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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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: 0-26372
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of principal executive offices, including zip code)
(650) 616-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 ___
The number of shares outstanding of the registrant's common stock at November 8,
2002 was 19,504,976.
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 .......... 3
Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2002 and 2001, and the period from June 26, 1989 (inception) to
September 30, 2002 ............................................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2002 and 2001, and the period from June 26, 1989 (inception) to September 30, 2002 ........ 5
Notes to Condensed Consolidated Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk ........................................ 11
Item 4. Controls and Procedures ....................................................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................. 12
Item 2. Changes in Securities and Use of Proceeds ..................................................... 12
Item 3. Defaults Upon Senior Securities ............................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 12
Item 5. Other Information ............................................................................. 12
Item 6. Exhibits and Reports on Form 8-K .............................................................. 12
Signatures ............................................................................................. 13
Certifications ......................................................................................... 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share data)
September 30, December 31,
2002 2001
-------- --------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents ................................................................. $ 3,207 $ 5,795
Short-term investments .................................................................... 2,015 4,054
Prepaid expenses and other current assets ................................................. 693 837
-------- --------
Total current assets ........................................................................... 5,915 10,686
Restricted cash ................................................................................ 227 614
Property and equipment, net .................................................................... 2,478 2,468
Long-term investments .......................................................................... -- 6,727
Goodwill ....................................................................................... 814 814
Intangible assets related to acquisition, net of accumulated amortization of $902
and $658 as of September 30, 2002 and December 31, 2001, respectively .......................... 464 708
Other assets ................................................................................... 350 350
-------- --------
Total assets ................................................................................... $ 10,248 $ 22,367
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities .................................................. $ 1,073 $ 1,893
Accrued compensation and related expenses ................................................. 119 145
Payable to Ventiv Integrated Solutions .................................................... 330 --
-------- --------
Total current liabilities ...................................................................... 1,522 2,038
Other long-term liabilities .................................................................... 516 485
Shareholders' equity:
Common stock, no par value; 35,000,000 shares authorized: 17,304,976 and
17,295,274 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively ....................................................... 90,220 90,138
Accumulated other comprehensive income .................................................... -- 83
Deficit accumulated during the development stage .......................................... (82,010) (70,377)
-------- --------
Total shareholders' equity ..................................................................... 8,210 19,844
-------- --------
Total liabilities and shareholders' equity ..................................................... $ 10,248 $ 22,367
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
Period from
June 26, 1989
Three Months Ended Nine Months Ended (inception) to
September 30, September 30, September 30,
2002 2001 2002 2001 2002
-------- -------- -------- -------- --------
Revenues:
Licensing, milestone, and
development funding ....................... $ -- $ -- $ -- $ -- $ 2,697
Government grants ............................. 27 -- 27 -- 529
Product sales ................................. 118 265 535 359 4,282
-------- -------- -------- -------- --------
Total revenues ..................................... 145 265 562 359 7,508
Costs and expenses:
Cost of product sales ......................... 11 63 98 73 1,048
Sales and marketing ........................... (826) -- 1,408 -- 1,408
General and administrative .................... 817 1,017 2,795 3,301 23,357
Research and development ...................... 1,899 3,455 8,412 9,989 59,626
Acquired in-process technology ................ -- -- -- -- 7,350
-------- -------- -------- -------- --------
Total costs and expenses ........................... 1,901 4,535 12,713 13,363 92,789
-------- -------- -------- -------- --------
Operating loss ..................................... (1,756) (4,270) (12,151) (13,004) (85,281)
Interest income and other, net ................ 133 399 518 1,200 4,720
-------- -------- -------- -------- --------
Net loss ........................................... (1,623) (3,871) (11,633) (11,804) (80,561)
Non-cash preferred dividends ....................... -- -- -- -- 1,449
-------- -------- -------- -------- --------
Net loss applicable to common shareholder .......... $ (1,623) $ (3,871) $(11,633) $(11,804) $(82,010)
Basic and diluted net loss per common
share ......................................... $ (0.09) $ (0.23) $ (0.67) $ (0.79)
Weighted average common shares used in
computing basic and diluted net loss
per share ..................................... 17,305 16,638 17,304 15,036
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Period from
Nine Months Ended June 26, 1989
September 30, (inception) to
-------------------------- September 30,
2002 2001 2002
-------- -------- --------
Operating activities
Net loss ..................................................................... $(11,633) $(11,804) $(80,561)
Other operating activities ................................................... 505 1,327 14,714
-------- -------- --------
Net cash used in operating activities ........................................ (11,128) (10,477) (65,847)
Investing activities
Purchase of property and equipment ........................................... (571) (76) (4,675)
Purchases of investments ..................................................... 402 (16,896) (87,488)
Sales and maturities of investments .......................................... 8,684 10,584 85,771
Acquisition of Vaxis and Quay ................................................ -- -- (511)
-------- -------- --------
Net cash provided by (used in) investing activities .......................... 8,515 (6,388) (6,903)
Financing activities
Proceeds from notes payable .................................................. -- -- 8,047
Repayment of notes payable ................................................... -- (882) (6,611)
Other long-term liabilities .................................................. -- -- (614)
Net proceeds from issuance of common stock ................................... 25 15,388 63,457
Issuance of convertible preferred stock, net of issuance costs ............... -- -- 11,758
Deferred financing costs ..................................................... -- -- (80)
-------- -------- --------
Net cash provided by financing activities .................................... 25 14,506 75,957
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ......................... (2,588) (2,359) 3,207
Cash and cash equivalents, beginning of period ............................... $ 5,795 $ 8,838 $ --
-------- -------- --------
Cash and cash equivalents, end of period ..................................... $ 3,207 $ 6,479 $ 3,207
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
(unaudited)
Notes to Condensed Consolidated Financial Statements
Note 1. - Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by Cellegy in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnote disclosures required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair presentation of all periods
presented. The results of Cellegy's operations for any interim periods are not
necessarily indicative of the results of operations for any other interim period
or for a full fiscal year.
The balance sheet at December 31, 2001 has been derived from the audited
financial consolidated statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
In fiscal year 2001, amortization expenses relating to the Quay acquisition have
been reclassified from interest income, and other, net, to operating expenses.
As a result, approximately $88,000 per quarter is now classified in selling,
general and administrative operating expenses.
For further information, refer to the financial statements and footnotes thereto
included in Cellegy's Annual Report on Form 10-K for the year ended December 31,
2001.
Note 2. - Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"). SFAS 141 establishes new standards for accounting and reporting
for business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies the criteria for the recognition of intangible assets separately from
goodwill.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which
establishes new standards for goodwill and other intangible assets, including
the elimination of goodwill amortization, to be replaced with the periodic
evaluation of goodwill for impairment. SFAS 142 is effective for fiscal years
beginning after December 15, 2001, but any goodwill and intangible assets
resulting from a business combination after July 1, 2001 will be accounted for
under SFAS 142. Goodwill from business combinations prior to July 1, 2001 will
continue to be amortized prior to the adoption of SFAS 142.
On January 1, 2002, following adoption of the new rules, goodwill of
$814,000 will no longer be amortized but is subject to an impairment test at
least annually. Separately identified and recognized intangible assets resulting
from business combinations that met the new criteria for separate recognition of
intangible assets will continue to be amortized over their useful lives. Total
amortization expense for intangible assets will be $326,000 for 2002, $176,000
for 2003 and $69,000 each year, from 2004 through 2006.
As noted above, in accordance with SFAS 141 and 142, we discontinued
the amortization of goodwill on January 1, 2002 which resulted in a decrease in
reported net loss of approximately $24,000 and $73,000 for the three and nine
month periods ended September 30, 2001, as compared with the accounting prior to
the adoption of SFAS 141 and SFAS 142. We performed an impairment test of
goodwill as of January 1, 2002, which did not result in an impairment charge at
transition. We will continue to monitor the carrying value of our goodwill
through the annual impairment tests.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective for exit or
disposal activities that are initiated after December 31, 2002. SFAS 146
requires that a liability for a cost
6
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. We have not yet
determined the impact, if any, that the adoption of SFAS 146 will have on our
financial position or results of operations.
A reconciliation of previously reported net loss and net loss per share to
amounts adjusted for the exclusion of goodwill amortization follows (in
thousands, except per share amounts).
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
2002 2001 2002 2001
--------- -------- ---------- --------
Net loss applicable to common shareholders
Reported net loss $ (1,623) $ (3,871) $ (11,633) $(11,804)
Add back: Goodwill amortization -- 24 -- 73
--------- -------- ---------- --------
Adjusted net loss $ (1,623) $ (3,847) $ (11,633) $(11,731)
========= ======== ========== ========
Basic and diluted earnings per share
Reported net loss $ (0.09) $ (0.23) $ (0.67) $ (0.78)
Add back: Goodwill amortization -- -- -- --
--------- -------- ---------- --------
Adjusted net loss $ (0.09) $ (0.23) $ (0.67) $ (0.78)
========= ======== ========== ========
Note 3. - Principles of Consolidation
Our condensed consolidated financial statements include the accounts of Cellegy
Australia Pty Ltd ("Cellegy Australia") from June 14, 2000, the date of
acquisition, and Cellegy Canada, Inc. ("Cellegy Canada") from November 14, 2001,
the date of acquisition.
Note 4. - Comprehensive Loss
Accumulated other comprehensive income presented on the accompanying balance
sheets consists of the accumulated net unrealized gain or loss on
available-for-sale investments and foreign currency translation adjustments.
Total comprehensive loss for the nine months ended September 30, 2002 was
$11,551,000 compared with $11,700,000 for the nine months ended September 30,
2001. Total comprehensive loss for the three months ended September 30, 2002 and
2001 was $1,604,000 and $3,728,000, respectively.
Note 5. - Net Loss Per Share
Basic and diluted net loss per common share has been computed using the weighted
average number of shares of common stock outstanding during the period. Shares
issuable under outstanding stock options and warrants have been excluded from
the computations as their effect is antidilutive.
Note 6. - Segment Reporting
The following table contains information regarding revenues and loss
from operating each business segment for the three and nine months ended
September 30, 2002 and 2001 (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Pharmaceuticals $ 102 $ 63 $ 233 $ 157
Cosmeceuticals 43 202 329 202
-------- -------- -------- --------
$ 145 $ 265 $ 562 $ 359
======== ======== ======== ========
Operating loss:
Pharmaceuticals $ (1,779) $ (3,892) $(12,355) $(12,254)
Cosmeceuticals 23 (378) 204 (750)
-------- -------- -------- --------
$ (1,756) $ (4,270) $(12,151) $(13,004)
======== ======== ======== ========
Substantially all of the company's assets are related to the pharmaceutical
segment.
7
Note 7. - Payable to Ventiv Integrated Solutions
In August 2001, Cellegy announced an agreement with Ventiv Integrated
Solutions ("VIS"), a division of Ventiv Health Inc., to commercialize Cellegy's
lead product, Cellegesic(TM) ointment, in the United States. Under the
agreement, VIS provided certain integrated marketing and sales services, and
both Cellegy and VIS incurred expenses under the agreement through April 2002
when Cellegy withdrew its Cellegesic NDA. Both parties agreed to discontinue
further marketing activities. The agreement was subsequently terminated
effective September 30, 2002 and we recorded a one-time, non-cash credit of
$1,176,000 in operating expenses relating to the termination. Under the
agreement, Cellegy's repayment obligation to VIS at September 30, 2002, recorded
as a current liability, was approximately $330,000. This amount was paid to VIS
in October 2002. This payment was lower than previously estimated and
constitutes the complete obligation for both parties under the termination
provision of the agreement.
Note 8. - Subsequent Events
In November 2002, Cellegy completed a private placement of 2.2 million
shares of our common stock to a single investor, John M. Gregory at a price of
$2.50 per share, resulting in $5.5 million of gross proceeds to Cellegy. We have
agreed to file a registration statement to facilitate possible resale of the
shares from time to time, subject to various restrictions and limitations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements
that are made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. Investors should be aware that these
forward-looking statements are subject to risks and uncertainties, known and
unknown, which could cause actual results and developments to differ materially
from those expressed or implied in such statements. Such risks and uncertainties
relate to, among other factors: the completion and outcome of clinical trials;
the outcome and timing of reviews by the FDA and other regulatory authorities;
our need for further financing and ability to complete potential financings; and
various uncertainties arising from the FDA's review of our Phase III trial
protocol for Cellegesic. There can be no assurance that Cellegy's products will
be approved for marketing by regulatory authorities or will be successfully
marketed following approval. You are cautioned not to place undue reliance on
forward-looking statements and we undertake no obligation to update or revise
statements made herein.
Cellegy Pharmaceuticals, Inc., a specialty pharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs in the areas of gastroenterology, sexual dysfunction in men
and women and women's health care. We are developing several prescription drug
candidates, including Cellegesic for the treatment of anal fissures and
hemorrhoids and two transdermal testosterone gel product candidates, Tostrex(TM)
gel, for the treatment of male hypogonadism, a condition that afflicts men
generally above the age of forty, and Tostrelle(TM) gel, for the treatment of
sexual dysfunction in menopausal women. Other pipeline products include nitric
oxide donors for the treatment of sexual dysfunction in females, Raynaud's
Disease, Restless Leg Syndrome, and prostate cancer.
General
In September 1998, we began initial shipments and product sales of C79
Intensive Moisturizing formulation to Gryphon Development Inc., the product
development arm of a major specialty retailer. C79 is an ingredient in a line of
healing hand creams sold at most of the specialty retailer's stores in the
United States.
In June 2000, we acquired all assets of Quay Pharmaceuticals Pty Ltd,
an Australian pharmaceutical company producing Rectogesic(TM) ointment, a drug
similar to Cellegesic. The acquired assets consisted of Quay's inventory, other
tangible assets, and purchased technology. The aggregate value of the purchase
price of $1,835,000 included 169,224 shares of our common stock paid to Quay
with an estimated value of $977,000, warrants to purchase 171,146 shares of
common stock with an estimated value of $489,000, and cash payments of $369,000.
The purchase price was allocated to net tangible assets of $97,000, purchased
technology of $770,000, and goodwill of $968,000 based on their estimated fair
values on the acquisition date. Purchased technology is being amortized over
three years. The operations in Australia are conducted by a
8
wholly owned subsidiary, Cellegy Australia Pty Ltd.
In November 2001, we acquired a private Canadian based company, Vaxis
Therapeutics, valued at $4.1 million. The purchase was payable primarily in
shares of Cellegy common stock. The purchase price was allocated to net tangible
assets of $250,000, intangible assets of $350,000 and $3,507,000 of acquired
in-process research and development. The intangibles of $350,000 are being
amortized over five years and the acquired in-process research and development
was expensed in the fourth quarter of 2001. The acquired in-process research and
development was in an early stage of development such that, as of the
acquisition date, technological feasibility had not been reached and no
alternative use existed. The assumptions used in determining the purchase price
allocation were based on an appropriate discount rate applied to expected cash
flows.
In April 2002, Cellegy announced the withdrawal of its Cellegesic New
Drug Application ("NDA"). Cellegy and Ventiv Integrated Solutions ("VIS")
subsequently discontinued marketing spending and deferred marketing programs
under their agreement. (see note 7 to the financial statements above) The
agreement was terminated effective September 30, 2002 and we recorded a
one-time, non-cash credit of $1,176,000 in operating expenses relating to the
termination. Under the agreement, Cellegy's repayment obligation to VIS at
September 30, 2002, recorded as a current liability, was approximately $330,000.
This amount was paid to VIS in October 2002. This payment was lower than
previously estimated and constitutes the complete obligation for both parties
under the termination provision of the agreement.
In November 2002, Cellegy completed a private placement of 2.2 million
shares of our common stock to a single investor, John M. Gregory at a price of
$2.50 per share, resulting in $5.5 million of gross proceeds to Cellegy. We have
agreed to file a registration statement to facilitate possible resale of the
shares from time to time, subject to various restrictions and limitations.
Critical Accounting Policies
We believe there have been no significant changes in our critical
accounting policies during the quarter ended September 30, 2002 when compared
with our previous disclosures in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended December 31, 2001.
Results of Operations
Revenues. Cellegy had revenues of $562,000 and $359,000 for the nine
months ended September 30, 2002 and 2001, respectively. During the nine months
ended September 30, 2002, revenues consisted of $205,000 in Rectogesic(TM)
ointment sales in Australia (a 30% increase over the same period last year),
$225,000 in cosmeceutical product sales to Gryphon, the product development
division of a major specialty retailer, $105,000 in other cosmeceutical sales
and $27,000 in grant revenue in Cellegy Canada. For the first nine months of
last year, revenues consisted of $157,000 in Rectogesic sales and $202,000 in
Gryphon sales.
Cellegy had revenues of $145,000 and $265,000 for the three months
ended September 30, 2002 and 2001, respectively. During the three months ended
September 30, 2002, revenues consisted of $75,000 in Rectogesic sales (a 20%
increase over last year's third quarter), $43,000 in other cosmeceutical product
sales and $27,000 in grants received by Cellegy Canada. For the same period last
year, revenues consisted of $63,000 in Rectogesic sales in Australia and
$202,000 in product sales to Gryphon. Cellegy has recently received orders for
product totaling about $800,000 from Gryphon, which are expected to result in
revenue during the fourth quarter of 2002.
Research and Development Expenses. Research and development expenses
were $8,412,000 for the nine months ended September 30, 2002, compared with
$9,989,000 for the same period of 2001. For the nine months of 2002, compared
with 2001, Cellegy incurred lower clinical costs due to completion of the
Tostrex(TM) gel and Cellegesic(TM) ointment Phase III clinical trials. Other
research and development expenses decreased as a result of an overall cutback in
Cellegy's domestic research programs beginning in August 2002. There were no
research expenses incurred at Cellegy Canada for the three and nine month
periods of 2001 since this operation was not acquired until December 2001.
During the first part of 2003, clinical spending is likely to increase due to
the planned start up of an additional Phase III Cellegesic clinical trial.
During the three months ended September 30, 2002 and 2001, research and
development expenses were $1,899,000 and $3,455,000, respectively. Lower
expenses for the three months ended September 30, 2002, compared with 2001,
consisted of decreases in clinical expenses resulting from the completion of the
Tostrex and Cellegesic Phase III clinical trials, an
9
employee salary reduction program, a reduction in domestic research personnel
and decreased facility expenses due to the sublease of a portion of our domestic
laboratories. In addition, non-cash compensation expense decreased to $9,000 in
2002, compared with $154,000 in the third quarter of 2001. Overall domestic
research expense reductions during the third quarter in 2002 were partly offset
by operating expenses in Cellegy Canada and non-cash amortization expenses
related to the Cellegy Canada acquisition.
General and Administrative Expenses. General and administrative
expenses were $2,795,000 for the nine months ended September 30, 2002, compared
with $3,301,000 for the same period last year. For the three months ended
September 30, 2002 and 2001, these expenses were $817,000 and $1,017,000,
respectively. General and administrative expense reductions during the three
month period ended September 30, 2002 are due to selected cutbacks in salary and
workforce, travel, facility and office expenses. The decrease during the nine
month period was primarily due to reductions in non-cash compensation and
amortization expenses in 2002. Cellegy will continue to minimize general and
administrative expenses for, at least, the next two quarters.
Sales and Marketing Expenses. Sales and marketing expenses declined for
the three month period due to a significant one-time, non-cash credit of
$1,176,000 resulting from the termination of the Ventiv agreement. Sales and
marketing expenses are expected to remain at minimal levels until we determine
our future commercialization strategy for our product pipeline.
Interest Income, and Other, Net. Cellegy earned for the nine months
ended September 30, 2002 and 2001, interest income, and other, net of $518,000
and $1,200,000, respectively. For the three months ended September 30, 2002, we
earned $133,000 in interest income, and other, net compared with $399,000 for
the same period in 2001. The decreases during both periods of 2002 were due
primarily to lower rental income associated with the expiration of an earlier
sublease of a portion of Cellegy's corporate offices, as well as lower average
investment balances and lower interest rates on invested cash. We expect
interest income and other net to increase in the last quarter of 2002 due to
higher investment balances resulting from the recently completed private
placement and rental income from a new facility sublease.
In August of 2002, Cellegy entered into a long-term sublease of
approximately 75% of our currently leased corporate offices and laboratories in
South San Francisco, California. The sublease payments to Cellegy are
approximately $100,000 per month, at a rate above our current lease cost. Under
certain circumstances, Cellegy can require the tenant to sublease additional
space at a pre-negotiated rate above our cost.
Net Loss. Net loss applicable to common shareholders was $11,633,000 or
$0.67 per share based on 17,304,000 weighted average shares outstanding for the
nine months ended September 30, 2002, compared with a net loss applicable to
common shareholders of $11,804,000 or $0.79 per share based on 15,036,000
weighted average shares outstanding for the same period in 2001. For the three
months ended September 30, 2002, the net loss applicable to common shareholders
was $1,623,000 or $0.09 per share based on 17,305,000 weighted average shares
outstanding, compared with $3,871,000 or $0.23 per share based on 16,638,000
weighted average shares outstanding for the three months ended September 30,
2001. The net loss for the three and nine month periods for 2002 was favorably
impacted by a one-time credit to expenses related to the termination of the
sales and marketing agreement for Cellegesic ointment between Cellegy and
Ventiv.
Liquidity and Capital Resources
Cellegy has experienced net losses and negative cash flow from
operations each year since its inception. Through September 30, 2002, we have
incurred an accumulated deficit of $82.0 million and have consumed cash from
operations of $65.8 million. Our equity financings included $6.4 million in net
proceeds from our initial public offering in August 1995, $6.8 million in net
proceeds from a preferred stock financing in April 1996, $3.8 million in net
proceeds from a private placement of common stock in July 1997, $13.8 million in
net proceeds from a secondary public offering of common stock in November 1997,
$10.0 million in net proceeds from a private placement of common stock in July
1999, $11.6 million in net proceeds from a private placement in October 2000,
$15.4 million in gross proceeds from a private placement of common stock in June
2001 and $5.5 million in gross proceeds from a private placement of common stock
to a single investor in November 2002. Our cash, cash equivalents and
investments were $5.5 million at September 30, 2002, compared with $17.2 million
at December 31, 2001. Both periods included restricted cash of $227,500 and
$614,000, respectively. The decrease in cash, cash equivalents and investments
was principally due to cash used to support operations. Adjusted for the recent
$5.5 million private placement, current cash, cash equivalents and investments
are approximately $10.0 million as of
10
the date of this Report on Form 10-Q.
Since inception, Cellegy has incurred significant losses and expects to
incur substantial additional development costs. Our operations have and will
continue to use significant amounts of cash. We have no current source of
ongoing revenues or capital beyond existing cash and investments, current
Rectogesic product sales in Australia and C79 sales to Gryphon. Our future
expenditures and capital requirements depend on numerous factors including,
without limitation, the outcome of the FDA's review of our Phase III trial
protocol for Cellegesic, the outcome of the FDA's review of our pending Tostrex
NDA, the future commercialization activities relating to Cellegesic and Tostrex,
the progress and focus of our research and development programs, the results of
pre-clinical and clinical testing, the time and costs involved in obtaining
regulatory approvals, the costs of prosecuting, defending and enforcing any
patent claims and other intellectual property rights, our ability to establish
corporate partnership and availability of other financing.
As a result of the above, we will require additional funds to finance
operations and will seek private or public equity investments, corporate
partnerships and other collaborative arrangements with third parties to meet
such needs. There is no assurance that such funding will be available for us to
finance our operations on acceptable terms, if at all, and future equity funding
is likely to involve material dilution to our shareholders. Insufficient funding
could require us to delay or eliminate research and development activities,
planned clinical trials, administrative programs and personnel, outside services
and cause us to sublease more of our facilities. During the third quarter of
2002, Cellegy announced that it had initiated several cost reduction programs,
including the elimination or deferral of non-core research programs, a salary
reduction for executives and certain other employees, and a reduction in force
of nine employees, representing approximately 25% of our employees. These
programs reduced monthly cash outflow (burn rate) by about 40% from the burn
rate during second quarter of 2002 with the current burn rate at approximately
$800,000 per month. Cellegy incurred a one-time expense charge of approximately
$175,000 in the third quarter of 2002 for severance and other payments related
to the reduction in force. We believe that available cash resources after
completion of the recent $5.5 million private placement and the interest thereon
will be adequate to satisfy our capital needs through June 30, 2003. If we do
not obtain additional funding, then our auditors may include a going concern
qualification as part of future consent or report. In addition, as the result of
changes to the listing and maintenance standards for the Nasdaq guidelines,
including those relating to minimum shareholders' equity requirements, we may
receive a communication from Nasdaq initiating de-listing procedures. Under
those procedures, if we receive such a communication we intend to submit a plan
to Nasdaq in order to satisfy their listing requirements. However, there can be
no assurance that Nasdaq would grant our request for continued listing.
Factors That May Affect Future Operating Results
This Quarterly Report on Form 10-Q includes forward-looking statements
that are made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. Investors should be aware that these
forward-looking statements are subject to risks and uncertainties, known and
unknown, which could cause actual results and developments to differ materially
from those expressed or implied in such statements. Such risks and uncertainties
relate to, among other factors: the completion and outcome of clinical trials;
the outcome and timing of planned regulatory filings and review by the FDA and
other regulatory authorities; the timing and magnitude of our spending and cash
flow; our need for further financing, and our ability to complete such
financings; the scope of our patent coverage; and various uncertainties arising
from the FDA's approval of our Phase III clinical trial protocol for Cellegesic
and our pending NDA relating to our Tostrex product. There can be no assurance
that Cellegesic and Cellegy's other product candidates will be approved for
marketing by regulatory authorities or will be successfully marketed following
approval. You are cautioned not to place undue reliance on forward-looking
statements and we undertake no obligation to update or revise statements made
herein. The factors discussed in Cellegy's reports filed with the Securities and
Exchange Commission, including our Annual Report on Form 10-K for the year ended
December 31, 2001, in particular under the caption "Factors That May Affect
Future Operating Results," should be carefully considered when evaluating our
business and prospects.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
We invest our excess cash in short-term, investment grade, fixed income
securities under an investment policy. All of our investments are classified as
available-for-sale and 60% of our securities will mature by the end of 2002. We
believe that potential near-term losses in future earnings, fair values or cash
flows related to our investment portfolio will not be significant. There have
been no significant changes to our quantitative and qualitative disclosures from
our Form 10-K.
11
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this report.
Based on their evaluation, our principal executive officer and principal
accounting officer concluded that our disclosure controls and procedures are
effective.
(b) Changes in Internal Controls
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in paragraph (a) above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
12
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.
CELLEGY PHARMACEUTICALS, INC.
Date: November 15, 2002 /s/ K. Michael Forrest
----------------------------------------
K. Michael Forrest
Chairman, President and Chief
Executive Officer
Date: November 15, 2002 /s/ A. Richard Juelis
----------------------------------------
A. Richard Juelis
Vice President, Finance and Chief
Financial Officer
13
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, K. Michael Forrest, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cellegy
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002 By: /s/ K. Michael Forrest
-------------------------------
Chairman, President and Chief
Executive Officer
14
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, A. Richard Juelis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cellegy
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002 By: /s/ A. Richard Juelis
-------------------------------
Vice President, Finance and
Chief Financial Officer
15