466 shares of Cypress common stock at $7.50 per share.
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In the U.S., Cypress and FHI will jointly market the Prosorba column.
Cypress and FHI will share in clinical trials and sales and marketing expenses
in the U.S., subject to certain annual dollar limits. Fresenius will have
exclusive distribution rights and responsibility for clinical trials and
registration of the product overseas. In the U.S., net profit will be split
50/50 until Prosorba column revenue reaches a pre-determined sales threshold,
after which time Cypress will receive 60% of the profits and Fresenius will
receive 40%. Net profits will be split 50/50 outside the U.S.
Revenue from Fresenius agreement for the second quarter of 1999
consisted of expense reimbursement for production, research and development and
sales and marketing expenses from the sale of Prosorba column by Fresenius
Hemotechnlogy, Inc. ("FHI"). Until profits are generated from the arrangement
with Fresenius, Cypress will recognize revenue based on an amount equal to the
net sales of the Prosorba column by FHI multiplied by a fraction based on the
ratio of allowable expenses incurred by Cypress compared to allowable expenses
incurred by both parties under the agreement. As such, it is not directly
comparable to revenues recorded in the prior period.
In April 1999, Fresenius exercised its option to acquire the Prosorba
column manufacturing facility and related assets, located in Redmond,
Washington, for $5.2 million. The purchase price paid to Cypress consisted of
cash of $1.2 million and an offset of $4.0 million from the previous draw down
of an interest-free line of credit provided by Fresenius. In connection with
this transaction, Fresenius purchased from the company inventory for $2.0
million that resulted in a gain to Cypress of $693,000.
The purchase price of the manufacturing facility and related assets may
result in a gain to Cypress. The potential gain was deferred since the company
is responsible for reimbursing Fresenius for certain operating costs associated
with this facility during 1999. The net book value of the property and equipment
sold to Fresenius totaling $1.4 million was recorded on the balance sheet as
"Assets of Business Transferred to Fresenius". The purchase price of the
property and equipment sold totaling $3.2 million was recorded as "Liabilities
of Business Transferred to Fresenius". As the Company becomes obligated to
reimburse Fresenius, such amounts will be charged to "Liabilities of Business
Transferred to Fresenius". When the obligation to Fresenius lapses at year end,
the assets sold will be removed from the company's balance sheet and the excess
of the purchase price over the net book value of the assets sold plus
reimbursement of certain operating costs will be recorded as a gain from sale of
assets, if any.
3. INVENTORIES
Inventories at December 31, 1998 comprised of the following:
Raw materials and components $ 536,513
Work in process 288,930
Finished goods 189,000
-----------------
$1,014,443
=================
7
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In connection with the acquisition of the Prosorba column manufacturing
facility and related assets by Fresenius AG in April 1999, all inventory in hand
was sold to Fresenius. The Company will not incur production costs for the
Prosorba column after April 1999.
4. 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.
5. EQUITY
In March 1999, Cypress received proceeds of $600,000 from the exercise
of warrants to purchase approximately 332,944 shares of common stock. During
April 1999, the Company received additional proceeds of approximately $4.6
million from the exercise of warrants to purchase approximately 2,286,916
million shares of common stock. The warrants were exercised at $2.00 per share.
8
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Item 2. 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 on Form 10-K
for the year ended December 31, 1998.
Results of Operations
In March 1999, the Company entered into an agreement with Fresenius AG of
Bad Homburg, Germany and its U.S. subsidiary, Fresenius Hemotechnology, Inc.
("Fresenius"). The Company granted to Fresenius the exclusive right to co-market
and distribute the Prosorba column in the U.S. and to register and distribute
the Prosorba column in Europe, Latin America, and subject to certain conditions,
Japan and select Asian countries. In the U.S., net profits will be split 50/50
until Prosorba column revenue reaches a pre-determined sales threshold, after
which time Cypress will receive 60% of the profits and Fresenius will receive
40%. Net profits will be split 50/50 in countries outside the U.S. In addition,
the Company may be entitled to receive up to $54 million in license payments
upon the achievement of certain cumulative net sales of the Prosorba column. As
of April 1999, the Company will no longer record revenues from the sale of the
Prosorba column. Instead, Cypress will recognize revenue based on its share of
net profits from the sale of the Prosorba column by Cypress and Fresenius.
Cypress's share of net losses from the sale of the Prosorba column will be
recorded as expense. Until profits are generated from the Fresenius arrangement,
Cypress will recognize revenue based on an amount equal to the net sales of the
Prosorba column by FHI multiplied by a fraction based on the ratio of allowable
expenses incurred by Cypress compared to combined allowable expenses incurred by
both parties under the agreement.
Total revenue for the second quarter of 1999 was $379,000 compared to
$645,000 for the same period in 1998. Total revenue for the six months ended
June 30, 1999 was $967,000 compared to $1.2 million for the same period in 1998.
Total revenue earned during the second quarter of 1999 included revenue earned
under the Fresenius agreement. As such, it is not directly comparable to total
revenue recorded in prior periods. Sales of the Prosorba column for the second
quarter of 1999 totaled $585,000 compared to $491,000 in 1998. Sales of the
Prosorba column for the six months ended June 30, 1999 totaled $1.2 million
compared to $1.0 million for the same period in 1998. The increase in Prosorba
column sales was the result of product sales for the rheumatoid arthritis ("RA")
indication offset by a decrease in sales for the idiopathic thrombocytopenic
purpura (ITP) indication.
During 1998, the Company had an NIH Small Business Innovation Research
(SBIR) grant which generated revenues of $153,000 and $204,000 for the second
quarter and six months ended June 30, 1998, respectively. This grant expired at
the end of 1998 and will not be renewed.
9
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Production costs were $270,000 and $790,000 for the quarter and six months
ended June 30, 1999, respectively, compared to $419,000 and $770,000 for the
comparable periods of 1998. In April 1999, Fresenius purchased the Prosorba
column manufacturing facility and related assets from Cypress. The 36% decrease
in production costs during the second quarter of 1999 compared to 1998 was a
result of the Company not incurring production costs subsequent to the sale of
the manufacturing plant to Fresenius. Production costs for the six months ended
June 30, 1999 were comparable to costs for 1998. This resulted from higher
production costs attributable to increased production of the Prosorba column to
support commercial launch of the Prosorba column for RA during the first quarter
of 1999. This was offset by the decrease in production cost during the second
quarter of 1999 after Fresenius' purchase of the manufacturing plant. In
connection with the sale of the manufacturing plant, Fresenius purchased from
the Company inventory of $2.0 million that resulted in a gain to the Company of
$693,000. This gain is recorded as a gain on sale of assets in the statement of
operations. The Company will not incur production costs associated with the
Prosorba column in the future.
Sales and marketing expenses were $1.3 million and $2.4 million for the
quarter and six months ended June 30, 1999, respectively, up from $472,000 and
$753,000 for the same periods of 1998. The increases in sales and marketing
expenses of approximately 191% and 212% for the quarter and six months ended
June 30, 1999, respectively, primarily resulted from the hiring of a sales force
and other activities associated with the launch of the Prosorba column for RA in
April 1999. In the U.S., Cypress and Fresenius will jointly market the Prosorba
column. Under its agreement with Fresenius, sales and marketing expenses of up
to 15% of net sales for the applicable periods may be incurred by the Company in
the U.S. Fresenius may incur sales and marketing expenses of up to 5% of net
sales. Sales and marketing expenses of up to 20% of net sales may be incurred by
Fresenius outside the U.S. During the first two years of the partnership, the
Company expects to spend approximately $9 million may be incurred by sales and
marketing expenses in excess of the 15% of net sales allowed under the agreement
due to product launch costs. If net sales during the first two years are higher
than expected, the Company may be able to recover a portion of its excess
unreimbursed sales and marketing expenses up to $9 million under the agreement.
The Company expects to incur substantially higher sales and marketing expenses
during 1999 due to the commercial launch of the Prosorba column for RA.
Research and development expenses were $460,000 and $1.1 million for the
quarter and six months ended June 30, 1999, respectively, down from
approximately $1.5 million and $2.7 million for the corresponding periods of
1998. The decrease in research and development expenses of approximately 69% and
59% for the quarter and six months ended was primarily attributable to the
completion of the Phase III clinical trials for the Prosorba column for RA in
January 1998. In addition, expenses associated with the development of Cyplex
decreased with the closing of a facility in Boston in June 1998. Effective April
1999, Cypress and Fresenius will share in future clinical trials expenses in the
U.S. Fresenius will have exclusive responsibility for clinical trials and
registration of the product in certain other markets. The Company expects to
incur significant ongoing research and development expenses in connection with
the mandatory Phase IV U.S. clinical trials for the treatment of RA using the
Prosorba column in combination with methotrexate,
10
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a disease-modifying anti-rheumatic drug ("DMARD"). Cypress and Fresenius will
share in the funding of these clinical studies.
General and administrative expenses were $888,000 and $2.3 million for the
quarter and six months ended June 30, 1999, respectively, compared to
approximately $1.1 million and $1.8 million for the comparable periods in 1998.
The 19% decrease in general and administrative expenses for the second quarter
of 1999 compared to 1998 was due to completion of business development efforts
associated with the Company's agreement with Fresenius. The 28% increase in
general and administrative expenses for the six months ended June 30, 1999
compared to the same period in 1998 was primarily the result of business
development activities with Fresenius in the first quarter of 1999.
The purchase price of the manufacturing facility and related assets by
Fresenius may result in a gain to Cypress. The potential gain was deferred since
the Company is responsible for reimbursing Fresenius for certain operating costs
associated with this facility during 1999. The net book value of the property
and equipment sold to Fresenius totaling $1.4 million was recorded on the
balance sheet as "Assets of Business Transferred to Fresenius". The purchase
price of the property and equipment sold totaling $3.2 million was recorded as
"Liabilities of Business Transferred to Fresenius". As the Company becomes
obligated to reimburse Fresenius, such amounts will be charged to "Liabilities
of Business Transferred to Fresenius". When the obligation to Fresenius lapses
at year end, the assets sold will be removed from the Company's balance sheet
and the excess of the purchase price over the net book value of the assets sold
plus reimbursement of certain operating costs will be recorded as a gain from
sale of assets, if any.
The Company expects to incur operating losses until it and Fresenius
successfully market the Prosorba column for RA in the U.S., or until sales of
the Prosorba column for the ITP indication increase significantly. There can
be no assurance that the Company can achieve or sustain profitability. There can
be no assurance that the Company and Fresenius will be able to successfully
market the Prosorba column for RA in the U.S., or increase sales in the ITP
indication. There can be no assurance that the Company will be able to obtain
FDA approval for or be able to successfully commercialize Cyplex. The Company
has spent considerable time and expense in obtaining FDA approval of the
Prosorba column for the RA indication. Pursuant to the Company's agreement with
Fresenius, the Company must incur significant additional expense and assume the
majority of the risk associated with the commercial launch and ongoing sales and
marketing of the Prosorba column in the U.S. and the on-going clinical trials.
Any net profits from the sale of the Prosorba column are shared with Fresenius
and the Company depends upon Fresenius to reimburse it for expenses from net
sales. The successful launch of the Prosorba column for use in RA will depend
without limitation on the following factors; acceptance of the product by
physicians, medical groups and patients, availability and convenience of
treatment centers, availability of third party reimbursements, the effectiveness
of the Company's and Fresenius' marketing strategy, competition and
effectiveness and availability of alternative treatments.
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Liquidity and Capital Resources
In March 1999, Cypress entered into an agreement with Fresenius for the
Prosorba column. Upon signing of the agreement, Cypress received a total of $1.5
million from Fresenius consisting of the purchase of 297,530 shares of Cypress
common stock for $1.0 million, and $500,000 for the purchase of three-year
warrants to buy 342,466 shares of Cypress common stock at $7.50 per share.
The Company's working capital as of June 30, 1999 was approximately $10.3
million compared to $5.6 million at December 31, 1998. The increase in working
capital was partially attributable to proceeds from the sale of common stock and
warrants to Fresenius totaling $1.5 million. In addition, the Company received
net proceeds of $1.2 million upon Fresenius' purchase of the Prosorba
manufacturing facility and related assets. The purchase consisted of cash of
$1.2 million and an offset of a drawn down in March 1999 of $4.0 million from an
interest-free line of credit provided by Fresenius during the same period.
Further, during 1999, the Company received proceeds of $6.1 million from the
exercise of warrants and stock options to purchase 3.1 million shares of the
Company's common stock. The increase in working capital was partially offset by
cash used in operations of approximately $3.3 million during the first six
months of 1999.
The Company recently hired a sales force for the commercial launch of the
Prosorba column for RA. To date, the Company's sales force has only sold the
Prosorba column for use in the treatment of ITP. The Company's sales force has
had no experience in marketing the Prosorba column for use in the treatment of
RA. There can be no assurance that the Company's sale force will be successful
in marketing the Prosorba column for RA or any other use. The Company's
marketing strategy includes gaining medical association support and the support
of opinion leaders in the rheumatology community. There can be no assurance that
the Company's sales force will succeed in gaining this acceptance. Any such
failure to successfully market the Prosorba column for RA, or any other disease
indication other than ITP, could have a material adverse effect on the Company's
business, cash flow and financial position. The failure of sales to increase at
expected rates may adversely affect the Company's cash flow, its results of
operations and its profit share from the Fresenius agreement for at least the
next six months.
As a condition to FDA approval of the Post Marketing Application for the
Prosorba column for RA, the Company is obligated to conduct a Phase IV clinical
trial on the use of the Prosorba column in combination with a DMARD. Depending
upon the number of patients and the rate of enrollment, the Company expects this
study will require enrollment of a significant number of patients and take
approximately two years to four years to complete. The cost of the Phase IV
trial will be shared with Fresenius and will result in lower profits for the
Company. There can be no assurance that the outcome of the Phase IV clinical
trials will be indicative of earlier clinical trial results or generate positive
results. Any of these occurrences could have a material adverse on the Company
including changes to the product labeling for the RA indication, reduction of
the potential sales of the Prosorba column and/or withdrawal of FDA approval.
The Company expects that existing cash resources will be sufficient to fund
operations to profitability.
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The Company is actively seeking opportunities to raise additional capital
to fund the development of new products and the completion of existing research,
additional clinical trials for the Prosorba column for post marketing studies
and other indications, and the further development and marketing of Cyplex. To
the extent the Company decides to develop products other than the Prosorba
column, it will be required to raise additional capital. The amount of capital
required by the Company is dependent upon many factors, including the following:
results of clinical trials, results of current research and development efforts,
the FDA regulatory process, the timing and volume of Prosorba sales, marketing
costs and the profitability of the Fresenius agreement, 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 or to seek
additional methods of financing.
Year 2000 Compliance
For the purposes of this section, the terms "we, "ours" and "us" refer to
Cypress.
Since our business hardware, telecommunication and software systems are
new, we believe most of these systems are already year 2000 compliant and we do
not expect internal year 2000 problems to materially affect us.
We have started assessing the corporate systems and operations that we
believe could be affected by the year 2000 problem. We have focused our year
2000 review on three areas: information technology infrastructure; non-
information technology systems; and third-party compliance.
Information Technology Infrastructure
Our year 2000 plan required us to assess and evaluate our information
technology systems, including our computers, hardware, and software systems. We
have identified critical computer, hardware, or software information technology
systems that require replacement, upgrade, or modification. We have made the
required replacement, upgrade, or modification. We currently believe that all of
our critical information technology systems are year 2000 compliant.
Non-Information Technology Systems
Some non-information technology systems used in our business, including air
conditioning, fire sprinkler, telephone systems, and other equipment, may
contain software that is vulnerable to
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<PAGE>
year 2000 problems. The year 2000 problem could cause failures in these systems
which could disrupt our operations. We are currently assessing the year 2000
readiness of many of these systems and equipment internally and with third
parties and expect to have identified and corrected year 2000 problems in our
critical non-information technology systems by September 1999.
Third-Party Compliance
Our material third party business relationships include: third party
manufacturer of our product, contract research organizations who assist us with
the management of clinical trials and clinical data, and vendors and suppliers
who provide goods and services to us. We are currently reviewing our vendors'
and suppliers' year 2000 compliance plans and statements, and we expect to
complete the assessment of our primary vendors and suppliers by September 1999.
If we determine that any of our service providers, third party vendors or third
party suppliers are not year 2000 compliant and cannot resolve all significant
year 2000 issues by September 1999, we intend to select and implement alternate
providers no later than October 1999.
Costs
Our year 2000 assessment, remediation and testing activities have been
conducted by internal personnel, and we have not tracked the amount of employee
time expended on these tasks. Accordingly, we are unable to determine the cost
of employee time devoted to year 2000 matters. We estimate that the cost of our
year 2000 readiness efforts, including any necessary modifications, upgrading or
replacement of computer equipment or software, has not been or will not be
material.
Contingency Plan
We are currently developing contingency plans to be implemented if we
encounter year 2000 problems. We expect to complete these plans in September
1999. However, notwithstanding these plans and the other efforts of our year
2000 team, we cannot assure you that we will be year 2000 ready, or that year
2000 problems will not adversely affect our business, financial condition and
results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
14
<PAGE>
PART II
Item 1 - Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
27. Financial Date Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
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 16, 1999 /s/ Jay D. Kranzler
- --------------------------- --------------------------------------------
Date
Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer and Chairman of the
Board
(Principal Executive Officer and Acting
Principal Accounting and Financial Officer)
16
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