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,
1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to _________
Commission file number 0-20772
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 15, 1999, the Registrant had 15,711,877 shares of
Common Stock, no par value, outstanding.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Page
<S> <C> <C>
Part I.
1. Financial Statements:
a. Balance Sheets - January 31, 1999
(unaudited) And July 31, 1998 3
b. Statements of Operations - Three
and Six Months Ended January 31,
1999 And 1998 (unaudited) 4
c. Statements of Cash Flows - Six
Months Ended January 31, 1999 and
1998 (unaudited) 5
d. Notes to Financial Statements
(unaudited) 6
2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II.
1. Legal Proceedings *
2. Changes in Securities *
3. Defaults Upon Senior Securities *
4. Submission of Matters to a Vote of
Securities Holders 12
5. Other Information *
6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
* No information provided due to inapplicability of item.
<TABLE>
<CAPTION>
PART I.
Item 1. Financial Statements
Cypros Pharmaceutical Corporation
Balance Sheets
January 31 July 31,
1999 1998
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,937,680 $ 3,015,890
Short-term investments, held to
maturity 7,591,806 10,428,580
Accounts receivable 429,893 516,886
Inventories 171,130 83,078
Prepaid expenses and other
current assets 179,552 214,765
Total current assets 11,310,061 14,259,199
Property, equipment and leasehold
improvements, net 1,094,240 1,063,566
Purchased technology, net 3,714,794 4,163,487
Licenses and patents, net 171,195 176,927
Other assets 272,456 72,461
Total assets $16,562,746 $19,735,640
Liabilities and shareholders'
equity
Current liabilities:
Accounts payable $ 286,853 $ 551,191
Accrued compensation 151,330 125,434
Other accrued liabilities 19,221 15,641
Current portion of long-term
debt 100,754 97,477
Current portion of capital
lease obligations 112,681 91,740
Total current liabilities 670,839 881,483
Long-term debt 8,778 59,408
Capital lease obligations 190,258 157,656
Deferred rent 125,364 125,761
Shareholders' equity:
Common stock, 30,000,000 shares
authorized, 15,711,877
shares issued and outstanding
at January 31, 1999 (unaudited)
and July 31, 1998 41,458,734 41,328,470
Deferred compensation (69,367) (87,334)
Accumulated deficit (25,821,860)(22,729,804)
Total shareholders' equity 15,567,507 18,511,332
Total liabilities and
shareholders' equity $16,562,746 $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
(Unaudited)
Three Months Ended Six Months Ended
January 31 January 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 606,701 $ 916,045 $ 1,247,055 $ 1,687,461
Cost of sales 194,276 207,698 354,754 375,642
Gross profit 412,425 708,347 892,301 1,311,819
Operating expenses:
Sales and marketing 406,840 321,137 812,468 677,833
General and
administrative 736,034 791,136 1,428,845 1,492,876
Clinical testing
and
regulatory 556,567 552,476 1,235,941 1,009,378
Pre-clinical
research
and development 148,447 197,659 298,583 450,632
Depreciation and
amortization 299,944 310,707 611,241 611,138
Total operating
expenses 2,147,832 2,173,115 4,387,078 4,241,857
Loss from
operations (1,735,407) (1,464,768) (3,494,777) (2,930,038)
Research grant income - 47,471 10,871 72,508
Interest and other
income, net 162,155 287,736 350,445 522,327
Sublease income, net 20,703 - 41,405 -
Amortization of
discount and costs on
mandatorily
convertible notes - (39,001) - (225,690)
Net loss $(1,552,549) $(1,168,562) $(3,092,056) $(2,560,893)
Net loss per share,
basic and diluted $ (0.10) $ (0.08) $ (0.20) $ (0.17)
Shares used in
computing net loss
per share,
basic and diluted 15,711,877 15,412,010 15,711,877 14,718,360
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cypros Pharmaceutical
Corporation
Statements of Cash Flows
(Unaudited)
Six Months Ended
January 31,
1999 1998
<S> <C> <C>
Operating activities
Net loss (3,092,056) (2,560,893)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Amortization of deferred
compensation 148,231 175,062
Depreciation and amortization 623,558 613,919
Amortization of discount and
costs on mandatorily
convertible notes - 225,690
Deferred rent (397) 22,861
Gain on the sale of equipment (5,752) -
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable 86,993 (73,803)
Inventories (88,052) (34,991)
Prepaid expenses 27,995 (359,373)
Other current assets 7,218 50,038
Accounts payable (264,338) (23,640)
Accrued liabilities 29,476 (155,280)
Net cash flows used in
operating activities (2,527,124) (2,120,410)
Investing activities
Purchases of short-term
investments (3,107,517)(10,944,250)
Maturities of short-term
investments 5,944,291 10,391,371
Installment payment for
purchased technology - (1,200,000)
Proceeds from the sale of
equipment 11,000 -
Purchase of property, equipment
and leasehold improvements (195,411) (470,545)
Increase in licenses and
patents (9,644) (46,809)
Increase in other assets (199,995) (221,111)
Net Cash flows provided by
(used in) investing activities 2,442,724 (2,491,344)
Financing activities
Increase in short-term debt - 270,979
Proceeds from exercise of B
Warrants - 4,707,576
Proceeds from long-term debt 4,574 112,001
Repayments of long-term debt (51,927) -
Proceeds from capital lease
obligations 104,030 -
Repayments of capital lease
obligations (50,487) (53,526)
Net cash flows provided by
financing activities 6,190 5,037,030
(Decrease)Increase in cash and
cash equivalents (78,210) 425,276
Cash and cash equivalents at
beginning of period 3,015,890 5,101,710
Cash and cash equivalents at
end of period $ 2,937,680 $ 5,526,986
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 26,316 $ 113,569
Noncash investing and financing
activities:
Equipment financed under
capital lease obligations $ 104,030 $ -
Notes converted to common
stock $ - $ 3,513,061
</TABLE>
See accompanying notes.
CYPROS PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 and six months ended
January 31, 1999 and 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, increasing 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 $21,634 and finished
goods of $149,496.
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 under certain contracts with
hospitals and hospital buying groups. At January 31, 1999, such
discounts and allowances totaled $72,826.
The Company's policy is not to accept returns of product sold.
However, certain contracts with wholesale drug distributors provide
for product returns if the product is within a certain number of
months of expiration. To date, the Company has experienced few
returns.
Net Loss Per Share Data
Under Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share", basic and diluted loss per share is based on net
loss for the relevant period, divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
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.
2. Recently-Issued Accounting Standards
Comprehensive Income
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 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 No.130
did not have an impact on the Company's financial statements.
Segment Information
Effective August 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 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 No. 131 does 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 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 topical burn/wound care technology and
two FDA-cleared products, Neoflo and Sildaflo, in November 1997. The
Company has sustained an accumulated deficit of $25,821,860 from
inception through January 31, 1999. 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, 1999 and 1998
During the quarter ended January 31, 1999, the Company reported sales
of $606,701, a 33.8% decrease from the $916,045 reported in the prior-
year period, principally due to increasing competition in the market
served by Ethamolin and 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. The decrease in
sales for the period also caused a 41.8% decrease in gross profit on
sales to $412,425 from the $708,347 reported in the prior-year period.
As a percent of sales, the gross margin in the current quarter was
68.0% compared to 77.3% in the prior-year period. This decrease is
principally due to a price increase by the supplier of finished Glofil
vials to the Company, increased chargeoffs of expired Glofil vials due
to declining sales, and allocations of facility rent and quality
assurance and quality control expenses to cost of goods sold in the
current period.
Total operating expenses decreased 1.2% during the quarter to
$2,147,832 from $2,173,115 during the prior-year quarter. Sales and
marketing expense increased by more than 26.7% principally due to the
hiring of additional personnel, the cost of a study to expand the
market for Ethamolin, the cost of a clinical study of Glofil to prove
the viability of a 45-minute test, and regulatory consulting expense
related to these studies. General and administrative expense decreased
7.0% principally due to decreases in investor relations and business
development activities. Pre-clinical research and development expense
decreased 24.9% principally due to decreases in salaries, rent and
grant expenditures.
In addition, net interest and other income for the current quarter
decreased 43.6% to $162,155 from $287,736 during the prior-year
quarter, principally because the Company had a larger investment
portfolio during the prior-year quarter, which yielded more interest
income.
The Company did not receive any new Small Business Innovation Research
grants during the current period, and therefore, there was a 100%
decline in grant income for the quarter ended January 31, 1999.
The amortization of the discount and costs on the Company's
mandatorily convertible notes was completed in the previous year, and
therefore, there were no such expenses for the quarter ended
January 31, 1999.
Six Months Ended January 31, 1999 and 1998
During the six months ended January 31, 1999, the Company reported
sales of $1,247,055, a 26.1% decrease over the $1,687,461 reported in
the prior-year period, and a gross profit on sales of $892,301, a
32.0% decrease over the $1,311,819 reported in the prior-year period.
As a percent of sales, the gross margin in the current period was
71.6% compared to 77.7% in the prior-year period. These decreases
occurred for the same reasons discussed above under the three-month
analysis.
During the six months ended January 31, 1999, the Company sustained a
loss of $3,092,056 (or $.20 per share, basic and diluted), compared to
a loss of $2,560,893 (or $.17 per share, basic and diluted) for the
prior-year period, as overall operating expenses increased. Total
operating expenses increased 3.4% during the current period to
$4,387,078 from $4,241,857 during the prior-year period. Sales and
marketing expense increased 19.9% primarily due to the same reasons as
set forth in the three-month analysis above. General and
administrative expense decreased 4.3% due to decreases in investor
relations and business development activities and securities fees.
Clinical testing and regulatory expense increased by more than 22.4%,
principally due to costs incurred with the Phase III trial of Cordox
in sickle cell anemia crisis patients. Pre-clinical research and
development expenditures decreased 33.7%, principally due to decreases
in salaries, rent and grant expenditures.
In addition, net interest and other income for the current period
decreased more than 32.9% to $350,445 from $522,327 during the prior-
year period, principally for the reason set forth in the three-month
analysis above.
Grant income declined 85% during the current period to $10,871 from
$72,508, as there was only one grant in process (versus two during the
prior-year period) and it was completed prior to the end of the
current period. The pre-clinical research and development expense for
the current period includes expenses incurred in connection with the
completed grant.
The amortization of the 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 six months ending January 31, 1999.
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 January 31, 1999, the Company had cash, cash equivalents and short-
term investments of $10,529,486, compared to $13,444,470 at July 31,
1998. At January 31, 1999, working capital was $10,639,222, compared
to $13,377,716 at July 31, 1998. The decline in these balance sheet
items is principally due to the cash used to fund the net loss of the
Company.
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 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on February 16,
1999. The following matters received the votes for, votes against,
abstentions and broker non-votes set forth across from them at the
meeting:
<TABLE>
<CONTENTS
Votes For Votes Absten Broker
Against tions Non-
Votes
<S> <C> <C> <C> <C>
Election of Directors
to hold office until
the 2000 Annual
Meeting of
Shareholders
Paul J. Marangos 13,363,425 88,989 0 0
Robert F. Allnutt 12,693,875 758,539 0 0
Digby W. Barrios 12,693,875 758,539 0 0
Virgil Thompson 12,693,875 758,539 0 0
Robert A. Vukovich 12,593,875 858,539 0 0
Approve the Company's
1993 Non-Employee
Directors' Equity
Incentive Plan, as
amended (the "Plan"),
to (i) increase the
aggregate number of
shares of the
Company's Common Stock
authorized for
issuance under the
Plan by 100,000 from
250,000 to 350,000 and
(ii) provide for the
automatic grant to
such directors of
stock bonus awards
comprised of $2,000 of
Common Stock for each
Board meeting attended
by such director on or
after the 1999 Annual
Meeting of
Stockholders 12,009,152 1,285,743 53,314 104,205
Ratification of the
selection of Ernst &
Young LLP as the
Company's independent
auditors for the
fiscal year ending
July 31, 2000 13,402,646 37,918 11,850 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.
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
15th day of March, 1999.
CYPROS PHARMACEUTICAL CORPORATION
s/s Paul J. Marangos
- --------------------
Paul J. Marangos
Chairman of the Board,
President and Chief Executive Officer
s/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 10-Q for the Period Ended January 31, 1999 and is qualified
in its entirety by reference to such financial statements.
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUL-31-1999
[PERIOD-END] JAN-31-1999
[CASH] 2,937,680
[SECURITIES] 7,591,806
[RECEIVABLES] 429,893
[ALLOWANCES] 0
[INVENTORY] 171,130
[CURRENT-ASSETS] 179,552
[PP&E] 2,070,118
[DEPRECIATION] (975,878)
[TOTAL-ASSETS] 16,562,746
[CURRENT-LIABILITIES] 670,839
[BONDS] 199,036
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 41,458,734
[OTHER-SE] (25,891,227)
[TOTAL-LIABILITY-AND-EQUITY] 16,562,746
[SALES] 1,247,055
[TOTAL-REVENUES] 1,247,055
[CGS] 354,754
[TOTAL-COSTS] 4,387,078
[OTHER-EXPENSES] 66,373
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 20,191
[INCOME-PRETAX] (3,092,056)
[INCOME-TAX] 0
[INCOME-CONTINUING] (3,092,056)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (3,092,056)
[EPS-PRIMARY] (0.20)
[EPS-DILUTED] (0.20)
</TABLE>
