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
January 31, 1997
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:
(619) 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 March 13, 1997, the Registrant had 12,217,531 shares of
Common Stock, no par value, outstanding.
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TABLE OF CONTENTS
Item
Page
Part I.
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1. Financial Statements:
a. Balance Sheets -- January 31, 1997 and July 3
31,1996
b. Statements of Operations -- Three and Six 4
Months Ended January 31, 1997 and 1996
c. Statements of Cash Flows -- Six Months Ended 5
January 31, 1997 and 1996
d. Notes to Financial Statements 6
2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II.
1. Legal Proceedings *
2. Changes in Securities *
3. Defaults Upon Senior Securities *
4. Submission of Matters to a Vote of Securities
Holders 11
5. Other Information *
6. Exhibits and Reports on Form 8-K 11
Signatures 12
* No information provided due to inapplicability of
item.
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PART I.
Item 1. Financial Statements
Cypros Pharmaceutical Corporation
Balance Sheets
January 31, July 31,
1997 1996
(Unaudited) (Note)
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Assets
Current assets:
Cash and cash equivalents $ 4,172,007 $8,306,752
Short-term investments 7,662,930 7,690,297
Accounts receivable 280,103 149,626
Inventory 104,574 63,386
Prepaid expenses 173,470 61,409
Total current assets 12,393,084 16,271,470
Property, equipment and leasehold
improvements, net 622,110 608,206
Purchased technology, net 5,509,569 2,629,427
Licenses and patents, net 137,303 111,231
Deposits and other assets, net 119,274 126,180
Total assets $ 18,781,340 $19,746,514
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 317,061 $ 119,092
Other accrued liabilities 451,383 387,612
Purchased asset obligation 1,224,000 200,000
Current portion of capital lease
obligations 103,688 81,035
Current portion of long-term debt 91,008 99,282
Total current liabilities 2,187,140 887,021
Capital lease obligations 201,467 187,265
Deferred rent 128,169 120,411
Long-term debt - 41,367
Shareholders' equity:
Common stock, 30,000,000 shares
authorized, 11,613,748
shares issued and outstanding as of
January 31, 1997 and
July 31, 1996 21,872,515 21,838,493
Mandatorily convertible notes 7,463,756 7,458,498
Deferred compensation (163,477) (304,309)
Accumulated deficit (12,908,230) (10,482,232)
Total shareholders' equity 16,264,564 18,510,450
Total liabilities and
shareholders' equity $ 18,781,340 $ 19,746,514
</TABLE>
Note: The balance sheet at July 31, 1996 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.
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Cypros Pharmaceutical
Corporation
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
1997 1996 1997 1996
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Net sales $587,665 $353,990 $ 954,796 $578,718
Cost of sales 134,741 141,344 239,862 195,069
Gross profit 452,924 212,646 714,934 383,649
Operating expenses:
Sales and marketing 257,182 76,710 419,638 114,332
General and 699,423 396,788 1,320,934 773,004
administrative
Clinical testing and
regulatory 560,983 391,773 900,433 711,774
Research and 271,004 221,655 486,090 414,929
development
Depreciation and
amortization 290,154 148,347 478,040 295,792
Total operating expenses 2,078,746 1,235,273 3,605,135 2,309,831
Loss from operations (1,625,822) (1,022,627) (2,890,201) (1,926,182) 7)
Research grant income 32,090 91,434 79,490 165,926
Interest income, net 100,217 190,733 384,713 379,316
Net loss $(1,493,515) $(740,460) $(2,425,998) $(1,380,940) 8) 0)
Net loss per share $ (0.13) $ (0.06) $ (0.21) $ (0.12)
Shares used in computing
net loss per share 11,613,748 11,419,59 11,613,748 11,390,301
</TABLE>
See accompanying notes.
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<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Cash Flows (Unaudited)
Six Months Ended January 31,
1997 1996
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Operating activities
Net loss $(2,425,998) $(1,380,940)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred
compensation 174,854 96,509
Compensation expense related to
warrant issuances - 74,082
Depreciation and amortization 478,040 295,792
Deferred rent expense 7,758 2,222
Changes in operating assets and
liabilities; net of effects from
acquisitions:
Accounts receivable (130,477) (229,557)
Inventory 31,406 (40,902)
Prepaid expenses (112,061) (108,070)
Accounts payable 197,969 8,474
Other current liabilities 93,029 292,397
Net cash flows used in operating
activities (1,685,480) (989,993)
Investing activities
Payment for purchase of acquired (2,286,642) (1,835,356)
business
Short-term investments 27,367 2,701,802
Note receivable - (1,000,000)
Purchase of property, equipment and
leasehold improvements (59,269) (60,360)
(Increase)/decrease in licenses and 2,266 (6,597)
patents
Increase in deposits and other assets (40,209) (18,411)
Net cash flows used in investing (2,356,487) (218,922)
activities
Financing activities
Issuance of common stock, net - 869,749
Repurchase and retirement of common - (1,540,000)
stock
Repayments of long-term debt (49,641) (49,642)
Principal payments under capital
lease obligations (43,137) (14,307)
Net cash flows used in financing (92,778) (734,200)
activities
Decrease in cash and cash equivalents (4,134,745) (1,943,115)
Cash and cash equivalents
at beginning of period 8,306,752 5,026,745
Cash and cash equivalents at end of $ 4,172,007 $ 3,083,630
period
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 26,932 $ 17,955
Non-cash investing and financing
activities:
Issuance of common stock in business
acquisition $ - $1,032,309
Issuance of purchased asset
obligation in business acquisitions $ 1,200,000 $ 200,000
Equipment financed under capital $ 79,992 $ 26,553
leases
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See accompanying notes.
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
On November 4, 1996, the Company acquired the New Drug
Application, the U.S. trademark for Ethamolin Injection (the
"Ethamolin Assets") and the finished goods inventory on hand
at closing from Schwarz Pharma, Inc., a Delaware
corporation. The acquisition was accounted for using the
purchase method. The total purchase price was $3,286,642, of
which the Company paid $2,086,642 in cash and issued a
$1,200,000 note bearing interest at 8% per annum at closing.
The principal and accrued interest on the note are due and
payable on November 3, 1997. Repayment of the principal and
interest on the note is secured by the Ethamolin Assets. The
Company used its working capital to make the cash payment at
closing.
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's two clinical programs, CPC-111 and
CPC-211, are in various Phase II trials for cardiovascular
and neurological disorders.
Basis of Presentation
The unaudited financial statements for the three and six
months ended January 31, 1997 and 1996 have been prepared on
the same
basis as the Company's audited financial statements for the
year ended July 31, 1996 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, 1996 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 $24,570
and finished goods of $80,004.
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 subsequently adjusted for
discounts and allowances due to contractual discounts on
certain pharmaceuticals under contracts with hospitals and
hospital buying groups. At January 31, 1997, such discounts
and allowances totalled $11,991.
Net Loss Per Share
Net loss per share is computed using the weighted average
number of common shares outstanding during the periods.
Reclassifications
Certain previously reported amounts have been reclassified to
conform with the 1997 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. Subsequent Events
On March 5, 1997, the Company entered into private placement
agreements for $5 million of the Company's Common Stock, no par
value, under SEC Regulation D. The placement was
sold to two institutions led by the President and Fellows of
Harvard College.
The closing of the transaction is conditioned upon the
effectiveness of a registration statement which has been filed
by the Company covering resale of the acquired shares by the
purchasers.
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, 1996 and those discussed
in the S-3 Registration Statement File No. 333-17501 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 and acquired two FDA-cleared products,
Glofil and Inulin, in August 1995. The Company has sustained
an accumulated deficit of $12,908,230 from inception through
January 31, 1997. As the Company will not have significant
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 January 31, 1997 Versus Three Months Ended
January 31, 1996
During the quarter ended January 31, 1997, the Company
reported sales of $587,665, a 66% increase over the $353,990
reported in the prior-year period, principally due to the
acquisition of Ethamolin, and a gross profit on sales of
$452,924, a 113% increase over the $212,646 reported in the
prior-year period. As
a percent of sales, the gross margin in the current quarter
was 77% compared to 60% in the prior-year period. Without the
effect of the recall of a lot of Inulin, the gross margin for
the prior year period would have been 72%.
For the quarter, the Company sustained a loss of $1,493,515
(or $.13 per share), compared to a loss of $740,460 (or $.06
per share) for the prior-year quarter, as expenses increased
in all operating areas. Sales and marketing expense increased
by more than 235% principally due to the tripling of the field
sales force, the hiring of a product manager, executive search
fees relating to these hires and increased travel expense by
sales and marketing personnel.
General and administrative expense increased more than 76%
principally due to the launch of a substantial investor
relations program, the payment of 1996 and 1997 annual product
user fees to the Food and Drug Administration for Glofil and
Inulin, and increased payroll expense. Clinical testing and
regulatory expense increased more than 43% principally due to
increased enrollment at the various sites for the Phase II
trials of CPC111 and CPC-211. Depreciation and amortization
expense increased more than 95% principally due to the
amortization of the purchased technology related to the
acquisition of Ethamolin during the current quarter.
During the current quarter, research grant income decreased
65%, principally due to the prior-year quarter receiving
income from a Phase II SBIR grant that was completed in
September 1996. The research and development expense for the
quarter includes expenses incurred in connection with the
grant.
In addition, net interest income for the current quarter
declined more than 47% principally due to interest income
received in the prior-year quarter from fees and interest on a
loan that the Company made during that quarter which was
subsequently repaid, coupled with interest expense during the
current quarter accruing on the promissory note issued to
Schwarz Pharma as part of the acquisition of Ethamolin.
Six Months Ended January 31, 1997 Versus Six Months Ended
January 31, 1996
During the six months ended January 31, 1997, the Company
reported sales of $954,796, a 65% increase over the $578,718
reported in the prior-year period, principally due to the
acquisition of Ethamolin, and a gross profit on sales of
$714,934, an 86% increase over the $383,649 reported in the
prioryear period, principally because the gross profit in the
prioryear period was adversely affected by the recall of a lot
of Inulin. As a percent of sales, the gross margin in the
current period was 75% compared to 66% in the prior-year
period. Without the effect of the recall of the Inulin lot,
the gross margin for the prior-year period would have been
74%.
During the six months ended January 31, 1997, the Company
sustained a loss of $2,425,998 (or $.21 per share), compared
to a loss of $1,380,940 (or $.12 per share) for the prior-year
period, as expenses increased in all operating areas. Sales
and marketing expense increased more than 267% for the reasons
set forth in the three-month analysis above. General and
administrative expense increased 71% for the reasons set forth
in the three-month analysis above in addition to a onetime
payment of $100,000 to a financial advisor in September 1996.
Clinical testing and regulatory expense increased by more than
26% principally due to increased payments to clinical research
organizations managing two of the Company's Phase II clinical
trials and increased usage of consultants to perform clinical
monitoring, data base management and statistical analysis
functions. Depreciation and amortization expense increased
more than 61% for the reason set forth in the threemonth
analysis above.
During the current six-month period, research grant income
declined more than 52% for the reason set forth in the three
month analysis above. The research and development expense
for the current six-month period includes expenses incurred
in connection with the SBIR grants.
Liquidity and Capital Resources
The Company has principally funded its activities to date
through its initial public offering ("IPO") in November 1992,
which raised net proceeds of $5,951,000, subsequent
exercises of its Redeemable Class A Warrants in 1994 and
early 1995, which raised net proceeds of $10,497,000,
exercises by the underwriter of the IPO of its unit purchase
options (and the Redeemable Class A Warrants within such
options), which raised net proceeds of $1,681,000, that it
had received as part of its compensation for the IPO, and
three private placements of mandatorily convertible notes
during April and July 1996, which raised $7,464,000. At
January 31, 1997, the Company had cash, cash equivalents and
short-term investments of $11,834,937 compared to $15,997,049
at July 31, 1996. At January 31, 1997, working capital was
$10,205,944, compared to $15,384,449 at July 31, 1996.
The 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 more than two years dependent,
in part, on the timing of the commencement of each phase of
the clinical trials on CPC-111 and CPC-211 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 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 exercises of its currently
outstanding options and warrants, 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.
Part II.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on
January 28, 1997. The following matters received the votes
for, votes against, abstentions and broker non-votes set
forth across from
them at the meeting:
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Vote Votes Abstensions Broker
For Against Non-Votes Non
es
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(1) Election of Directors to hold office until
to hold office
until the 1998
Annual Meeting of
Shareholders
Paul J. Marangos 8,872,294 7,589 0 0
Robert F. 8,868,693 11,190 0 0
Allnutt
Digby W. Barrios 8,875,793 4,090 0 0
Virgil Thompson 8,875,693 4,190 0 0
Robert A. 8,865,797 14,086 0 0
Vukovich
(2) Ratification of
the selection of
Ernst &
Young LLP as the
Company's
independent
auditors for the
fiscal year
ending July 31,
1997 8,860,284 5,100 4,499 10,000
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Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits.
No exhibits are included in this report.
(b) Reports on Form 8-K.
A report on Form 8-K/A, pertaining to Item 7, "Financial
Statements and Exhibits" was filed by the Company on
January 16,1997.
</TABLE>
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
13th day of March, 1997.
CYPROS PHARMACEUTICAL CORPORATION
(Signature)
By Paul J. Marangos
Chairman of the Board,
President and Chief Executive Officer
(Signature)
By David W. Nassif
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 4,172,007
<SECURITIES> 7,662,930
<RECEIVABLES> 280,103
<ALLOWANCES> 0
<INVENTORY> 104,574
<CURRENT-ASSETS> 12,393,084
<PP&E> 1,027,358
<DEPRECIATION> (405,248)
<TOTAL-ASSETS> 18,781,340
<CURRENT-LIABILITIES> 2,187,140
<BONDS> 0
0
0
<COMMON> 21,872,515
<OTHER-SE> (5,607,951)
<TOTAL-LIABILITY-AND-EQUITY> 18,781,340
<SALES> 954,796
<TOTAL-REVENUES> 1,469,931
<CGS> 239,862
<TOTAL-COSTS> 239,862
<OTHER-EXPENSES> 3,605,135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,932
<INCOME-PRETAX> (2,425,998)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,425,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,425,998)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
