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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 October 31, 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
QUESTCOR PHARMACEUTICALS, INC.
(formerly 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.)
26118 RESEARCH ROAD
HAYWARD, CALIFORNIA 94545
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 732-5551
Indicate by mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 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 December 13, 1999, the Registrant had 24,361,113 shares of Common Stock,
no par value, outstanding.
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TABLE OF CONTENTS
ITEM PAGE
PART I.
1. Financial Statements:
a. Balance Sheets -- October 31, 1999 (unaudited) and July 31, 1999 3
b. Statements of Operations -- Three Months Ended
October 31, 1999 and 1998 (unaudited) 4
c. Statements of Cash Flows -- Three Months Ended
October 31, 1999 and 1998 (unaudited) 5
d. Notes to Financial Statements 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 11
Signatures 12
* No information provided due to inapplicability of item.
Questcor Pharmaceuticals, Inc.
(formerly Cypros Pharmaceutical Corporation)
2
BALANCE SHEETS
OCTOBER 31, JULY 31,
1999 1999
ASSETS (UNAUDITED) (NOTE)
------------------------------
Current assets:
Cash and cash equivalents $ 1,438,574 $ 2,509,386
Short-term investments, held to maturity 1,534,417 2,964,689
Accounts receivable 456,553 391,888
Inventories 141,019 205,207
Prepaid expenses and other current assets 36,400 112,540
------------------------------
Total current assets 3,606,963 6,183,710
Investment grade securities, non current portion 1,798,231 1,788,749
Property, equipment and leasehold
improvements, net 1,413,994 1,471,565
Purchased technology, net 3,041,753 3,266,100
Licenses and patents, net 150,451 158,215
Deferred acquisition costs 1,037,210 -
Other assets 270,525 270,525
------------------------------
Total assets $ 11,319,127 $ 13,138,864
------------------------------
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 513,842 $ 497,985
Accrued acquisition costs 463,860
Accrued compensation 159,712 201,024
Other accrued liabilities 34,887 63,565
Current portion of long-term debt 54,551 53,616
Current portion of capital lease obligations 96,575 105,892
------------------------------
Total current liabilities 1,323,427 922,082
Long-term debt 5,380 6,541
Capital lease obligations 122,089 140,380
Deferred rent 178,021 155,854
Shareholders' equity:
Common stock, 30,000,000 shares authorized,
15,735,007 and 15,711,877 shares issued and outstanding
as of October 31, 1999 and July 31, 1999, respectively 41,551,662 41,497,174
Deferred compensation (59,987) (69,441)
Accumulated deficit (31,801,465) (29,513,726)
------------------------------
Total shareholders' equity 9,640,210 11,914,007
------------------------------
Total liabilities and shareholders' equity $ 11,319,127 $ 13,138,864
------------------------------
------------------------------
Note: The balance sheet at July 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.
SEE ACCOMPANYING NOTES.
QUESTCOR PHARMACEUTICALS, INC.
(formerly Cypros Pharmaceutical Corporation)
3
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31,
1999 1998
-----------------------------------
Net sales $ 498,295 $ 640,354
Cost of sales 355,392 160,478
-----------------------------------
Gross profit 142,903 479,876
Operating expenses:
Sales and marketing 583,824 405,628
General and administrative 899,582 692,811
Clinical testing and regulatory 649,885 679,374
Pre-clinical research and development 161,128 150,136
Depreciation and amortization 289,178 311,297
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Total operating expenses 2,583,597 2,239,246
-----------------------------------
Loss from operations (2,440,694) (1,759,370)
Research grant income 65,522 10,871
Interest and other income, net 74,204 188,290
Sublease income, net 13,229 20,702
-----------------------------------
Net loss $ (2,287,739) $ (1,539,507)
-----------------------------------
-----------------------------------
Net loss per share, basic and diluted $ (0.15) $ (0.10)
-----------------------------------
-----------------------------------
Shares used in computing net loss per
share, basic and diluted 15,723,693 15,711,877
-----------------------------------
-----------------------------------
SEE ACCOMPANYING NOTES.
4
QUESTCOR PHARMACEUTICALS, INC.
(formerly Cypros Pharmaceutical Corporation)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED OCTOBER 31,
1999 1998
---------------------------------
OPERATING ACTIVITIES
Net loss $(2,287,739) $(1,539,507)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation 63,942 117,107
Depreciation and amortization 310,990 319,224
Deferred rent expense 22,167 (8,164)
Gain on sale of equipment - (5,752)
Deferred acquisition costs, net (573,350) -
Changes in operating assets and liabilities:
Accounts receivable (64,665) 109,139
Inventories 64,188 (17,584)
Prepaid expenses and other current assets 76,140 (16,595)
Accounts payable 15,857 (285,400)
Other accrued liabilities (69,990) 61,584
---------------------------------
Net cash flows used in operating activities (2,442,460) (1,265,948)
INVESTING ACTIVITIES
Purchases of short-term investments (1,360,028) (1,356,215)
Maturities of short-term investments 2,780,818 2,550,355
Proceeds from the sale of equipment - 11,000
Purchase of property, equipment and leasehold
improvements (21,308) (7,419)
Increase in licenses and patents - (4,702)
Decrease in deposits and other assets - 21,420
---------------------------------
Net cash flows provided by investing activities 1,399,482 1,214,439
FINANCING ACTIVITIES
Issuance of long-term debt 825 2,675
Repayment of long-term debt (1,051) (952)
Repayments of capital leases/obligations (27,608) (22,641)
---------------------------------
Net cash flows used in financing activities (27,834) (20,918)
---------------------------------
Decrease in cash and cash equivalents (1,070,812) (72,427)
Cash and cash equivalents at beginning of period 2,509,386 3,015,890
---------------------------------
Cash and cash equivalents at end of period $ 1,438,574 $ 2,943,463
---------------------------------
---------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,582 $ 7,493
---------------------------------
---------------------------------
SEE ACCOMPANYING NOTES.
5
QUESTCOR PHARMACEUTICALS, INC.
(formerly Cypros Pharmaceutical Corporation)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Questcor Pharmaceuticals, Inc. (the "Company") is engaged in the
development and marketing of acute-care, hospital-based products. The Company
is currently marketing three products, Ethamolin-Registered Trademark-,
Glofil and Inulin, expects to launch two burn and wound care products using
the Company's Dermaflo-TM- technology and is developing two drugs, Cordox-TM-
and Emitasol-TM-. The Company is conducting a Phase III clinical trial of
Cordox in sickle cell anemia crisis patients. Effective with the acquisition
described in the following paragraph, the Company is conducting a Phase III
clinical trial of Emitasol in diabetic gastroparesis through its partner,
Roberts Pharmaceutical Corporation.
On August 4, 1999, the Company announced that it had entered into a
definitive agreement to acquire all of the shares of RiboGene, Inc. in a
stock-for-stock transaction. On November 5, 1999, the shareholders of the
Company and the stockholders of RiboGene approved the transaction, and the
acquisition was closed on November 17, 1999. Simultaneously, the name of the
Company was changed to Questcor Pharmaceuticals, Inc and its common stock
began trading on the American Stock Exchange, Inc. under the symbol "QSC" on
November 18, 1999. The acquisition is structured to be a tax-free
reorganization and will be accounted for under the purchase method, whereby
the purchase price will be allocated to the underlying assets and liabilities
based upon their estimated fair values. Additionally, for more complete
information about the acquisition of RiboGene, this discussion should be read
in conjunction with the Form S-4 (Registration Statement No. 333-87611) filed
with the U.S. Securities and Exchange Commission on September 23, 1999.
BASIS OF PRESENTATION
The unaudited financial statements for the three months ended October
31, 1999 have been prepared on the same basis as the Company's audited financial
statements for the year ended July 31, 1999 and 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, 1999 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, 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 $50,121 and finished goods of
$90,898.
6
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 October 31, 1999, such discounts and allowances totaled $42,585.
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.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
with the 1999 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.
2. RECENTLY-ISSUED ACCOUNTING STANDARDS
COMPREHENSIVE INCOME
The Company's comprehensive net loss and net loss are the same for
the three months ended October 31, 1999 and 1998.
7
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
will be effective January 1, 2001. This statement established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company believes the adoption of SFAS No. 133 will not have a material effect
on the financial statements.
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
8
RIGHTS" OF THE COMPANY'S ANNUAL REPORT (FORM 10-K) FOR THE FISCAL YEAR ENDED
JULY 31, 1999 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's predecessor, Cypros Pharmaceuctical Corporation, 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-Registered Trademark-, in November 1996, and acquired the Dermaflo
topical burn/wound care technology and two FDA-cleared products, Neoflo and
Sildaflo, in November 1997. On November 17, 1999, Cypros changed its name to
Questcor Pharmaceuticals, Inc. after completing the acquisition of RiboGene,
Inc. The Company has sustained an accumulated deficit of $31,801,465 from
inception through October 31, 1999. The acquisition of RiboGene will not
cause the Company to have positive net operating cash flow, and since the
Company's expenses during the next few years will be substantial and
increasing, the Company expects to incur increasing losses for the
foreseeable future.
RESULTS OF OPERATIONS
During the first quarter ended October 31, 1999, the Company sustained
a loss of $2,287,739 (or $.15 per share) compared to a loss of $1,539,507 (or
$.10 per share) for the prior-year quarter. During the current quarter, the
Company reported net sales of $498,295, a 22.2% decrease over the $640,354
reported in the prior-year period, principally due to the decline in Ethamolin
sales volume due to increased competition. Gross profit on sales amounted to
$142,903, a 70.2% decrease over the $479,876 reported in the prior-year period.
As a percent of sales, the gross margin in the current quarter was
28.7% compared to 74.9% in the prior-year period. As there were no Dermaflo
product sales in the prior-year period, the overhead costs of the Dermaflo
manufacturing facility were recorded as general and administrative expense
during that period. The gross margin will continue to be adversely affected
by the overhead costs of the facility until sales to NutraMax of the triple
antibiotic rolled padded stock reach a critical mass and other Dermaflo
products are launched.
Total operating expenses during the first quarter ended October 31,
1999 amounted to $2,583,597, a 15.4% increase over the $2,239,246 incurred
during the prior-year quarter. Sales and marketing expenses increased by 43.9%
to $583,824 due to expenses incurred for advertising, materials, brochures and
consulting.
General and administrative expense increased 29.8% to $899,582 due to
increases in legal fees, investor relations, board of director fees and
expenditures
9
related to the Dermaflo-TM- manufacturing facility allocated to the
development of Sildaflo-TM- and the professional form of the Neoflo-TM- product.
In addition, net interest and other income for the current quarter
decreased 61.0% to $74,204 from $188,290 during the prior-year quarter,
principally because the Company had a larger investment portfolio during the
prior-year quarter, which yielded more interest income.
As a consequence of the acquisition of RiboGene, the Company
expects to record a significant charge off of in-process research and
development in the next fiscal quarter, currently estimated at $16 million.
However, the Company intends to obtain an independent valuation for such
charge.
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 from product sales.
At October 31, 1999, the Company had cash, cash equivalents and
short-term investments of $2,972,991 compared to $5,474,075 at July 31, 1999.
At October 31, 1999, working capital was $2,283,536, compared to $5,261,628
at July 31, 1998. The decrease in both balance sheet items was principally
due to the loss from operations for the current quarter. The Company's cash,
cash equivalents and short-term investments and its working capital will
improve significantly as a result of the acquisition of RiboGene. At
September 30, 1999, RiboGene had cash, cash equivalents and short-term
investments of approximately $22,427,000 and working capital of
$18,457,000. In addition, at September 30, 1999, RiboGene had a $5 million
long-term note payable to a bank. The note is collateralized by the Company's
assets and the Company is required to maintain $5 million on deposit with the
bank.
The Company expects that its cash needs will increase significantly in
future periods due to increased clinical testing activity, growth of
administrative, clinical and laboratory staff and expansion of facilities to
accommodate increased numbers of employees. With the acquisition of RiboGene
subsequent to the October 31 quarter-end, the Company's management believes that
the Company's working capital will be sufficient to fund the operations of the
Company into the first half of 2001 dependent, in part, on the timing of the
commencement of each phase of the clinical trials on Cordox and Ceresine and 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 delay in 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 portion of its operating expenses
through cash flow from product sales, but expects to seek additional funds
through public or private equity financings, collaborations, 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
10
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk at October 31, 1999 has not
changed materially from July 31, 1999, and reference is made to the more
detailed disclosures of market risk included in the Company's Form 10-K for
the fiscal year ended July 31, 1999 as filed with the U.S. Securities and
Exchange Commission on October 29, 1999.
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
(1) The Registrant filed a Report on Form 8-K on August 16, 1999
pertaining to the execution of the Agreement and Plan of
Reorganization with RiboGene.
(2) The Registrant filed another Report on Form 8-K on December 2,
1999 pertaining to the closing of the acquisition of RiboGene,
and the
11
changing of the Registrant's name to Questcor Pharmaceuticals,
Inc. The Registrant filed a Report on Form 8-K/A on December
14, 1999 amending that Form 8-K to include various historical
and pro forma financial statements.
12
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
Hayward, County of Alameda, State of California, on the 15th day of December,
1999.
QUESTCOR PHARMACEUTICALS, INC.
By Charles J. Casamento
--------------------
Charles J. Casamento
Chairman of the Board,
President and Chief Executive Officer
(Chief Executive Officer)
Michael D. Rose
---------------
Michael D. Rose
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
13