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 SEPTEMBER 30, 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 NOVEMBER 8, 1996:
Common Stock - 18,627,535 shares
Total pages: 15
Page number of exhibit index:14
CYGNUS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1: Financial Statements
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1996 and 1995 (unaudited).... 2
Consolidated Condensed Balance Sheets at September 30,1996
(unaudited) and December 31, 1995.............................. 3
Consolidated Statements of Cash Flows for the nine month
periods ended September 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...................................... 14
Item 6: Exhibits and Reports on Form 8-K....................... 14
SIGNATURES........................................................... 15
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 Nine months ended
September 30, September 30,
1996 1995 1996 1995
-------- --------- --------- --------
Product revenues $ 7,149 $ 830 $ 12,442 $ 2,682
Contract revenues 3,517 2,478 10,330 9,012
Royalty and other revenues 145 560 790 2,342
-------- --------- --------- --------
TOTAL REVENUES 10,811 3,868 23,562 14,036
Costs and expenses:
Costs of products sold 6,291 1,250 11,052 3,608
Research and development 5,996 5,091 16,881 15,367
Marketing, general and administrative 1,497 2,026 6,876 5,330
-------- --------- --------- --------
TOTAL COSTS AND EXPENSES 13,784 8,367 34,809 24,305
LOSS FROM OPERATIONS (2,973) (4,499) (11,247) (10,269)
Interest income, net 232 45 1,202 133
-------- --------- --------- --------
NET LOSS $ (2,741) $ (4,454) $ (10,045) $(10,136)
-------- --------- --------- --------
-------- --------- --------- --------
NET LOSS PER SHARE $ (0.15) $ (0.28) $ (0.54) $ (0.65)
-------- --------- --------- --------
-------- --------- --------- --------
Shares used in computation of
net loss per share 18,584 15,734 18,506 15,661
-------- --------- --------- --------
-------- --------- --------- --------
(See accompanying notes.)
2
CYGNUS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, December 31,
1996 1995
------------- ------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 25,385 $ 30,445
Short-term investments 25,922 16,053
Trade accounts receivable, net of allowance 6,726 2,310
Inventories 2,166 378
Prepaid expenses and other current assets 1,219 640
--------- ---------
TOTAL CURRENT ASSETS 61,418 49,826
Equipment and improvements, at cost 18,898 18,132
Less accumulated depreciation and amortization (13,198) (11,260)
--------- ---------
NET EQUIPMENT AND IMPROVEMENTS 5,700 6,872
Lease deposits and other assets 2,165 1,156
--------- ---------
TOTAL ASSETS $ 69,283 $ 57,854
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable 2,560 1,006
Accrued compensation 2,452 2,191
Accrued professional services 423 726
Other accrued liabilities 729 1,287
Customer advances 846 846
Current portion of deferred revenue 13,256 3,301
Current portion of long-term debt 1,689 489
Current portion of capital lease obligations 1,313 1,425
--------- ---------
TOTAL CURRENT LIABILITIES 23,268 11,271
Long-term portion of deferred revenue 2,965 3,532
Long-term portion of debt 7,167 734
Long-term portion of capital lease obligations 1,292 1,976
Accrued rent and other long-term liabilities 2,904 2,089
Stockholders' equity:
Common stock 116,732 113,266
Accumulated deficit (85,045) (75,014)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 31,687 38,252
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 69,283 $ 57,854
--------- ---------
--------- ---------
(See accompanying notes.)
3
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,045) $ (10,136)
Adjustments to reconcile net loss to cash (used in)/provided by
operating activities:
Depreciation and amortization 1,883 2,019
Decrease/(increase) in assets (7,781) (2,827)
Increase/(decrease) in liabilities 11,297 (2,402)
-------------- -------------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (4,646) (13,346)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (953) (2,108)
Decrease/(increase) in short-term investments (9,765) 13,241
-------------- -------------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (10,718) 11,133
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of assets 282 2,001
Issuance of common stock 3,466 1,906
Issuance of long-term debt 8,000 ----
Principal payments of long-term debt (367) (347)
Payment of capital lease obligations (1,077) (932)
-------------- -------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES 10,304 2,628
-------------- -------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (5,060) 415
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,445 9,220
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,385 $ 9,635
-------------- -------------
-------------- -------------
(See accompanying notes.)
4
CYGNUS, INC.
September 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 nine month periods
ended September 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
The United States Court of Appeals for the Federal Circuit upheld a 1995
decision of the United States District Court for the Northern District of
California which dismissed Cygnus' action seeking a declatory judgment of
invalidity and/or unenforceability of Alza Corporation's United States patent
relating to the transdermal administration of fentanyl. In dismissing the
action, the court did not consider the merits of Cygnus' arguments relating to
invalidity/unenforceability of the Alza Corporation patent nor associated
antitrust claims, but rather dismissed the action on jurisdictional grounds as
failing to establish the presence of an actual controversey between the
parties. The Company has effectively suspended its development efforts for the
transdermal administration of fentanyl.
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.
September 30, 1996
breached its existing contract with Sanofi by, among other things, entering
into a product development agreement with another company 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 Tribunal
of the International Chamber of Commerce (the "Tribunal") announced an
interim award in the arbitration proceedings in October 1996. The Tribunal
found that two transdermal products for hormone replacement therapy licensed
by Cygnus to another company fall within the scope of the exclusive license
previously granted to Sanofi. 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. Should
all or part of the claims as sought for by Sanofi, and in the amounts asserted
be successful, and should Cygnus' counter claims and defenses not be allowed,
the Company could be materially and adversely affected.
6
CYGNUS, INC.
September 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 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.
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.
September 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
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 September 30, 1996, the Company's accumulated deficit was
approximately $85.0 million.
In November 1996 the Company announced that a change in the application
specific integrated circuit (ASIC) component of the GlucoWatch will delay the
receipt of the latest prototype of these devices. Once the problem has been
resolved, the new ASICs will be manufactured and reassembled in the prototype
GlucoWatches. Cygnus expects to receive this shipment in early 1997, but the
actual timing will depend on the supplier's ability to complete the task
swiftly. These new prototypes are targeted for use in advanced development
activities, including clinical evaluation studies.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
PRODUCT REVENUES for the quarter ended September 30, 1996 were $7.1
million compared to $0.8 million for the quarter ended September 30, 1995 and
were $12.4 million for the nine months ended September 30, 1996 compared to
$2.7 million for the nine months ended September 30, 1995. This reflects
increased demand for additional shipments of Nicotrol during 1996 related to
the change of Nicotrol's status from prescription to over-the-counter
("OTC"). On July 3, 1996 the Food and Drug Administration (the "FDA")
approved Nicotrol as the first OTC 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
8
CYGNUS, INC.
September 30, 1996
manufacture and supply Nicotrol for the United States market through 1999.
In addition to product revenues, the Company will also earn royalties on
sales of Nicotrol 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 September 30, 1996 were $3.5
million compared to the $2.5 million for the quarter ended September 30, 1995
and were $10.3 million for the nine months ended September 30, 1996 compared
to $9.0 million for the nine months ended September 30, 1995. The increase in
contract revenues primarily reflects the amortization of previously
capitalized milestone payments relating to the glucose monitoring device and
certain transdermal delivery systems.
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, 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. In the third quarter 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 sales. 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
9
CYGNUS, INC.
September 30, 1996
of any such payment. The Company expects that contract revenues will be
lower in 1996 compared 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 September 30, 1996 were
$0.1 million compared to $0.6 million for the quarter ended September 30, 1995
and were $0.8 million for the nine months ended September 30, 1996 compared to
$2.3 million for the nine months ended September 30, 1995. The amounts include
royalties from sales by Pharmacia of the Company's nicotine transdermal product
in Europe and Canada, and by Pharmacia's marketing partner in the United States.
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 nine months ended September 30, 1996 is primarily attributable
to the first half of 1995 including a full six months amortization of "Customer
Advances" compared to the nine months ended September 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. However, it is anticipated that royalty revenue in
the quarter ending December 31, 1996 will be significantly higher than in prior
quarters due to the recognition of previously deferred royalty payments
associated with the US OTC sales of Nicotrol mentioned above. The associated
deferred revenue balance at September 30, 1996 is $8.4 million and will be
recognized in the quarter following the quarter in which sales by the Company's
licensees occur.
COSTS OF PRODUCTS SOLD for the quarter ended September 30, 1996 were $6.3
million compared to $1.3 million for the quarter ended September 30, 1995 and
were $11.1 million for the nine months ended September 30, 1996 compared to $3.6
million for the nine months ended September 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 nine months ended September 30, 1996, costs of
products sold increased due to increased Nicotrol shipments.
The Company experienced positive product margins for the quarter and nine
months ended September 30, 1996 due to increased demand for additional shipments
of Nicotrol. Conversely, the Company experienced negative product margins for
the quarter and nine months ended September 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 September 30, 1996
were $6.0 million compared to $5.1 million for the quarter ended September 30,
1995 and were $16.9
10
CYGNUS, INC.
September 30, 1996
million for the nine months ended September 30, 1996 compared to $15.4 million
for the nine months ended September 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 two 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 the responsibility of Warner-Lambert, the Company's marketing
partner. While this study has been provided to the FDA by Warner-Lambert, 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
September 30, 1996 were $1.5 million compared to the $2.0 million for the
quarter ended September 30, 1995 and were $6.9 million for the nine months ended
September 30, 1996 compared to $5.3 million for the nine months ended September
30, 1995. The decrease for the three month period ending September 30, 1996
primarily reflects a decrease in expenses due to the Company's legal proceedings
against Sanofi. However, the increase for the nine months ended September 30,
1996 resulted from increased legal expenses related to the above during the
first half of 1996 (See Part I, Item I, "Notes to the Consolidated Financial
Statements", Note 3 Legal Proceedings). The Company believes 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
September 30, 1996 was $0.2 million compared to $0.05 million for the quarter
ended September 30, 1995 and were $1.2 million for the nine months ended
September 30, 1996 compared to $0.1 million for the nine months ended September
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 1995 and the nine months ended
September 30, 1996, the Company financed approximately $2.5 million,
$1.6 million, $1.7 million, $2.1 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 received $8.0 million under a bank loan agreement 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
11
CYGNUS, INC.
September 30, 1996
working capital financing, the Company has been financing its operations
primarily through product and contract revenues and interest income.
Net cash used in operating activities for the nine month period ended
September 30, 1996 was $4.6 million, compared to $13.3 million for the period
ended September 30, 1995. Cash used in operating activities during the period
ended September 30, 1996 was primarily due to the Company's net loss of $10.0
million, increases in accounts receivable, inventories and prepaid and other
assets and the decrease in accrued professional services, offset by increases in
accounts payable, deferred revenue and accrued rent and other liabilities. Cash
used in operating activities during the period ended September 30, 1995 was
primarily due to the Company's net loss of $10.1 million, the increases in
accounts receivable and inventories, and the 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 $10.7 million for the nine months
ended September 30, 1996 resulted primarily from net purchases of short-term
investments of $9.8 million and capital expenditures of $0.8 million. Net cash
provided by investing activities of $11.1 million for the nine month period
ended September 30, 1995 was primarily generated by the sales and maturity of
short-term investments to finance operating activities.
Net cash provided by financing activities of $10.3 million for the nine
months ended September 30, 1996 includes $8.0 million received from the short-
term working capital loan and security agreement, $3.5 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 of $0.4 million and $1.1
million, respectively. Net cash provided by financing activities for the nine
months ended September 30, 1995 includes proceeds of $2.0 million from the sale
and leaseback of equipment and $1.9 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.
12
CYGNUS, INC.
September 30, 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 $51.3 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.
13
CYGNUS, INC.
September 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
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
September 30, 1996.
14
CYGNUS, INC.
September 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 27 Financial Data Schedule