<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[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 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 22-2389839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 EXECUTIVE DRIVE, SUITE 325, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (zip code)
(619) 452-2323
(Registrant's telephone number including area code)
------------------------------------
Indicate by check (X) 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
------ ------
AT JULY 31, 1997, 34,636,067 SHARES OF COMMON STOCK OF THE REGISTRANT
WERE OUTSTANDING.
This filing, without exhibits, contains 13 pages.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996.......................................... 3
Consolidated Statements of Operations for the quarter and six
months ended June 30, 1997 and 1996......................................... 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996...................................... 5
Notes to Consolidated Financial Statements....................................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................ 12
Item 6 - Exhibits and Reports on Form 8-K................................................. 12
Signatures................................................................................ 13
</TABLE>
2
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,990,154 $ 8,045,508
Short-term investments 2,965,850 2,890,160
Accounts receivable:
Trade 419,519 344,041
Other 192,819 150,954
Inventories 708,626 973,767
Prepaid expenses 79,444 171,231
------------ ------------
Total current assets 8,356,412 12,575,661
Property and equipment, net 2,218,424 2,351,928
Convertible debenture issuance costs, net 29,605 33,487
------------ ------------
Total assets $ 10,604,441 $ 14,961,076
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 375,774 $ 999,442
Accrued compensation 316,627 485,751
Accrued liabilities 1,800,304 902,090
Current portion of notes payable 13,721 27,208
------------ ------------
Total current liabilities 2,506,426 2,414,491
Convertible debentures 400,000 400,000
Notes payable, net of current portion 9,926 12,020
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value; authorized 60,000,000 shares;
issued and outstanding, 34,573,111 shares at June
30, 1997 and December 31, 1996 691,462 691,462
Additional paid-in capital 70,061,625 70,062,301
Deferred compensation (1,085,013) (1,313,276)
Accumulated deficit (61,979,985) (57,305,922)
------------ ------------
Total stockholders' equity 7,688,089 12,134,565
------------ ------------
Total liabilities and stockholders' equity $ 10,604,441 $ 14,961,076
============ ============
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1996, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles.
3
<PAGE> 4
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product sales $ 732,838 $ 588,057 $ 1,549,296 $ 605,733
Grant income 62,270 -- 93,904 --
------------ ------------ ------------ ------------
795,108 588,057 1,643,200 605,733
------------ ------------ ------------ ------------
Costs and expenses:
Production costs 360,687 211,233 962,021 460,136
Sales and marketing 437,776 108,957 752,942 161,000
Research and development 2,096,068 663,811 3,586,315 1,091,044
General and administrative 630,502 845,619 1,204,875 1,805,770
Restructuring expense -- 11,935 -- 453,611
Debt conversion expense -- -- -- 183,688
------------ ------------ ------------ ------------
3,525,033 1,841,555 6,506,153 4,155,249
------------ ------------ ------------ ------------
Loss from operations (2,729,925) (1,253,498) (4,862,953) (3,549,516)
Other income (expense):
Interest income 102,359 128,061 205,165 248,355
Interest expense (7,969) (8,231) (16,275) (33,598)
------------ ------------ ------------ ------------
94,390 119,830 188,890 214,757
------------ ------------ ------------ ------------
Net loss $ (2,635,535) $ (1,133,668) $ (4,674,063) $ (3,334,759)
============ ============ ============ ============
Net loss per share $ (0.08) $ (0.04) $ (0.14) $ (0.12)
============ ============ ============ ============
Shares used in computing net loss
per share 34,573,111 28,728,276 34,573,111 27,171,713
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,674,063) $ (3,334,759)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 209,582 88,512
Amortization of deferred compensation 228,263 217,880
Debt conversion expense -- 183,688
Loss (Gain) on disposal of property and equipment 2,049 (11,110)
Common stock issued for services and expenses -- 86,898
Accounts receivable allowance -- 29,145
Changes in operating assets and liabilities, net 345,007 (1,887,095)
------------ ------------
Net cash used by operating activities (3,889,162) (4,626,841)
INVESTING ACTIVITIES
Purchase of equipment (74,921) (209,187)
Short-term investments (75,690) --
------------ ------------
Net cash used by investing activities (150,611) (209,187)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 12,109,340
Proceeds from issuance of convertible debentures -- 500,000
Payment of notes payable (15,581) (12,120)
Debt issuance costs -- (71,929)
------------ ------------
Net cash (used by) provided by financing activities (15,581) 12,525,291
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,055,354) 7,689,263
Cash and cash equivalents at beginning of period 8,045,508 1,009,878
------------ ------------
Cash and cash equivalents at end of period $ 3,990,154 $ 8,699,141
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Stock issued for debt conversion $ - $ 2,351,607
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY
The accompanying consolidated financial statements have been prepared
by Cypress Bioscience, Inc. (the "Company") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
SEC. The consolidated financial statements include the accounts of the Company
and its wholly- owned subsidiaries. All intercompany accounts and transactions
have been eliminated. In the opinion of the Company's management, all
adjustments necessary for a fair presentation of the accompanying unaudited
financial statements are reflected herein. All such adjustments are normal and
recurring in nature. Interim results are not necessarily indicative of results
for the full year. For more complete financial information, these consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's 1996 Annual Report
on Form 10-K filed with the SEC.
The Company researches, develops, manufactures and markets medical
devices and therapeutics for the treatment of certain types of immune disorders
and is engaged in the development of novel therapeutic agents for the treatment
of blood platelet disorders. The Company's first product, the PROSORBA(R)
column, a medical device, treats a patient's defective immune system so that it
can more effectively respond to certain diseases. Through its acquisition of
PRP, Inc. in November 1996, the Company acquired rights to Cyplex(TM) platelet
alternative previously known as Infusible Platelet Membranes (IPM), which is
positioned to become an alternative to traditional platelet transfusions.
The Company commenced business activities in January 1982. The U.S.
Food and Drug Administration ("FDA") approved the PROSORBA(R) column for
commercial sale in December 1987 for the treatment of patients with Idiopathic
Thrombocytopenic Purpura ("ITP"), an immune-mediated bleeding disorder. The
Company continues to devote most of its efforts to obtaining FDA marketing
approval for the use of the PROSORBA(R) column for the treatment of additional
autoimmune diseases as well as to the continued development of Cyplex(TM)
platelet alternative. The Company is currently conducting a Phase III pivotal
clinical trial using the PROSORBA(R) column for therapy for rheumatoid
arthritis as a follow-on to a pilot clinical trial completed in September 1995.
Clinical trials for certain platelet disorders are being planned for 1998.
6
<PAGE> 7
2. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials and components $ 144,066 $ 214,632
Work in process 481,040 700,815
Finished goods 83,520 58,320
------------- -----------------
$ 708,626 $ 973,767
============= =================
</TABLE>
3. PER SHARE INFORMATION
The computation of net loss per share is based on the weighted average
number of shares of common stock outstanding for each period. Common stock
equivalents related to options, warrants and convertible debentures have not
been considered in the calculation of net loss per share inasmuch as their
effect would have been antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted 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 earning per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of primary earning per share for the quarters presented
is not expected to be material.
4. COMMITMENTS AND CONTINGENCIES
The Company has settled a patent infringement claim filed against the Company on
February 6, 1997, in the United States District Court for the Western District
of Washington alleging that the manufacture, use and sale of the Company's
PROSORBA(R) column infringes a patent issued to Dr. Meir Strahilevitz (the
"Strahilevitz Patent"). Pursuant to the terms of the settlement, the Company
was granted a nonexclusive license permitting the Company to use the
Strahilevitz Patent in connection with the manufacture, use and sale of its
PROSORBA(R) column for the treatment of Idiopathic Thrombocytopenic Purpura
(ITP) and Rheumatoid Arthritis. In exchange for such license, the Company has
agreed to pay Dr. Strahilevitz a license fee and royalty payments during the
life of the Strahilevitz Patent. The settlement of the claim did not and will
not have a material impact on the Company's business, financial position or
results of operations.
5. RESTRUCTURING EXPENSE
The Company has incurred approximately $1.3 million of capital
expenditures through June 30, 1997 in connection with the consolidation of its
two Washington manufacturing facilities. That consolidation was completed in
April 1997 with the Company receiving FDA GMP approval of the facility.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements within the meaning of Section
21E of the Exchange Act that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed below and elsewhere
in this Report. Factors that could cause or contribute to such differences
include, without limitation, those discussed in this section, as well as other
sections of this report, and those discussed in the Company's Form 10-K for the
year ended December 31, 1996.
RESULTS OF OPERATIONS
Revenues associated with shipments of the Company's PROSORBA(R) column
were $733,000 and $1.5 million for the quarter and six months, respectively,
ended June 30, 1997 compared to $588,000 and $606,000 for the same periods,
respectively, in 1996. The significant increase is a result of the Company
regaining from Baxter Healthcare Corporation ("Baxter") the distribution rights
to the PROSORBA(R) column in May 1996 and initiating direct sales and marketing
efforts thereafter. Although the Company's direct sales and marketing efforts
have proven more effective than those under the Baxter distribution agreement,
idiopathic thrombocytopenic purpura (ITP) remains a small, niche market. In
1996 the Company initiated a Phase IV marketing study for use of the PROSORBA(R)
column in ITP in an effort to generate more rigorous clinical data than has been
available to date. Such data will be necessary before any appreciable increase
in sales, above their current levels, can be expected. Enrollment to date in
this study has been below original expectations and may delay any such increases
in sales.
Consolidated operating expenses increased to $3.5 million and $6.5
million for the quarter and six months, respectively, ended June 30, 1997 from
to $1.8 million and $4.2 million for the same periods, respectively, in 1996.
This increase reflects a significant expansion in the Company's research and
development activities, offset, in part, by a reduction in general and
administrative expenses. As a percent of total revenues, operating expenses
decreased significantly.
During the first half of 1996, production was impacted by both the
termination of the Baxter distribution agreement and the consolidation of the
Company's manufacturing facilities undertaken in connection with the Company's
restructuring. There were very few PROSORBA(R) columns shipped during the
first four months of 1996 as the Company did not resume direct shipments to
domestic customers until May 1996. Production costs of $361,000 and $962,000
for the quarter and six months ended June 30, 1997 and of $211,000 and $460,000
for the corresponding periods, respectively, of 1996 reflect this unusual
activity.
Sales and marketing expenses for the quarter and six months ended June
30, 1997 increased to $438,000 and $753,000, respectively, from $109,000 and
$161,000 for the corresponding periods in 1996. This increase was anticipated
and is related to the $944,000 increase in sales during the first half of the
year resulting from the Company's initiation of direct sales and marketing
efforts.
8
<PAGE> 9
For the quarter and six months ended June 30, 1997, research and
development expenses were approximately $2.1 million and $3.6 million,
respectively. For the same periods in 1996, such expenses were $664,000 and
$1.1 million, respectively. The significant increase in 1997 is attributable to
the Company's efforts to establish a stronger scientific base for its products.
The majority of these efforts are directed to the Company's ongoing controlled
clinical trial for use of the PROSORBA(R) column in rheumatoid arthritis. The
Company expects further increases in research and development expenses in
future periods as the aforementioned trial continues and with the expected
launch of a Phase II dose-ranging clinical trial for Cyplex(TM) platelet
alternative, previously known as Infusible Platelet Membranes (IPM), scheduled
to begin in 1998.
In July 1997, the Company announced that an independent Data Safety
and Monitoring Board (DSMB) reviewing the interim data from its pivotal trial
of the PROSORBA(R) column in rheumatoid arthritis (RA) recommended that the
trial be continued. The DSMB had earlier been instructed by the Company to
recommend either the continuation or cessation of the trial based upon
pre-determined stopping rules, including an efficacy threshold and safety
profile of the treatment. Based upon the DSMB's recommendation, Company
management, who remain blinded to the data, will continue the trial of its
novel rheumatoid arthritis therapy.
In the trial, patients undergo 12 weekly PROSORBA(R) column treatments,
followed by 12 weeks of observation. Each treatment entails a two-hour
plasmapheresis procedure, either with the PROSORBA(R) column or a control
procedure of plasmapheresis alone. During this 24-week period, the patient is
removed from all other RA-specific therapy. At week 20, the patient's health is
assessed based on the criteria recently adopted by the American College of
Rheumatology (ACR) and compared to their pre-treatment baseline. The ACR
criteria are a set of measures including patient and physician assessments of
disease activity that have been specifically developed for use in clinical
trials of new therapies for rheumatoid arthritis. Approximately 250 patients
were originally scheduled to be enrolled in 12 leading arthritis centers around
the United States. The DSMB reviewed the interim results from the first 63
patients and recommended that the trial be continued, indicating that the
Company was on track to attain its targeted 20% differential response rate. The
DSMB also recommended that the next interim analysis be conducted when 90
patients have completed the protocol and that at that time a total of 120 to 130
patients be enrolled. The Company estimates that this will occur in January
1998. FDA approval for this indication would expand the use of the PROSORBA(R)
column to the treatment of RA, an estimated $2 billion market.
The Company set the 20% differential response rate for continuation of
the RA trial after extensive analysis of the literature and discussion with its
advisors as to what outcomes could lead to a significant product both from a
clinical and commercial perspective. The 20% differential response rate was
viewed by the Company and its clinical advisors as an aggressive threshold for
product performance, and is consistent with the original assumptions used in
designing the trial. Although the Company remains blinded to the distribution of
the treated patients into the two groups, namely placebo and treatment, they
were encouraged by the fact that, as anticipated, 11 of the 63 patients included
in the interim analysis had responded.
9
<PAGE> 10
The Company's efforts to control costs were reflected in considerably
lower general and administrative expenses. General and administrative expenses
were $631,000 and $1.2 million for the quarter and six months ended June 30,
1997, respectively. For the comparable periods in 1996 such expenses were
$846,000 and $1.8 million, respectively. The decline of $601,000, or 33%, over
the comparable period in 1996 is a result of both a reduction in spending as
well as of non-recurring expenses in 1996 associated with the hiring of the
Company's new Chief Executive Officer, and President and Chief Operating
Officer, both of who joined the Company in December 1995, and severance payments
paid to the Company's former Chief Scientific Officer in connection with his
resignation in March 1996.
Interest expense of $8,000 and $16,000 for the quarter and six months,
respectively, ended June 30, 1997 compares to interest expense of $8,000 and
$34,000 for the same periods, respectively, in 1996. The decline in interest
expense relates to the September 1995 and March 1996 conversions of the majority
of the Company's outstanding 7% Convertible Debentures.
In January 1996, the Company notified approximately twenty employees,
which was slightly greater than half of its work force, that their positions
were being eliminated immediately as part of the restructuring. Such positions
were from all departments of the Company. Costs related to these elimination's
were approximately $440,000 and were recorded as a restructuring expense in the
six months ended June 30, 1996.
The Company recorded a non-cash expense of $183,688 as debt conversion
expense in the six months ended June 30, 1996. Such expense represented the
fair market value of the increased number of shares issued by the Company under
the terms of an exchange offering to holders of the Company's 7% Convertible
Debentures to exchange one share of common stock of the Company for each $2.25
of outstanding principal (including any accrued and unpaid interest on such
principal) of the 7% Convertible Debentures. Outstanding principal of $845,000
was tendered for exchange, leaving an outstanding principal balance of $400,000
as of both June 30, 1997 and June 30, 1996.
The increase in total operating expenses was only partially offset by
the increase in revenues, thereby resulting in a net loss of approximately $2.6
million and $4.7 million for the quarter and six months, respectively, ended
June 30, 1997 compared to a net loss of approximately $1.1 million and $3.3
million for the same periods, respectively, in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of June 30, 1997 was $5.8 million,
compared to $10.2 million at December 31, 1996. The decrease in working
capital is attributable to the net loss for the six months ended June 30, 1997.
The Company expects to incur operating losses until it can obtain
marketing approval from the FDA for additional disease indications for the
PROSORBA(R) column, or obtain FDA approval for Cyplex(TM) platelet alternative,
or until sales of the PROSORBA(R) column for its existing indication of ITP
increase significantly. A clinical trial is currently being conducted using
10
<PAGE> 11
the PROSORBA(R) column for rheumatoid arthritis therapy to obtain the necessary
clinical data to apply to the FDA to obtain marketing approval. The Company
expects to perform a second interim analysis for this trial in January 1998.
There can be no assurance that the Company will be able to obtain FDA approval
to market the PROSORBA(R) column for disease indications other than ITP or that
sales of the PROSORBA(R) column will increase significantly, if at all. In
addition, there can be no assurance that the interim data regarding the use of
the PROSORBA(R) column for the therapy of rheumatoid arthritis will continue to
be favorable or that the Company will be able to apply to or obtain approval
from the FDA with respect to the use of the PROSORBA(R) column for the
treatment of RA.
During 1996, the Company implemented a restructuring plan which
included consolidating its manufacturing facilities to one location in the state
of Washington and moving all other operations of the Company to San Diego,
California. The Company has incurred approximately $1.3 million of capital
expenditures through June 30, 1997 to consolidate its two Washington
manufacturing facilities. In April 1997, the Company's Redmond, Washington
facility successfully completed the FDA GMP re-approval process, signifying the
successful completion of the consolidation. The Company believes that it's
existing cash and proceeds from sales of the PROSORBA(R) column, will provide
the resources necessary to fund operations, including clinical trials, until
early 1998.
11
<PAGE> 12
PART II
Item 1 - Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
The Company has settled a patent infringement claim filed against the
Company on February 6, 1997, in the United States District Court for
the Western District of Washington alleging that the manufacture, use
and sale of the Company's PROSORB(R) column infringes a patent issued
to Dr. Meir Strahilevitz (the "Strahilevitz Patent"). Pursuant to the
terms of the settlement, the Company was granted a nonexclusive
license permitting the Company to use the Strahilevitz Patent in
connection with the manufacture, use and sale of its PROSORBA(R)
column for the treatment of Idiopathic Thrombocytopenic Purpura (ITP)
and Rheumatoid Arthritis. In exchange for such license, the Company
has agreed to pay Dr. Strahilevitz a license fee and royalty payments
during the life of the Strahilevitz Patent. The settlement of the
claim did not and will not have a material impact on the Company's
business, financial position or results of operations.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE> 13
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.
Cypress Bioscience, Inc.
August 14, 1997 /s/ Jay D. Kranzler
- ------------------------------ -----------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer, Chief Scientific
Officer and Vice Chairman of the Board
(Principal Executive Officer)
August 14, 1997 /s/ Susan E. Feiner
- ------------------------------ -----------------------------------------
Date Susan E. Feiner
Director of Finance, Controller
(Principal Accounting and Financial Officer)
13
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
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<SECURITIES> 2,966
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<CURRENT-ASSETS> 8,356
<PP&E> 3,100
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0
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