SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 1996
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 0-18962
CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063-4719
(Address of principle executive offices and zip code)
Registrant's telephone number, including area code: (415) 369-4300
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
----- -----
Number of shares outstanding of each of the registrant's classes of common stock
as of MAY 6, 1996:
Common Stock - 18,567,247 shares
Total pages: 14
Page number of exhibit index:13
CYGNUS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1: Financial Statements
Consolidated Statements of Operations for the three month
period ended March 31, 1996 and 1995 (unaudited)..............2
Consolidated Condensed Balance Sheets at March 31,1996
(unaudited) and December 31,1995..............................3
Consolidated Statements of Cash Flows for the three month
period ended March 31,1996 and 1995 (unaudited)...............4
Notes to Consolidated Financial Statements (unaudited)..........5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................7
PART II. OTHER INFORMATION
Item 1: Legal Proceedings..............................................13
Item 6: Exhibits and Reports on Form 8-K...............................13
SIGNATURES..................................................................14
1
THIS REPORT ON FORM 10-Q CONTAINS PROJECTIONS AND FORWARD LOOKING
STATEMENTS REGARDING FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY. WE WISH TO CAUTION YOU THAT THESE STATEMENTS ARE ONLY OUR PREDICTIONS
AND OBJECTIVES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. PLEASE NOTE IN
PARTICULAR THROUGHOUT THIS DOCUMENT WHERE WE HAVE HIGHLIGHTED SPECIFIC RISKS
ASSOCIATED WITH THE COMPANY AND ITS ACTIVITIES. WE ALSO REFER YOU TO DOCUMENTS
THE COMPANY FILES FROM TIME TO TIME, SUCH AS ITS FORM 10-K, ITS OTHER 10-Q AND
ITS FORM 8-K REPORTS. THESE DOCUMENTS AND THIS REPORT ON FORM 10-Q CONTAIN
IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER FROM OUR CURRENT
EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT ON FORM
10-Q.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three Months ended March 31,
1996 1995
--------- ---------
Product revenues $ 18 $ 888
Contract revenues 3,440 3,590
Royalty and other revenues 306 918
--------- ---------
TOTAL REVENUES 3,764 5,396
Costs and expenses:
Costs of products sold 958 1,167
Research and development 5,217 5,583
Marketing, general and administrative 2,338 1,465
--------- ---------
TOTAL COSTS AND EXPENSES 8,513 8,215
LOSS FROM OPERATIONS (4,749) (2,819)
Interest income, net 544 51
--------- ---------
NET LOSS $(4,205) $(2,768)
--------- ---------
--------- ---------
NET LOSS PER SHARE $(0.23) $(0.18)
--------- ---------
--------- ---------
Shares used in computation of
net loss per share 18,362 15,581
--------- ---------
--------- ---------
(See accompanying notes.)
2
CYGNUS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
MARCH 31, December 31,
ASSETS: 1996 1995
- ------ ------------- --------------
(unaudited)
Current assets:
Cash and cash equivalents $ 20,710 $ 30,445
Short-term investments 27,782 16,053
Trade accounts receivable, net of allowance 375 2,310
Inventories 519 378
Prepaid expenses and other current assets 792 640
--------- ---------
TOTAL CURRENT ASSETS 50,178 49,826
Equipment and improvements, at cost 18,432 18,132
Less accumulated depreciation and amortization (11,979) (11,260)
--------- ---------
NET EQUIPMENT AND IMPROVEMENTS 6,453 6,872
Lease deposits and other assets 1,765 1,156
--------- ---------
TOTAL ASSETS $ 58,396 $ 57,854
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable 647 1,006
Accrued compensation 1,676 2,191
Accrued professional services 985 726
Other accrued liabilities 1,091 1,287
Current portion of customer advances 846 846
Deferred revenue 4,869 3,301
Current portion of long term debt 489 489
Current portion of capital lease obligations 1,425 1,425
--------- ---------
TOTAL CURRENT LIABILITIES 12,028 11,271
Long-term portion of deferred revenue 4,573 3,532
Long-term debt 612 734
Capital lease obligations 1,633 1,976
Accrued rent and other liabilities 2,662 2,089
Stockholders' equity:
Common stock 116,097 113,266
Accumulated deficit (79,209) (75,014)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 36,888 38,252
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,396 $ 57,854
--------- ---------
--------- ---------
(See accompanying notes.)
3
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
THREE MONTHS ENDED MARCH 31,
1996 1995
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,205) $ (2,768)
Adjustments to reconcile net loss to cash (used in)/provided by
operating activities:
Depreciation and amortization 696 666
Decrease/(increase) in assets 1,039 (1,048)
Increase/(decrease) in liabilities 2,393 (3,405)
--------------- --------------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (77) (6,555)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (300) (656)
Decrease/(increase) in short-term investments (11,724) 3,736
--------------- --------------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (12,024) 3,080
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of assets 0 843
Issuance of common stock 2,831 379
Principal payments of long-term debt (122) (122)
Payment of capital lease obligations (343) (372)
--------------- --------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES 2,366 728
--------------- --------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (9,735) (2,747)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,445 9,220
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,710 $ 6,473
--------------- --------------
--------------- --------------
(See accompanying notes.)
4
CYGNUS, INC.
March 31, 1996
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Cygnus, Inc. (the "Company" or "Cygnus") was incorporated in California in
April 1985. In September 1995 the Company changed its name from Cygnus
Therapeutic Systems to Cygnus, Inc. and its place of incorporation to Delaware.
The consolidated financial statements as of and for the three month periods
ended March 31, 1996 and 1995, included herein, are unaudited, but include all
adjustments (consisting only of normal recurring adjustments), which the
management of Cygnus, Inc. believes necessary for a fair presentation of the
financial position as of the reported dates and the results of operations for
the respective periods presented. Interim financial results are not necessarily
indicative of results for a full year. The consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended December 31, 1995 included in the Company's 1995 Annual
Report and incorporated by reference on Form 10-K.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is anti-dilutive.
3. LEGAL PROCEEDINGS
Alza Corporation ("Alza") owns a patent that was issued on May 13, 1986 and
contains claims for the transdermal delivery of fentanyl. The Alza fentanyl
patent claims were reviewed by the Patent Office during two re-examination
procedures, one of which was instituted by Cygnus, but were nevertheless
confirmed in January 1989. In January 1994, Cygnus filed a complaint in the U.S.
District Court in San Francisco, California against Alza for violation of the
antitrust laws and for declaration of unenforceability and invalidity of the
Alza patent on fentanyl transdermal systems. In April 1995, motions by Alza to
dismiss the suit were granted primarily on the basis that Alza had made
insufficient threat of enforcement. The Company appealed this ruling in May
1995. The outcome of this litigation is uncertain and there can be no assurance
that Cygnus will prevail in the suit. If the Company were to seek to
commercialize this product and Alza were to successfully enforce its fentanyl
patent against the Company, the Company could be enjoined from manufacturing and
marketing fentanyl transdermal systems in the U.S. or the Company could be
required to seek a license or similar arrangement from Alza. Such a license may
not be available, or may only be available on adverse terms. In addition, the
existence of the Alza patent has negatively affected the Company's ability to
obtain a collaborative partner for its fentanyl product and the Company has
effectively suspended its development efforts for this product.
On June 30, 1994, Sanofi, S.A. ("Sanofi") filed a request for arbitration
against Cygnus with the International Court of Arbitration. In its request for
arbitration, Sanofi has alleged that Cygnus
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CYGNUS, INC.
March 31, 1996
breached its existing contract with Sanofi by, among other things, entering into
product development agreements with The Warner-Lambert Company
("Warner-Lambert") and American Home Products Corporation ("American Home
Products") for the development of transdermal systems in the field of hormone
replacement therapy (which agreements pertain to each of the Company's hormone
replacement products other than FemPatch). Sanofi claims it has a proprietary
interest in certain Cygnus technologies and that it has incurred substantial
damages as a result of the alleged breach. It is seeking to recover such damages
and claims it is entitled to a sum of $60.0 million. Cygnus has answered
Sanofi's request for arbitration by maintaining that Sanofi's claims are
inconsistent with its contractual relationship and that such claims are
otherwise without merit. Cygnus intends to aggressively defend against this
arbitration and has asserted certain counterclaims exceeding the amount being
sought by Sanofi. A hearing is currently scheduled in May 1996. Due to the
preliminary nature of this arbitration proceeding, the Company is unable to
accurately predict how this matter will be resolved. Cygnus believes that it
will ultimately prevail in this arbitration; however, should all or part of the
claims asserted by Sanofi be successful, the Company could be materially and
adversely affected.
6
CYGNUS, INC.
March 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cygnus is engaged in the development of diagnostic and drug delivery
systems, with its current efforts primarily focused on three core technologies:
a painless, continuous glucose monitoring device, transdermal drug delivery
systems and mucosal drug delivery systems.
The Company's product development efforts have been and are expected to
continue to be either self-funded, funded by licensees, or both. In general,
the Company's licensing agreements provide that Cygnus will manufacture drug
delivery systems and receive manufacturing revenues from sales of these products
to its licensees. Cygnus may also receive royalties based on certain of its
licensees' product sales. In certain circumstances, the Company may elect to
license manufacturing rights for the product to its licensees in exchange for a
technology transfer fee and/or a higher royalty rate.
Cygnus' licensees generally have the right to abandon a product development
effort at any time for any reason without significant penalty, and this can
result in delays in clinical testing, in the preparation and processing of
regulatory filings and in commercialization efforts. Licensees have exercised
this right in the past, and there can be no assurance that current and future
licensees will not exercise this right in the future. Such cancellations may
cause delays in product development. In January 1995, the Company and Procter
and Gamble (P&G) terminated their collaboration for the development and
marketing of a consumer product utilizing Cygnus' mucosal technology. This
collaboration was terminated primarily because the consumer product application
chosen by P&G did not meet either company's financial criteria. In October 1995,
the Company and P&G also terminated a collaboration to develop and market a
portfolio of transdermal smoking cessation products. If a licensee were to
terminate funding one of the Company's products, Cygnus would either self-fund
development efforts, identify and enter into an agreement with an alternative
licensee or suspend further development work on the product. There can be no
assurance that, if necessary, the Company would be able to negotiate an
agreement with an alternative licensee on acceptable terms. Since all payments
to the Company under its licensing agreements following their execution are
contingent on the occurrence of future events or sales levels, and the
agreements are terminable by the licensee, no assurance can be given as to
whether the Company will receive any particular payment thereunder or as to the
amount or timing of any such payment. The Company may choose to self-fund
certain research and development projects in order to exploit its technologies
and to maximize financial returns. Any increase in Company-sponsored research
and development activities will have an immediate adverse effect on the
Company's results of operations. However, should such Company-sponsored research
and development activities result in a commercial product, the long-term effect
on the Company's results of operations could be favorable.
For the Company to be successful, it will need to develop new diagnostic
and drug delivery products. Furthermore, the Company's ability to develop and
commercialize products in the future
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CYGNUS, INC.
March 31, 1996
will depend on its ability to enter into collaborative arrangements with
additional licensees. There can be no assurance that the Company will be able
to enter into new collaborative arrangements.
The Company's results of operations vary significantly from year to year
and depend on, among other factors, the signing of new product development
agreements and the timing of recognizing payment amounts specified thereunder,
the timing of recognizing license fees and cost reimbursement payments made by
licensees, the demand for and shipments of its Nicotrol-Registered Trademark-
product, and the costs associated with the manufacture of Nicotrol. The
Company's contract revenues are generally earned and recognized based on the
percentage of actual efforts expended compared to total expected efforts during
the development period for each contract. However, contract revenues are not
always aligned with the timing of related expenses. To date, research and
development expenses generally have exceeded contract revenue in any particular
period and the Company expects the same situation to continue for the next
several years. In addition, the level of revenues in any given period is not
necessarily indicative of expected revenues in future periods. The Company has
incurred net losses each year since its inception and does not believe it will
achieve profitability in 1996 or 1997. At March 31, 1996, the Company's
accumulated deficit was approximately $79.2 million.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
PRODUCT REVENUES for the quarter ended March 31, 1996 were $.02 million
compared to $0.9 million for the quarter ended March 31, 1995. This reflects
decreased demand for additional shipments of Nicotrol Rx during the first
quarter of 1996 as a result of the ability of the Company's marketing partner to
meet product demand by utilizing existing inventories.
In November 1993, the Company entered into an agreement pursuant to which
the Company granted Pharmacia & Upjohn, Inc. ("Pharmacia") the exclusive
worldwide right to manufacture Nicotrol in return for a royalty based on
Pharmacia's sales of such products. Prior to that, Pharmacia had the exclusive
right to manufacture Nicotrol outside of North America and was obligated to pay
to Cygnus a royalty based on Pharmacia's sales of such products outside of North
America. The November 1993 agreement, as amended in November 1994, obligated
Cygnus to continue to manufacture and supply Nicotrol until December 31, 1995.
In February of 1996, the Company and Pharmacia further amended the 1993
agreement, whereby Cygnus will continue to manufacture and supply Nicotrol for
the United States market through 1999. In addition to product revenues, the
Company will also earn royalty on sales within the United States. Pharmacia can
terminate the amendment with the payment of certain amounts to the Company.
As a result of the above factors, the Company believes that the level of
product revenues experienced to date are not necessarily indicative of future
results.
CONTRACT REVENUES for the quarter ended March 31, 1996 were $3.4 million
compared to the $3.6 million for the quarter ended March 31, 1995. The decrease
in contract revenues primarily reflects a decrease in billings related to the
Company's first hormone replacement product (due to agreed upon maximum cost
reimbursements as described below) and the mutually agreed upon
8
CYGNUS, INC.
March 31, 1996
termination of the P&G collaboration to develop and market the smoking cessation
product as mentioned above. This reduction was partially offset by the
recognition of glucose monitoring device and certain transdermal delivery system
revenues.
The Company's first hormone replacement product was developed under its
product development agreement with Sanofi. Over the past several years, pre-
commercialization costs for the product have been reimbursed to the Company by
Warner-Lambert, Sanofi's sublicensee. In August 1994, the sublicensee submitted
a proposal that the Company incur a portion of the current and future costs
related to pre-commercialization activities instead of being fully reimbursed
for these costs, as in the past. In September 1994 this proposal was finalized
with an agreement by the Company establishing a maximum cost reimbursement level
and providing that any costs above this maximum level would be paid by the
Company. The Company had exceeded the maximum by June 30, 1995 and accordingly
the Company will not be reimbursed for subsequent pre-commercialization costs
for the product. The Company expects to continue to incur pre-commercialization
costs related to this project, but the Company does not anticipate that such
unreimbursed costs will significantly impact its financial results.
In February 1996 the Company entered into an agreement with Becton
Dickinson for the marketing and distribution of the GlucoWatchTM, Cygnus'
painless, continuous glucose monitoring device. Under the terms of the
agreement, Becton Dickinson has exclusive worldwide marketing and distribution
rights, with the exception of Japan and Korea. Cygnus will have primary
responsibility for completing product development, obtaining regulatory
approvals, manufacturing, and customer service and support for the product.
Cygnus will be eligible to receive up-front and milestone payments as well as a
percentage of the products' future commercial success.
Contract revenues are expected to fluctuate from quarter to quarter and
from year to year, and future contract revenues cannot be reasonably predicted.
The contributing factors to achieving contract revenues include, but are not
limited to, future successes in finalizing new collaborative agreements, timely
achievement of milestones under current contracts, and strategic decisions on
self-funding certain projects. Cygnus' licensees generally have the right to
abandon the rights to a product and the obligation to make related payments.
Since all payments to the Company under these agreements following their
execution are contingent on the occurrence of future events or sales levels, and
the agreements are terminable by the licensee, no assurance can be given as to
whether the Company will receive any particular payment thereunder or as to the
amount or timing of any such payment. The Company expects that contract
revenues under existing contracts will be lower in 1996 compared to 1995, but
cannot predict to what extent new collaborative agreements, if any, will impact
overall contract revenues in 1996 and subsequent future periods.
ROYALTY AND OTHER REVENUES for the quarter ended March 31, 1996 were
$0.3 million compared to $0.9 million for the quarter ended March 31, 1995. The
amounts include royalties from sales by Pharmacia of the Company's nicotine
transdermal product in Europe and Canada. Additionally, for the quarter ended
March 31, 1995, amounts included the amortization of the unearned balance of
prepayments from Pharmacia included in "Customer Advances". As of June 30, 1995,
all of the prepayments were fully amortized. The decrease in the quarter ended
March 31, 1996 is primarily attributable to the quarter ended March 31, 1995
including a full quarter
9
CYGNUS, INC.
March 31, 1996
amortization of "Customer Advances" compared to the quarter ended March 31, 1996
which included no such amortization.
The company believes royalty income will fluctuate from period to period
since it is primarily based upon sales by the Company's licensees. The level of
royalty income for a product also depends on various external factors, including
the size of the market for the product, product pricing levels and the ability
of the Company's licensee to market the product. Therefore, the level of
royalty income for any given period is not indicative of the expected royalty
income for future periods.
COSTS OF PRODUCTS SOLD for the quarter ended March 31, 1996 were $1.0
million compared to $1.2 million for the quarter ended March 31, 1995. Costs of
products sold include direct and indirect manufacturing costs of Nicotrol
production and facility and personnel costs required to meet future anticipated
production levels.
The Company experienced negative product margins for the three month
periods ended March 31, 1996 and 1995 primarily due to low production volumes
which prevented the Company from absorbing all the fixed costs associated with
Nicotrol production. With the level of demand for Nicotrol and Pharmacia's
manufacturing plans being uncertain, it is difficult to predict the level of
Nicotrol demand for 1996 and the direct and indirect manufacturing costs
associated with Nicotrol production. There can be no assurance that product
margins associated with Nicotrol production will improve. There can also be no
assurance that the overall level of demand for Nicotrol will improve.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended March 31, 1996 were
$5.2 million compared to $5.6 million for the quarter ended March 31, 1995. This
decrease reflects a reduced level of materials required in ongoing development
programs and the Company's ongoing cost control measures. Research and
development and clinical activities primarily include the support of the
Company's hormone replacement therapy products (one of which is covered by an
NDA ("New Drug Application") submitted to the FDA and three of which are in
clinical trials), contraception products and the glucose monitoring development
program. After the NDA was submitted for FemPatch, the FDA requested a bio-
equivalency study, which is the responsibility of Warner-Lambert, the Company's
marketing partner. It is uncertain when the NDA will ultimately be approved.
Cygnus expects that its anticipated development of new products, continued
research of new technologies and preparation for regulatory filings and
clinicals could result in an increase in its overall research and development
expenses.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended March
31, 1996 were $2.3 million compared to the $1.5 million for the quarter ended
March 31, 1995. The increase primarily reflects an increase in business
development activities related to the glucose monitoring development program and
increased expenses due to the Company's legal proceedings against Alza and
Sanofi (See Part I, Item I, "Notes to the Consolidated Financial Statements",
Note 3 Legal Proceedings). The Company expects that marketing, general and
administrative expenses could increase in the future as the Company expands its
operations.
10
CYGNUS, INC.
March 31, 1996
INTEREST INCOME, NET OF INTEREST AND OTHER EXPENSE for the quarter ended
March 31, 1996 was $0.5 million as compared to $0.05 million for the quarter
ended March 31, 1995. The increase is due primarily to interest earned on the
October 1995 public offering proceeds as mentioned below.
LIQUIDITY AND CAPITAL RESOURCES
In 1991 and 1992 the Company generated net proceeds of approximately
$52.3 million from public offerings. Additionally the Company received net
proceeds of approximately $29.8 million from its October 1995 public offering.
In June 1992, January 1993, December 1994 and in the first half of 1995, the
Company financed approximately $2.5 million, $1.6 million, $1.7 million and $2.0
million respectively, of manufacturing and research equipment under capital loan
and lease arrangements. In addition to the cash from the public offerings and
equipment lease financing, the Company has been financing its operations
primarily through contract revenues and interest income. In December of 1994,
the Company borrowed $1.7 million under a bank line of credit to finance the
purchase of manufacturing and research equipment. This line will be repaid in
monthly installments by June 30, 1998. The Company has another line of credit
with the same bank which provides up to $3.0 million for borrowings. The line,
available until May 31, 1996, is revolving, collateralized by accounts
receivable and bears an interest rate of one and one-half percentage points
above the prime rate. Both lines of credit are subject to a number of financial
covenants. As of March 31, 1996, the Company had $0.6 million available under
the accounts receivable line of credit, with no borrowings outstanding.
Net cash used in operating activities for the three month period ended
March 31, 1996 was $0.08 million, compared with net cash used of $6.6 million
for the period ended March 31, 1995. Cash used in operating activities during
the period ended March 31, 1996 was primarily due to the Company's net loss of
$4.2 million, increases in prepaid and other assets, and the decreases in
accounts payable and other accrued liabilities, offset by increases in deferred
revenue and accrued rent and other liabilities and a decrease in accounts
receivable. Cash used in operating activities during the quarter ended March
31, 1995 was primarily due to the Company's net loss of $2.8 million, decreases
in customer advances, accrued compensation and accounts payable.
The current level of cash used in operating activities is not necessarily
indicative of the level of future cash usage. As a result of increased
expenditures for the development of new products, preparation for regulatory
filings and clinical trials, the Company anticipates an increase in cash usage
for future operating activities.
Net cash used in investing activities of $12.0 million for the quarter
ended March 31, 1996 resulted primarily from net purchases of short-term
investments of $11.7 million. Net cash provided by investing activities of $3.1
million for the quarter ended March 31, 1995 was primarily generated by the
sales and maturity of short-term investments to finance operating activities.
Net cash provided by financing activities for the three months ended
March 31, 1996 includes $2.8 million of common stock issuance proceeds offset by
long-term debt and capital lease repayments. Net cash provided by financing
activities for the three months ended March 31, 1995 includes proceeds of $0.8
million from the sale and leaseback of equipment and $0.4 million of
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CYGNUS, INC.
March 31, 1996
common stock issuance proceeds offset by long-term debt and capital lease
repayments. The Company continues to evaluate the benefits of using equipment
leases to finance equipment purchases.
As of March 31, 1996 the Company held $27.8 million in short-term
investments.
The Company's long term capital expenditure requirements will depend upon
numerous factors, including the progress of the Company's research and
development programs; the time required to obtain regulatory approvals; the
resources that the Company devotes to the development of self-funded products,
proprietary manufacturing methods and advanced technologies; the ability of the
Company to obtain additional licensing arrangements and to manufacture products
under those arrangements, additional expenditures to support the manufacture of
new products if and when approved; and possible acquisitions of products,
technologies and companies. As the Company evaluates the progress of its
development projects, in particular the glucose monitoring device and hormone
replacement products, its commercialization plans and the lead time to set up
manufacturing capabilities, Cygnus may commence long-term planning for another
manufacturing site. Nevertheless, the Company believes that such long-term
planning will not result in any material impact on the cash flows and liquidity
for 1996.
Based upon current expectations for operating losses and capital
expenditures for 1996, the Company believes that its existing cash, cash
equivalents and short-term investments of $48.5 million, when coupled with
future contract revenues from development agreements, interest income and
possible additional equipment financing, will be sufficient to meet its
operating expenses and capital expenditure requirements through at least 1996.
However, there can be no assurance that the Company will not require additional
financing depending upon future business strategies, results of clinical trials
and management decisions to accelerate certain research and development programs
and other factors.
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CYGNUS, INC.
March 31, 1996
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item I, "Notes to the Consolidated Financial Statements", Note 3
regarding Legal Proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
10.1 Distributorship Agreement dated as of February 9, 1996 between the
Registrant and Becton Dickison (Confidential treatment has been applied for or
granted for portions of this agreement. The portions redacted have been filed
separately with the SEC).
27. Financial Data Schedules
B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K for the three months
ended March 31, 1996.
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CYGNUS, INC.
March 31, 1996
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.
CYGNUS, INC.
By: /S/ John C. Hodgman
------------------------------------------------
John C. Hodgman
Chief Financial Officer (and Principal Accounting
Officer), and Vice President, Finance;
President, Cygnus Diagnostics
14