<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: 0-19871
March 31, 2000 -------
Commission File Number
CYTOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No)
525 DEL REY AVENUE SUITE C
SUNNYVALE, CA 94086
(Address of principal executive offices including zip code)
(408) 731-8670
--------------
(Registrant's telephone number, including area code)
Indicate by check mark 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 twelve months (or for such shorter periods 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 30, 2000, there were 19,598,521 shares of Common Stock, $.01
par value, issued and outstanding. There were no issued and outstanding
shares of Preferred Stock.
Page 1 of 13
<PAGE>
CYTOTHERAPEUTICS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets (unaudited) 3
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations 4
(unaudited) Three months ended March 31, 2000
and 1999
Condensed Consolidated Statements of Cash Flows 5
(unaudited) Three months ended March 31, 2000
and 1999
Notes to Condensed Consolidated Financial Statements 6
(unaudited)
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION 11
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Page 2 of 13
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(unaudited) (footnote 1)
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,502,209 $ 4,760,064
Technology sale receivable 3,000,000
Other current assets 898,427 1,210,791
------------- --------------
Total current assets 5,400,636 8,970,855
Property, plant and equipment, net 5,150,670 5,251,376
Intangible assets, net 1,013,298 1,108,768
Other assets 771,272 750,000
------------- --------------
Total assets $12,335,876 $ 16,080,999
------------- --------------
------------- --------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 122,274 $ 631,315
Accrued expenses 1,107,829 2,859,443
Other accrued expenses 45,625
Current maturities of capitalized lease obligations 326,250 324,167
------------- --------------
Total current liabilities 1,556,353 3,860,550
Capitalized lease obligations, less current maturities 2,855,000 2,937,083
Deposits 26,000 26,000
Deferred rent 541,460 502,353
Redeemable stock - 5,248,610
Stockholders' equity
Common stock 194,398 186,355
Additional paid in capital 129,510,883 123,917,758
Deferred compensation (1,181,250) (1,225,000)
Accumulated deficit (121,166,968) (119,372,710)
------------- --------------
Total stockholders' equity 7,358,602 3,506,403
------------- --------------
Total liabilities and stockholders' equity $12,335,876 $ 16,080,999
------------- --------------
------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 13
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(unaudited) Three Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenue from collaborative arrangements $ - $ 2,501,035
Operating expenses:
Research and development 786,139 3,566,557
General and administrative 1,012,593 995,459
------------ ------------
1,798,732 4,562,016
------------ ------------
Loss from operations (1,798,732) (2,060,981)
Other income (expense):
Investment income 73,332 222,111
Interest expense (68,858) (93,825)
------------ ------------
4,474 128,286
------------ ------------
Net loss ($ 1,794,258) ($ 1,932,695)
------------ ------------
------------ ------------
Basic and diluted net loss per share ($0.09) ($ 0.10)
------------ ------------
------------ ------------
Shares used in computing basic and diluted
net loss per share 19,329,517 18,452,297
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 13
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) Three Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,794,258) ($1,932,695)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 204,449 580,556
Amortization of deferred compensation expense 43,750 134,963
Net changes in operating assets and liabilities (1,776,812) (1,967,157)
------------ ------------
Net cash used in operating activities (3,322,870) (3,184,333)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities - 3,192,039
Purchases of marketable securities - (3,544,276)
Purchase of property, plant and equipment (7,542) (41,624)
Acquisition of other assets - (149,043)
Proceeds from sales of technology 2,800,000 -
------------ ------------
Net cash provided by investing activities 2,792,458 (542,904)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 352,557 66,428
Principal payments under capitalized lease obligations
and mortgage payable (80,000) (328,750)
------------ ------------
Net cash provided by (used in) financing activities 272,557 (262,322)
------------ ------------
Net decrease in cash and cash equivalents (257,855) (3,989,559)
Cash and cash equivalents, beginning of period 4,760,064 7,864,788
------------ ------------
Cash and cash equivalents, end of period $4,502,209 $3,875,229
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
Page 5 of 13
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000 and 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying, unaudited, condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying financial statements include
all adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. Results of operations
for the three months ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the entire fiscal year ending December
31, 2000.
The balance sheet at December 31, 1999 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.
For further information, refer to the audited financial statements and
footnotes thereto as of December 31, 1999 included in the Company's Annual
Report to Stockholders and the Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded, as their effect is antidilutive.
NOTE 3. COMPREHENSIVE INCOME
For the three months ended March 31, 2000 and 1999, total comprehensive
loss was the same as the reported net loss.
NOTE 4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY
In the last two quarters of 1999, the Company wound down operations
relating to its former encapsulated cell technology to focus its resources
on the research and development of its proprietary stem cell technology
platform. At the end of 1999 balance in the reserve created for wind-down
expenses was $1,934,569. For the first quarter of 2000 the rollforward of
this balance is as follows:
<TABLE>
<CAPTION>
- ----------------------- --------------------- -------------------- --------------------- --------------------
Description Reserve as at Cash Payments Other Reserve as at
12/31/99 3/31/00
- ----------------------- --------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Fixed Assets $300,000 $0 $0 $300,000
- ----------------------- --------------------- -------------------- --------------------- --------------------
Facilities,
Maintenance and other 462,569 246,028 0 216,541
Expenses
- ----------------------- --------------------- -------------------- --------------------- --------------------
RIPSAT Settlement 1,172,000 1,172,000 0 0
- ----------------------- --------------------- -------------------- --------------------- --------------------
</TABLE>
Page 6 of 13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ----------------------- --------------------- -------------------- --------------------- --------------------
Totals $1,934,569 $1,418,028 $0 $516,541
- ----------------------- --------------------- -------------------- --------------------- --------------------
</TABLE>
Page 7 of 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company for the three months ended March 31, 2000 and 1999 should be
read in conjunction with the accompanying unaudited condensed consolidated
financial statements and the related footnotes thereto.
The statements contained in this report, other than statements of historical
fact, constitute forward-looking statements. Such statements include, without
limitation, all statements as to expectation or belief and statements as to
the Company's future results of operations, the progress of the Company's
research and product development programs, the need for, and timing of,
additional capital and capital expenditures, partnering prospects, the need
for additional intellectual property rights, effects of regulations, and the
need for additional facilities and potential market opportunities. The
Company's actual results may vary materially from those contained in such
forward-looking statements because of risks to which the Company is subject,
such as failure to obtain a corporate partner or partners to support the
Company's stem cell programs, the Company's ability to sell, assign or
sublease its interests in its facilities related to its former encapsulated
cell technology program, risks of delays in research, development and
clinical testing programs, obsolescence of the Company's technology, lack of
available funding, competition from third parties, intellectual property
rights of third parties, failure of the Company's collaborators to perform,
regulatory constraints, litigation and other risks to which the Company is
subject. See "Cautionary Factors Relevant to Forward-Looking-Information"
filed as Exhibit 99 to the Company's Annual Report for the fiscal year ended
1999 and incorporated herein by reference.
OVERVIEW
Since its inception in 1988, the Company has been primarily engaged in
research and development of human therapeutic products. As a result of a
restructuring in the second half of 1999, the Company's sole focus is now on
its platform stem cell technology. At the beginning of last year, by
contrast, the Company's main headquarters, the substantial majority of its
employees, and a main focus of its operations were primarily devoted to a
different technology (encapsulated cell technology, or "ECT"). A clinical
trial of the ECT then in progress has been terminated, the other operations
relating to the ECT were wound down, the employment of those who worked on
the ECT was terminated, the ECT has been sold and the Company has relocated
from Rhode Island to Sunnyvale, California. Comparisons with last year's
results are correspondingly less meaningful than they may be under other
circumstances.
No revenues have been derived from the sale of any products, and the Company
does not expect to receive revenues from product sales for at least several
years. The Company has not commercialized any product and in order to do so
it must, among other things, substantially increase its research and
development expenditures as research and product development efforts
accelerate and clinical trials are initiated. The Company has incurred annual
operating losses since inception and expects to incur substantial operating
losses in the future. As a result, the Company is dependent upon external
financing from equity and debt offerings and revenues from collaborative
research arrangements with corporate sponsors to finance its operations.
There can be no assurance that such financing or partnering revenues will be
available when needed or on terms acceptable to the Company.
The Company's results of operations have varied significantly from year to
year and quarter to quarter and may vary significantly in the future due to
the occurrence of material, nonrecurring events, including without limitation
the receipt of one-time, nonrecurring licensing payments, and the initiation
or termination of research collaborations, in addition to the winding-down of
terminated research and development programs referred to above.
Results of Operations
Three months ended March 31, 2000 and 1999
For the quarters ended March 31, 2000 and 1999, revenues from collaborative
agreements totaled $0 and $2,501,000, respectively. The decrease in revenues
resulted from the June 1999 termination of a
Page 8 of 13
<PAGE>
Development, Marketing and License Agreement related to the Company's former
encapsulated cell technology. The Company has not yet entered
revenue-producing collaborations with respect to its platform stem cell
technology.
Research and development expenses totaled $786,000 for the three months ended
March 31, 2000, compared with $3,566,000 for the same period in 1999. The
decrease of $2,780,000, or 78%, from 1999 to 2000 was primarily attributable
to the wind-down of research activities relating to the ECT.
General and administrative expenses were $1,013,000 for the three months
ended March 31, 2000, compared with $995,000 for the same period in 1999. The
increase of $18,000, or 2%, from 1999 to 2000 was primarily attributable to
the Company's reestablishment of its corporate office in California.
Interest income for the three months ended March 31, 2000 and 1999 was
$73,000 and $222,000, respectively. The decrease in interest income in
2000 was attributable to the lower average investment balances during such
period.
Interest expense was $69,000 for the three months ended March 31, 2000,
compared with $94,000 for the same period in 1999. The decrease in 2000 was
attributable to lower outstanding debt and capital lease balances in 2000
compared to 1999.
Net loss for the three months ended March 31, 2000 was $1,794,000, or $0.09
per share, as compared to net loss of $1,933,000, or $0.10 per share, for the
comparable period in 1999. The decrease in net loss of $139,000, or 7%, from
the same period in 1999 is primarily due to the wind-down of research
activities related to the Encapsulated Cell Technology which was sold at the
end of 1999.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through the sale
of common and preferred stock, the issuance of long-term debt and capitalized
lease obligations, revenues from collaborative agreements, research grants
and interest income.
The Company had unrestricted cash and cash equivalents totaling $4,502,000 at
March 31, 2000. Cash equivalents are invested in money market funds.
The Company's liquidity and capital resources have been significantly
affected by its relationships with corporate partners, which were related to
the Company's former ECT. These relationships are now terminated, and the
Company has not yet established corporate partnerships with respect to its
stem cell technology. On December 30, 1999 the Company sold its ECT to
Neurotech S.A. for a payment of $3,000,000, royalties on future product
sales, and a portion of certain Neurotech revenues from third parties in
return for the assignment to Neurotech of intellectual property assets
relating to ECT. In addition, the Company retained certain non-exclusive
rights to use ECT in combination with its proprietary stem cell technology
and in the field of vaccines for prevention and treatment of infectious
diseases. The Company received $2,800,000 of the initial payment on January
3, 2000 with a remaining balance of $200,000 placed in escrow, to be received
by the Company upon demonstration satisfactory to Neurotech that certain
intellectual property is not subject to other claims.
The Company continues to have substantial outstanding obligations in regard
to its facilities in Lincoln, Rhode Island, including lease payments and
operating costs of approximately $950,000 per year associated with its former
research laboratory and corporate headquarters building, and debt service
payments and operating costs of approximately $1,000,000 per year with
respect to the its pilot manufacturing and cell processing facility. The
Company is actively seeking to sublease, assign or sell its interests in
these facilities, but there can be no assurance that the Company will succeed
in these efforts within a reasonable time period. Failure to do so will have
a material adverse effect on the Company's liquidity and capital resources.
On April 13, 2000, the Company completed arrangements to sell 1,500 shares of
6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to a member of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from
Page 9 of 13
<PAGE>
outside investors. The shares are convertible at the option of the holder
into common stock at a price to be determined by reference to the price of
the Company's common stock for a period approximately from April 12, 2000
through the twentieth trading day following the filing of this Form 10-K. The
conversion price may be below the trading market price of the stock at the
time of conversion. The holder of the preferred stock has liquidation rights
equal to his original investment plus accrued but unpaid dividends. The
investor would be entitled to make additional investments in the Company on
the same terms as those on which the Company completes offerings of its
securities with third parties within 6 months, if any such offerings are
completed. If offerings totaling at least $6 million are not completed during
the 6 months, the investor has the right to acquire up to 1,500 additional
shares of convertible preferred stock at a pre-determined per share. Any
unconverted preferred stock is converted, at the applicable conversion price,
on April 13, 2002 in the case of the original stock and two years after the
first acquisition of any of the additional 1,500 shares, if any are acquired.
The warrant expires on April 13, 2005. As a result of this transaction, the
Company has adequate resources to fund its operations into the first quarter
of 2001.
The Company has limited liquidity and capital resources and must obtain
significant additional capital resources in the near future in order to
sustain its product development efforts. Substantial additional funds will be
required to support the Company's research and development programs, for
acquisition of technologies and intellectual property rights, for preclinical
and clinical testing of its anticipated products, pursuit of regulatory
approvals, acquisition of capital equipment, laboratory and office
facilities, establishment of production capabilities and for general and
administrative expenses. The Company's ability to obtain additional capital
will be substantially dependent on the its ability to obtain partnering
support for its stem cell technology and, in the near term, on the its
ability to realize proceeds from the sale, assignment or sublease of its
facilities in Rhode Island. There can be no assurance that the Company will
succeed in any or all of these efforts, and failure to do so will have a
material effect on the Company's liquidity and capital resources. Until the
Company's operations generate significant revenues from product sales, the
Company must rely on cash reserves and proceeds from equity and debt
offerings, proceeds from the transfer or sale of its intellectual property
rights, equipment or facilities, government grants and funding from
collaborative arrangements, if obtainable, to fund its operations.
The Company intends to pursue opportunities to obtain additional financing in
the future through equity and debt financings, grants and collaborative
research arrangements. The source, timing and availability of any future
financing will depend principally upon market conditions, interest rates and,
more specifically, on the Company's progress in its exploratory, preclinical
and future clinical development programs. Lack of necessary funds may require
the Company to delay, reduce or eliminate some or all of its research and
product development programs or to license its potential products or
technologies to third parties. No assurance can be given that funding will be
available when needed, if at all, or on terms acceptable to the Company.
While the Company's cash requirements may vary, as noted above, the Company
currently expects that its existing capital resources, including income
earned on invested capital, will be sufficient to fund its operations into
the first quarter of 2001. The Company's cash requirements may vary, however,
depending on numerous factors. Lack of necessary funds may require the
Company to delay, scale back or eliminate some or all of its research and
product development programs and/or its capital expenditures or to license
its potential products or technologies to third parties.
Year 2000
The Company tested its material software applications to determine whether
each program was prepared to accommodate date information for the year 2000
and beyond, and found them to be year 2000 compliant. The Company also tested
the status of its facilities systems such as phones, voice mail, heating/air
conditioning, electricity and security systems and its laboratory and
manufacturing equipment, and polled its major vendors and suppliers, to
determine if they are year 2000 compliant, again without identifying any
problems. The Company has not to date encountered any significant year 2000
problems, but is continuing to monitor for potential issues. The costs of
testing and monitoring have been and are expected to continue to be
immaterial to the Company's operating results, but there can be no assurance
that no problem will reveal itself in the future, or that if a problem does
occur it will not have an adverse effect on the Company's operations or
financial results, but there can be no assurance that no problem will reveal
itself in
Page 10 of 13
<PAGE>
the future, or that if a problem does occur it will not have an adverse
effect on the Company's operations or financial results.
PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed three current reports on Form 8-K during the first
quarter of 2000: on January 14, 2000, it reported the sale of its former
encapsulated cell technology to Neurotech, SA; on February 11, 2000, it
reported the appointment of George W. Dunbar, Jr., as Acting President and
CEO of the Company; and on March 23, 2000, it announced the settlement of
certain claims or potential claims.
Page 11 of 13
<PAGE>
SIGNATURE
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.
CYTOTHERAPEUTICS, INC.
---------------------------
(Name of Registrant)
May 12, 2000 /s/ George W. Dunbar, Jr.
----------------------------
(Date) Acting Chief Executive Officer and
Acting Chief Financial Officer
(principal financial officer and
principal accounting officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000883975
<NAME> CYTOTHERAPEUTICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,502,209
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 898,427
<PP&E> 9,040,146
<DEPRECIATION> 3,889,475
<TOTAL-ASSETS> 12,335,876
<CURRENT-LIABILITIES> 1,556,353
<BONDS> 2,885,000
0
0
<COMMON> 194,398
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,335,876
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,794,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (68,858)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,794,258)
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
