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, 1998
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 March 9, 1998, the Registrant had 15,660,655 shares of
Common Stock, no par value, outstanding.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Page
Part I.
<S> <C> <C>
1. Financial Statements:
a. Balance Sheets -- January 31, 1998 and 3
July 31, 1997
b. Statements of Operations -- Three and Six 4
Months Ended January 31, 1998 and 1997
c. Statements of Cash Flows -- Six Months 5
Ended January 31, 1998 and 1997
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 11
Holders
5. Other Information *
6. Exhibits and Reports on Form 8-K 11
12
Signatures
</TABLE>
* No information provided due to inapplicability of item.
<TABLE>
<CAPTION>
PART I.
Item 1. Financial Statements
Cypros Pharmaceutical
Corporation
Balance Sheets
January July 31,
31, 1997
1998
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash
equivalents $5,526,986 $5,101,710
Short-term investments,
held to maturity 10,018,440 9,465,561
Accounts receivable 429,228 355,425
Inventories 128,168 93,177
Prepaid expenses and
other current assets 113,394 75,038
Total current assets 16,216,216 15,090,911
Property, equipment and
leasehold improvements,
net 1,001,369 675,686
Purchased technology, net 4,612,181 5,060,875
Deferred financing costs,
net 33,437 259,127
Licenses and patents, net 189,038 162,592
Other assets 316,636 95,525
Total assets $22,368,877 $ 21,344,716
Liabilities and
shareholders' equity
Current liabilities:
Accounts payable $ 341,746 $ 365,386
Accrued compensation 127,544 121,605
Other accrued
liabilities 29,439 118,658
Purchased asset
obligations - 1,272,000
Current portion of long-
term debt 45,735 41,367
Current portion of
capital lease obligations 98,712 106,206
Current portion of
sublease obligations,net 11,326 13,142
Total current liabilities 654,502 2,038,364
Long-term debt 107,633 -
Capital lease obligations 102,755 148,787
Sublease obligation 49,963 59,407
Deferred rent 78,910 44,789
Mandatorily convertible
notes 514,400 4,027,461
Shareholders' equity:
Common stock,
30,000,000 shares
authorized, 15,538,952
and 13,650,405 shares
issued and
outstanding as of
January 31, 1998 and
July 31,1997,
respectively 40,689,312 32,344,793
Deferred compensation (110,770) (161,950)
Accumulated deficit (19,717,828) (17,156,935)
Total shareholders'
equity 20,860,714 15,025,908
Total liabilities
and shareholders'
equity $22,368,877 $21,344,716
</TABLE>
Note: The balance sheet at July 31, 1997 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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<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Operations
(Unaudited)
Three Months Six Months
Ended Ended
January 31 January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 916,045 $ 587,665 $1,687,461 $954,796
Cost of sales 207,698 134,741 375,642 239,862
Gross profit 708,347 452,924 1,311,819 714,934
Operating expenses:
Sales and marketing 321,137 257,182 677,833 419.638
General and
administrative 791,136 699,423 1,492,876 1,320,934
Clinical testing and
regulatory 552,476 561,299 1,009,378 900,433
Research and
development 197,659 270,688 450,632 486,090
Depreciation and
amortization 310,707 290,154 611,138 478,040
Total operating
expenses 2,173,115 2,078,746 4,241,857 3,605,135
Loss from
operations (1,464,768)(1,625,822) (2,930,038)(2,890,201)
Research grant income 47,471 32,090 72,508 79,490
Interest and other
income, net 287,736 100,217 522,327 384,713
Amortization of
discount and costs
on mandatorily
convertible notes (39,001) (674,184) (225,690)(1,350,699)
Net loss $(1,168,562)(2,167,699) $(2,560,893)(3,776,697)
Net loss per share:
Basic and Diluted $ (0.08) $ (0.19) $ (0.17) $ (0.33)
Weighted average
shares outstanding:
Basic and Diluted 15,412,010 11,613,748 14,718,360 11,613,748
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Cash Flows
(Unaudited)
Six Months Ended
January 31,
1998 1997
<S> <C> <C>
Operating activities
Net loss $(2,560,893) $(3,776,697)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred compensation 175,062 174,854
Depreciation and amortization 613,919 478,040
Amortization of discount
and costs on
mandatorily
convertible notes 225,690 1,350,699
Deferred rent 34,121 7,758
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable (73,803) (130,477)
Inventories (34,991) 31,406
Prepaid expenses and other current (38,356) (112,061)
Accounts payable (23,640) 197,969
Accrued liabilities (155,280) 100,671
Net cash flows used in operating
activities (1,838,171) (1,677,838)
Investing activities
Payment for business acquisition - (2,286,642)
Short-term investments (552,879) 27,367
Installment payment for purchased
technology (1,200,000) -
Purchase of property, equipment and
leasehold improvements (470,545) (59,269)
(Decrease)/increase in licenses and
patents (46,809) 2,266
Increase in other assets (221,111) (40,209)
Net cash flows used in investing
activities (2,491,344) (2,356,487)
Financing activities
Decrease in sublease obligation, net (11,260) (7,642)
Proceeds from exercise of B Warrants 4,707,576 -
Issuance of long-term debt 112,001 (49,641)
Repayments of capital lease obligations (53,526) (43,137)
Net cash flows provided by (used in) by
financing activities 4,754,791 (100,420)
Increase/decrease in cash and cash
equivalents 425,276 (4,134,745)
Cash and cash equivalents at beginning
of period 5,101,710 8,306,752
Cash and cash equivalents at end of
period $ 5,526,986 $ 4,172,007
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 113,569 $ 26,932
Noncash investing and financing
activities:
Equipment financed under capital leases $ - $ 79,992
Issuance of purchased asset obligation
in business acquisitions $ - $ 1,200,000
Notes converted to common stock $ 3,513,061 $ -
</TABLE>
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. The Company is currently marketing three
products, Ethamolin, Glofil and Inulin, and developing two
drugs, CPC-111 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 expects to be in
late-phase clinical trials with CPC-111 and Ceresine in
1998.
Basis of Presentation
The unaudited financial statements for the three and six
months ended January 31, 1998 and 1997 have been prepared on
the same basis as the Company's audited financial statements
for the year ended July 31, 1997 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, 1997 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
$3,856 and finished goods of $124,312.
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 when products are 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, 1998, such discounts and allowances totaled $55,921.
The Company's policy is not to accept returns of product
sold. Certain contracts with wholesale drug distributors
provide for product returns if the product is within a
certain number of months of expiration. To date, the Company
has experienced few returns.
Net Loss Per Share Data
In the second quarter of fiscal years ended January 31, 1998
and 1997, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 128, "Earnings Per
Share". This statement redefines the standards for computing
and presenting earnings per share, previously promulgated by
Accounting Principles Board Opinion No. 15, "Earnings Per
Share". Under Statement 128, basic 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 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 also 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 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, 1997 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, and acquired a third FDA-
cleared product, Ethamolin, in November 1996.. The Company
has sustained an accumulated deficit of $19,717,828 from
inception through January 31, 1998. 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 January 31, 1998 Versus Three Months
Ended January 31, 1997
During the quarter ended January 31, 1998, the Company
reported sales of $916,045, a 55.9% increase over the
$587,665 reported in the prior-year period, principally due
to the acquisition of Ethamolin, and a gross profit on sales
of $708,347, a 56.4% increase over the $452,924 reported in
the prior-year period. As a percent of sales, the gross
margin in the current quarter was 77.3% compared to 77.1% in
the prior-year period.
Total operating expenses increased only 4.5% during the
quarter to $2,173,115 from $2,078,746 during the prior-year
quarter. Sales and marketing expense increased by more than
24.9% principally due to the expansion of the field sales
force, sales-related commissions and advertising costs.
General and administrative expense increased 13.1%
principally due to the acquisition of the Dimac drug
delivery technology during November, the hiring of a project
manager to establish and scale-up the manufacturing for the
Dimac products and consulting and other expenses related to
the manufacturing scale-up.
During the current quarter, research grant income increased
47.9%, due to increased income from a Phase I Small Business
Innovation Research Grant during the current quarter.
In addition, net interest and other income for the current
quarter increased more than 187.1% to $287,736 from $100,217
during the prior-year quarter, principally because the
Company had a larger investment portfolio during the current
quarter (as a result of the March 1997 common stock private
placement and the November 1997 exercises of the Company's
Redeemable Class B Warrants) which yielded more interest
income.
Amortization of discount and costs on mandatorily
convertible notes (the "Notes") decreased 94.2% to $39,001
in the current quarter from $674,184 in the prior-year
quarter principally as a result of the fact that the
amortization of discounts on the Notes was allocated over
the lock-up periods for the Noteholders which began on the
date of closing of the transactions in April and July 1996
and ended on the first possible conversion dates which
ranged from January 1997 to July 1997. Thus, all of the
amortization of the discount was recognized by the end of
fiscal 1997, and the current quarter's amortization relates
completely to deferred financing costs.
The financing costs of the Notes are amortized as Notes are
converted in proportion to the percentage of outstanding
Notes converted, but no less than on a straight-line basis
over the three-year maturity of the Notes. At the end of the
current quarter only $33,437 of these costs remained to be
amortized. The decline in this amortization expense is the
principal reason for the decreased net loss for the quarter
of $1,168,562 (or $.08 per share), compared to a loss of
$2,167,699 (or $.19 per share) for the prior-year quarter.
During the current quarter, $600,000 in principal amount of
the Notes was exercised into 161,805 shares of Common Stock
and $514,400 in principal amount remained outstanding as of
January 31, 1998.
Six Months Ended January 31, 1998 Versus Six Months Ended
January 31, 1997
During the six months ended January 31, 1998, the Company
reported sales of $1,687,461, a 76.7% increase over the
$954,796 reported in the prior-year period, principally due
to the acquisition of Ethamolin, and a gross profit on
sales of $1,311,819, an 83.5% increase over the $714,934
reported in the prior-year period. As a percent of sales,
the gross margin in the current period was 77.7% compared to
74.9% in the prior-year period.
During the six months ended January 31, 1998, the Company
sustained a loss of $2,560,893 (or $.17 per share), compared
to a loss of $3,776,697 (or $.33 per share) for the prior-
year period, as operating expenses increased overall. Total
operating expenses increased 17.7% during the current period
to $4,241,857 from $3,605,135 during the prior-year period.
Sales and marketing expense accounted for 40.6% of the
increase in total operating expenses, as it increased 61.5%
to $677,833 from $419,638 for the reasons set forth in the
three-month analysis above. General and administrative
expense accounted for 27.0% of the increase in total
operating expenses, as it increased 13.0% to $1,492,876 from
$1,320,934 for the reasons set forth in the three-month
analysis above. Clinical testing and regulatory expense
increased by more than 12.1% to $1,009,378 form $900,433,
principally due to increased payroll and related benefits.
Depreciation and amortization expense increased more than
27.8% to $611,138 from $478,040, principally due to
increased amortization of purchased technology related to
the acquisition of Ethamolin. The current period expense
reflects six months of such amortization, while the prior
period only reflects three months of such expense, since the
acquisition occurred halfway through that period in November
1996.
In addition, net interest and other income for the current
period increased more than 35.8% to $522,327 from $384,713
during the prior-year period for the reasons set forth in
the three-month analysis.
Amortization of discount and costs on mandatorily
convertible notes (the "Notes") decreased 83.3% to $225,690
in the current period from $1,350,699 in the prior-year
period for the same reason discussed above in the three-
month analysis. The decline in this expense is the principal
reason for the decreased net loss for the quarter of
$2,560,893 (or $.17 per share), compared to a loss of
$3,776,697 (or $.33 per share) for the prior-year period.
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 $30.3 million, as well as
product sales.
At January 31, 1998, the Company had cash, cash equivalents
and short-term investments of $15,544,426 compared to
$14,567,271, at July 31, 1997. At January 31, 1998, working
capital was $15,561,714, compared to $13,052,547 at July
31, 1997. The increase in both balance sheet items was
principally due to the receipt of the proceeds from the
exercise of the Redeemable Class B Warrants.
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 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 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
February 10, 1998. 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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<CAPTION>
Votes Votes Broker
For Against Abstentio Non-
Votes
<S> <C> <C> <C> <C>
(1) Election of Directors
to hold office until 1999
Annual Meeting of
Shareholders
Paul Marangos 12,859,502 181,594 0 0
Robert F. Allnutt 12,867,902 173,194 0 0
Digby Barrios 12,849,302 191,794 0 0
Virgil Thompson 12,856,902 183,194 0 0
Robert A. Vukovich 12,838,802 201,244 0 0
(2) Amendment of the
Company's 1992 Stock
Option Plan (the "Plan")
to increase the aggregate
number of shares of the
Company's Common Stock
authorized for issuance
under the Plan from
2,266,288 to 2,766,288 12,368,263 494,602 65,791 112,440
(3) Ratification of the
selection of Ernst &
Young LLP as the
Company's independent
auditors for the fiscal
year ending July 31, 1999 12,842,612 168,859 29,625 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
No exhibits are included in this report.
(b) Reports on Form 8-K.
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
6th day of March, 1998.
CYPROS PHARMACEUTICAL CORPORATION
By /s/ Paul J. Marangos
- ------------------------
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)
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUL-31-1998
[PERIOD-END] JAN-31-1998
[CASH] 5,526,986
[SECURITIES] 10,018,440
[RECEIVABLES] 429,228
[ALLOWANCES] 0
[INVENTORY] 128,168
[CURRENT-ASSETS] 113,394
[PP&E] 8,331,682
[DEPRECIATION] (2,529,094)
[TOTAL-ASSETS] 22,368,877
[CURRENT-LIABILITIES] 654,502
[BONDS] 853,661
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 40,689,312
[OTHER-SE] (19,717,828)
[TOTAL-LIABILITY-AND-EQUITY] 22,368,877
[SALES] 1,311,819
[TOTAL-REVENUES] 1,311,819
[CGS] 4,241,857
[TOTAL-COSTS] 4,241,857
[OTHER-EXPENSES] (413,389)
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 44,244
[INCOME-PRETAX] (2,560,893)
[INCOME-TAX] 0
[INCOME-CONTINUING] (2,560,893)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (2,560,893)
[EPS-PRIMARY] (0.17)
[EPS-DILUTED] (0.17)
</TABLE>
