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, 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 (Zip Code)
Carlsbad, California 92008
(Address of principal executive offices)
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 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 June 8, 1998, the Registrant had 15,696,570 shares of
Common Stock, no par value, outstanding.
<TABLE>
<CONTENTS>
TABLE OF CONTENTS
Item Part I.
Page
<S> <C>
<C>
1. Financial Statements:
a. Balance Sheets -- April 30, 1998 and July 31, 3
1997
b. Statements of Operations -- Three and Nine Months 4
Ended April 30, 1998 and 1997
c. Statements of Cash Flows -- Nine Months Ended 5
April 30, 1998 and 1997
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 *
5. Other Information *
6. Exhibits and Reports on Form 8-K *
Signatures 12
</TABLE>
* No information provided due to inapplicability of item.
<TABLE>
<CONTENTS>
PART I.
Item 1. Financial Statements
Cypros Pharmaceutical
Corporation
Balance Sheets
April 30, July 31,
1998 1997
(Unaudited) (Note)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,698,556 $5,101,710
Short-term investments, held
to maturity 10,767,962 9,465,561
Accounts receivable 378,473 355,425
Inventories 109,274 93,177
Prepaid expenses and other
current assets 143,289 75,038
Total current assets 15,097,554 15,090,911
Property, equipment and
leasehold improvements, net 953,542 675,686
Purchased technology, net 4,387,834 5,060,875
Deferred financing costs, net 3,120 259,127
Licenses and patents, net 187,056 162,592
Other assets 313,700 95,525
Total assets $20,942,806 $21,344,716
Liabilities and shareholders'
equity
Current liabilities:
Accounts payable 299,646 $365,386
Accrued compensation 166,640 121,605
Other accrued liabilities 29,643 118,658
Purchased asset obligations - 1,272,000
Current portion of long-term debt 48,505 41,367
Current portion of capital
lease obligations 89,318 106,206
Current portion of lease
obligations,net 19,722 -
Current portion of sublease
obligation, net 1,917 13,142
Total current liabilities 655,391 2,038,364
Long-term debt 106,633 -
Capital lease obligations 84,050 148,787
Sublease obligation 31,885 59,407
Deferred rent 80,402 44,789
Mandatorily convertible notes 48,300 4,027,461
Shareholders' equity:
Common stock, 30,000,000
shares authorized, 15,696,570
and 13,650,405 shares issued
and outstanding as of April 30,
1998 and July 31,1997
respectively 41,218,293 32,344,793
Deferred compensation (96,717) (161,950)
Accumulated deficit (21,185,431)(17,156,935)
Total shareholders' equity 19,936,145 15,025,908
Total liabilities and
shareholders' equity $20,942,806 $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.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $824,399 $717,658 $2,511,860 $1,672,454
Cost of sales 202,751 148,154 578,469 388,016
Gross profit 621,648 569,504 1,933,391 1,284,438
Operatingexpenses:
Sales and
marketing 331,022 287,212 1,008,779 706,850
General and
administrative 736,978 599,111 2,229,854 1,920,045
Clinical testing
and regulatory 761,449 441,767 1,770,827 1,342,200
Research and
development 216,977 234,578 667,609 720,668
Depreciation and
amortization 293,568 293,989 904,706 772,029
Total operating
expenses 2,339,994 1,856,657 6,581,775 5,461,792
Loss from
operations (1,718,346)(1,287,153) (4,648,384)(4,177,354)
Research grant
income 46,193 - 118,701 79,490
Interest and other
income, net 234,867 138,486 757,194 523,199
Amortization of
discount and costs
on mandatorily
convertible notes (30,317) (322,347) (256,007) (1,673,046)
Net loss $(1,467,603)$(1,471,014) $(4,028,496)$(5,247,711)
Netloss per
share:
Basic and diluted $ (0.09) $ (0.12) $ (0.27) $ (0.44)
Weighted average
shares
outstanding:
Basic and
diluted 15,644,114 12,431,095 15,020,087 11,880,209
</TABLE>
See accompanying notes.
<TABLE>
<CONTENTS>
Cypros Pharmaceutical Corporation
Statements of Cash Flows
(Unaudited)
Nine Months Ended April 30,
1998 1997
<S> <C> <C>
Operating activities
Net loss $(4,028,496) (5,247,711)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of deferred
compensation 251,996 283,519
Depreciation and amortization 912,026 772,029
Amortization of discount and costs
on mandatorily convertible notes 256,007 1,673,046
Deferred rent 55,335 9,996
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable (23,048) (276,205)
Inventories (16,097) 37,729
Prepaid expenses and other
current assets (68,251) (62,844)
Accounts payable (65,740) 170,626
Accrued liabilities (115,980) 116,679
Net cash flows used in operating
activities (2,842,248) (2,523,136)
Investing activities
Payment for business acquisition - (2,286,642)
Short-term investments (1,302,401) (4,830,596)
Installment payment for purchased
technology (1,200,000) -
Purchase of property, equipment and
leasehold improvements (494,496) (152,298)
Increase in licenses and patents (46,809) (71,533)
Increase in deposits and other assets (218,175) (7,940)
Net cash flows used in investing
activities (3,261,881) (7,349,009)
Financing activities
Decrease in sublease obligation, net (38,747) -
Proceeds from exercise of B Warrants 4,707,576 -
Issuance of long-term debt 115,267 -
Repayments of long-term debt (1,496) (74,461)
Issuance of Common Stock, net - 4,721,069
Repayments of capital lease
obligations (81,625) (67,811)
Net cash flows provided by financing
activities 4,700,975 4,578,797
Decrease in cash and cash equivalents (1,403,154) (5,293,348)
Cash and cash equivalents at
beginning of period 5,101,710 8,306,752
Cash and cash equivalents at end of
period $3,698,556 $3,013,404
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 124,005 $ 40,362
Noncash investing and financing
activities:
Equipment financed under capital
leases $ - $ 79,992
Issuance of purchased asset
obligation in business acquisition $ _ $1,200,000
Notes converted to common stock $3,979,161 $3,326,938
</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, expects to launch
two burn and wound care products using the Company's DIMAC
technology within the next year and is developing two drugs,
Cordox (formerly CPC111) 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 in 1998.
Basis of Presentation
The unaudited financial statements for the three and nine
months ended April 30, 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
$2,435 and finished goods of $106,839.
Revenue Recognition
Revenues from product sales of whole vials of Glofil and
Inulin are recognized upon shipment. Revenues from Glofil
unit dose 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. For the nine-month
period ending April 30, 1998, such discounts and allowances
totaled $84,873.
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 the fiscal year ended July 31,
1998, the Company adopted the provisions of Financial
Accounting Standards Board Statement No.128, "Earnings
Per Share" ("Statement 128"). Statement 128 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.
RECENTLY-ISSUED ACCOUNTING STANDARDS
Comprehensive Income
Effective August 1, 1998, the Company will adopt Statement
of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 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 130 will not have an impact on the Company's financial
statements.
Segment Information
Effective August 1, 1998, the Company will adopt Statement
of Financial Accounting Standard No.131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 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 131 will not affect the Company's financial
statements.
Pensions and Other Post Retirement Benefits
Effective August 1,1998, the Company will adopt Statement
of Financial Accounting Standard No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). SFAS 132 revises current disclosures for
employers' disclosures for pensions and other post retirement
benefit plans. The Company does not currently have a
pension plan, and therefore, the adoption of SFAS 132
did 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
10K) 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, acquired a
third FDA-cleared product, Ethamolin, in November 1996, and
acquired the DIMAC technology and two related FDA-cleared
products in November 1997. The Company has sustained an
accumulated deficit of $21,185,431 from inception through
April 30, 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 April 30, 1998 Versus Three Months Ended
April 30, 1997
During the quarter ended April 30, 1998, the Company
reported sales of $824,399, a 14.9% increase over the $717,658
reported in the prior-year period, principally due to
continued strong Ethamolin sales, and a gross profit on sales
of $621,648, a 9.2% increase over the $569,504 reported in
the prior-year period. During the quarter, the Company's
largest Glofil customer informed the Company that it will
soon terminate two clinical trials which require Glofil to
be used as part of their protocols. The Company expects the
loss of sales to this customer to slow the rate of overall sales
growth for the next six to nine months.
As a percent of sales, the gross margin in the current
quarter was 75.4% compared to 79.4% in the prior-year period,
as the high gross profit margin on Ethamolin was offset by costs
incurred by the Company in entering into a joint venture with another
company to manufacture Glofil. The Company expects the new
manufacturing facility (a) to lower the Glofil cost of sales
and (b) to ship product by the middle of fiscal year 1999.
Total operating expenses increased 26.0% during the quarter
to $2,339,994 from $1,856,657 during the prior-year quarter.
Sales and marketing expense increased by more than 15.3%
principally due to increased promotional costs for Glofil.
General and administrative expense increased 23.0%
principally due to the salary expense of the DIMAC project
manager, the reimbursement of legal fees in connection with
the acquisition of the DIMAC technology, and consulting,
travel and other expenses related to the DIMAC manufacturing
scale-up.
During the current quarter, grant income increased 100%, as
the Company received a new grant which it did not have
in the previous year's quarter.
Net interest and other income for the current quarter
increased more than 69.6% to $234,867 from $138,486 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 90.6% to $30,317 in
the current quarter from $322,347 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 $3,120 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
$1,467,603 (or $.09 per share), compared to a loss of
$1,471,014 (or $.12 per share) for the prior-year quarter.
During the current quarter, $466,100 in principal amount of
the Notes was exercised into 157,618 shares of Common Stock
and $48,300 in principal amount remained outstanding as of
April 30,1998.
Nine Months Ended April 30, 1998 Versus Nine Months Ended
April 30, 1997
During the nine months ended April 30, 1998, the Company
reported sales of $2,511,860, a 50.2% increase over the
$1,672,454 reported in the prior-year period, principally
due to the acquisition of Ethamolin, and a gross profit
on sales of $1,933,391, a 50.5% increase over the $1,284,438
reported in the prior-year period. As a percent of sales, the
gross margin in the current period was 77.0% compared to
76.8% in the prior-year period.
Total operating expenses increased 20.5% during the
current period to $6,581,775 from $5,461,792 during the
prior-year period. Sales and marketing expense accounted for
27.0% of the increase in total operating expenses, as it
increased 42.7% to $1,008,779 from $706,850 principally due to
increased salary expense and increased promotional costs for Glofil.
General and administrative expense accounted for 27.7% of
the increase in total operating expenses,increasing 16.1%
to $2,229,854 from $1,920,045 principally due to
increased investor relations programs. Clinical testing and
regulatory expense increased by more than 31.9% to $1,770,827
from $1,342,200 principally due to increased salary expense
and certain toxicology studies on the clinicalprograms.
Depreciation and amortization expense increased more than 17.2%
to $904,706 from $772,029, principally due to increased
amortization of purchased technology related to the acquisition
of Ethamolin. The current period expense reflects nine months of such
amortization, while the prior period only reflects six
months of such expense, since the acquisition occurred in
November 1996.
In addition, net interest and other income for the current
period increased 44.7% to $757,194 from $523,199 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 84.7% to $256,007
in the current period from $1,673,046 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 nine months of
$4,028,496 (or $.27 per share), compared to a loss of
$5,247,711 (or $.44 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 April 30, 1998, the Company had cash, cash equivalents
and short-term investments of $14,466,518 compared to
$14,567,271, at July 31,1997. At April 30, 1998,
working capital was $14,442,163, 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 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 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 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.
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 8th
day of June, 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
[LEGEND]
This schedule contains summary financial information extracted from the
Form 10Q for the Period Ended April 30, 1998 and is qualified to its
entirety by reference to such financial statements
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] JUL-31-1998
[PERIOD-END] APR-30-1998
[CASH] 3,698,556
[SECURITIES] 10,767,962
[RECEIVABLES] 378,473
[ALLOWANCES] 0
[INVENTORY] 109,274
[CURRENT-ASSETS] 143,289
[PP&E] 8,317,394
[DEPRECIATION] (2,788,962)
[TOTAL-ASSETS] 20,942,806
[CURRENT-LIABILITIES] 655,391
[BONDS] 270,868
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 41,218,293
[OTHER-SE] (21,185,431)
[TOTAL-LIABILITY-AND-EQUITY] 20,942,806
[SALES] 2,511,860
[TOTAL-REVENUES] 3,456,418
[CGS] 578,469
[TOTAL-COSTS] 7,160,244
[OTHER-EXPENSES] 267,315
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 57,355
[INCOME-PRETAX] (4,028,496)
[INCOME-TAX] 0
[INCOME-CONTINUING] (4,028,496)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (4,028,496)
[EPS-PRIMARY] (0.27)
[EPS-DILUTED] (0.27)
</TABLE>
