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, 1997
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 8, 1997:
Common Stock - 18,826,146 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 month
period ended March 31, 1997 and 1996 (unaudited) ............ 2
Consolidated Condensed Balance Sheets at March 31, 1997
(unaudited) and December 31,1996 ............................ 3
Consolidated Statements of Cash Flows for the three month
period ended March 31, 1997 and 1996 (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 ................... 14
SIGNATURES ........................................................ 15
1
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,
1997 1996
---------- ----------
Product revenues $ 1,700 $ 18
Contract revenues 3,390 3,440
Royalty and other revenues 4,202 306
-------- --------
TOTAL REVENUES 9,292 3,764
Costs and expenses:
Costs of products sold 2,422 958
Research and development 5,831 5,217
Marketing, general and administrative 1,692 2,338
-------- --------
TOTAL COSTS AND EXPENSES 9,945 8,513
LOSS FROM OPERATIONS (653) (4,749)
Interest income, net 290 544
-------- --------
NET LOSS $ (363) $ (4,205)
-------- --------
-------- --------
NET LOSS PER SHARE $ (0.02) $ (0.23)
-------- --------
-------- --------
Shares used in computation of
net loss per share 18,744 18,362
-------- --------
-------- --------
(See accompanying notes.)
2
CYGNUS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
MARCH 31, December 31,
ASSETS: 1997 1996
----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 22,296 $ 33,148
Short-term investments 27,960 16,286
Trade accounts receivable, net of allowance 2,116 7,759
Inventories 2,028 2,331
Prepaid expenses and other current assets 1,492 1,010
--------- ---------
TOTAL CURRENT ASSETS 55,892 60,534
Equipment and improvements, at cost 19,228 19,462
Less accumulated depreciation and amortization (14,208) (13,872)
--------- ---------
NET EQUIPMENT AND IMPROVEMENTS 5,020 5,590
Lease deposits and other assets 3,459 2,674
--------- ---------
TOTAL ASSETS $ 64,371 $ 68,798
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable 1,352 2,153
Accrued compensation 1,611 3,177
Accrued professional services 1,213 691
Other accrued liabilities 2,283 2,465
Customer advances 1,110 1,146
Current portion of deferred revenue 8,382 10,912
Current portion of long term debt 2,614 2,289
Current portion of capital lease obligations 1,066 1,315
--------- ---------
TOTAL CURRENT LIABILITIES 19,631 24,148
Long-term portion of deferred revenue 2,171 2,567
Long-term portion of debt 5,547 6,444
Long-term portion of capital lease obligations 920 1,076
Accrued rent and other long-term liabilities 4,089 3,350
Stockholders' equity:
Common stock 118,483 117,284
Accumulated deficit (86,470) (86,071)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 32,013 31,213
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,371 $ 68,798
--------- ---------
--------- ---------
(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,
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (363) $ (4,205)
Adjustments to reconcile net loss to cash
(used in)/provided by operating activities:
Depreciation and amortization 1,185 696
Decrease/(increase) in assets 4,627 1,039
Increase/(decrease) in liabilities (4,225) 2,393
---------- ---------
NET CASH (USED IN)/PROVIDED BY
OPERATING ACTIVITIES 1,224 (77)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (639) (300)
Decrease/(increase) in short-term
investments (11,660) (11,724)
---------- ---------
NET CASH (USED IN)/PROVIDED BY
INVESTING ACTIVITIES (12,299) (12,024)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,200 2,831
Principal payments of long-term debt (572) (122)
Payment of capital lease obligations (405) (343)
---------- ---------
NET CASH (USED IN)/PROVIDED BY
FINANCING ACTIVITIES 223 2,366
---------- ---------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (10,852) (9,735)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 33,148 30,445
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,296 $ 20,710
---------- ---------
---------- ---------
(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 reincorporated in Delaware.
The consolidated financial statements as of and for the three month
periods ended March 31, 1997 and 1996, 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, 1996 included in the Company's 1996 Annual Report and incorporated by
reference on Form 10-K.
2. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earning per Share" which is required to be adopted by the
Company on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options and warrants, Common
Stock Equivalents ("CSE"), will be excluded. The Company is not impacted by
Statement 128 on the calculation of primary or fully diluted loss per share
for the quarters ended March 31, 1997 and March 31, 1996 since the Company's
stock options and warrants are considered CSE and their effect is currently
anti-dilutive.
Currently, net loss per share is computed using the weighted average
number of shares of common stock outstanding. CSE shares from stock options
and warrants are excluded from the computation as their effect is
anti-dilutive.
3. LEGAL PROCEEDINGS
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 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-Registered Trademark-). 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
5
CYGNUS, INC.
March 31, 1996
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 International Chambers 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 an exclusive license
previously granted to Sanofi. In March 1997 hearings were held during which
Cygnus presented its liability claims against Sanofi to the Tribunal.
Post-hearing briefs of Cygnus and Sanofi were submitted in April 1997 and a
decision of the Tribunal as to Cygnus' claims against Sanofi is pending.
Remaining to be heard is a determination as to the amount of damages to be
awarded to either party. 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.
In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") related to Nicotrol-Registered
Trademark-, Cygnus' smoking cessation patch. In March of this year, Cygnus
announced that Pharmacia exercised its option to purchase the U.S.
manufacturing rights for Nicotrol. The agreement between Cygnus and Pharmacia
provided that Pharmacia would be obligated to pay Cygnus for, among other
things, existing inventory costs and for certain purchase order
commitments. Pharmacia disputes their obligations regarding inventory costs
and purchase order commitments. The arbitration is intended to resolve these
matters. Should Cygnus' claims not be allowed, the Company could be
adversely affected.
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 declaratory judgment of
invalidity and/or unenforceability of Alza Corporation's United States patent
relating to the transdermal administration of fentanyl. Consequently, the
Company has effectively suspended its development efforts for the transdermal
administration of fentanyl.
6
CYGNUS, INC.
March 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION SET FORTH BELOW 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 WITH THE SECURITIES AND
EXCHANGE COMMISSION, SUCH AS ITS FORM 10-K, ITS OTHER 10-Q AND FORM 8-K
REPORTS. THESE DOCUMENTS AND THE DISCUSSION BELOW CONTAIN IMPORTANT FACTORS,
INCLUDING WITHOUT LIMITATION THOSE INVOLVING CERTAIN ONGOING ARBITRATION
PROCEEDINGS INVOLVING THE COMPANY, THAT COULD CAUSE OUR ACTUAL RESULTS TO
DIFFER FROM OUR CURRENT EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN.
GENERAL
Cygnus, Inc. (the "Company" or "Cygnus") is engaged in the development
of diagnostic and drug delivery systems, with its current efforts primarily
focused on three core technologies: a painless, automatic 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. 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. 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
7
CYGNUS, INC.
March 31, 1996
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 drug
delivery and diagnostic 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 on
favorable terms. There can be no assurance that the Company will be able to
enter into new collaborative arrangements on such terms, if at all.
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 pharmaceutical licensees, the demand for its
Nicotrol-Registered Trademark- product, the demand for and shipments of its
FemPatch product, and the costs associated with its manufacture. 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 few 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 1997. At March 31, 1997, the
Company's accumulated deficit was approximately $86.5 million.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
PRODUCT REVENUES for the quarter ended March 31, 1997 were $1.7 million
compared to $0.02 million for the quarter ended March 31, 1996.
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 to provide that Cygnus will
continue to manufacture and supply Nicotrol for the United States ("U.S.")
market through 1999. In addition to product revenues under this agreement,
the Company also earns royalties on sales within the U.S. Pharmacia had the
option to terminate this agreement and purchase the U.S. manufacturing rights
upon the payment of certain amounts to the Company. Pharmacia has exercised
this option to purchase the U.S. manufacturing rights for Nicotrol. The
Company has been unsuccessful in reaching an agreement with Pharmacia
regarding Pharmacia's obligations for certain purchase order commitments and
existing inventory costs. Cygnus has initiated arbitration proceedings
against Pharmacia relating to these disputed matters (See Part I, Item I,
"Notes to the Consolidated Financial Statements", Note 3 regarding Legal
Proceedings).
8
CYGNUS, INC.
March 31, 1996
obligations for certain purchase order commitments and existing inventory
costs. Cygnus has initiated arbitration proceedings against Pharmacia
relating to these disputed matters.
The Company anticipates that the demand for Nicotrol within the U.S.
during 1997 will be well below 1996 levels as a result of the ability of the
Company's marketing partner to meet product demand by utilizing existing
inventories. In addition, the long-term demand for Nicotrol is uncertain in
both existing and potential markets. Currently, in addition to Nicotrol,
there are other smoking cessation transdermal patches and other smoking
cessation products that have been approved for over-the-counter ("OTC") sale
by the FDA which are not made by or licensed from Cygnus. A reduction in
demand for Nicotrol will have the effect of reducing the Company's revenues
and therefore negatively impact its overall results of operations.
Due to the above factors, the uncertainty of the success of the
Company's recently approved FemPatch product, and the uncertainty regarding
when and if additional products obtain FDA clearance and when and if
licensees sell and market such products, the Company believes that the level
of product revenues experienced to date are not indicative of future results.
CONTRACT REVENUES for the quarter ended March 31, 1997 were $3.4 million
compared to the $3.4 million for the quarter ended March 31, 1996. Contract
revenues primarily reflect labor and material cost reimbursements associated
with certain transdermal delivery systems and the amortization of milestone
payments relating to certain transdermal delivery systems and the glucose
monitoring device.
In February 1996 the Company entered into an agreement with Becton
Dickinson for the marketing and distribution of the GlucoWatch-TM-, Cygnus'
painless, automatic 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 non-refundable payment from
Becton Dickinson and is eligible to receive milestone payments as well as a
percentage of the product's 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. Under the 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
non-refundable payment from Yamanouchi and is eligible to receive milestone
payments as well as a percentage of the product's 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.
9
CYGNUS, INC.
March 31, 1996
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 is unable to predict to what extent the termination of
existing contracts by current partners, or new collaborative agreements, if
any, will impact overall contract revenues in 1997 and subsequent future
periods.
ROYALTY AND OTHER REVENUES for the quarter ended March 31, 1997 were
$4.2 million compared to $0.3 million for the quarter ended March 31, 1996.
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 U.S. The net increase in royalty and other revenues
is primarily due to the significant increase in volume of units shipped as a
result of the July 1996 change of Nicotrol's status to OTC in the U.S.
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. It is anticipated that royalty revenue in 1997 will be
greater then 1996 due to the recognition of previously deferred royalty
payments associated with the U.S. OTC sales of Nicotrol during the second
half of 1996.
COSTS OF PRODUCTS SOLD for the quarter ended March 31, 1997 were $2.4
million compared to $1.0 million for the quarter ended March 31, 1996. Costs
of products sold include direct and indirect manufacturing costs of Nicotrol
production and facility and personnel costs required to meet production
levels. Costs of products sold increased primarily due to increased Nicotrol
shipments as a result of the change of Nicotrol's status to OTC in the U.S.
as mention above. The Company experienced negative product margins for the
three month periods ended March 31, 1997 and 1996 primarily due to low
production volumes which prevented the Company from absorbing all the fixed
costs associated with Nicotrol production.
As a result of Pharmacia's exercise of the option to purchase the
manufacturing rights of Nicotrol, the Company will incur no manufacturing
cost associated with Nicotrol production, but consequently, will achieve no
production margin associated with such production.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended March 31, 1997
were $5.8 million compared to $5.2 million for the quarter ended March 31,
1996. The increase is primarily due to a $0.5 million charge to reduce the
net realizable value of certain equipment used in development, for the
production of clinical supplies and for the manufacturing of commercial
products. The write-down was related to current and anticipated future
production levels being
10
CYGNUS, INC.
March 31, 1996
significantly below equipment production capabilities. Research and
development and clinical activities primarily include the glucose monitoring
development program, the support of the Company's hormone replacement therapy
products (one of which, FemPatch, was approved by FDA on December 3, 1996 and
two of which are in clinical trials), and a contraception product. 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, 1997 were $1.7 million compared to the $2.3 million for the quarter
ended March 31, 1996. The decrease primarily reflects a decrease in expenses
due to the Company's legal proceedings against Sanofi. 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
March 31, 1997 was $0.3 million as compared to $0.5 million for the quarter
ended March 31, 1996. The decrease is due primarily to interest expense
associated with the Company's June 1996 $8.0 million bank loan agreement for
short-term working capital.
LIQUIDITY AND CAPITAL RESOURCES
Through October 1995, the Company received net proceeds of approximately
$82.1 million from public offerings. Through 1996, the Company financed
approximately $8.4 million 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 1996, the Company received $8.0
million under a bank loan agreement for short-term working capital. This
line will be repaid monthly beginning in January 1997 through 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 revenues and interest income.
Net cash provided in operating activities for the three month period
ended March 31, 1997 was $1.2 million, compared with net cash used of $0.1
million for the period ended March 31, 1996. Cash provided in operating
activities during the period ended March 31, 1997 was primarily due to a
decrease in accounts receivable of $6.0 million and an increase in accrued
rent and other liabilities, offset by decreases in deferred revenue and
accrued compensation and an increase in notes receivable, prepaid expenses
and other current liabilities. 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.
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,
11
CYGNUS, INC.
March 31, 1996
preparation for regulatory filings and clinical trials and the expected
reduction in product revenues, the Company anticipates an increase in cash
usage for 1997 operating activities.
Net cash used in investing activities of $12.3 million for the quarter
ended March 31, 1997 resulted primarily from net purchases of short-term
investments of $11.7 million. 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 financing activities of $0.2 million for the three
months ended March 31, 1997 includes $1.2 million of common stock issuance
proceeds offset by long-term debt and capital lease repayments.Net cash
provided by financing activities of $2.4 million 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.
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, the 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 cash flows and liquidity for 1997.
Based upon current expectations for operating losses and capital
expenditures for 1997, the Company believes that its existing cash, cash
equivalents and short-term investments of $50.3 million, when coupled with
expected future product sales and royalty, 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 1997. 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
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 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
International Chambers 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 an exclusive license previously
granted to Sanofi. In March 1997 hearings were held during which Cygnus
presented its liability claims against Sanofi to the Tribunal. Post-hearing
briefs of Cygnus and Sanofi were submitted in April 1997 and a decision of
the Tribunal as to Cygnus' claims against Sanofi is pending. Remaining to be
heard is a determination as to the amount of damages to be awarded to either
party. 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.
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 declaratory judgment of
invalidity and/or unenforceability of Alza Corporation's United States patent
relating to the transdermal administration of fentanyl. Consequently The
Company has effectively suspended its development efforts for the transdermal
administration of fentanyl.
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CYGNUS, INC.
March 31, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
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, 1997.
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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
15