UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
___________________________________
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the period ended April 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 0-20772
CYPROS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
California 33-0476164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2714 Loker Avenue West
Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(760) 929-9500
Indicate by mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange
Act 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.
[ X ] YES [ ] NO
As of June 11, 1999, the Registrant had 15,711,877 shares of Common
Stock, no par value, outstanding.
TABLE OF CONTENTS
Item Page
Part I
1. Financial Statements:
a. Balance Sheets - April 20, 1999
(unaudited) and July 31, 1998 3
b. Statements of Operations - Three and
Nine Months Ended April 30, 1999 and
1998 (unaudited) 4
c. Statements of Cash Flows - Nine Months
Ended April 30, 1999 and 1998
(unaudited) 5
d. Notes to Financial Statements
(unaudited) 6
2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II
1. Legal Proceedings *
2. Changes in Securities *
3. Defaults Upon Senior Securities *
4. Submission of Matters to a Vote of
Securities Holders *
5. Other Information *
6. Exhibits and Reports on Form 8-K 13
Signatures 14
*No Information provided due to inapplicability of item.
PART I.
Item 1. Financial Statements
Cypros Pharmaceutical Corporation
Balance Sheets
April 30, July 31,
1999 1998
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $2,892,149 $3,015,890
Short-term investments, held to
maturity 6,269,097 10,428,580
Accounts receivable 308,827 516,886
Inventories 168,720 83,078
Prepaid expenses and other current
assets 126,680 214,765
Total current assets 9,765,473 14,259,199
Property, equipment and leasehold
improvements, net 1,248,291 1,063,566
Purchased technology, net 3,490,447 4,163,487
Licenses and patents, net 162,926 176,927
Other assets 270,525 72,461
Total assets $14,937,662 $19,735,640
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 356,073 $ 551,191
Accrued compensation 209,210 125,434
Other accrued liabilities 16,484 15,641
Current portion of long-term debt 102,759 97,477
Current portion of capital lease
obligations 110,039 91,740
Total current liabilities 794,565 881,483
Long-term debt 7,674 59,408
Capital lease obligations 164,889 157,656
Deferred rent 141,161 125,761
Shareholders' equity:
Common stock, 30,000,000 shares
authorized, 15,711,877
shares issued and outstanding as
of April 30, 1999 (unaudited) and
July 31, 1998 41,478,214 41,328,470
Deferred compensation (79,020) (87,334)
Accumulated deficit (27,569,821) (22,729,804)
Total shareholders' equity 13,829,373 18,511,332
Total liabilities and shareholders'
equity $14,937,662 $19,735,640
Note: The balance sheet at July 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.
See accompanying notes.
Cypros Pharmaceutical Corporation
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
April 30 April 30
1999 1998 1999 1998
(unaudited) (unaudited)
Net sales $ 606,252 $ 824,399 $1,853,307 $2,511,860
Cost of sales 170,753 202,751 525,507 578,469
Gross profit 435,499 621,648 1,327,800 1,933,391
Operating expenses:
Sales and marketing 364,512 331,022 1,176,980 1,008,779
General and
administrative 858,751 736,978 2,287,596 2,229,854
Clinical testing
and regulatory 644,747 761,449 1,880,688 1,770,827
Pre-clinical
research and
development 143,451 216,977 442,034 667,609
Depreciation and
amortization 321,763 293,568 933,004 904,706
Total operating
expenses 2,333,224 2,339,994 6,720,302 6,581,775
Loss from operations (1,897,725) (1,718,346) (5,392,502) (4,648,384)
Research grant income - 46,193 10,871 118,701
Interest and other
income, net 129,155 234,867 479,600 757,194
Sublease income, net 20,609 - 62,014 -
Amortization of
discount and costs on
mandatorily
convertible notes - (30,317) - (256,007)
Net loss $(1,747,961) $(1,467,603) $(4,840,017) $(4,028,496)
Net loss per share,
basic and diluted $(0.11) $ (0.09) $(0.31) $(0.27)
Shares used in
computing net loss
per share, basic and
diluted 15,711,877 15,644,114 15,711,877 15,020,087
See accompanying notes.
Cypros Pharmaceutical
Corporation
Statements of Cash Flows
(Unaudited)
Nine Months Ended April 30,
1999 1998
Operating activities
Net loss $ (4,840,017) $ (4,028,496)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Amortization of deferred
compensation 158,058 251,996
Depreciation and amortization 957,634 912,026
Amortization of discount and
costs on mandatorily
convertible notes - 256,007
Deferred rent 15,400 16,588
Gain on the sale of equipment (5,752) -
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable 208,059 (23,048)
Inventories (85,642) (16,097)
Prepaid expenses and other
current assets 88,085 (68,251)
Accounts payable (195,118) (65,740)
Accrued liabilities 84,619 (115,980)
Net cash flows used in operating
activities (3,614,674) (2,880,995)
Investing activities
Purchases of short-term
investments (6,435,425) (15,062,413)
Maturities of short-term
investments 10,594,908 13,760,012
Installment payment for
purchased technology - (1,200,000)
Proceeds from the sale of
equipment 11,000 -
Purchase of property, equipment
and leasehold improvements (450,620) (494,496)
Increase in licenses and patents (9,946) (46,809)
Increase in other assets (198,064) (218,175)
Net cash flows provided by (used
in) investing activities 3,511,853 (3,261,881)
Financing activities
Proceeds from exercise of B
Warrants - 4,707,576
Proceeds from long-term debt 6,475 115,267
Repayments of long-term debt (52,927) (1,496)
Proceeds from capital lease
obligations 104,030 -
Repayments of capital lease
obligations (78,498) (81,625)
Net cash flows (used in)
provided by financing activities (20,920) 4,739,722
Decrease in cash and cash
equivalents (123,741) (1,403,154)
Cash and cash equivalents at
beginning of period 3,015,890 5,101,710
Cash and cash equivalents at end
of period $ 2,892,149 $ 3,698,556
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 36,945 $ 124,005
Noncash investing and financing
activities:
Equipment financed under capital
lease obligations $ 104,030 $ -
Notes converted to common stock $ - $ 3,979,161
See accompanying notes.
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Cypros Pharmaceutical Corporation (the "Company") is engaged in the
development and marketing of acute-care, hospital-based products. The
Company is currently marketing three products, Ethamolin, Glofil and
Inulin, expects to launch two burn and wound care products using the
Company's Dermaflo technology within the next year and is developing
two drugs, Cordox and Ceresine. The Company's pre-clinical and
clinical development programs focus on cytoprotective drugs designed
to reduce ischemia (low blood flow) induced tissue damage in acute-
care settings. The Company is conducting a Phase III clinical trial of
Cordox in sickle cell anemia crisis patients.
Basis of Presentation
The unaudited financial statements for the three and nine months ended
April 30,1999 and 1998 have been prepared on the same basis as the
Company's audited financial statements for the year ended July 31,
1998. The unaudited financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for the fair presentation of the
results of the interim periods presented. Results for the interim
periods are not necessarily indicative of the results for the entire
year.
For more complete financial information, these financial statements
should be read in conjunction with the audited financial statements
and the related notes thereto for the year ended July 31, 1998
included in the Company's Annual Report on Form 10-K.
The Company has experienced significant quarterly fluctuations in
operating results and increases in expenses and losses since inception
and it expects these fluctuations, increasing expenses and losses will
continue.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method)
or market and is comprised of raw materials of $15,394 and finished
goods of $153,326.
Revenue Recognition
Revenues from product sales of whole vials of Glofil and Inulin are
recognized upon shipment. Revenues from Glofil unit sales are
recognized upon receipt by the Company of monthly sales reports from
Syncor, the exclusive marketing agent for Glofil in this form.
Sales are reported net of returns during the period in which product
is shipped. These sales are adjusted for discounts and
allowances due to contractual discounts under certain contracts with
hospitals and hospital buying groups. At April 30, 1999, such
discounts and allowances totaled $107,633.
The Company's policy is not to accept returns of product sold.
However, certain contracts with wholesale drug distributors provide
for product returns if the product is within a certain number of
months of expiration.
Net Loss Per Share Data
Under Financial Accounting Standards Board Statement ("SFAS") No. 128,
"Earnings Per Share", basic and diluted loss per share is based on net
loss for the relevant period, divided by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share gives effect to all potential dilutive common shares outstanding
during the period such as options, warrants, and convertible
securities, and contingently issuable shares. All potential dilutive
common stock equivalents have been excluded from the calculation of
diluted loss per share as their inclusion would have been
antidilutive.
2. Recently-Issued Accounting Standards
Comprehensive Income
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements
in the period in which they are recognized. "Comprehensive Income" is
defined as the change in equity during the period from transactions
and other events and circumstances from non-owner sources. Net income
and other comprehensive income, including unrealized gains and losses
on investments, shall be reported, net of their related tax effect, to
arrive at comprehensive income. The Company's comprehensive net loss
and net loss are the same, and therefore, the adoption of SFAS No. 130
did not have an impact on the Company's financial statements.
Segment Information
Effective August 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 redefines segments and requires companies to report
financial and descriptive information about their operating segments.
The Company has determined that it operates in one business segment
and therefore the adoption of SFAS No. 131 does not affect the
Company's financial statements.
Reclassifications
Certain previously reported amounts have been reclassified to conform
with the 1998 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and disclosures made in the accompanying notes to the
financial statements. Actual results could differ from those
estimates.
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 that involve risks and
uncertainties, including statements regarding the period of time
during which the Company's existing capital resources and income from
various sources will be adequate to satisfy its capital requirements.
The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such
differences include but are not limited to, those discussed in this
section, as well as in the sections entitled "Business", "Licenses",
"Manufacturing", "Sales and Marketing", "Competition", "Government
Regulation", "Patents and Proprietary Rights" of the Company's Annual
Report (Form 10-K) for the fiscal year ended July 31, 1998 and those
discussed in the S-3 Registration Statement File No. 333-25661 filed
with U.S. Securities and Exchange Commission, as well as those
discussed in any documents incorporated by reference herein or
therein.
The Company was founded in 1990, commenced its research and
development activities in 1991, completed an initial public offering
(the "IPO") in November 1992, commenced clinical trials in December
1994, acquired two FDA-cleared products, Glofil and Inulin, in August
1995, acquired a third FDA-cleared product, Ethamolin, in November
1996, and acquired the Dermaflo topical burn/wound care technology and
two FDA-cleared products, Neoflo and Sildaflo, in November 1997. The
Company has sustained an accumulated deficit of $27,569,821 from
inception through April 30, 1999. As the Company will not have
positive net operating cash flow for the next few years and the
Company's sales and marketing, research and development, clinical
testing and regulatory and general and administrative expenses during
these years will be substantial and increasing, the Company expects to
incur increasing losses for the foreseeable future.
Results of Operations
Three Months Ended April 30, 1999 and 1998
During the quarter ended April 30, 1999, the Company reported sales of
$606,252, a 26.5% decrease from the $824,399 reported in the prior-
year period, principally due to increasing competition in the market
served by Ethamolin and the expected decline in Glofil sales volume
due to the termination of a customer's two clinical trials which
required Glofil to be used as part of their protocols. The decrease in
sales for the period also caused a 29.9% decrease in gross profit on
sales to $435,499 from the $621,648 reported in the prior-year period.
As a percent of sales, the gross margin in the current quarter was
71.8% compared to 75.4% in the prior-year period. This decrease was
principally due to start-up costs incurred by the Company in its joint
venture with another company to establish a new manufacturing facility
for Glofil.
Total operating expenses decreased .3% during the quarter to
$2,333,224 from $2,339,994 during the prior-year quarter. Sales and
marketing expense increased 10.1% principally due to the cost of an
ongoing clinical study of Glofil to prove the viability of a 45-minute
test and regulatory consulting expense related to the Glofil study.
General and administrative expense increased 16.5% principally due to
additional material and supply purchases for the Dermaflo facility in
Lee's Summit, Missouri, hiring of additional personnel there,
consulting services for that project, additional home-office overhead
allocated to that project for quality control and quality assurance
and rent expense for the Lee's Summit facility. Clinical testing and
regulatory expense decreased 15.3% principally due to the decline in
CRO and site costs for the Phase II study of Cordox in sickle cell
crisis patients which was completed last year. Pre-clinical research
and development expense decreased 33.9% principally due to decreases
in salaries, rent and grant related expenditures.
In addition, net interest and other income for the current quarter
decreased 45.0% to $129,155 from $234,867 during the prior-year
quarter, principally because the Company had a larger investment
portfolio during the prior-year quarter, which yielded more interest
income.
The Company did not receive any new Small Business Innovation Research
grants during the current period, and therefore, there was a 100%
decline in grant income for the quarter ended April 30, 1999.
The amortization of the discount and costs on the Company's
mandatorily convertible notes was completed in the previous year, and
therefore, there were no such expenses for the quarter ended April 30,
1999.
Nine Months Ended April 30, 1999 and 1998
During the nine months ended April 30, 1999, the Company reported
sales of $1,853,307, a 26.2% decrease over the $2,511,860 reported in
the prior-year period, and a gross profit on sales of $1,327,800, a
31.3% decrease over the $1,933,391 reported in the prior-year period.
As a percent of sales, the gross margin in the current period was
71.6% compared to 77.0% in the prior-year period. These decreases
occurred for the same reasons discussed above under the three-month
analysis.
During the nine months ended April 30, 1999, the Company sustained a
loss of $4,840,017 (or $.31 per share, basic and diluted), compared to
a loss of $4,028,496 (or $.27 per share, basic and diluted) for the
prior-year period, as revenues decreased and overall operating
expenses increased. Total operating expenses increased 2.1% during the
current period to $6,720,302 from $6,581,775 during the prior-year
period. Sales and marketing expense increased 16.7% principally due to
the same reasons as set forth in the three-month analysis above. Pre-
clinical research and development expenditures decreased 33.8%,
principally due to a decrease in staffing, rent expense and materials
and supplies used for grant expenditures. Rent expense decreased in
the current period due to the reclassification of a portion of rent
expense to other income and expense.
In addition, net interest and other income for the current period
decreased 36.7% to $479,600 from $757,194 during the prior-year
period, principally for the reason set forth in the three-month
analysis above.
Grant income declined 90.8% during the current period to $10,871 from
$118,701, as there was only one grant in process (versus two during
the prior-year period) and it was completed prior to the end of the
current period. The pre-clinical research and development expense for
the current period includes expenses incurred in connection with the
completed grant.
The amortization of the discount and costs on the Company's
mandatorily convertible notes was completed in the previous year, and
therefore, there were no such expenses for the nine months ended April
30, 1999.
Liquidity and Capital Resources
The Company has principally funded its activities to date through
various issuances of equity securities, which have raised total net
proceeds of $35 million, as well as product sales.
At April 30, 1999, the Company had cash, cash equivalents and short-
term investments of $9,161,246, compared to $13,444,470 at July 31,
1998. At April 30, 1999, working capital was $8,970,908, compared to
$13,377,716 at July 31, 1998. The decline in these balance sheet items
is principally due to the cash used to fund the operations of the
Company.
he Company expects that its cash needs will increase significantly in
future periods due to expansion of research and development programs,
increased clinical testing activity, growth of administrative,
clinical and laboratory staff and expansion of facilities to
accommodate increased numbers of employees. The Company's management
believes that the Company's working capital will be sufficient to fund
the operations of the Company for approximately two years dependent,
in part, on the timing of the commencement of each phase of the
clinical trials on Cordox and Ceresine and the funding priorities that
it gives its various research programs, the results of clinical tests
and research programs; competing technological and market
developments; the time and costs involved in obtaining regulatory
approvals and in obtaining, maintaining and enforcing patents; the
cost of product acquisitions: the timing of scaling up manufacturing
operations; the growth in sales of the acquired products and their
resulting cash flows; and other factors.
The Company is funding a significant portion of its operating expenses
through cash flow from product sales, but expects to seek additional
funds through public or private equity financings, collaborations,
Small Business Innovation Research grants or from other sources. There
can be no assurance that additional funds can be obtained on desirable
terms or at all. The Company may seek to raise additional capital
whenever conditions in the financial markets are favorable, even if
the Company does not have an immediate need for additional cash at
that time.
Impact of the Year 2000 Issue
The Year 2000 problem is the result of computer applications being
written using two digits rather than four digits to define the
applicable year. Any of the Company's computer applications (and
computer applications used by any of the Company's customers,
collaborators and manufacturers) that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruption of operations.
The Company has modified or replaced portions of its software so that
its computer systems will function properly with respect to dates in
the year 2000 and thereafter. The costs associated with such
modifications were not significant. The Company believes that, with
these modifications to existing software and conversions to new
software, the Year 2000 problem will not pose significant operational
problems for its computer systems. However, because of the many
uncertainties associated with Year 2000 compliance issues, and because
the Company's assessment is necessarily based on information from
third-party customers, collaborators and manufacturers, there can be
no assurance that the Company's assessment is correct or as to the
materiality or effect of any failure of such assessment to be correct.
The Company has initiated a program to determine whether the computer
applications of its significant customers, collaborators and
manufacturers will be upgraded in a timely manner. The Company has not
completed its review and it is unknown whether the computer
applications of its customers, collaborators and manufacturers will be
Year 2000 compliant. The Company has not determined the extent to
which any disruption in the computer applications of third parties
caused by the Year 2000 issues will affect the Company's operations,
and has no contingency plans in the event of any such disruption.
However, any disruptions in payments by customers or in the
manufacture of the Company's products could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Part II.
Item 6. Exhibits and Reports on Form 8-K.
(a)Exhibits.
No exhibits are included in this report.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in
the City of Carlsbad, County of San Diego, State of California, on the
11th day of June, 1999.
CYPROS PHARMACEUTICAL CORPORATION
By /s/ Paul J. Marangos
- ------------------------
Chairman of the Board,
President and Chief Executive Officer
/s/ David W. Nassif
- ------------------------
David W. Nassif
Senior Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)