SEC Filing | Mallinckrodt

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, 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 June 11, 1999, the Registrant had 15,711,877 shares of Common Stock, no par value, outstanding. TABLE OF CONTENTS Item Page Part I 1. Financial Statements: a. Balance Sheets - April 20, 1999 (unaudited) and July 31, 1998 3 b. Statements of Operations - Three and Nine Months Ended April 30, 1999 and 1998 (unaudited) 4 c. Statements of Cash Flows - Nine Months Ended April 30, 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 * 5. Other Information * 6. Exhibits and Reports on Form 8-K 13 Signatures 14 *No Information provided due to inapplicability of item. PART I. Item 1. Financial Statements Cypros Pharmaceutical Corporation Balance Sheets April 30, July 31, 1999 1998 (Unaudited) (Note) Assets Current assets: Cash and cash equivalents $2,892,149 $3,015,890 Short-term investments, held to maturity 6,269,097 10,428,580 Accounts receivable 308,827 516,886 Inventories 168,720 83,078 Prepaid expenses and other current assets 126,680 214,765 Total current assets 9,765,473 14,259,199 Property, equipment and leasehold improvements, net 1,248,291 1,063,566 Purchased technology, net 3,490,447 4,163,487 Licenses and patents, net 162,926 176,927 Other assets 270,525 72,461 Total assets $14,937,662 $19,735,640 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 356,073 $ 551,191 Accrued compensation 209,210 125,434 Other accrued liabilities 16,484 15,641 Current portion of long-term debt 102,759 97,477 Current portion of capital lease obligations 110,039 91,740 Total current liabilities 794,565 881,483 Long-term debt 7,674 59,408 Capital lease obligations 164,889 157,656 Deferred rent 141,161 125,761 Shareholders' equity: Common stock, 30,000,000 shares authorized, 15,711,877 shares issued and outstanding as of April 30, 1999 (unaudited) and July 31, 1998 41,478,214 41,328,470 Deferred compensation (79,020) (87,334) Accumulated deficit (27,569,821) (22,729,804) Total shareholders' equity 13,829,373 18,511,332 Total liabilities and shareholders' equity $14,937,662 $19,735,640 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. Cypros Pharmaceutical Corporation Statements of Operations (Unaudited) Three Months Ended Nine Months Ended April 30 April 30 1999 1998 1999 1998 (unaudited) (unaudited) Net sales $ 606,252 $ 824,399 $1,853,307 $2,511,860 Cost of sales 170,753 202,751 525,507 578,469 Gross profit 435,499 621,648 1,327,800 1,933,391 Operating expenses: Sales and marketing 364,512 331,022 1,176,980 1,008,779 General and administrative 858,751 736,978 2,287,596 2,229,854 Clinical testing and regulatory 644,747 761,449 1,880,688 1,770,827 Pre-clinical research and development 143,451 216,977 442,034 667,609 Depreciation and amortization 321,763 293,568 933,004 904,706 Total operating expenses 2,333,224 2,339,994 6,720,302 6,581,775 Loss from operations (1,897,725) (1,718,346) (5,392,502) (4,648,384) Research grant income - 46,193 10,871 118,701 Interest and other income, net 129,155 234,867 479,600 757,194 Sublease income, net 20,609 - 62,014 - Amortization of discount and costs on mandatorily convertible notes - (30,317) - (256,007) Net loss $(1,747,961) $(1,467,603) $(4,840,017) $(4,028,496) Net loss per share, basic and diluted $(0.11) $ (0.09) $(0.31) $(0.27) Shares used in computing net loss per share, basic and diluted 15,711,877 15,644,114 15,711,877 15,020,087 See accompanying notes. Cypros Pharmaceutical Corporation Statements of Cash Flows (Unaudited) Nine Months Ended April 30, 1999 1998 Operating activities Net loss $ (4,840,017) $ (4,028,496) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation 158,058 251,996 Depreciation and amortization 957,634 912,026 Amortization of discount and costs on mandatorily convertible notes - 256,007 Deferred rent 15,400 16,588 Gain on the sale of equipment (5,752) - Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 208,059 (23,048) Inventories (85,642) (16,097) Prepaid expenses and other current assets 88,085 (68,251) Accounts payable (195,118) (65,740) Accrued liabilities 84,619 (115,980) Net cash flows used in operating activities (3,614,674) (2,880,995) Investing activities Purchases of short-term investments (6,435,425) (15,062,413) Maturities of short-term investments 10,594,908 13,760,012 Installment payment for purchased technology - (1,200,000) Proceeds from the sale of equipment 11,000 - Purchase of property, equipment and leasehold improvements (450,620) (494,496) Increase in licenses and patents (9,946) (46,809) Increase in other assets (198,064) (218,175) Net cash flows provided by (used in) investing activities 3,511,853 (3,261,881) Financing activities Proceeds from exercise of B Warrants - 4,707,576 Proceeds from long-term debt 6,475 115,267 Repayments of long-term debt (52,927) (1,496) Proceeds from capital lease obligations 104,030 - Repayments of capital lease obligations (78,498) (81,625) Net cash flows (used in) provided by financing activities (20,920) 4,739,722 Decrease in cash and cash equivalents (123,741) (1,403,154) Cash and cash equivalents at beginning of period 3,015,890 5,101,710 Cash and cash equivalents at end of period $ 2,892,149 $ 3,698,556 Supplemental disclosures of cash flow information: Cash paid for interest $ 36,945 $ 124,005 Noncash investing and financing activities: Equipment financed under capital lease obligations $ 104,030 $ - Notes converted to common stock $ - $ 3,979,161 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 is conducting a Phase III clinical trial of Cordox in sickle cell anemia crisis patients. Basis of Presentation The unaudited financial statements for the three and nine months ended April 30,1999 and 1998 have been prepared on the same basis as the Company's audited financial statements for the year ended July 31, 1998. The unaudited financial statements 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 $15,394 and finished goods of $153,326. 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 adjusted for discounts and allowances due to contractual discounts under certain contracts with hospitals and hospital buying groups. At April 30, 1999, such discounts and allowances totaled $107,633. 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. Net Loss Per Share Data Under Financial Accounting Standards Board Statement ("SFAS") 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 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 $27,569,821 from inception through April 30, 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 April 30, 1999 and 1998 During the quarter ended April 30, 1999, the Company reported sales of $606,252, a 26.5% decrease from the $824,399 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 29.9% decrease in gross profit on sales to $435,499 from the $621,648 reported in the prior-year period. As a percent of sales, the gross margin in the current quarter was 71.8% compared to 75.4% 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. Total operating expenses decreased .3% during the quarter to $2,333,224 from $2,339,994 during the prior-year quarter. Sales and marketing expense increased 10.1% principally due to the cost of an ongoing clinical study of Glofil to prove the viability of a 45-minute test and regulatory consulting expense related to the Glofil study. General and administrative expense increased 16.5% principally due to additional material and supply purchases for the Dermaflo facility in Lee's Summit, Missouri, hiring of additional personnel there, consulting services for that project, additional home-office overhead allocated to that project for quality control and quality assurance and rent expense for the Lee's Summit facility. Clinical testing and regulatory expense decreased 15.3% principally due to the decline in CRO and site costs for the Phase II study of Cordox in sickle cell crisis patients which was completed last year. Pre-clinical research and development expense decreased 33.9% principally due to decreases in salaries, rent and grant related expenditures. In addition, net interest and other income for the current quarter decreased 45.0% to $129,155 from $234,867 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 April 30, 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 April 30, 1999. Nine Months Ended April 30, 1999 and 1998 During the nine months ended April 30, 1999, the Company reported sales of $1,853,307, a 26.2% decrease over the $2,511,860 reported in the prior-year period, and a gross profit on sales of $1,327,800, a 31.3% decrease over the $1,933,391 reported in the prior-year period. As a percent of sales, the gross margin in the current period was 71.6% compared to 77.0% in the prior-year period. These decreases occurred for the same reasons discussed above under the three-month analysis. During the nine months ended April 30, 1999, the Company sustained a loss of $4,840,017 (or $.31 per share, basic and diluted), compared to a loss of $4,028,496 (or $.27 per share, basic and diluted) for the prior-year period, as revenues decreased and overall operating expenses increased. Total operating expenses increased 2.1% during the current period to $6,720,302 from $6,581,775 during the prior-year period. Sales and marketing expense increased 16.7% principally due to the same reasons as set forth in the three-month analysis above. Pre- clinical research and development expenditures decreased 33.8%, principally due to a decrease in staffing, rent expense and materials and supplies used for grant expenditures. Rent expense decreased in the current period due to the reclassification of a portion of rent expense to other income and expense. In addition, net interest and other income for the current period decreased 36.7% to $479,600 from $757,194 during the prior-year period, principally for the reason set forth in the three-month analysis above. Grant income declined 90.8% during the current period to $10,871 from $118,701, 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 were no such expenses for the nine months ended April 30, 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 April 30, 1999, the Company had cash, cash equivalents and short- term investments of $9,161,246, compared to $13,444,470 at July 31, 1998. At April 30, 1999, working capital was $8,970,908, 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 operations of the Company. he 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 timing of 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 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. 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 11th day of June, 1999. CYPROS PHARMACEUTICAL CORPORATION By /s/ 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)

5 This schedule contains summary financial information extracted from the Form 10-Q for the Period Ended April 30, 1999 and is qualified in its entirety by reference to such financial statements.

9-MOS JUL-31-1999 APR-30-1999 2,892,149 6,269,097 308,827 0 168,720 126,680 2,321,250 (1,072,959) 14,937,662 794,565 172,563 0 0 41,478,214 (27,648,841) 14,937,662 1,853,307 1,853,307 525,507 4,840,017 99,653 0 32,720 (4,840,017) 0 (4,840,017) 0 0 0 (4,840,017) (0.31) (0.31)