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 September 30, 1995.
[ ] 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 - 16612
CNS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1580270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 PARK ROAD
CHANHASSEN, MN 55317
(Address of principal executive offices including zip code)
(612) 474-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 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.
YES _ X _ NO ____
At November 14, 1995, 17,379,772 shares of common stock were outstanding.
This Form 10-Q consists of 14 pages (including Exhibits). The Index to Exhibits
is set forth on page 10.
PART I - FINANCIAL INFORMATION
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $12,170,231 $ 6,024,366
Accounts receivable 7,394,323 936,279
Note receivable 297,805 0
Inventories:
Finished goods 7,049,310 932,407
Work in process 1,289,722 171
Components 675,904 192,431
Total inventories 9,014,936 1,125,009
Prepaid expenses 1,986,552 245,619
Net assets of discontinued operations 0 2,990,990
TOTAL CURRENT ASSETS 30,863,847 11,322,263
PROPERTY AND EQUIPMENT
less accumulated depreciation of
$128,258 and $15,453, respectively 365,391 178,104
OTHER ASSETS
Intangible assets
less accumulated amortization of
$80,277 and $38,538, respectively 121,621 112,504
$31,350,859 $11,612,871
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
September 30, December 31,
LIABILITIES AND 1995 1994
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,767,487 $ 272,039
Accrued expenses 1,698,662 134,297
Accrued income tax 1,491,000 0
TOTAL CURRENT LIABILITIES 7,957,149 406,336
SHAREHOLDERS' EQUITY
Common stock, $.01 par value.
Authorized 50,000,000 shares;
issued and outstanding,
17,352,772 shares at September 30, 1995 and
17,041,656 shares at December 31, 1994. 173,528 170,417
Additional paid-in capital 25,245,985 24,229,582
Accumulated deficit (2,025,803) (13,193,464)
TOTAL SHAREHOLDERS' EQUITY 23,393,710 11,206,535
$31,350,859 $11,612,871
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Sales $10,287,980 $ 681,607 $36,565,663 $ 1,554,757
Cost of goods sold 3,512,658 368,081 13,434,983 980,776
Gross profit 6,775,322 313,526 23,130,680 573,981
Operating expenses:
Marketing and selling 4,836,659 838,978 10,764,407 1,742,706
General and administrative 638,616 139,869 1,316,437 399,260
Research and development 3,500 44,540 10,633 107,640
Total operating expenses 5,478,775 1,023,387 12,091,477 2,249,606
Operating profit (loss) 1,296,547 11,039,203
Interest income 214,000 78,558 434,969 140,947
Interest expense 0 0 (12,500) (4,612)
Income (loss) from continuing
operations before income taxes 1,510,547 (631,303) 11,461,672 (1,539,290)
Income tax provision 150,000 0 1,060,000 0
Income (loss) from continuing
operations 1,360,547 (631,303) 10,401,672 (1,539,290)
Income (loss) from operations of
discontinued sleep division (less
applicable income tax benefit of
$259,000 and $0 at September 30,
1995 and 1994, respectively) 0 36,694 (459,901) 43,762
Gain on disposal of sleep division
(less applicable income taxes of
$690,000 and $0 at September 30,
1995 and 1994, respectively) 0 0 1,225,890 0
Net income (loss) $1,360,547 $ (594,609) $11,167,661 $(1,495,528)
Income (loss) per common and
common equivalent share:
From continuing operations $ .07 $ (.04) $ .57 (.10)
From discontinued operations $ 0 0 .04 0
Net income (loss) per share $ .07 $ (.04) $ .61 $ (.10)
Weighted average number of
common and common equivalent
shares outstanding $18,657,086 $16,753,952 $18,342,901 $15,357,218
The accompanying notes are an integral part
of the condensed financial statements.
CNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
1995 1994
OPERATING ACTIVITIES:
Net income (loss) $ 11,167,661 $ (1,495,528)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Gain on sale of discontinued operations (1,915,890) 0
Depreciation and amortization 154,544 32,251
Changes in operating assets and liabilities:
Accounts receivable (6,458,044) (679,721)
Inventories (7,889,927) (789,366)
Prepaid expenses (1,740,933) (853,197)
Net assets of discontinued operations 0 (337,582)
Accounts payable and accrued expenses 7,159,888 586,287
Net cash provided by (used in) operating activities 477,299 (3,536,856)
INVESTING ACTIVITIES:
Payments for purchases of property and equipment (300,092) (66,290)
Payments for intangible assets (50,856) (72,751)
Net cash used in investing activities (350,948) (139,041)
FINANCING ACTIVITIES:
Proceeds from sale of discontinued operations 5,000,000 0
Proceeds from exercise of employee
stock options 211,714 75,837
Proceeds from exercise of warrants,
nonqualified options and other 807,800 171,000
Net proceeds from public offering 0 9,661,932
Net cash provided by financing activities 6,019,514 9,908,769
Net increase
in cash and cash equivalents 6,145,865 6,232,872
Beginning cash and cash equivalents 6,024,366 347,224
Ending cash and cash equivalents $ 12,170,231 $ 6,580,096
Supplemental schedule of non-cash operating
and financing activities:
A note receivable for $595,611 was received on
June 1, 1995 when the Company sold the assets
of its discontinued sleep division. $297,805 remains
open at September 30, 1995.
The accompanying notes are an integral part
of the condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements as of September 30, 1995 and
1994 are unaudited but, in the opinion of management, include all adjustments
(consisting only of normal, recurring accruals) necessary for a fair
presentation of results for the interim periods presented.
The accounting principles followed in the preparation of the financial
information contained herein are the same as those described in the Form 10-K
report for the year ended December 31, 1994, and reference is hereby made to
that report for detailed information on accounting policies.
1. The Company's balance sheet reflects Common Stock outstanding on a
historical basis. Net income per common share for the three and nine
month periods ended September 30, 1995 was based upon the weighted
average of common and common equivalent shares outstanding during the
period. Net loss per share of Common Stock for the three and nine month
periods ended September 30, 1994 was based upon the weighted average
number of common shares outstanding during the period. Common
equivalent shares were not included because they were anti-dilutive.
2. The Company has a $1.25 million bank line of credit. Borrowings are due
on demand, bear interest at 1% over a defined base rate (8 3/4% at
September 30, 1995), are secured by substantially all assets of the
Company and are subject to certain restrictive covenants. Borrowings
are limited to 80% of eligible accounts receivable. There were no
borrowings against this line of credit as of September 30, 1995. The
line of credit expires on March 31, 1996.
3. The Company declared a two-for-one stock split, which was accomplished
in the form of a 100 percent stock dividend distributed on June 22,
1995 to shareholders of record on June 1, 1995. The accompanying
condensed financial statements presented for all periods herein have
been adjusted to reflect the increased shares.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
On June 1, 1995, the Company completed the sale of all the assets of its Sleep
Disorder Diagnostic Products Division (Sleep) to Aequitron Medical Inc. Net sale
proceeds of $5,000,000 cash and a note receivable of $595,611 resulted in a gain
on the sale of discontinued operations of $1,915,890 which is reflected in the
nine month period ended September 30, 1995. The net income or loss of this
operation is shown on the Condensed Statement of Operations as the income (loss)
from discontinued operations. The net assets of Sleep were $2,990,990 at
December 31, 1994. Continuing operations of the Company is soley related to the
manufacture and marketing of the Breathe Right nasal strip, which is a non
medicinal disposable device that improves nasal breathing by reducing nasal
airflow resistance.
Unless otherwise noted, the following discussion of financial condition and
results of operations relates only to the continuing operations of the Company.
Results of Operations:
Net sales of continuing operations increased to $10.3 million in the quarter
ended September 30, 1995 from $.7 million in the quarter ended September 30,
1994. For the nine month period of 1995 net sales were $36.6 million, up from
$1.6 million in the comparable nine month period of 1994. These significant
increases of Breathe Right sales were due to increased consumer awareness as a
result of the use of the Breathe Right nasal strips by professional athletes in
several sports, as well as the commencement of national consumer advertising in
newspapers, magazines and radio. The Company believes that the Breathe Right
nasal strip sales to wholesalers and retailers represent an expansion of their
inventories as well as a replenishment of product sold to consumers. The Company
expected that the third quarter sales of the Breathe Right nasal strip would
ease somewhat from the second quarter due to the expansion of inventories during
the second quarter of 1995. Foreign sales of the Breathe Right nasal strip were
$.7 million for the nine months ended September 30, 1995.
Gross profit was $6.8 million and $23.1 million compared to $.3 million and $.6
million in the third quarter and nine month periods of 1995 and 1994,
respectively. As a percentage of sales, gross profit from sales was 65.9% and
63.3% for the two periods of 1995, respectively, compared to 46.0% and 36.9% for
the same two periods of 1994 as a result of the efficiencies realized from the
higher level of Breathe Right nasal strip sales.
Marketing and selling expenses were $4.8 million and $10.8 million in the third
quarter and nine month periods of 1995, respectively, compared to $.8 million
and $1.7 million in the same two periods of 1994, respectively. This significant
increase results primarily from the marketing expenses associated with trade
advertisements, consumer advertisements, and other product roll-out items for
the Breathe Right nasal strip. Marketing and selling expenses were expected to
increase significantly in 1995 as a result of the increased marketing and
advertising of the Breathe Right nasal strip.
General and administrative expenses were $.6 million and $1.3 million for the
third quarter and nine month period ended September 30, 1995, respectively,
compared to $.1 million and $.4 million in the same two periods of 1994,
respectively. These increases result from the additional personnel and systems
required to support the Breathe Right nasal strip.
Research and Development expenses for the Breathe Right nasal strips are
minimal.
The Company received interest income of $435,000 during the first nine months
ending September 30, 1995 compared to approximately $141,000 during the same
nine month period of 1994, primarily due to the Company's higher level of cash
and cash equivalents in the 1995 period. Interest expense during the reporting
periods represents the cost of minimal borrowings and maintaining the bank line
of credit.
The tax expense of $1,060,000 on continuing operations represent the estimated
tax rate from all of 1995 applied to earnings for the nine month period ended
September 30, 1995.
Liquidity and Capital Resources:
At September 30, 1995, the Company had cash and cash equivalents of $12.2
million, working capital of $22.9 million and $1.25 million line of credit with
a bank, subject to certain borrowing base restrictions. The Company had total
assets at September 30, 1995 of $31.4 million, an increase of $19.8 million from
$11.6 million at December 31, 1994. The increase primarily reflects the
Company's net income, the receipt of proceeds from the sale of the sleep
disorders product line and the increases in current liabilities during the first
nine months of 1995.
The Company's operations provided approximately $.5 million in cash flow during
the nine months ended September 30, 1995 compared to a use of cash of $3.5
million for the comparable nine month period of 1994. Cash provided in
operations was primarily from net earnings, less an increase in accounts
receivable of $6.5 million, an increase in inventories of $7.9 million, the gain
on discontinued operations of $1.9 million offset by an increase in accounts
payable and accrued expenses of $7.2 million.
With respect to investing activities, the Company made purchases of property and
equipment totaling $300,000 during the first nine months of 1995 compared to
$66,000 during the comparable nine months of 1994. Capitalized patent and
trademark costs were approximately $51,000 in the first nine months of 1995
compared to $73,000 during the first nine months of 1994. The Company presently
does not have any significant commitments for capital equipment.
At September 30, 1995, the Company had a $1.25 million bank line of credit.
Borrowings are due on demand, bear interest at 1% over a defined base rate, (8
3/4% at September 30, 1995) are secured by substantially all assets of the
Company and are subject to certain restrictive covenants. Borrowings are limited
to 80% of eligible accounts receivable. There were no borrowings against this
line of credit as of September 30, 1995. The line of credit expires on March 31,
1996.
During the nine month period ended September 30, 1995, the Company utilized net
operating loss carryforwards totaling approximately $11,476,000. The remaining
net operating loss and credit carryforwards at September 30, 1995 which are
available to reduce income taxes payable in future periods total approximately
$240,000 and $312,000 respectively, and expire at various times through 2009.
The Company believes that its existing funds and funds generated from
operations, along with its bank line of credit, will be sufficient to support
its planned operations for the foreseeable future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On November 8, 1995, the Company issued a press release (attached
hereto as Exhibit 99.1) reporting that the U.S. Food and Drug
Administration has cleared the Company's Breathe Right nasal strip
for marketing with a new indication for use of the strip for the
reduction or elimination of snoring.
On November 9, 1995, the Company issued a press release (attached
hereto as Exhibit 99.2) reporting that the Company received the
official notice of allowance from the U.S. Patent Office with
regard to a patent based on the original application of its
Breathe Right nasal strips.
Item 6. Exhibits and Reports of Form 8-K Page
(a) Exhibits:
Exhibit No. 11, Calculation of Net Income (Loss) Per Share 12
Exhibit No. 99.1, Press Release - FDA 13
Exhibit No. 99.2, Press Release - U.S. Patent 14
Exhibit No. 27, Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated July 20,
1995 reporting a Rights agreement which grants implicit rights to
shareholders of record on August 3, 1995. No financial statements
were filed.
SIGNATURES
Pursuant to the requirements 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.
CNS, Inc.
Registrant
Date: November 14, 1995 By: /s/ Richard E. Jahnke
Richard E. Jahnke
President & Chief Operating Officer
Date: November 14, 1995 By: /s/ Ronald D. Cox
Ronald D. Cox
Vice President of Finance and Chief
Financial Officer