1477
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, 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 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, 1998, the Registrant had 15,711,877
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 -- October 31, 1998 3
(unaudited) and July 31, 1998
b. Statements of Operations -- Three 4
Months Ended October 31, 1998
(unaudited) and 1997
c. Statements of Cash Flows -- Three 5
Months Ended October 31, 1998
(unaudited) and 1997
d. Notes to Financial Statements 6
2. Management's Discussion and 8
Analysis of Financial 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 11
Signatures 12
</TABLE>
* No information provided due to inapplicability of
item.
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Balance Sheets
October 31 July 31,
1998 1998
Assets (Unaudited) (Note)
<S>Current assets: <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,943,463 $ 3,015,890
Short-term investments, held to
maturity 9,234,440 10,428,580
Accounts receivable 407,747 516,886
Inventories 100,662 83,078
Prepaid expenses and other current
assets 231,360 214,765
Total current assets 12,917,672 14,259,199
Property, equipment and leasehold
improvements, net 986,135 1,063,566
Purchased technology, net 3,939,141 4,163,487
Licenses and patents, net 166,353 176,927
Other assets 51,041 72,461
Total assets $18,060,342 $19,735,640
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 265,791 $ 551,191
Accrued compensation 188,957 125,434
Other accrued liabilities 13,702 15,641
Current portion of long-term debt 100,252 97,477
Current portion of capital lease
obligations 89,523 91,740
Total current liabilities 658,225 881,483
Long-term debt 58,356 59,408
Capital lease obligations 137,232 157,656
Deferred rent 117,597 125,761
Shareholders' equity:
Common stock, 30,000,000 shares
authorized, 15,711,877
shares issued and outstanding as
of October 31, 1998
(unaudited) and July 31, 1998,
respectively 41,436,469 41,328,470
Deferred compensation (78,226) (87,334)
Accumulated deficit (24,269,311) (22,729,804) 1) )
Total shareholders' equity 17,088,932 18,511,332
Total liabilities and
shareholders' equity $18,060,342 $19,735,640
</TABLE>
Note: The balance sheet at July 31, 1998 has been
derived from the audited financial statements at that
date but does not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical
Corporation
Statements of Operations
Three Months Ended
October 31,
1998 1997
<S> <C> <C>
Net sales $ 640,354 $ 771,417
Cost of sales 160,478 167,944
Gross profit 479,876 603,473
Operating expenses:
Sales and marketing 405,628 356,696
General and administrative 692,811 701,740
Clinical testing and
regulatory 679,374 456,902
Pre-clinical research and
development 150,136 252,973
Depreciation and amortization 311,297 300,431
Total operating expenses 2,239,246 2,068,742
Loss from operations (1,759,370) (1,465,269)
Research grant income 10,871 25,037
Interest and other income, net 188,290 180,703
Sublease income, net 20,702 53,889
Amortization of discount and
costs on mandatorily
convertible notes - (186,689)
Net loss $(1,539,507) $(1,392,329)
Net loss per share, basic and
diluted $ (0.10) $ (0.10)
Shares used in computing net
loss per share,
basic and diluted 15,711,877 14,024,710
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Cypros Pharmaceutical Corporation
Statements of Cash Flows
Three Months Ended
October 31,
1998 1997
<S>Operating activities <C> <C>
Operating activities
Net loss $(1,539,507) $(1,392,329)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Amortization of deferred
compensation 117,107 137,392
Depreciation and amortization 319,224 301,822
Amortization of discount and costs
mandatorily convertible notes - 186,689
Deferred rent expense (8,164) 26,599
Gain on sale of equipment (5,752) -
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable 109,139 (26,305)
Inventories (17,584) 7,941
Prepaid expenses and other
current assets (16,595) 49,216
Accounts payable (285,400) (42,394)
Other accrued liabilities 61,584 (65,058)
Net cash flows used in operating
activities (1,265,948) (816,427)
Investing activities
Purchases of short-term investments (1,356,215) (4,122,127)
Maturities of short-term investments 2,550,355 3,867,924
Installment payment for purchased
technology - (1,200,000)
Proceeds from the sale of equipment 11,000 -
Purchase of property, equipment and
leasehold improvements (7,419) (15,661)
Increase in licenses and patents (4,702) (36,110)
Decrease in deposits and other assets 21,420 14,893
Net cash flows provided by (used in)
investing activities 1,214,439 (1,491,081)
Financing activities
Issuance of long-term debt 2,675 -
Repayment of long-term debt (952) (26,328)
Repayments of capital
leases/obligations (22,641) (24,820)
Net cash flows used in financing
activities (20,918) (51,148)
Decrease in cash and cash equivalents (72,427) (2,358,656)
Cash and cash equivalents at
beginning of period 3,015,890 5,101,710
Cash and cash equivalents at end of
period $2,943,463 $2,743,054
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 7,493 $ 103,887
Noncash investing and financing
activities:
Mandatorily convertible notes
converted to common stock $ - $2,913,061
See accompanying notes.
</TABLE>
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 Dermaflo technology
within the next year and is developing two drugs, Cordox and
Ceresine. The Company's pre-clinical and clinical development
programs focus on cytoprotective drugs designed to reduce
ischemia (low blood flow) induced tissue damage in acute-care
settings. The Company has commenced a Phase III clinical trial of
Cordox in sickle cell anemia crisis patients.
Basis of Presentation
The unaudited financial statements for the three months
ended October 31, 1998 have been prepared on the same basis as
the Company's audited financial statements for the year ended
July 31, 1998 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, 1998 included in the Company's Annual Report on
Form 10-K.
The Company has experienced significant quarterly
fluctuations in operating results and increases in expenses and
losses since inception and it expects these fluctuations,
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
$21,888 and finished goods of $78,774.
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 under
contracts with hospitals and hospital buying groups. For the
three month period ending October 31, 1998, such discounts and
allowances totaled $30,906.
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
The Company complies with 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 after giving effect to all
potential dilutive common shares outstanding during the period
such as options, warrants, and convertible securities, and
contingently issuable shares. All potential dilutive common stock
equivalents have been excluded from the calculation of diluted
loss per share as their inclusion would have been antidilutive.
2. Recently-Issued Accounting Standards
Comprehensive Income
Effective August 1, 1998, the Company adopted Statement of
Financial Accounting Standard 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
did not have an impact on the Company's financial statements.
Segment Information
Effective August 1, 1998, the Company adopted 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 does not
affect the Company's financial statements.
Pensions and Other Post Retirement Benefits
Effective August 1, 1998, the Company adopted 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 or pay postretirement
benefits, and therefore, the adoption of SFAS 132 did not affect
the Company's financial statements.
Derivative Instruments and Hedging Activities
In June 1998,the Financial Accounting Standards Board
Issued Statement of Financial Accounting Standards No.133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. The Company has determined that the adoption
of SFAS 133, which is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, will have no impact on its
financial statements.
Reclassifications
Certain previously reported amounts have been reclassified
to conform with the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and disclosures made in the
accompanying notes to the financial statements. Actual results
could differ from those estimates.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Except for the historical information contained herein,
the following discussion contains forward-looking statements that
involve risks and uncertainties, including statements regarding
the period of time during which the Company's existing capital
resources and income from various sources will be adequate to
satisfy its capital requirements. The Company's actual results
could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include but are not
limited to, those discussed in this section, as well as in the
sections entitled "Business", "Licenses", "Manufacturing", "Sales
and Marketing", "Competition", "Government Regulation", "Patents
and Proprietary Rights" of the Company's Annual Report (Form 10-
K) for the fiscal year ended July 31, 1998 and those discussed in
the S-3 Registration Statement File No. 333-25661 filed with U.S.
Securities and Exchange Commission, as well as those discussed in
any documents incorporated by reference herein or therein.
The Company was founded in 1990, commenced its research and
development activities in 1991, completed an initial public
offering (the "IPO") in November 1992, commenced clinical trials
in December 1994, acquired two FDA-cleared products, Glofil and
Inulin, in August 1995, acquired a third FDA-cleared product,
Ethamolin, in November 1996, and acquired the Dermaflo technology
and two related FDA-cleared products in November 1997. The
Company has sustained an accumulated deficit of $24,269,311 from
inception through October 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
During the first quarter ended October 31, 1998, the Company
sustained a loss of $1,539,507 (or $.10 per share) compared to a
loss of $1,392,329 (or $.10 per share) for the prior-year
quarter. During the current quarter, the Company reported net
sales of $640,354, a 17.0% decrease over the $771,417 reported in
the prior-year period, principally due to the expected decline in
Glofil sales volume due to the termination of a customer's two
clinical trials which required Glofil to be used as part of their
protocols. Gross profit on sales amounted to $479,876, a 20.5%
decrease over the $603,473 reported in the prior-year period.
As a percent of sales, the gross margin in the current
quarter was 74.9% compared to 78.2% in the prior-year period.
This decrease was principally due to start-up costs incurred by
the Company in its joint venture with another company to
establish a new manufacturing facility for Glofil. Such costs
were expensed as incurred. The Company expects the new
manufacturing facility to lower the cost of sales for Glofil once
it is operational, which is expected to be later on in fiscal
year 1999.
Total operating expenses during the first quarter ended
October 31, 1998 amounted to $2,239,246, an 8.2% increase over
the $2,068,742 incurred during the prior-year quarter. Sales and
marketing expenses increased by 13.7% to $405,628 due to
increased recruitment and relocation, the commencement of a
clinical study of Glofil to prove the viability of a 45-minute
test, and increased salary and consulting expense offsetting a
decrease in commissions and promotional expense. Clinical testing
and regulatory expenditures amounted to $679,374, an increase of
48.7% over the $456,902 of expenditures incurred in the same
quarter during the previous fiscal year. This increase was
principally due to the costs related to starting up the Phase III
clinical trial of Cordox in sickle cell anemia crisis patients.
Pre-clinical research and development expense decreased by 40.7%
to $150,136, principally due to a decrease in staffing and rent
expense. Rent expense decreased in the current period due to the
reclassification of a portion of rent expense to other income and
expense.
All of the amortization of discount and costs on the
Company's mandatorily convertible notes was completed in the
previous year, and therefore, there was a 100% decline in the
expenses related to this amortization for the quarter ending
October 31, 1998.
Liquidity and Capital Resources
The Company has principally funded its activities to date
through various issuances of equity securities, which have
raised total net proceeds of $35 million, as well as product
sales.
At October 31, 1998, the Company had cash, cash equivalents
and short-term investments of $12,177,903 compared to $13,444,470
at July 31, 1998. At October 31, 1998, working capital was
$12,259,447, compared to $13,377,716 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 expects that its cash needs will increase
significantly in future periods due to expansion of research and
development programs, increased clinical testing activity, growth
of administrative, clinical and laboratory staff and expansion of
facilities to accommodate increased numbers of employees. The
Company's management believes that the Company's working capital
will be sufficient to fund the operations of the Company for
approximately two years dependent, in part, on the timing of the
commencement of each phase of the clinical trials on Cordox and
Ceresine and the funding priorities that it gives its various
research programs, the results of clinical tests and research
programs; competing technological and market developments; the
time and costs involved in obtaining regulatory approvals and in
obtaining, maintaining and enforcing patents; the cost of product
acquisitions; the 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 public or private equity
financings, collaborations, Small Business Innovation Research
grants or from other sources. There can be no assurance that
additional funds can be obtained on desirable terms or at all.
The Company may seek to raise additional capital whenever
conditions in the financial markets are favorable, even if the
Company does not have an immediate need for additional cash at
that time.
Impact of the Year 2000 Issue
The Year 2000 problem is the result of computer applications
being written using two digits rather than four digits to define
the applicable year. Any of the Company's computer applications
(and computer applications used by any of the Company's
customers, collaborators and manufacturers) that have time-
sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruption of operations.
The Company has modified or replaced portions of its
software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter. The costs
associated with such modifications were not materially
significant. The Company believes that, with these modifications
to existing software and conversions to new software, the Year
2000 problem will not pose significant operational problems for
its computer systems. However, because of the many uncertainties
associated with Year 2000 compliance issues, and because the
Company's assessment is necessarily based on information from
third-party customers, collaborators and manufacturers, there can
be no assurance that the Company's assessment is correct or as to
the materiality or effect of any failure of such assessment to be
correct.
The Company has initiated a program to determine whether the
computer applications of its significant customers, collaborators
and manufacturers will be upgraded in a timely manner. The
Company has not completed its review and it is unknown whether
the computer applications of its customers, collaborators and
manufacturers will be Year 2000 compliant. The Company has not
determined the extent to which any disruption in the computer
applications of third parties caused by the Year 2000 issues will
affect the Company's operations, and has no contingency plans in
the event of any such disruption. However, any disruptions in
payments by customers or in the manufacture of the Company's
products could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Part II.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibit is required to be filed by
Item 601 of Regulation S-K.
Exhibit Number Description
10.1 Amendment No. 4 to Employment
Agreement, dated December 7,1998 between the Registrant
and Paul J. Marangos, Ph.D.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Carlsbad, County of San
Diego, State of California, on the 13th day of December, 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)
EXHIBIT 10.1
AMENDMENT NO. 4 TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 4 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(the "Agreement") is made and entered into effective as of
December 7, 1998 (this "Amendment") by and between Cypros
Pharmaceutical Corporation, a California corporation (the
"Company") and Paul J. Marangos ("Executive"). The Company and
Executive are hereinafter collectively referred to as the
"Parties," and individually referred to as "Party."
For good and valuable consideration, receipt of which is hereby
acknowledged by the Company and Executive, the Parties, intending
to be legally bound, agree that Section 3 and Section 4 of the
Agreement is hereby amended and restated in its entirety as
follows:
"3. Term of Employment.
3.1. Subject to earlier termination as provided in this
Agreement, Executive shall be employed pursuant to the terms of
this Agreement for a term beginning September 1, 1992 and
expiring at midnight on August 31, 2001. After the expiration of
such term, this Agreement shall continue from month to month in
the absence of written notice to the contrary from either Party
to the other."
"4. Compensation of Executive.
4.1. During the term of this Agreement, the Company shall pay
Executive a salary (the "Base Salary") of Two Hundred Forty One
Thousand Five Hundred Dollars ($241,500) per year, payable in
regular periodic payments in accordance with Company policy. Such
salary shall be prorated for any partial year of employment on
the basis of a 365-day year."
IN WITNESS WHEREOF, the Parties have executed this Amendment No.
4 as of the date first above written.
The Company:
Cypros Pharmaceutical Corporation,
a California corporation
By: /s/ David W. Nassif
- ----------------------------------
David W. Nassif
Senior Vice President and Chief Financial Officer
Executive:
/s/ Paul J. Marangos
- ----------------------------------
Paul J. Marangos
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the Period Ended October 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 2,943,643
<SECURITIES> 9,234,440
<RECEIVABLES> 407,747
<ALLOWANCES> 0
<INVENTORY> 100,662
<CURRENT-ASSETS> 231,360
<PP&E> 1,878,049
<DEPRECIATION> (891,914)
<TOTAL-ASSETS> 18,060,342
<CURRENT-LIABILITIES> 658,225
<BONDS> 195,588
0
0
<COMMON> 41,436,469
<OTHER-SE> (24,347,537)
<TOTAL-LIABILITY-AND-EQUITY> 18,060,342
<SALES> 640,354
<TOTAL-REVENUES> 640,354
<CGS> 160,478
<TOTAL-COSTS> 2,239,246
<OTHER-EXPENSES> 33,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,168
<INCOME-PRETAX> (1,539,507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,539,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,539,507)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
