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, 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
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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 AUGUST 6, 1997:
Common Stock - 18,866,159 shares
Total pages: 16
Page number of exhibit index: 15
CYGNUS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1: Financial Statements
Consolidated Statements of Operations for the three
and six month periods ended June 30, 1997 and
1996 (unaudited)..................................... 2
Consolidated Condensed Balance Sheets at June 30,
1997 (unaudited) and December 31,1996................ 3
Consolidated Statements of Cash Flows for the six
month periods ended June 30,1997 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 4: Submission of Matters to a Vote of Security Holders.... 14
Item 6: Exhibits and Reports on Form 8-K....................... 15
SIGNATURES........................................................ 16
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 Six months ended
June 30, June 30,
1997 1996 1997 1996
------- -------- -------- --------
Product revenues $ ---- $ 5,274 $ 1,700 $ 5,292
Contract revenues 4,065 3,373 7,456 6,813
Royalty and other revenues 4,175 340 8,377 646
------- -------- -------- --------
TOTAL REVENUES 8,240 8,987 17,533 12,751
Costs and expenses:
Costs of products sold 1,587 3,804 4,009 4,761
Research and development 5,141 5,667 10,973 10,885
Marketing, general and administrative 2,170 3,040 3,862 5,378
------- -------- -------- --------
TOTAL COSTS AND EXPENSES 8,898 12,511 18,844 21,024
LOSS FROM OPERATIONS (658) (3,524) (1,311) (8,273)
Interest income, net 348 425 638 969
------- -------- -------- --------
NET LOSS $ (310) $ (3,099) $ (673) $ (7,304)
------- -------- -------- --------
------- -------- -------- --------
NET LOSS PER SHARE $ (0.02) $ (0.17) $ (0.04) $ (0.40)
------- -------- -------- --------
------- -------- -------- --------
Shares used in computation of
net loss per share 18,832 18,570 18,788 18,466
------- -------- -------- --------
------- -------- -------- --------
(See accompanying notes.)
2
CYGNUS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
JUNE 30, December 31,
ASSETS 1997 1996
- ------ ----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 19,189 $ 33,148
Short-term investments 24,163 16,286
Trade accounts receivable, net of allowance 1,478 7,759
Inventories 2,535 2,331
Prepaid expenses and other current assets 1,404 1,010
--------- ---------
TOTAL CURRENT ASSETS 48,769 60,534
Equipment and improvements, at cost 20,531 19,462
Less accumulated depreciation and amortization (14,829) (13,872)
--------- ---------
NET EQUIPMENT AND IMPROVEMENTS 5,702 5,590
Deferred Compensation and other assets 3,701 2,674
--------- ---------
TOTAL ASSETS $ 58,172 $ 68,798
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable 1,318 2,153
Accrued compensation 2,287 3,177
Accrued professional services 1,251 691
Other accrued liabilities 2,017 2,465
Customer advances 1,206 1,146
Current portion of deferred revenue 3,014 10,912
Current portion of long term debt 2,939 2,289
Current portion of capital lease obligations 847 1,315
--------- ---------
TOTAL CURRENT LIABILITIES 14,879 24,148
Long-term portion of deferred revenue 1,774 2,567
Long-term portion of debt 4,650 6,444
Long-term portion of capital lease obligations 761 1,076
Accrued rent and other long-term liabilities 4,251 3,350
Stockholders' equity:
Common stock 118,598 117,284
Accumulated deficit (86,741) (86,071)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 31,857 31,213
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,172 $ 68,798
--------- ---------
--------- ---------
(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,
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (673) $ (7,304)
Adjustments to reconcile net loss to cash
(used in)/provided by operating
activities:
Depreciation and amortization 1,704 1,299
Decrease/(increase) in assets 4,651 (8,597)
Increase/(decrease) in liabilities (9,269) 4,402
----------- ----------
NET CASH (USED IN)/PROVIDED BY
OPERATING ACTIVITIES (3,587) (10,200)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,942) (602)
Decrease/(increase) in short-term investments (7,816) (12,773)
----------- ----------
NET CASH (USED IN)/PROVIDED BY
INVESTING ACTIVITIES (9,758) (13,375)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of assets --- 282
Issuance of common stock 1,314 3,046
Issuance of long-term debt --- 8,000
Principal payments of long-term debt (1,145) (245)
Payment of capital lease obligations (783) (701)
----------- ----------
NET CASH (USED IN)/PROVIDED BY
FINANCING ACTIVITIES (614) 10,382
----------- ----------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (13,959) (13,193)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,148 30,445
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,189 $ 17,252
----------- ----------
----------- ----------
(See accompanying notes.)
4
CYGNUS, INC.
June 30, 1997
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 six month periods
ended June 30, 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 three and six month periods ended June 30, 1997 and June 30, 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.
5
CYGNUS, INC.
June 30, 1997
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 claimed substantial damages as a
result of the alleged breach. Sanofi, in the original filing, sought to
recover from Cygnus in excess of $60 million for damages attributable to the
alleged breach. 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. In June
1997 the Tribunal ruled in favor of Sanofi with respect to Cygnus' claims.
The final stage of the Sanofi arbitration proceedings will involve the
Tribunal making a determination as to the amount of damages to be awarded
against Cygnus. In July 1997 hearings were held during which Cygnus and
Sanofi presented their respective positions as to the appropriate amount and
form of damages to be awarded against Cygnus. Sanofi suggested to the
Tribunal various damage awards including a large lump-sum cash payment but,
in particular, it suggested an award consisting of a substantial cash payment
(approximately $35.0 million) and future royalties payable to Sanofi with
respect to net sales attributable to the products found by the Tribunal to
fall within the scope of Sanofi's exclusive license. Cygnus has suggested to
the Tribunal damage awards substantially less significant than those being
sought by Sanofi. Should the Tribunal concur in Sanofi's assessment of the
amount of damages to be awarded, the Company would be materially and
adversely affected.
In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") relating 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 certain inventory costs and
purchase order commitments. The arbitration is intended to resolve these
matters.
6
CYGNUS, INC.
June 30, 1997
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
and manufacture 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.
June 30, 1997
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, in-license or
acquire 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
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 June 30, 1997, the Company's accumulated deficit
was approximately $86.7 million.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1996
PRODUCT REVENUES. No product revenue was recognized for the quarter ended
June 30, 1997 compared to $5.3 million for the quarter ended June 30, 1996.
Product revenues were $1.7 million for the six months ended June 30, 1997
compared to $5.3 million for the six months ended June 30, 1996. The
reduction resulted from the discontinuation of Nicotrol manufacturing.
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 would
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 and the
8
CYGNUS, INC.
June 30, 1997
applicable payment has been made to the Company. Cygnus will continue to
receive royalty revenue from the worldwide sales of 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).
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. In particular, the
Company anticipates that total revenue from Nicotrol during 1997 will be well
below 1996 levels as a result of the discontinuation of Nicotrol
manufacturing.
CONTRACT REVENUES for the quarter ended June 30, 1997 were $4.1 million
compared to the $3.4 million for the quarter ended June 30, 1996 and were
$7.5 million for the six months ended June 30, 1997 compared to $6.8 million
for the six months ended June 30, 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. The
increase in contract revenues for the quarter and six months ended June 30,
1997 is primarily due to a $1.0 million payment from Pharmacia & Upjohn for
the exercise of its option to purchase the manufacturing rights for Nicotrol
as noted above.
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.
June 30, 1997
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 June 30, 1997 were $4.2
million compared to $0.3 million for the quarter ended June 30, 1996 and were
$8.4 million for the six months ended June 30, 1997 compared to $0.6 million
for the six months ended June 30, 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. However, royalty revenue for the second half of 1997 will be
considerable less than for the first half of 1997 as a result of the
Company's marketing partner to meet product demand by utilizing existing
inventory.
COSTS OF PRODUCTS SOLD for the quarter ended June 30, 1997 were $1.6
million compared to $3.8 million for the quarter ended June 30, 1996 and were
$4.0 million for the six months ended June 30, 1997 compared to $4.8 million
for the six months ended June 30, 1996. Costs of products sold primarily
include direct and indirect production, facility and personnel costs required
to meet future anticipated production levels. The decrease in costs of
products sold for the quarter and six months ended June 30, 1997 primarily
reflects the reduction of direct expenses related to 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. The Company experienced negative product
margins for the quarter and six months ended June 30, 1997 due to low
production volumes which prevented the Company from absorbing all the fixed
costs.
10
CYGNUS, INC.
June 30, 1997
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended June 30, 1997
were $5.1 million compared to $5.7 million for the quarter ended June 30,
1996 and were $11.0 million for the six months ended June 30, 1997 compared
to $10.9 million for the six months ended June 30, 1996. 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 June
30, 1997 were $2.2 million compared to the $3.0 million for the quarter ended
June 30, 1996 and were $3.9 million for the six months ended June 30, 1997
compared to $5.4 million for the six months ended June 30, 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
June 30, 1997 was $0.3 million compared to $0.4 million for the quarter ended
June 30, 1996 and were $0.6 million for the six months ended June 30, 1997
compared to $1.0 million for the six months ended June 30, 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 used in operating activities for the six month period ended June
30, 1997 was $3.6 million, compared with net cash used of $10.2 million for
the period ended June 30, 1996. Cash used in operating activities during the
period ended June 30, 1997 was primarily due to a decreases in deferred
revenue, accounts payable and other accrued liabilities and an increase in
notes receivable, prepaid expenses and other current assets, offset by a
decrease in accounts receivable. 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.
11
CYGNUS, INC.
June 30, 1997
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 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 $9.8 million for the six months
ended June 30, 1997 resulted primarily from net purchases of short-term
investments of $7.8 million and capital expenditures of $1.9 million. 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 used in financing activities of $0.6 million for the six months
ended June 30, 1997 includes $1.3 million of common stock issuance proceeds
offset by $1.9 million in long-term debt and capital lease repayments. Net
cash provided by financing activities of $10.4 million 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 $0.9 million in 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, capital expenditures
for 1997 and the unknown amount of damages Cygnus may be required to pay Sanofi
as a result of the arbitration decision, the Company is uncertain whether its
existing cash, cash equivalents and short-term investments of $43.4 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 1997. 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.
12
CYGNUS, INC.
June 30, 1997
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-Registered Trademark-). Sanofi claimed substantial damages as a
result of the alleged breach. Sanofi, in the original filing, sought to
recover from Cygnus in excess of $60 million for damages attributable to the
alleged breach. 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. In June
1997 the Tribunal ruled in favor of Sanofi with respect to Cygnus' claims.
The final stage of the Sanofi arbitration proceedings will involve the
Tribunal making a determination as to the amount of damages to be awarded
against Cygnus. In July 1997 hearings were held during which Cygnus and
Sanofi presented their respective positions as to the appropriate amount and
form of damages to be awarded against Cygnus. Sanofi suggested to the
Tribunal various damage awards including a large lump-sum cash payment but,
in particular, it suggested an award consisting of a substantial cash payment
(approximately $35.0 million) and future royalties payable to Sanofi with
respect to net sales attributable to the products found by the Tribunal to
fall within the scope of Sanofi's exclusive license. Cygnus has suggested to
the Tribunal damage awards substantially less significant than those being
sought by Sanofi. Should the Tribunal concur in Sanofi's assessment of the
amount of damages to be awarded, the Company would be materially and
adversely affected.
In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") relating 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 certain inventory costs and
purchase order commitments. The arbitration is intended to resolve these
matters.
13
CYGNUS, INC.
June 30, 1997
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 8, 1997 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 re-appoint Ernst & Young
LLP to serve as the Company's
independent auditors. 16,706,162 17,590 31,436 0
14
CYGNUS, INC.
June 30, 1997
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
June 30, 1997.
15
CYGNUS, INC.
June 30, 1997
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
16
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 27 Financial Data Schedule