1
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
JUNE 30, 1996 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)
TWO RICHMOND SQUARE
PROVIDENCE, RI 02906
(Address of principal executive offices including zip code)
(401) 272-3310
(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 July 31, 1996, there were 15,398,067 shares of Common Stock, $.01 par value,
issued and outstanding. There were no issued and outstanding shares of Preferred
Stock.
Page 1 of 15
2
CYTOTHERAPEUTICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------- --------------------- -----------
Item 1. Financial Statements
Condensed Balance Sheets (unaudited)
June 30, 1996 and December 31, 1995 3
Condensed Statements of Operations (unaudited)
Three and six months ended June 30, 1996 and 1995 4
Condensed Statements of Cash Flows (unaudited)
Six months ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Page 2 of 15
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PART I - ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------------------------------------
CYTOTHERAPEUTICS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
JUNE 30, 1996 DECEMBER 31, 1995
------------------------ -----------------------
ASSETS
Current assets:
Cash and cash equivalents $7,084,064 $9,548,579
Marketable securities 31,332,247 34,643,160
Receivables from collaborative agreement 23,600 167,906
Other current assets 1,636,212 1,303,379
----------------------- -----------------------
Total current assets 40,076,123 45,663,024
Property, plant and equipment, net 8,268,984 7,892,763
Other assets 3,535,845 3,251,718
----------------------- -----------------------
Total assets $51,880,952 $56,807,505
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,598,335 $3,082,419
Deferred revenue 1,750,000 1,750,000
Current maturities of capitalized lease obligations 614,015 668,325
Current maturities of long term debt 525,119 474,245
----------------------- -----------------------
Total current liabilities 5,487,469 5,974,989
Capitalized lease obligations, less current maturities 4,229,008 4,498,957
Long term debt, less current maturities 1,539,313 942,181
Stockholders' equity
Common stock 153,813 151,770
Additional paid in capital 105,541,128 104,271,658
Accumulated deficit (64,891,427) (59,163,536)
Deferred compensation (122,356) -
Unrealized gain (loss) on marketable securities (55,996) 131,486
----------------------- -----------------------
Total stockholders' equity 40,625,162 45,391,378
----------------------- -----------------------
Total liabilities and stockholders' equity $51,880,952 $56,807,505
======================= =======================
See accompanying notes to condensed financial statements.
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PART I - ITEM 1 - FINANCIAL STATEMENTS
- ---------------------------------------------------------------
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
Revenue from collaborative arrangements $1,850,632 $1,543,830 $3,514,849 $7,859,016
Operating expenses:
Research and development 4,175,341 3,583,999 8,080,500 7,004,528
General and administrative 1,173,221 1,093,439 2,407,269 2,217,483
-------------- -------------- -------------- --------------
5,348,562 4,677,438 10,487,769 9,222,011
-------------- -------------- -------------- --------------
Loss from operations (3,497,930) (3,133,608) (6,972,920) (1,362,995)
Other income (expense):
Investment income 572,744 399,294 1,207,269 644,423
Interest expense (149,145) (146,808) (304,740) (289,549)
Other income 342,500 - 342,500 -
-------------- -------------- -------------- --------------
766,099 252,486 1,245,029 354,874
-------------- -------------- -------------- --------------
Net loss ($2,731,831) ($2,881,122) ($5,727,891) ($1,008,121)
============== ============== ============== ==============
Net loss per share ($0.18) ($0.23) ($0.37) ($0.09)
============== ============== ============== ==============
Shares used in calculation 15,368,009 12,322,203 15,320,989 11,758,266
============== ============== ============== ==============
See accompanying notes to condensed financial statements.
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PART I - ITEM 1 - FINANCIAL STATEMENTS
- --------------------------------------------------------------------
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
(unaudited) JUNE 30,
1996 1995
-----------------------------------------------
Cash flows from operating activities:
Net loss ($5,727,891) ($1,008,121)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 794,645 782,296
Compensation expense relating to the grant
of stock options 31,061 65,408
Changes in operating assets and liabilities (639,653) 1,953,678
------------------- --------------------
Net cash provided by (used in) operating activities (5,541,838) 1,793,261
------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 6,207,051 7,013,834
Purchases of marketable securities (3,083,620) (18,012,435)
Purchase of property, plant and equipment (1,149,202) (661,474)
Acquisition of other assets (305,791) (25,598)
Other investments - (500,100)
------------------- --------------------
Net cash provided by (used in) investing activities 1,668,438 (12,185,773)
------------------- --------------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 1,085,138 9,992,215
Proceeds from financing transactions 821,172 148,785
Principal payments under capitalized lease obligations
and mortgage payable (497,425) (550,906)
------------------- --------------------
Net cash provided by financing activities 1,408,885 9,590,094
------------------- --------------------
Decrease in cash and cash equivalents (2,464,515) (802,418)
Cash and cash equivalents, January 1 9,548,579 8,715,890
------------------- --------------------
Cash and cash equivalents, June 30 $7,084,064 $7,913,472
=================== ====================
See accompanying notes to condensed financial statements.
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PART I - ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996 AND 1995
NOTE 1. BASIS OF PRESENTATION
The accompanying, unaudited, condensed 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 and six months
ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the entire fiscal year ended December 31, 1996.
For further information, refer to the audited financial statements and
footnotes thereto as of December 31, 1995 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. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No.
121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, which requires impairment
losses to be recorded on the long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of SFAS 121
had no impact on the financial position or results of operations of the
Company as no indicators of impairment currently exist.
The Company has adopted the disclosure provisions of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting and Disclosure of
Stock-Based Compensation. The Company will continue to account for its
stock-based compensation arrangements under the provisions of APB 25,
Accounting for Stock Issued to Employees.
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NOTE 4. SUBSEQUENT EVENT
On July 10, 1996, The Company participated in the establishment of
Modex Therapeutiques SA, as a 50% owned, Swiss subsidiary to pursue
extensions of the Company's encapsulated-cell technology for
applications outside the central nervous system. Modex is headquartered
in Lausanne, Switzerland.
The Company has initially invested $2 million in Modex, with a
commitment to invest an additional $2 million on the second anniversary
of the agreement if Modex has, prior to that time, achieved one or more
specified scientific milestones, in exchange for a 50% stake in Modex.
An investment fund, managed by a Swiss private bank, has invested $2
million in Modex, with a commitment to invest an additional $1 million
on the second anniversary of the agreement, in exchange for a 15% stake
in the company. The remaining 35% of Modex is owned by the scientific
founders of Modex.
The Company has granted to Modex an exclusive, royalty-bearing license
to the Company's proprietary encapsulated-cell technology for three
applications outside the central nervous system (diabetes, obesity, and
anemia). Modex granted the Company an exclusive royalty-bearing license
to any technology developed or obtained by Modex for application to
diseases, conditions, and disorders which affect the central nervous
system. In addition to its royalty obligations, the Company is also
obligated to issue to Modex up to 300,000 shares of the Company's
Common Stock on the achievement by Modex of certain scientific
milestones. Substantially all of these shares are expected to be
awarded by Modex as incentive compensation to Modex' founding
scientists and other researchers upon the achievement of such
milestones.
Under the terms of its agreement with the investment fund, during the
first two years following closing, the Company has the right to acquire
the fund's interest in Modex for the greater of a 30% annual return or
$3 million. Following this two-year period, the Company has the right
to purchase the fund's interest at 110% of fair market value. Following
the second anniversary of the agreement and prior to the tenth
anniversary of the agreement, if no public market exists for the Common
Stock of Modex, the fund has the right to require the Company to
purchase the fund's interest in Modex for 90% of the fair market value
of such interest. Any purchase made by the Company under any of the
circumstances described in this paragraph may be made at the Company's
option in cash or shares of the Company's Common Stock valued at the
market price at the time of purchase. The Company also has the right to
acquire, and the founders have the right to require the Company to
acquire, the founders' initial equity interest in Modex in exchange for
the issuance of an aggregate of approximately 92,000 shares of the
Company's Common Stock.
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PART 1 - ITEM 2
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 and six months ended June 30, 1996 and 1995 should be
read in conjunction with the accompanying unaudited condensed financial
statements and the related footnotes thereto.
This report may contain certain forward-looking statements regarding, among
other things, the Company's results of operations, the progress of the Company's
product development programs, the Company's need for, and required timing of,
additional capital, capital expenditures and need for additional facilities. The
Company's actual results may vary materially from those contained in such
forward-looking statements. See "Cautionary Factors Relevant to
Forward-Looking-Information" filed herewith as Exhibit 99 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. 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 expects that
its research and development expenditures will increase substantially in future
years as research and product development efforts accelerate and clinical trials
are broadened or 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. The Company's results of
operations have varied significantly from period to period 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. Results may vary from quarter to quarter and results of one
quarter may not be representative of the actual results for the year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
For the quarter ended June 30, 1996 and 1995, revenues from collaborative
agreements totaled $1,851,000 and $1,544,000, respectively. The revenues were
earned solely from a Development, Marketing and License Agreement with Astra AB,
which was signed in March 1995.
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Research and development expenses totaled $4,175,000 for the three months ended
June 30, 1996, compared with $3,584,000 for the same period in 1995
The increase of $591,000, or 16%, from 1995 to 1996 is principally due to
increases in the number of scientists and increased spending for research
agreements and clinical trials.
General and administrative expenses were $1,173,000 for the three months ended
June 30, 1996, compared with $1,093,000 for the same period in 1995. The
increase of $80,000, or 7%, from 1995 to 1996 was primarily attributable to
increased spending for general patent costs, as well as, increases in spending
for administrative salaries, offset by a decrease in legal expenses.
Other income in the amount of $343,000 was received in May 1996 for settlement
of a legal suit filed on behalf of the Company.
Interest income for the three months ended June 30, 1996 and 1995 was $573,000
and $399,000, respectively. The average investment balances were $38,807,000 and
$21,574,000 in the second quarter of 1996 and 1995, respectively. The increase
in interest income in 1996 is attributable to the higher average balances.
Interest expense was $149,000 for the three months ended June 30, 1996, compared
with $147,000 for the same period in 1995. The increase from 1996 to 1995 was
attributable to additional collateralized loan obligations recorded in
connection with equipment financings offset, in part, by decreasing balances of
existing capital leases.
Net loss for the three months ended June 30, 1996 was $2,732,000, or $0.18 per
share, as compared to net loss of $2,881,000, or $0.23 per share, for the
comparable period in 1995.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
For the six months ended June 30, 1996 and 1995, revenues from collaborative
agreements totaled $3,515,000 and $7,859,000. The revenues were earned solely
from a Development, Marketing and License Agreement with Astra AB, which was
signed in March 1995. Included in the 1995 revenues was a non-refundable,
one-time payment from Astra totaling $5,000,000.
Research and development expenses totaled $8,081,000 for the six months ended
June 30, 1996, compared with $7,005,000 for the same period in 1995. The
increase of $1,076,000, or 15%, from 1995 to 1996 is principally due to
increases in the number of scientists and associated supplies, increased
spending for research agreements, scientific consulting and clinical trials.
General and administrative expenses were $2,407,000 for the six months ended
June 30, 1996, compared with $2,217,000 for the same
period in 1995. The
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increase of $190,000, or 9%, from 1995 to 1996 was primarily attributable to
increases in patent related expenses, as well as, increases in spending for
administrative salaries.
Other income in the amount of $343,000 was received in May 1996 for settlement
of a legal suit filed on behalf of the Company.
Interest income for the six months ended June 30, 1996 and 1995 was $1,207,000
and $644,000, respectively. The average investment balances were $40,517,000 and
$19,878,000 for the first six months of 1996 and 1995, respectively. The
increase in interest income in 1996 is primarily attributable to the higher
average balances.
Interest expense was $305,000 for the six months ended June 30, 1996, compared
with $290,000 for the same period in 1995. The increase from 1995 to 1996 was
attributable to additional collateralized loan obligations recorded in
connection with equipment financings offset, in part, by decreasing balances of
existing capital leases.
Net loss for the six months ended June 30, 1996 was $5,728,000, or $0.37 per
share, as compared to net loss of $1,008,000, or $0.09 per share, for the
comparable period in 1995. The initial one-time payment of $5,000,000 from Astra
is responsible for the Company's decreased loss in the first six months of 1995.
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, cash equivalents, and marketable securities
totaling $38,416,000 at June 30, 1996. Cash equivalents and marketable
securities are invested in agencies of the U.S. government, investment grade
corporate notes and money market funds.
In May 1996, the Company secured an equipment loan facility with a bank in the
amount of $2,000,000. The Company has borrowed $741,000 under this agreement as
of June 30, 1996. The loan requires interest payments only for the first year,
principal payments are payable over a three-year period beginning May 1997. Any
unused commitment expires on May 15, 1997. The loan is secured by equipment
purchased with the proceeds of the credit facility.
The Company currently occupies all of its laboratory and administrative office
space, other than that at its pilot manufacturing site, under the terms of
operating leases subject to termination upon nine months notice by the Company.
As a result
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of a potential increase in the number of employees, the Company's current
facilities may not be sufficient to accommodate the Company's needs past the
first half of 1997. The Company is currently evaluating a proposals under which
it will lease new office and laboratory facilities.
In July 1996, the Company invested $2 million in Modex, a 50% owned Swiss
subsidiary, to pursue extensions of the Company's encapsulated-cell technology
for applications outside the central nervous system, with a commitment to invest
an additional $2 million on the second anniversary of the agreement if Modex
has, prior to that time, achieved one or more specified scientific milestones.
An investment fund, managed by a Swiss private bank, has invested $2 million in
Modex, with a commitment to invest an additional $1 million on the second
anniversary of the agreement, in exchange for a 15% stake in the company. The
remaining 35% of Modex is owned by the scientific founders of Modex. The Company
has granted to Modex an exclusive, royalty-bearing license to the Company's
proprietary encapsulated-cell technology for three applications outside the
central nervous system (diabetes, obesity and anemia). Modex granted the Company
an exclusive royalty-bearing license to any technology developed or obtained by
Modex for application to diseases, conditions, and disorders which affect the
central nervous system. In addition to its royalty obligations, the Company is
also obligated to issue to Modex up to 300,000 shares of the Company's Common
Stock on the achievement by Modex of certain scientific milestones.
Substantially all of these shares are expected to be awarded by Modex as
incentive compensation to Modex' founding scientists and other researchers upon
the achievement of such milestones.
Under the terms of its agreement with the investment fund, during the first two
years following closing, the Company has the right to acquire the fund's
interest in Modex for the greater of a 30% annual return or $3 million.
Following this two-year period, the Company has the right to purchase the fund's
interest at 110% of fair market value. Following the second anniversary of the
agreement and prior to the tenth anniversary of the agreement, if no public
market exists for the Common Stock of Modex, the fund has the right to require
the Company to purchase the fund's interest in Modex for 90% of the fair market
value of such interest. Any purchase made by the Company under any of the
circumstances described in this paragraph may be made at the Company's option in
cash or shares of the Company's Common Stock valued at the market price at the
time of purchase. The Company also has the right to acquire, and the founders
have the right to require the Company to acquire, the founders' initial equity
interest in Modex in exchange for the issuance of an aggregate of approximately
92,000 shares of the Company's Common Stock.
In March 1995, the Company signed a collaborative research and development
agreement with Astra for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, nonrefundable
payment of $5,000,000 and may make up to $16,000,000 in additional payments
subject to the achievement of certain development milestones. Under the
agreement, the Company is obligated to conduct certain research and development
pursuant to a
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four-year research plan agreed upon by the parties. Over the term of the
agreement, the Company expects to receive annual research payments from Astra of
$5 million to $7 million, which the Company expects should approximate the
research and development costs incurred by the Company under the plan. Subject
to the successful development of such products and obtaining necessary
regulatory approvals, Astra is obligated to conduct all clinical trials of
products arising from the collaboration and to seek approval for their sale and
use. Astra has the exclusive worldwide right to market products covered by the
agreement. Until the later of either the last to expire of all patents included
in the licensed technology or a specified fixed term, the Company is entitled to
a royalty on the worldwide net sales of such products in return for the license
granted to Astra and the Company's obligation to manufacture and supply
products. Astra has the right to terminate the agreement after April 1, 1998.
In March 1994, the Company entered into a Development Collaboration and License
Agreement with Genentech, Inc. relating to the development of products for the
encapsulation of certain neurotrophic factors. The initial focus of the
collaboration has been the development of encapsulated NGF-producing cells for
the treatment of Alzheimer's disease. In addition to NGF, the agreement also
covers the neurotrophic factors NT-3, NT-4/5 and two other neurotrophic factors
to be chosen by Genentech. The agreement provides that Genentech and the Company
will work exclusively with each other to develop and commercialize NGF-producing
encapsulated-cell products; that Genentech will not work with any third party in
the field of the treatment of neurological disease by the administration of
encapsulated neurotrophic factor-producing mammalian cells, without the
Company's consent; and that the Company will not work with the neurotrophic
factors NGF, NT-3 and NT-4/5 with any third party, without Genentech's consent.
Under the Agreement, the Company granted to Genentech an exclusive license to
use any of the company's existing and future technology to sell NGF-producing
encapsulated-cell products in the field of the treatment of any human
neurological disorder or condition by the administration of neurotrophic-factor
producing encapsulated cells. Upon execution of the Agreement, Genentech made a
$1,250,000 payment to CytoTherapeutics, and purchased 334,428 shares of the
Company's Common Stock for $3,500,000. Under the Agreement, the Company was
obligated to undertake certain preclinical development projects and studies and
to fund the $3,750,000 cost of such projects and 40% of such cost thereafter.
The Company and Genentech have decided that Alzheimer's disease is not the most
appropriate disease state to emphasize at this time under their collaboration
agreement and are discussing other applications of the technologies. The Company
has expended approximately $1,500,000 to fund the preclinical development
projects and studies contemplated under the Agreement and does not currently
expect to incur any further material expenditures for such projects and studies.
The Company expects that future collaborations, if any, will involve new
commitments and funding mechanisms.
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In March 1994, the Company entered into a contract research and license
agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive worldwide royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. Terms of the agreement provide future research funding of
$325,000 through February 1998. Upon the achievement of certain milestones, the
Company will make payments to NeuroSpheres totaling a maximum of $3,750,000,
payable at NeuroSpheres' option, in cash or in shares of the Company's common
stock at a price of $12.50 per share. Upon commercial sale of a product
utilizing the licensed technology, the Company is obligated to pay a range of
royalties based on product revenues and market share, subject to certain minimum
royalties. In order to maintain exclusivity, the Company is also obligated to
expend additional amounts to support research related to development of products
under the agreement.
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,
expansion of laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Until the Company's
operations generate significant revenues from product sales, cash reserves and
proceeds from equity and debt offerings, and funding from collaborative
arrangements will be used to fund operations.
The Company intends to pursue opportunities to obtain additional financing in
the future through equity and debt financings, lease agreements related to
capital equipment and collaborative research arrangements. The source, timing
and availability of any future financing will depend principally upon equity
market conditions, interest rates and, more specifically, on the Company's
continued progress in its exploratory, preclinical and clinical development
programs. There can be no assurance that such funds will be available on
favorable terms, if at all.
The Company expects that its existing capital resources, revenues from
collaborative agreements and income earned on invested capital will be
sufficient to fund its operations into the first half of 1998. 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 or to license its
potential products or technologies to third parties.
Page 13 of 15
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PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) On May 14, 1996 the 1996 Annual Meeting of Stockholders was held in
Providence, Rhode Island.
(b) Not applicable.
(c) The following is a brief description of each matter voted upon at the
meeting and a breakdown of the votes cast for, against or withheld, as
well as the number of abstentions voted for each proposal.
1. Proposal to elect the following nominees as Directors of the
Company: Edwin C. Cadman, M.D. and Donald R. Conklin.
Dr. Cadman - 10,279,558 votes
33,725 votes withheld
Mr. Conklin - 10,279,558 votes in favor
33,725 votes withheld
2. Proposal to increase by 1,500,000 the number of shares of Common
Stock available for issuance under the Company's 1992 Equity Incentive
Plan and to make certain other changes to such Plan.
6,812,403 votes in favor
1,827,751 votes against
16,888 votes abstaining
1,656,241 votes Delivered-Not Voted
3. Proposal to increase the awards issuable under the Company's 1992
Stock Option Plan for Non-Employee Directors and to make certain other
changes to such Plan.
9,730,782 votes in favor
419,661 votes against
26,740 votes abstaining
136,100 votes Delivered-Not Voted
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 99 - Cautionary Factors Relevant to
Forward-Looking-Information.
(b) REPORTS ON FORM 8-K
The Registrant filed a report on Form 8-K on July 10, 1996 relating to
the Registant's investment in Modex, a 50% owned subsidiary, which was
established to pursue applications of the Registrant's technology outside the
central nervous system.
Page 14 of 15
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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)
AUGUST 7, 1996 Daniel E. Geffken
- -------------- -----------------
(Date) Vice President, Chief Financial Officer
and Treasurer
(principal financial officer and
principal accounting officer)
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EXHIBIT INDEX
Exhibit 99 - Cautionary Factors Relavent to Forward Looking Statements.
5
6-MOS
DEC-31-1996
JUN-30-1996
7,084,064
31,332,247
0
0
0
40,076,123
14,427,985
6,159,001
51,880,952
5,487,469
5,768,321
0
0
153,813
40,471,349
51,880,952
0
3,514,849
0
0
10,487,769
0
304,740
(5,727,891)
0
(5,727,891)
0
0
0
(5,727,891)
(.37)
(.37)
1
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
CytoTherapeutics, Inc. (the "Company") wishes to caution readers that
the following important factors, among others, in some cases have affected and
in the future could affect the Company's results and could cause actual results
and needs of the Company to vary materially from forward-looking statements
made in this Quarterly Report by the Company on the basis of management's
current expectations. The business in which the Company is engaged is rapidly
changing, extremely competitive and involves a high degree of risk, and
accuracy with respect to forward-looking projections is difficult.
EARLY STAGE DEVELOPMENT; HISTORY OF OPERATING LOSSES - Substantially all of the
Company's revenues to date have been derived, and for the foreseeable future
substantially all of the Company's revenues will be derived, from collaborative
agreements, research grants and income earned on invested funds. The Company
will incur substantial operating losses in the future as the Company conducts
its research, development, clinical trial and manufacturing activities. There
can be no assurance that the Company will achieve revenues from product sales
or become profitable.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING - The development of
the Company's products will require the commitment of substantial resources to
conduct the time-consuming research, preclinical development and clinical trials
that are necessary for regulatory approvals and to establish production and
marketing capabilities if such approvals are obtained. The Company will need to
raise substantial additional funds to continue its product development efforts
and intends to seek such additional funds through partnership, collaborative or
other arrangements with corporate sponsors, public or private equity or debt
financings, or from other sources. Future cash requirements may vary from
projections based on changes in the Company's research and development programs,
progress in preclinical and clinical testing, the Company's ability to enter
into, and perform successfully under, collaborative agreements, competitive and
technological advances, the need to obtain proprietary rights owned by third
parties, facilities requirements, regulatory approvals and other factors. 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.
UNCERTAINTIES OF CLINICAL DEVELOPMENT AND NEW MODE OF THERAPY - None of the
Company's proposed products has been approved for commercial sale or entered
Phase II or III clinical trials. Even if the Company's proposed products appear
to be promising at an early stage of research or development such products may
later prove to be ineffective, have adverse side effects, fail to receive
necessary regulatory approvals, be difficult or uneconomical to manufacture or
market on a commercial scale, be adversely affected by government price
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controls or limitations on reimbursement, be precluded from commercialization by
proprietary rights of third parties or be subject to significant competition
from other products. There can be no assurance that the Company will be able to
demonstrate, as required, that its implants, on a consistent basis and on a
commercial scale, among other things: (i) successfully isolate transplanted
cells from the recipient's immune system; (ii) remain biocompatible with the
tissue into which they are implanted, including, for certain implants, brain
tissue; (iii) adequately maintain the viability of cells contained within the
membrane; (iv) safely permit the therapeutic substances produced by the cells
within the membrane to pass through the membrane unto the patient in controlled
doses for extended periods; and (v) are sufficiently durable for the intended
indication.
DEPENDENCE ON OUTSIDE PARTIES--The Company's strategy for the research,
development, commercialization and marketing of its products contemplates that
the Company will enter into various arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that the Company will be able to enter into any additional
arrangements on terms acceptable to the Company, or successfully perform its
obligations under its existing or any additional arrangements. If any of the
Company's collaborators fails to perform its obligations in a timely manner or
terminate their agreement with the Company, the development or
commercialization of the Company's product candidate or research program under
such collaborative agreement may be adversely affected.
NEED FOR AND UNCERTAINTY OF OBTAINING PATENT PROTECTION--Patent protection for
products such as those the Company proposes to develop is highly uncertain and
involves complex factual and evolving legal questions. No assurance can be
given that any patents issued or licensed to the Company will not be
challenged, invalidated or circumvented, or that the rights granted under such
patents will provide competitive advantages to the Company.
EXISTENCE OF THIRD PARTY PATENTS AND PROPRIETARY RIGHTS; NEED TO OBTAIN
LICENSES--There are pending patent applications or issued patents held by others
relating to the Company's proposed products or the technology to be utilized by
the Company in the development of its proposed products. If such patents or
other patents are determined by the Company or a court to be valid and
infringed, the Company may be required to alter its products or processes, pay
licensing fees or royalties or cease certain activities. In particular, the
Company is aware of one issued patent claiming certain methods for treating
defective, diseased or damaged cells in the mammalian CNS by grafting
genetically modified donor cells from the same mammalian species. In addition,
each of the neurotrophic factors which the Company is currently investigating
for use in its proposed products is the subject of one or more claims in patents
or patent applications of third parties, and certain other neurotrophic factors
are the subject of third party patent applications. The Company may also be
required to seek licenses in regard to other cell lines, the techniques used in
creating or obtaining such cell lines, the materials used in the manufacture of
its implants or otherwise. There can be no assurance that the Company will be
able to establish collaborative arrangements or obtain licenses to the
3
foregoing technology or to other necessary or desirable technology on
acceptable terms, if at all, or that the patents underlying any such licenses
will be valid and enforceable.
GOVERNMENT REGULATION - The Company's research, preclinical development and
clinical trials, as well as the manufacturing and marketing of its potential
products, are subject to extensive regulation by government authorities in the
United States and other countries. The process of obtaining FDA other required
regulatory approvals is lengthy, expensive and uncertain. There can be no
assurance that the Company or its collaborators will be able to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market its potential products in anticipated time frames, if at all. In
addition, several legislative proposals have been made to reform the FDA. If
such proposals are enacted they may result in significant changes in the
regulatory environment the Company faces. These changes could result in
different, more costly or more time consuming approval requirements for the
Company's products, in the dilution of FDA resources available to review the
Company's products, or in other unpredictable consequences.
SOURCES OF CELLS AND OTHER MATERIALS - The Company's potential products require
genetically engineered cell lines or living cells harvested from animal or
human sources. There can be no assurance that the Company will successfully
identify or develop sources of the cells required for its potential products and
obtain such cells in quantities sufficient to satisfy the commercial
requirements of its potential products. These supply limitations may apply, in
particular, to primary cells which must be drawn directly from animal or human
sources, such as the bovine adrenal chromaffin cells currently used in the
Company's product for the treatment of pain. As an alternative to primary
cells, the Company is developing products based on the used of genetically
altered cells. Intellectual property rights to important genetic constructs
used in developing such cells, including the constructs used to develop cells
producing neurotrophic factors, are or may be claimed by one or more companies,
which could prevent the Company from using such cells.
MANUFACTURING UNCERTAINTIES - The Company's pilot manufacturing plant, may not
have sufficient capacity to permit the Company to produce all the products for
clinical trials it anticipates developing. In addition, the Company has not
developed the capability to commercially manufacture any of its proposed
products and is unaware of any other company which has manufactured any
membrane-escapulsated cell product on a commercial scale. There can be no
assurance that the Company will be able to develop the capability of
manufacturing any of its proposed products at a cost or in the quantities
necessary to make a commercially viable product, if at all.
COMPETITION - Competitors of the Company are numerous and include major
pharmaceutical and chemical companies, biotechnology companies, universities
and other research institutions. Currently, several of these competitors market
and sell therapeutic products for the treatment of chronic pain, Parkinson's
disease and other CNS conditions. In addition, most of the Company's
competitors have substantially greater capital resources, experiences in
obtaining
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regulatory approvals and, in the case of commercial entities, experience in
manufacturing and marketing pharmaceutical products, than the Company. A number
of other companies are attempting to develop methods of delivering therapeutic
substances within or across the blood brain barrier. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
products that are more effective than those being developed by the Company or
that would render the Company's technology and products obsolete or
non-competitive.
DEPENDENCE ON KEY PERSONNEL - The Company is highly dependent on the principal
members of its management and scientific staff and certain of its outside
consultants. Loss of the services of any of these individuals could have a
material adverse effect on the Company's operations. In addition, the Company's
operations are dependent upon its ability to attract and retain additional
qualified scientific and management personnel. There can be no assurance the
Company will be able to attract and retain such personnel on acceptable terms
given the competition among pharmaceutical, biotechnology and health care
companies, universities and research institutions for experienced personnel.
REIMBURSEMENT AND HEALTH CARE REFORM - In both domestic and foreign markets,
sales of the Company's potential products will depend in part upon the
availability and amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health care insurers and
other health care payors such as health maintenance organizations and
self-insured employee plans. There is considerable pressure to reduce the cost
of therapeutic products. There can be no assurance that reimbursements will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable the Company to sell its products on a profitable
basis.
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