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 JUNE 30, 1996
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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
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CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction (I.R.S. employer
of 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 AUGUST 6, 1996:
Common Stock - 18,579,630 shares
Total pages: 15
Page number of exhibit index: 14
CYGNUS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1: Financial Statements
Consolidated Statements of Operations for the three month
period ended June 30, 1996 and 1995 (unaudited)................2
Consolidated Condensed Balance Sheets at June 30, 1996
(unaudited) and December 31, 1995..............................3
Consolidated Statements of Cash Flows for the six month
period ended June 30, 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 4: Submission of Matters to a Vote of Security Holders..............13
Item 6: Exhibits and Reports on Form 8-K.................................14
SIGNATURES.................................................................15
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 Six months ended
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
Product revenues $ 5,274 $ 964 $ 5,292 $ 1,852
Contract revenues 3,373 2,944 6,813 6,534
Royalty and other revenues 340 864 646 1,782
------- ------- ------- -------
TOTAL REVENUES 8,987 4,772 12,751 10,168
Costs and expenses:
Costs of products sold 3,804 1,191 4,761 2,358
Research and development 5,667 4,693 10,885 10,276
Marketing, general and
administrative 3,040 1,839 5,378 3,304
------- ------- ------- -------
TOTAL COSTS AND EXPENSES 12,511 7,723 21,024 15,938
LOSS FROM OPERATIONS (3,524) (2,951) (8,273) (5,770)
Interest income, net 425 37 969 88
------- ------- ------- -------
NET LOSS $(3,099) $(2,914) $(7,304) $(5,682)
------- ------- ------- -------
------- ------- ------- -------
NET LOSS PER SHARE $ (0.17) $ (0.19) $ (0.40) $ (0.36)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computation of
net loss per share 18,570 15,667 18,466 15,624
------- ------- ------- -------
------- ------- ------- -------
(See accompanying notes.)
2
CYGNUS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
JUNE 30, December 31,
ASSETS: 1996 1995
- ------ ----------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 17,252 $ 30,445
Short-term investments 28,899 16,053
Trade accounts receivable, net of allowance 9,096 2,310
Inventories 1,232 378
Prepaid expenses and other current assets 716 640
-------- --------
TOTAL CURRENT ASSETS 57,195 49,826
Equipment and improvements, at cost 18,667 18,132
Less accumulated depreciation and amortization (12,625) (11,260)
-------- --------
NET EQUIPMENT AND IMPROVEMENTS 6,042 6,872
Lease deposits and other assets 2,016 1,156
-------- --------
TOTAL ASSETS $ 65,253 $ 57,854
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Accounts payable 1,352 1,006
Accrued compensation 2,008 2,191
Accrued professional services 1,081 726
Other accrued liabilities 913 1,287
Customer advances 846 846
Current portion of deferred revenue 6,320 3,301
Current portion of long term debt 1,389 489
Current portion of capital lease obligations 1,461 1,425
-------- --------
TOTAL CURRENT LIABILITIES 15,370 11,271
Long-term portion of deferred revenue 3,908 3,532
Long-term debt 7,589 734
Long-term portion of capital lease obligations 1,520 1,976
Accrued rent and other Long-term liabilities 2,820 2,089
Stockholders' equity:
Common stock 116,312 113,266
Accumulated deficit (82,266) (75,014)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 34,046 38,252
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,253 $ 57,854
-------- --------
-------- --------
(See accompanying notes.)
3
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
SIX MONTHS ENDED JUNE 30,
1996 1995
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,304) $ (5,682)
Adjustments to reconcile net loss to
cash (used in)/provided by
operating activities:
Depreciation and amortization 1,299 1,301
Decrease/(increase) in assets (8,597) (2,892)
Increase/(decrease) in liabilities 4,402 (3,907)
-------- --------
NET CASH (USED IN)/PROVIDED BY
OPERATING ACTIVITIES (10,200) (11,180)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (602) (1,937)
Decrease/(increase) in short-term investments (12,773) 4,922
-------- --------
NET CASH (USED IN)/PROVIDED
BY INVESTING ACTIVITIES (13,375) 2,985
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of assets 282 2,001
Issuance of common stock 3,046 464
Issuance of long-term debt 8,000 --
Principal payments of long-term debt (245) (225)
Payment of capital lease obligations (701) (613)
-------- --------
NET CASH (USED IN)/PROVIDED
BY FINANCING ACTIVITIES 10,382 1,627
-------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (13,193) (6,568)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,445 9,220
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,252 $ 2,652
-------- --------
-------- --------
(See accompanying notes.)
4
CYGNUS, INC.
June 30, 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 six month periods
ended June 30, 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 and, in August of 1996, the
appelate court affirmed the dismissal of the Company's lawsuit. 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
5
CYGNUS, INC.
June 30, 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. Sanofi is seeking to
recover from Cygnus approximately $60.0 million for damages attributable to
the alleged breach. 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 plans
to continue aggressively defending against this arbitration and has asserted
certain counterclaims exceeding the amount being sought by Sanofi. A hearing
was held in May 1996 with respect to the liability aspects of Sanofi's claims
against Cygnus, and the parties are awaiting the arbitrators' decision.
Remaining to be heard are Cygnus' liability claims against Sanofi and a
determination as to the amount of damages to be awarded to either party. No
date has been set for further hearings. 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.
June 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 FORM10-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.
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
7
CYGNUS, INC.
June 30, 1996
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 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. Further, there can be no assurance that the Company's potential
new products, including its Glucowatch, will be successfully developed or
commercialized.
The Company's results of operations vary significantly from period to
period 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 June 30, 1996, the Company's accumulated
deficit was approximately $82.3 million.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED JUNE 30, 1996 AND 1995
PRODUCT REVENUES for the quarter ended June 30, 1996 were $5.3 million
compared to $1.0 million for the quarter ended June 30, 1995 and were $5.3
million for the six months ended June 30, 1996 compared to $1.9 million for
the six months ended June 30, 1995. This reflects increased demand for
additional shipments of Nicotrol during the first half of 1996 related to the
anticipated change by the Food and Drug Administration (the "FDA") of
Nicotrol's status from prescription to over-the-counter ("OTC"). On July 3,
1996 the FDA approved Nicotrol as the first over-the-counter smoking
cessation transdermal patch.
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
8
CYGNUS, INC.
June 30, 1996
revenues, the Company will also earn a 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 June 30, 1996 were $3.4 million
compared to the $2.9 million for the quarter ended June 30, 1995 and were
$6.8 million for the six months ended June 30, 1996 compared to $6.5 million
for the six months ended June 30, 1995. The increase in contract revenues
primarily reflects the recognition, through amortization of previously
capitalized milestone payments, of glucose monitoring device and certain
transdermal delivery system revenues.
In February 1996 the Company entered into an agreement with Becton
Dickinson for the marketing and distribution of the GlucoWatch-TM-, 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 and manufacturing. In addition, Cygnus will participate
in sales, marketing and customer service and support for the product. In the
first half of 1996, Cygnus received an up-front payment and is eligible to
receive milestone payments as well as a percentage of the products' future
commercial success.
In July 1996 the Company entered into an agreement with Tokyo-based
Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") for the marketing and
distribution of the GlucoWatch-TM-, described above. Under terms of this
agreement, Yamanouchi has exclusive marketing and distribution rights in
Japan and Korea. Cygnus will have primary responsibility for completing
product development and for manufacturing. Cygnus will be eligible to receive
up-front and milestone payments as well as a percentage of the products'
future commercial success. In July 1996 the Company also entered into a
development and marketing agreement with Yamanouchi for a 7-day transdermal
product to deliver a proprietary Yamanouchi compound. Under the terms of the
agreement, Cygnus will receive funding for the development of the transdermal
product and will have exclusive rights to manufacture and supply Yamanouchi
with the product and Yamanouchi will have exclusive worldwide marketing
rights to the product.
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 will be lower in 1996
compared
9
CYGNUS, INC.
June 30, 1996
to 1995 for those contracts existing in 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 June 30, 1996 were $0.3
million compared to $0.9 million for the quarter ended June 30, 1995 and were
$0.6 million for the six months ended June 30, 1996 compared to $1.8 million
for the six months ended June 30, 1995. The amounts include royalties from
sales by Pharmacia of the Company's nicotine transdermal product in Europe
and Canada. Additionally, in the first half of 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 and six months ended June 30,
1996 is primarily attributable to the corresponding periods in 1995 including
a full six months amortization of "Customer Advances" compared to the quarter
and six months ended June 30, 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 June 30, 1996 were $3.8
million compared to $1.2 million for the quarter ended June 30, 1995 and were
$4.8 million for the six months ended June 30, 1996 compared to $2.4 million
for the six months ended June 30, 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. For
the quarter and six months ended June 30, 1996, costs of products sold
increased due to increased Nicotrol shipments.
The Company experienced positive product margins for the quarter and six
months ended June 30, 1996 due to increased demand for additional shipments
of Nicotrol. Conversely, the Company experienced negative product margins for
the quarter and six months ended June 30, 1995 primarily due to low
production volumes which prevented the Company from absorbing all the fixed
costs associated with Nicotrol production. There can be no assurance that
product margins associated with Nicotrol production will improve, nor can
there be any assurance that the overall level of demand for Nicotrol will
remain at current levels despite the change in Nicotrol's status from
prescription to OTC.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended June 30, 1996
were $5.7 million compared to $4.7 million for the quarter ended June 30,
1995 and were $10.9 million for the six months ended June 30, 1996 compared
to $10.3 million for the six months ended June 30, 1995. These increases
reflect the Company's accelerated level of research and development costs
primarily associated with the glucose monitoring system. Research and
development and clinical activities primarily include the support of the
Company's hormone replacement therapy products (one of which, FemPatch, is
covered by an NDA ( "New Drug Application") submitted to the FDA and three of
which are in clinical trials), contraception product and the glucose
monitoring development program. After the NDA was submitted for FemPatch, the
FDA requested a bioequivalency study, which is
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CYGNUS, INC.
June 30, 1996
the responsibility of Warner-Lambert, the Company's marketing partner. It is
uncertain when, if ever, 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 June
30, 1996 were $3.0 million compared to the $1.8 million for the quarter ended
June 30, 1995 and were $5.4 million for the six months ended June 30, 1996
compared to $3.3 million for the six months ended June 30, 1995. The increase
primarily reflects an increase in expenses due to the Company's legal
proceedings against 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.
INTEREST INCOME, NET OF INTEREST AND OTHER EXPENSE for the quarter ended
June 30, 1996 was $0.4 million compared to $0.04 million for the quarter
ended June 30, 1995 and were $1.0 million for the six months ended June 30,
1996 compared to $.09 million for the six months ended June 30, 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 & 1996, the Company financed approximately $2.5 million, $1.6 million,
$1.7 million, $2.0 million and $0.3 million respectively, of manufacturing
and research equipment under capital loan and lease arrangements. 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. In June of 1996, the
Company entered into a new $8.0 million bank line of credit for short-term
working capital. This line will be repaid monthly starting January 1997 and
is scheduled to be fully paid by December 1999. Both lines are subject to a
number of financial and other covenants. In addition to the cash from the
public offerings, equipment lease and short-term working capital financing,
the Company has been financing its operations primarily through contract
revenues and interest income.
Net cash used in operating activities for the six month period ended June
30, 1996 was $10.2 million, compared to $11.2 million for the period ended
June 30, 1995. Cash used in operating activities during the period ended June
30, 1996 was primarily due to the Company's net loss of $7.3 million,
increases in accounts receivable, prepaid and other assets and inventories
and the decrease in accrued compensation, offset by increases in deferred
revenue, accrued rent and other liabilities, and accrued professional
services. Cash used in operating activities during the period ended June 30,
1995 was primarily due to the Company's net loss of $5.7 million, the
increases in accounts receivable and inventories, and the decreases in
customer advances, accrued compensation and accounts payable.
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CYGNUS, INC.
June 30, 1996
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 $13.4 million for the six months
ended June 30, 1996 resulted primarily from net purchases of short-term
investments of $12.8 million and capital expenditures of $0.6 million. Net
cash provided by investing activities of $3.0 million for the six month
period ended June 30, 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 six months ended June
30, 1996 includes $8.0 million received from the short term working capital
loan and security agreement, $3.0 million of common stock issuance proceeds
and $0.3 million from the sale and leaseback of equipment offset by long-term
debt and capital lease repayments. Net cash provided by financing activities
for the six months ended June 30, 1995 includes proceeds of $2.0 million from
the sale and leaseback of equipment and $0.5 million of 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.
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 $46.2 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 or
pursue additional financing depending upon future business strategies,
results of clinical trials and management decisions to accelerate certain
research and development programs and other factors.
12
CYGNUS, INC.
June 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On June 6, 1996 the Annual Meeting of Stockholders was held. The
following Directors were re-elected at this meeting.
Frank T. Cary Gregory B. Lawless
Gary W. Cleary Richard G. Rogers
Walter B. Wriston Andre F. Marion
Other matters voted upon:
Votes
------------------------------------------------
Broker
Affirmative Negative Abstain Non-Votes
----------- --------- ------- ----------
To approve an amendment to the 1994 Stock
Option/Award Plan to increase the pool of 8,311,108 3,118,199 35,221 5,674,837
options available for grant under the plan
by 1,500,000 shares.
To approve an amendment to the Employees
Stock Purchase Plan to increase the pool 13,020,349 1,503,039 26,110 2,589,867
of shares available for purchase under the
plan by 200,000
To re-appoint Ernst & Young LLP to serve as
the Company's independent auditors. 16,450,965 654,490 33,910 0
13
CYGNUS, INC.
June 30, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) EXHIBITS
--------
The following exhibits are filed herewith or incorporated by reference:
10.1 Loan and Security Agreement between the Registrant and Silicon
Valley Bank entered into as of June 24, 1996.
10.2 Product Supply and Distribution Agreement between the Registrant
and Yamanouchi Pharmaceutical Co., LTD. dated as of July 14, 1996
(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 Schedule
b) REPORTS ON FORM 8-K
-------------------
The Company did not file any reports on Form 8-K for the three months
ended June 30, 1996.
14
CYGNUS, INC.
June 30, 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
15
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 10.1 Loan and Security Agreement
Exhibit 10.2 Product Supply and Distribution agreement between Cygnus, Inc.
and Yamanouchi Pharmaceutical Co., Ltd. dated July 14, 1996
(Confidential treatment has been applied or granted for portions
of this agreement. The portions redacted have been filed
separately with the SEC).
Exhibit 27 Financial Data Schedule