UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 2002
OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-26372
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 No.)
349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code: (650) 616-2200
Securities registered pursuant to Section 12(b) of the Act:
None Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Securities Exchange Act of 1934).
YES ___ NO _X_
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 28, 2002, the last business day of the Registrant's most
recently completed second fiscal quarter, was $27,767,037 based on the closing
price for the common stock on The Nasdaq Stock Market on such date. This
calculation does not include a determination that persons are affiliates or
non-affiliates for any other purpose.
As of March 11, 2003, there were 19,889,946 of shares of common stock
outstanding.
Documents Incorporated By Reference
The information called for by Part III, other than Item 14, and certain
information called for by Part II, Item 5, is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
which will be filed with the Securities and Exchange Commission not later than
120 days after December 31, 2002.
CELLEGY PHARMACEUTICALS, INC. 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
Part I
Item 1. BUSINESS 1
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT 10
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 12
Item 6. SELECTED FINANCIAL DATA 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 23
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24
Item 11. EXECUTIVE COMPENSATION 24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
Item 14. CONTROLS AND PROCEDURES 24
Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 25
Unless the context otherwise requires, the terms "we", "our", and
"Cellegy" refer to Cellegy Pharmaceuticals, Inc., a California corporation, and
its subsidiaries.
Cellegesic, Tostrex, Tostrelle, and Rectogesic are our trademarks. We
also refer to trademarks of other corporations and organizations in this
document.
PART I
ITEM 1: BUSINESS
Cellegy Pharmaceuticals, Inc. ("Cellegy" or the "Company"),
incorporated in California in 1989, is a specialty biopharmaceutical company
engaged in the development of prescription drugs and skin care products. Our
prescription products are directed towards the treatment of gastrointestinal
disorders, sexual dysfunction of both men and women, and selected conditions
affecting women's health.
Cellegy's lead product candidate, Tostrex(TM) gel, is for the treatment
of male hypogonadism, which usually results in diminished sexual function,
lethargy and, in severe cases, reduced bone and muscle mass in men. Cellegy
completed a pivotal Phase III clinical trial for Tostrex in November 2001 and
filed a New Drug Application ("NDA") with the United States Food and Drug
Administration ("FDA") in June 2002. In December 2002, Cellegy entered into an
exclusive license agreement with PDI, Inc. ("PDI") to commercialize Tostrex in
North American markets. Under the terms of the agreement, PDI will be
responsible for the marketing and sales of Tostrex and will utilize its existing
sales and marketing infrastructure. Cellegy received a payment of $15.0 million
on signing of the agreement on December 31, 2002 and will receive a milestone
payment of $10.0 million upon approval of the product for marketing in the
United States by the FDA. PDI will also make royalty payments on net sales
ranging from 20% to 30%.
In addition to Tostrex, Cellegy is developing a second transdermal
testosterone product, Tostrelle(TM) gel, for the treatment of female sexual
dysfunction in postmenopausal women. Testosterone deficiency in women frequently
leads to diminished libido, decreased bone and muscle mass and reduced energy
levels. Tostrelle has successfully completed two Phase I/II clinical studies,
and Cellegy is currently conducting an advanced Phase II/III clinical study.
Our Cellegesic(TM) ointment product candidate is being developed for
the treatment of chronic anal fissures, a painful condition which, in the
absence of an approved drug therapy, often requires surgery. In April 2002, we
announced the withdrawal of our Cellegesic New Drug Application ("NDA") after it
became clear that the FDA was not going to approve the NDA. We had several
subsequent discussions and meetings with the FDA to supply additional
information and to attempt to clarify and respond to the FDA's concerns and
questions. We now intend to begin a confirmatory Phase III trial after the final
protocol discussions with the FDA are completed, which we believe will be in the
second quarter of 2003. Cellegy's proposed trial design is for a smaller trial
of shorter duration than the prior Phase III trials, with a planned patient
enrollment of about 150 subjects. If results are satisfactory, we plan to
re-submit the NDA, and we expect that the FDA review of the re-submitted NDA
could occur in approximately six months, although there can be no assurances
regarding the duration of the FDA review. Cellegy is also conducting a Phase II
clinical trial using Cellegesic to determine its effect on the symptoms of
hemorrhoids. Hemorrhoids afflict an estimated 22 million people annually in the
United States, Europe and Japan, according to published data.
In November 2001, Cellegy acquired Vaxis Therapeutics Corporation
("Vaxis" or "Cellegy Canada"), a private Canadian company based in Kingston,
Ontario. This acquisition expanded our pipeline of products for the treatment of
sexual dysfunction in males and females and complements our current products. In
addition to product candidates for the treatment of sexual dysfunction, the
Cellegy Canada product pipeline consists of nitric oxide donors for the
treatment of various disorders including: Raynaud's Disease, Restless Leg
Syndrome, prostate cancer, breast cancer and other potential indications.
Marketing and Commercialization Strategy
Cellegy intends to become a leader in the development and marketing of
selected specialty biopharmaceutical products that are directed towards the
treatment of gastrointestinal disorders, sexual dysfunction in both men and
women, and conditions affecting women's health. Key elements of our business and
commercialization strategy include the following:
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o Self-Marketing to Specialty Physician Markets in United States.
Whenever possible, we plan to self market our products to a targeted
audience of key physician specialists, including Gastroenterologists
and Obstetrician-Gynecologists, through the establishment of our own
sales force. We plan to seek pharmaceutical partners to assist in the
promotion of products prescribed by larger physician groups. Cellegy
intends to commercialize Cellegesic, if approved, on our own and
potentially through co-promotion agreements with partners in the United
States. We plan to outlicense the overseas rights for products we
develop in exchange for upfront and milestone payments, as well as
royalties on sales.
o Tostrex License Agreement with PDI. Under the terms of the license
agreement, PDI will be responsible for the marketing and sales of
Tostrex in North American markets and will utilize its existing sales
and marketing infrastructure contained within their PDI Pharmaceutical
Products Group. Cellegy will be responsible for supplying finished
product to PDI through Cellegy's contract manufacturer. Cellegy is
seeking marketing partners for Tostrex overseas, particularly in
Europe.
o Marketing and Sales Agreements. We entered into a comprehensive license
and commercialization agreement with Ventiv Health, Inc. ("Ventiv"), a
contract sales organization, in August 2001. Ventiv was to provide
certain sales and marketing services relating to the anticipated launch
of Cellegesic. In September 2002, Cellegy and Ventiv terminated the
agreement based on the delay in commercialization of Cellegesic due to
the withdrawal of the NDA and our subsequent decision to conduct
another Phase III clinical trial. We may, in the future, decide to
enter into other such marketing agreements with contract sales or other
organizations.
o Acquisition of Complementary Products and Companies. As was done with
the acquisitions of Vaxis in Canada in November 2001, of Rectogesic(TM)
(nitroglycerin ointment) from Quay Pharmaceuticals Pty Ltd ("Quay") in
Australia in June 2000, and of Cellegesic from Neptune Pharmaceuticals
("Neptune") in the United States in December 1997, we intend to acquire
other products, technologies or companies with products and
distribution capabilities consistent with our commercial objectives.
o Manufacturing. Cellegy has manufacturing arrangements with PanGeo
Pharma Inc., ("PanGeo") an FDA approved contract manufacturing company
based in Canada. PanGeo has successfully manufactured Cellegesic,
Tostrex and Tostrelle for our clinical trials and will be the
commercial manufacturer for these products, when approved.
o Distribution. Cellegy has entered into a distribution agreement for
Rectogesic in South Korea and intends to contract additional
distributors in Asia, Latin America and other overseas markets.
Marketed Skin Care Products
Cellegy has completed development of certain consumer skin care and
cosmeceutical products, including skin barrier repairing/fortifying moisturizers
and anti-aging lotions and creams. We are currently marketing our C79 Intensive
Moisturizer formulation to a major specialty retailer which incorporates C79
into hand cream products. Our revenues from sales of these products totaled
$1,081,000 in 2002 and have totaled approximately $4,481,000 since product
introduction late in 1998.
Products Under Development
Tostrex (testosterone gel for male hormone replacement therapy)
Cellegy's lead product, Tostrex, is a transdermal testosterone gel to
treat male hypogonadism, a condition involving clinically deficient levels of
the sex hormone testosterone. Low levels of testosterone can result in lethargy,
depression and a decline in libido. In severely deficient cases, loss of muscle
mass and bone density can occur. Approximately 5 million men in the United
States, primarily in the aging (over 40) male population group, have deficient
levels of testosterone. Male hypogonadism is the first indication for which we
will seek regulatory approval
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in the United States. Subsequently, testosterone replacement may be used for
"male andropause," a potentially greater market consisting of several million
additional men with below normal levels of testosterone.
There are a number of companies currently marketing testosterone in
several different product forms in domestic and international markets. Cellegy
believes that a market opportunity exists for an improved product, as the side
effects and patient inconveniences associated with many of the currently
marketed products have limited their use to less than 5% of potential patients,
according to published prescription data. Current product forms include orals,
injectables, transdermal patches and two testosterone gel products launched in
2000 and 2003, respectively. The leading patch products are sold at prices
averaging approximately $1,000 per year per patient with the gel products
currently priced at approximately $3,500 per year.
Cellegy's proprietary testosterone gel product candidate is
transparent, rapid-drying and non-staining. It is designed as a once-a-day
application from a unique metered dose dispenser to relatively small areas of
the skin. Based on successful completion of a Phase III trial, including 201
patients at several study centers in the United States, positive trial results
were announced in November 2001. Cellegy filed an NDA in the second quarter of
2002 and is awaiting a decision from the FDA on marketing approval in the United
States.
Cellegesic (nitroglycerin ointment for treatment of anal fissures and
hemorrhoids)
Our Cellegesic is a topical, nitroglycerin-based prescription product
for the treatment of anal fissures and hemorrhoids. Anal fissures are painful
tears in the lining of the anal mucosa, a condition afflicting men and women of
all age groups. Of the over 600,000 new cases of anal fissures occurring each
year in the United States, Europe and Japan, many of these chronic cases require
painful and expensive surgery, a procedure that sometimes leaves patients
incontinent. Hemorrhoids are dilated, swollen veins and tissue located either in
the anal canal or at the margin of the anus. In the United Sates alone, there
are approximately 9 million people who suffer from hemorrhoids each year. Both
conditions are characterized by an increase in intra-anal pressure, which has
been shown to be effectively reduced by the application of Cellegesic. Current
drug therapies include anesthetics and anti-inflammatory agents that only
partially relieve the symptoms of these conditions.
Cellegesic is a proprietary formulation that includes nitroglycerin, a
drug that has been used for many years in the treatment of angina pectoris and
certain other heart diseases. Several previous third party studies reported that
nitroglycerin, once administered to the anal canal, causes relaxation of the
sphincter muscle and helps to relieve pain and promote healing of the anal
fissure in most patients.
We completed an initial Phase III clinical trial using Cellegesic for
the treatment of anal fissures and announced the results in November 1999. The
trial, which included 304 patients, did not demonstrate a statistically
significant rate of healing in comparison to placebo, but did show rapid and
significant pain reduction. Based on this outcome, we initiated a second Phase
III trial in 2000 to confirm the drug's ability to reduce fissure pain, the
primary trial endpoint, with healing of chronic anal fissures as a secondary
endpoint.
The second Phase III clinical trial, which included 229 patients in
several study centers in the United States and overseas, was completed in
September 2001. Patients received either of two strengths of Cellegesic or
placebo administered twice on a daily basis over an eight-week treatment period.
The patient's pain scores were tabulated and the patients were examined to
determine whether the fissure had healed. Positive results were achieved in the
primary endpoint, which was pain reduction of chronic anal fissures. Statistical
significance was not achieved in healing, the secondary endpoint.
In June 2001, we completed patient enrollment and filed an NDA with the
FDA requesting marketing approval of Cellegesic for the treatment of pain
associated with chronic anal fissures. We amended the NDA upon completion of the
second Phase III anal fissure pain study in November 2001. In April 2002, we
announced the withdrawal of our Cellegesic NDA after it became clear that the
FDA was not going to approve the NDA. We had several subsequent discussions and
meetings with the FDA to supply additional information and to attempt to clarify
and respond to the FDA's concerns and questions. In September 2002, we announced
that we believed most of the agency's previously stated concerns had been
satisfactorily addressed with the exception that the FDA believed that
3
some aspects of the statistical analysis methodology used by Cellegy were not
pre-specified in the statistical analysis plan submitted prior to unblinding the
trial. Cellegy believes that it had adequately demonstrated that the statistical
analysis methodology was properly set forth in the original analysis plan and
was correctly utilized. However, the FDA concluded that the method was not
pre-specified to its satisfaction and indicated that it would require another
Phase III trial before considering approval of the product. We intend to begin
the confirmatory Phase III trial after the final protocol discussions with the
FDA are completed, which we believe will be in the second quarter of 2003. Based
on our current protocol design, we expect that the trial will be smaller and of
shorter duration than the prior Phase III trials, with a planned patient
enrollment of about 150 subjects. If results are satisfactory, we plan to
re-submit the NDA, and we expect that the FDA review of the re-submitted NDA
could occur in approximately six months, although there can be no assurances
regarding the duration of the FDA's review. In addition to this fissure trial,
Cellegy is also conducting a Phase II clinical trial using Cellegesic to
determine its effect on the various symptoms of hemorrhoids.
Cellegesic is protected by two domestic patents, both of which have
been issued, the most recent in December 1997. Similar Canadian and European
patents have been issued and numerous patent applications have been filed in
most major overseas markets. Rectogesic(TM) (nitroglycerin ointment), a product
similar in formulation to Cellegesic, was approved by the Australian Therapeutic
Goods Administration and has been successfully marketed in Australia since early
1999.
Tostrelle (testosterone gel for female hormone replacement therapy)
Normal blood concentrations of testosterone in women range from 10 to
20 times less than those of men. Nevertheless, in both sexes, testosterone plays
a key role in building muscle tissue or bone and in maintaining sexual drive. In
women, the ovaries and adrenal glands continue to synthesize testosterone after
menopause, although the rate of production may diminish by as much as 50%.
Approximately 15 million women in the United States suffer from symptoms of
testosterone deficiency. At the present time, there are no approved products for
the treatment of this condition.
Based on the results of pharmacokinetic studies in men receiving
Tostrex, Cellegy's scientists were able to estimate the proper dosage of
testosterone required to achieve normal pre-menopausal hormone levels in
postmenopausal women. The result is Cellegy's Tostrelle, a product designed to
restore normal testosterone levels in hormone deficient women.
Cellegy has successfully completed two Phase I/II pharmacokinetic
studies in which we determined the proper dose necessary to restore normal
testosterone levels to normally menopausal and surgically-induced menopausal
women. Based on these results and a trial protocol meeting with the FDA, we
initiated a Phase II/III clinical study in 2002 and intend to begin additional
advanced trials in 2003.
Current Research Programs
Cellegy's research and development programs focus on nitric oxide
pharmacology, inflammation and nitric oxide treatments for anorectal and
gastrointestinal diseases, sexual dysfunction, peripheral vascular disorders and
cancer. The November 2001 acquisition of Vaxis, now Cellegy Canada,
significantly broadened our research and development efforts for the treatment
of female sexual dysfunction and male erectile dysfunction, and has also
expanded our research into potential oncology treatments. Cellegy has rights to
future discoveries, technologies and products developed by Cellegy Canada. Most
of the current research programs are being conducted at Queen's University in
Kingston, Ontario or in our leased laboratories located at the University.
The Vaxis acquisition also expanded our overall expertise efforts in
nitric oxide pharmacology. Based on research efforts at Cellegy Canada and at
Queen's University by our consultants, we better understand the role of nitric
oxide as a signaling molecule in modulating vascular smooth muscle relaxation,
perhaps by down-regulating endothelin expression. The significance of this
finding is that nitric oxide is capable of reducing vascular tone at a
concentration much lower than needed for a direct vaso-dilatation effect,
especially in tissues under an abnormally vaso-spasm or vaso-constrictive state.
This discovery presents various potential approaches to treat conditions
4
caused by vaso-constriction, such as peripheral vascular insufficiency found in
Raynaud's disease, male erectile dysfunction, and selected aspects of female
sexual dysfunction. We plan to verify and validate selected potential
therapeutic indications via in vivo animal testing and in pilot human studies.
We are also investigating the role of nitric oxide in modulating cancer
cell metastasis induced by hypoxia (low oxygen) and in attenuating pain due to
nociceptor activation. Results published in the Journal of National Cancer
Institute in December 2001 showed that the administration of nitric oxide to
hypoxic cancer cells led to reversal of metastatic cells. Furthermore, nitric
oxide can also reverse the development of certain hypoxia-induced drug resistant
cancer cells to chemotherapeutic agents. Follow-up experiments since the
publication further support the original findings. We will continue to expand
upon these original findings with relevant in vitro and in vivo models through
our research efforts at Cellegy Canada and Queen's University and to further
explore the ability of nitric oxide to interfere with other nociceptive
signaling pathway.
Cellegy continues to explore the role of nitric oxide in modulating
cancer cell development, as well as, resistance to chemotherapeutic agents such
as doxorubicin and 5-fluorouracil, and metastasis induced by hypoxia (low
oxygen). In addition to the results published in the Journal of National Cancer
Institute, recent progress shows that nitric oxide induces reversal of
chemo-resistance in human breast cancer cells and prostate cancer cells, and in
3-dimentional human breast cancer spheroid culture. While the mechanism of
action of reversal of chemo-resistance is largely unknown, the prevention of
tumor cell metastasis in vitro by nitric oxide appears to be mediated via the
cGMP protein kinase G pathway. These results continue to support our original
scientific hypothesis and have taken us to the next step of verifying the nitric
oxide effect in human xenograph models in vivo. Cellegy consultants and
collaborators at Queens University have recently been awarded a research grant
from the United States Army for its innovation in prostate cancer research.
Early observations by Cellegy Canada scientists showed that the
co-administration of nitric oxide releasing agents blocks nociceptive pain
response triggered by PGE1 injection. This concept is further supported by the
July 2002 publication of a pilot study in Journal of Gender Specific Medicine
reporting the efficacy of treating vulvar pain and pain with sexual activity in
women with vulvodynia using 0.2% topical nitroglycerin ointment. Cellegy plans
to conduct a placebo-controlled dose ranging study using topical nitroglycerin
in treating vulvar pain associated with vulvodynia and dyspareunia in 2003.
Patents and Trade Secrets
Cellegy has 22 issued United States patents, more than 60 issued
foreign patents, and over 80 pending patent applications worldwide. Two issued
United States patents and 15 pending patent applications relate to our
testosterone gel products for males and females. Two issued United States
patents, over 20 issued foreign patents, and more than 10 pending patent
applications relate to Cellegy's Cellegesic product for the treatment of anal
fissure and other anal diseases. Two issued United States patents and over 25
pending patent applications relate to possible backup compounds for our
Cellegesic product. As part of Cellegy's acquisition of Cellegy Canada, Cellegy
gained rights to 5 issued United States patents, 3 issued foreign patents, and
more than 40 pending patent applications. These patents and applications
disclose methods of treatment of peripheral vascular conditions including male
erectile dysfunction, female sexual dysfunction, and Raynaud's disease, as well
as other conditions. United States and foreign patent applications disclosing
novel store-operated calcium influx (SOC) inhibitors and their use in the
treatment of various disorders are pending or have recently published.
Additional patent applications are being prepared for filing that will cover
methods or products currently under development. Corresponding patent
applications for most of Cellegy's issued United States patents have been filed
in countries of importance to us located in major world markets, including
certain countries in Europe, Australia, South Korea, Japan, Mexico and Canada.
Our policy is to protect our technology by, among other things, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to our technology, improvements to our technology and to
specific products that we develop. It is impossible to anticipate the breadth or
degree of protection that any such patents will afford, or whether we can
meaningfully protect our rights to our unpatented trade secrets. Cellegy also
relies upon unpatented trade secrets and know-how, and no assurance can be given
that competitors will not independently develop substantially equivalent
5
proprietary information and techniques, or otherwise gain access to our trade
secrets or disclose such technology. It is our policy to require our employees
to execute an invention assignment and confidentiality agreement upon
employment. Our consultants are required to execute a confidentiality agreement
upon the commencement of their consultancy. Each agreement provides that all
confidential information developed or made known to the employee or consultant
during the course of employment or consultancy will be kept confidential and not
disclosed to third parties except in specific circumstances. The invention
assignment generally provides that all inventions conceived by the employee
shall be the exclusive property of Cellegy. In addition, it is our policy to
require collaborators and potential collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection of our trade secrets. For additional risks and
uncertainties relating to our patents and intellectual property, see the
discussion of our patents and intellectual property under the heading,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Factors That May Affect Future Operating Results."
Product Acquisitions
On November 27, 2001, Cellegy acquired Vaxis Therapeutics Corporation,
a private Canadian company for $4.1 million primarily in Cellegy stock. Vaxis,
subsequently renamed Cellegy Canada, is a wholly-owned research and development
subsidiary with prominent scientists focusing in the areas of sexual
dysfunction, peripheral vascular disorders, cancer and nitric oxide
pharmacology. This research is in line with our goal of expanding our pipeline
of products and protecting our patents.
In June 2000, Cellegy acquired Quay Pharmaceuticals, an Australian
company marketing Rectogesic, a nitroglycerin ointment product similar to
Cellegesic. The acquisition cost totaled $1,835,000, consisting primarily of
Cellegy stock and warrants. Cellegy continues to self-market Rectogesic in
Australia through its wholly-owned Cellegy Australia subsidiary and plans to
sell Rectogesic through distributors in the Pacific Rim countries and
potentially other countries around the world.
In December 1997, Cellegy acquired patent and related intellectual
property rights relating to Cellegesic from Neptune Pharmaceuticals. Pursuant to
the purchase agreement, we issued 462,809 shares of common stock to Neptune in
1997 with a value of $3,750,000. The agreement calls for a series of additional
payments, payable in shares of common stock, upon successful completion of
various milestones tied to clinical trial results and commercialization of
Cellegesic in domestic and foreign markets. During 2001, we issued 104,000
shares of common stock with a value of $750,000 for two clinical and regulatory
milestones achieved. Future potential milestones, payable in Cellegy common
stock, could result in the issuance of up to an additional 1,285,000 shares of
Cellegy common stock based on the closing price of Cellegy stock at the time of
issuance. The agreement does not provide for the payment by Cellegy of any
future product royalties to Neptune in connection with Cellegesic revenues.
Government Regulation
FDA Requirements for Human Drugs. The research, development, testing,
manufacturing, storage, labeling, record keeping, distribution, advertising,
promotion and marketing of drug products are extensively regulated by numerous
governmental authorities in the United States and other countries. In the United
States, drugs are subject to rigorous FDA regulation pursuant to, among other
laws, the Food, Drug and Cosmetic Act or FD&C Act.
The steps ordinarily required before a new pharmaceutical product may
be marketed in the United States include: (i) preclinical tests, (ii) the
submission to the FDA of an Investigational New Drug Application, or IND, which
must be approved before human clinical trials commence; (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
product for its proposed indication; (iv) the submission of a New Drug
Application, or NDA, for a new drug or a Product License Application for a new
biologic to the FDA; and (v) FDA review and approval of the NDA or Product
License Application before any commercial sale or shipment of the product.
Preclinical tests include laboratory evaluation of product formulation and
animal studies (if an appropriate animal model is available) to assess the
potential safety and efficacy of the product. Formulations must be
6
manufactured according to the FDA's current Good Manufacturing Practice, or GMP,
requirements, and preclinical safety tests must be conducted by laboratories
that comply with FDA's Good Laboratory Practice regulations.
The results of preclinical testing are submitted to the FDA as part of
an IND and are reviewed by the FDA before commencement of human clinical trials.
There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials. In some instances, the IND
application process can result in substantial delay and expense. Clinical trials
to support NDAs are typically conducted in three sequential phases, which may
overlap and which usually require several years to complete. A clinical trial
may combine the elements of more than one phase, and often two or more Phase III
studies are required.
After successful completion of the required clinical testing, generally
an NDA is submitted. FDA approval of the NDA (as described below) is required
before marketing may begin in the United States. The FDA reviews all NDAs
submitted and may request more information before it accepts the filing. The
review process is often extended significantly by FDA requests for additional
information or clarification. The FDA may refer the application to the
appropriate advisory committee, typically a panel of clinicians, for review,
evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee.
During the review process, the FDA generally will conduct an inspection of the
relevant drug manufacturing facilities and clinical sites to ensure that the
facilities are in compliance with applicable Good Manufacturing Practices
requirements. If FDA evaluations of the NDA application, manufacturing
facilities, and clinical sites are favorable, the FDA may issue either an
approvable letter or a not approvable letter, which contains a number of
conditions that must be met in order to secure approval of the NDA. When and if
those conditions have been met to the FDA's satisfaction, the FDA will issue an
approvable letter, authorizing commercial marketing of the drug for certain
specific indications. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the NDA
or issue a not approvable letter, outlining the deficiencies in the submission
and often requiring additional testing or information. Notwithstanding the
submission of any requested additional data or information in response to an
approvable or not approvable letter, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval. Even if FDA
approval is obtained, a marketed drug product and its manufacturer are subject
to continual review and inspection, and later discovery of previously unknown
problems with the product or manufacturer may result in restrictions or
sanctions on such product or manufacturer, including withdrawal of the product
from the market.
The process of developing and obtaining approval for a new
pharmaceutical product within this regulatory framework requires a number of
years and the expenditure of substantial resources. There can be no assurance
that necessary approvals will be obtained on a timely basis, if at all. Delays
in obtaining regulatory approvals could have a material adverse effect on us. If
we fail to comply with applicable regulatory requirements for marketing drugs,
or if our cosmeceutical products are deemed to be drugs by the FDA, we could be
subject to administrative or judicially imposed sanctions such as warning
letters, fines, product recalls or seizures, injunctions against production,
distribution, sales, or marketing, delays in obtaining marketing authorizations
or the refusal of the government to grant such approvals, suspensions and
withdrawals of previously granted approvals, civil penalties and criminal
prosecution of Cellegy, our officers or our employees.
Manufacturing. Each domestic drug manufacturing facility must be
registered with the FDA. Domestic drug manufacturing establishments are subject
to routine inspection by the FDA and other regulatory authorities and must
comply with GMP requirements and any applicable state or local regulatory
requirements. We intend to use contract manufacturers that operate in
conformance with these requirements to produce our compounds and finished
products in commercial quantities. We cannot assure you that manufacturing or
quality control problems will not arise at the manufacturing plants of our
contract manufacturers or that such manufacturers will have the financial
capabilities or management expertise to be able to adequately supply product or
maintain compliance with the regulatory requirements necessary to continue
manufacturing our products.
Foreign Regulation of Drugs. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities may be
necessary in foreign countries before the commencement of marketing of the
product in such countries. The approval procedures vary among countries, can
involve additional testing, and the time required may differ from that required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general each country has its own procedures and
requirements, many of
7
which are time consuming and expensive. Thus, there can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. We expect to rely
principally on corporate partners, licensees and contract research
organizations, along with our expertise, to obtain governmental approval in
foreign countries of drug formulations utilizing our compounds.
Other Government Regulation. In addition to regulations enforced by the
FDA, Cellegy is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other similar federal and state
laws regarding, among other things, occupational safety, the use and handling of
radioisotopes, environmental protection and hazardous substance control.
Although we believe that we have complied with these laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, there can be no assurance that Cellegy will not be required to
incur significant costs to comply with environmental and health and safety
regulations in the future. Our research and development involves the controlled
use of hazardous materials, chemicals, and various radioactive compounds.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, Cellegy could
be held liable for any damages that result and any such liability could exceed
our resources.
Health Care Reform. In the United States, there have been, and Cellegy
expects there will continue to be, a number of federal and state proposals to
implement cost controls and other health care regulatory measures. Future
legislation could result in a substantial restructuring of the health care
delivery system. While we cannot predict whether any legislative or regulatory
proposals will be adopted or the effect such proposals may have on our business,
the uncertainty of such proposals could have a negative effect on our ability to
raise capital and to identify and reach agreements with potential partners, and
the adoption of such proposals could have an adverse effect on Cellegy. In both
domestic and foreign markets, sales of our therapeutic products, if any, will
depend in part on the availability of reimbursement from third-party payors.
There can be no assurance that our products will be considered cost effective or
that reimbursement will be available. We cannot predict the outcome of any
government or industry reform initiatives or the impact thereof on our financial
position or results of operations.
Competition
The pharmaceutical industry is characterized by extensive research
efforts and rapid and significant technological changes. In the development and
marketing of topical prescription drugs, Cellegy faces intense competition.
Cellegy is much smaller in terms of size and resources than many of its
competitors in the United States and abroad, which include, among others, major
pharmaceutical, chemical, consumer product, and biotechnology companies,
specialized firms, universities and other research institutions. Cellegy's
competitors may succeed in developing technologies and products that are safer,
more effective or less costly than any which are being developed by us that
would render our technology and potential products obsolete and noncompetitive.
Many of these competitors have substantially greater financial and technical
resources, clinical production and marketing capabilities and regulatory
experience than we have. In addition, Cellegy's products are subject to
competition from existing products. For example, Cellegy's Tostrex product, if
commercialized, is expected to compete with a currently marketed transdermal
patch product sold by Watson Pharmaceuticals and two transdermal testosterone
gel products marketed by Unimed/Solvay and Auxilium Pharmaceuticals. Cellegy's
Cellegesic product, if commercialized, is expected to compete with
over-the-counter products, such as Preparation H marketed by American Home
Products, and various other prescription products. As a result, we cannot assure
you that Cellegy's products under development will be able to compete
successfully with existing products or innovative products under development by
other organizations.
Therapies for sexual dysfunction and women's health products represent
a large market opportunity, especially as the overall population continues to
age. As the size of the market continues to grow, competition will expand. The
approval and marketing of competitive products and other products that treat the
indications targeted by Cellegy could adversely affect the market acceptance of
Cellegy's products. The presence of directly competitive products could also
result in more intense price competition than might otherwise exist, which could
have a material adverse effect on Cellegy. Cellegy is aware of other companies
that are developing testosterone replacement products for
8
women and two testosterone replacement products for men. We believe that
competition will be intense for all of its female and male sexual dysfunction
product candidates.
Employees
As of March 11, 2003, we had twenty full-time and three part-time
employees. Thirteen of these employees, of whom 2 are M.D.'s and another 5 are
Ph.D.'s, are engaged in clinical research and development. In addition, we
utilize the services of several professional consultants, as well as contract
manufacturing and research organizations to supplement our internal staff's
activities. None of our employees are represented by a labor union. We have
experienced no work stoppages and we believe that our employee relations are
good.
ITEM 2: PROPERTIES
Cellegy currently leases 65,340 square feet of space located in South
San Francisco, California with an estimated 2003 rental cost of $106,000 per
month or $1,270,000 for 2003. Approximately 48,613 square feet of this space is
currently subleased to one tenant with an estimated 2003 rental income of
approximately $91,000 per month or $1,100,000 for 2003. We believe our current
facilities will be adequate for our needs for expansion for the foreseeable
future.
ITEM 3: LEGAL PROCEEDINGS
Cellegy is not a party to any material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the
fourth quarter of the year ended December 31, 2002.
9
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The executive officers of Cellegy are as follows:
Name Age Position
- ---- --- --------
K. Michael Forrest 59 Chairman, President, Chief Executive Officer
and Director
Daniel L. Azarnoff, M.D. 76 Senior Vice President, Medical and Regulatory
Affairs
John J. Chandler 61 Vice President, Corporate Development
A. Richard Juelis 54 Vice President, Finance and Chief Financial
Officer
David A. Karlin, M.D. 60 Vice President, Clinical Research
K. Michael Forrest. Mr. Forrest became Chairman in May 2000 and has
been President, CEO, and a director since December 1996. From January 1996 to
November 1996, he served as a biotechnology consultant. From November 1994 to
December 1995, he served as President and CEO of Mercator Genetics, a public
biotechnology company. From March 1991 to June 1994, he served as President and
CEO of Transkaryotic Therapies, Inc., a public biotechnology company. From 1968
to 1991, Mr. Forrest held a series of positions with Pfizer, Inc. and senior
management positions with American Cyanamid, including Vice President of Lederle
U.S. and Lederle International. He is a director of INEX Pharmaceuticals, a
public company developing anti-cancer products.
Daniel L. Azarnoff, M.D. Dr. Azarnoff joined Cellegy as Vice President,
Clinical and Regulatory Affairs in October 1997. He became Senior Vice President
in July 1999, and in February of 2001 was given the additional responsibility of
Medical Director. Since January 1986, Dr. Azarnoff has been President of D.L.
Azarnoff Associates and continues consulting to the industry on a part-time
basis. From August 1978 to December 1985, he served as President of Research and
Development at G.D. Searle and Co. From July 1967 to August 1978, he was KUMC
Distinguished Professor of Medicine and Pharmacology, as well as the Director of
the Clinical Pharmacology-Toxicology Center at the University of Kansas Medical
Center. Dr. Azarnoff has also served as a member of advisory and expert
committees within the Food and Drug Administration, World Health Organization,
American Medical Association, National Academy of Sciences and National
Institutes of Health. Dr. Azarnoff is a member of The Institute of Medicine of
the National Academy of Sciences. He received his M.D. from the University of
Kansas Medical School. Dr. Azarnoff is currently director of Western Center
Clinical Trials.
John J. Chandler. Mr. Chandler became Vice President, Corporate
Development in May 1998. From January 1995 to March 1998, he served as Vice
President, Europe for the Medical Device Division of American Home Products.
During 1994, he was Area Director, Europe/Latin America for American Home
Products. From 1968 to 1993, he held a series of management and senior
management positions with American Cyanamid Company. Mr. Chandler holds an
M.B.A. in Marketing from Seton Hall University and a B.S. in Biology from the
Queens College of the City University of New York.
A. Richard Juelis. Mr. Juelis became Vice President, Finance and Chief
Financial Officer in November 1994. From January 1993 to September 1994 he
served as Vice President, Finance and Chief Financial Officer for VIVUS, Inc., a
publicly traded drug delivery company. From October 1990 to December 1992, he
served as Vice President, Finance and Chief Financial Officer at XOMA
Corporation, a public biotechnology company. Mr. Juelis has also held domestic
and international financial and general management positions for seven years
each with Hoffmann-LaRoche and Schering-Plough. He holds a B.S. in Chemistry
from Fordham University and an M.B.A. from Columbia University.
David A. Karlin, M.D. Dr. Karlin joined Cellegy as Vice President,
Clinical Research in October 2002. From February 2002 to July 2002, he served as
Vice President, Clinical Development for Genteric, Inc., a privately held
company specializing in gene therapy. From August 1999 to October 2001, Dr.
Karlin was Senior Medical Director at Matrix Pharmacetuticals, a cancer and drug
delivery company. He was Vice President, Clinical Research at
10
SciClone Pharmaceuticals from 1995 to 1999. Prior to SciClone, Dr. Karlin held
various positions at Syntex Corporation over a nine-year period. Before joining
the pharmaceutical industry, Dr. Karlin was an Associate Professor at Temple
University School of Medicine and an Assistant Professor at University of Texas
M.D. Anderson Hospital and Tumor Institute. He was an instructor at the
University of Chicago, where he received his medical degree, and had
Gastroenterology and Gastrointestinal Oncology training at that University .
11
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Cellegy's common stock currently trades on The Nasdaq Stock Market
under the symbol "CLGY." The following table sets forth the range of high and
low sales prices for the common stock as reported on The Nasdaq Stock Market for
the periods indicated below.
2002 High Low
- ---- ---- ---
First Quarter........................................ $ 8.80 $ 5.15
Second Quarter....................................... 6.90 2.02
Third Quarter........................................ 2.44 1.66
Fourth Quarter....................................... 4.35 1.50
2001
- ----
First Quarter........................................ $ 7.37 $ 4.31
Second Quarter....................................... 7.75 4.20
Third Quarter........................................ 7.08 5.01
Fourth Quarter....................................... 9.15 6.36
Holders
As of March 11, 2003, there were approximately 200 shareholders of
record excluding beneficial holders of stock held in street name.
Dividend Policy
We have never paid cash or declared dividends on our common stock. We
do not anticipate that we will declare or pay cash dividends on our common stock
in the foreseeable future.
Information with respect to equity compensation plans that is required
by this Item will be included in our proxy statement for the 2003 annual meeting
of shareholders under the heading "Equity Compensation Plans", and is hereby
incorporated by reference.
12
ITEM 6: SELECTED FINANCIAL DATA
The following selected historical information has been derived from
audited financial statements of Cellegy. The financial information as of
December 31, 2002 and 2001 and for each of the three earlier years in the period
ended December 31 are derived from audited financial statements. The financial
statements, related notes thereto, and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K should be read carefully. The selected data
is not intended to replace the financial statements.
($000's) Years ended December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Statement of Operations Data:
Revenues ........................................... $ 1,402 $ 877 $ 1,586 $ 1,045 $ 832
Costs and expenses (1) ............................. 17,859 21,847 13,573 10,847 9,266
-------- -------- -------- -------- --------
Loss from operations ............................... (16,457) (20,970) (11,987) (9,802) (8,434)
Interest income and other net and
interest expense ................................... 521 1,505 569 501 1,068
-------- -------- -------- -------- --------
Net loss ........................................... $(15,936) $(19,465) $(11,418) $ (9,301) $ (7,366)
======== ======== ======== ======== ========
Basic and diluted net loss per common
shareholder ...................................... $ (0.90) $ (1.26) $ (0.91) $ (0.85) $ (0.73))
======== ======== ======== ======== ========
Weighted average common shares
outstanding ...................................... 17,643 15,503 12,542 10,914 10,160
(1) For the year ended December 31, 2002, Cellegy recorded non-cash compensation
expense totaling $1,017,000, with approximately $961,000 occurring in the fourth
quarter. The largest portion of these non-cash charges was approximately
$695,000 relating to the modification of certain previously granted stock
options. The modification reduced the number of shares subject to the options
and was implemented in connection with the restoration of salaries and fees for
certain employees and board members whose compensation had been reduced earlier
in 2002. Even though the modification reduced the number of outstanding options,
under generally accepted accounting principles, the modification resulted in a
variable option accounting charge with respect to the vested portion of the
modified options. The amount of the charge reflected in the financial statements
is based on the number of options vested multiplied by the difference between
the closing price of our common stock and the original exercise price of the
options at year end. During the year ended December 31, 2001, we recorded
non-cash charges of $3,507,134 for in-process research and development
associated with the Vaxis acquistion and $750,000 in non-cash charges for
research and development expenses associated with milestone payments to Neptune
Pharmaceuticals.
December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash, cash equivalents and investments(2) .......... $ 23,858 $ 17,190 $ 15,923 $ 16,737 $ 15,220
Total assets ....................................... 28,379 22,367 21,259 20,913 19,484
Deficit accumulated during the
development stage ................................ (86,312) (70,377) (50,912) (39,494) (30,192)
Total shareholders' equity ......................... $ 10,534 19,845 $ 18,794 $ 15,839 $ 14,218
(2) Includes restricted cash of $227,500 in 2002 and $614,000 in 2001.
13
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report includes forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about our industry, our beliefs and our assumptions. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. Our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains many such
forward-looking statements. These forward-looking statements are not guarantees
of future performance and concern matters that involve risks and uncertainties
that could cause our actual results to differ materially from those in the
forward-looking statements. These risks and uncertainties include those
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" and
elsewhere in this Annual Report. Except as required by law, we undertake no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may arise after the date of this Annual Report. Actual
events or results may differ materially from those discussed in this Annual
Report.
Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs and skin care products. We are developing several
prescription drugs, including two transdermal testosterone gel products,
Tostrex, for the treatment of male hypogonadism, a condition that afflicts
certain men, generally above the age of forty, and Tostrelle, for the treatment
of sexual dysfunction in menopausal women. Cellegesic is our nitroglycerin-based
product for the treatment of anal fissures and hemorrhoids.
General
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 stock. The purchase price was allocated to net tangible assets
of $250,000, intangible assets of $350,000 and $3,507,000 million of in-process
research and development. The intangibles of $350,000 are being amortized over
five years and the in-process research and development has been expensed in the
fourth quarter of 2001. The acquired technology 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. The purchase agreement provides for future
earn-out payments over a period of seven years that are based on commercial
sales of any products developed by Cellegy based on technologies acquired from
Vaxis. Any contingent consideration paid in the future will be accounted for as
a cost of earning the related revenues. The results of operations of the
acquired company have been included in our consolidated financial statements
since the acquisition date.
In September 2002, Cellegy and Ventiv Health, Inc. terminated the
Cellegesic License Agreement based on the delay in commercialization of
Cellegesic due to the withdrawal of the NDA and the subsequent decision to
conduct another Phase III trial. Cellegy and Ventiv originally signed a six year
agreement to commercialize Cellegesic, in the United States in August 2001.
Ventiv was to have delivered integrated marketing and sales solutions providing
pre-launch support, recruiting and training a sales force which would have been
jointly managed by both companies.
In November 2002, we completed a private placement of 2.2 million
shares of our common stock resulting in approximately $5.5 million of gross
proceeds to Cellegy. The financing was with a single investor, John M. Gregory,
founder and former CEO of King Pharmaceuticals and currently managing partner of
SJ Strategic Investments LLC.
In December 2002, Cellegy entered into an exclusive license agreement
with PDI, Inc. to commercialize Tostrex in North American markets. Under the
terms of the agreement, PDI's Pharmaceutical Products Group will be responsible
for the marketing and sale of Tostrex and will utilize its existing sales and
marketing infrastructure and skills contained within the PDI Pharmaceutical
Products Group. Cellegy received a payment of $15.0 million on signing of the
agreement on December 31, 2002 and will receive a milestone payment of $10.0
million upon
14
approval of the product by the FDA in the United States. PDI will also make
royalty payments on net sales ranging from 20% to 30%. Cellegy will be
responsible for supplying finished product to PDI through Cellegy's contract
manufacturer.
Critical Accounting Policies
Use of Estimates. The preparation of consolidated financial statements,
in conformity with accounting principles generally accepted in the United
States, requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. We have identified below some of our
more significant accounting policies. For further discussion of our accounting
policies, see Note 1 in the Notes to Consolidated Financial Statements.
Revenue Recognition. Revenues related to cost reimbursement provisions
under development contracts are recognized as the costs associated with the
projects are incurred. Revenues related to milestones specified under
development contracts are recognized as the milestones are achieved. Cellegy has
received certain government grants that support our research effort in defined
research projects. These grants generally provide for reimbursement of approved
costs incurred as defined in the various grants. Revenues associated with these
grants are recognized as costs under each grant are incurred. Revenues related
to product sales are recognized upon shipment when title to the goods has been
transferred to the customer. There is no right of return for our Rectogesic and
skin care product sales.
Up-front payments, such as the $15.0 million payment received from PDI
for the Tostrex license, are recorded as deferred revenue at the time the cash
is received. Amounts are recognized as revenue on a straight-line basis over the
longer of the life of the contract or the service period. Royalties payable to
Cellegy under the PDI License Agreement will be recognized as earned when the
royalties are no longer refundable to PDI under certain minimum royalty terms
defined in the agreement.
Long-Lived and Intangible Assets and Goodwill. Goodwill of $814,000 and
other intangible assets of $382,000 are included in our December 31, 2002
balance sheet. Management reviews goodwill for impairment either on an annual
basis or quarterly if an event occurs that might reduce the fair value of the
long-lived asset below its carrying value. All other long-lived and intangible
assets are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of the asset may not be recoverable. An impairment loss
would be recognized based on the difference between the carrying value of the
asset and its estimated fair value, which would be determined based on either
discounted future cash flows or other appropriate fair value methods. The
evaluation of goodwill and other intangibles for impairment requires management
to use significant judgments and estimates including, but not limited to,
projected future revenue, operating results, and cash flows.
Although management currently believes that the estimates used in the
evaluation of goodwill and other intangibles are reasonable, differences between
actual and expected revenue, operating results, and cash flow could cause these
assets to be deemed impaired. If an impairment were to occur, Cellegy would be
required to charge to earnings the write-down in value of such assets, which
could have a material adverse effect on our results of operations and financial
position.
Clinical Trial Expenses. Clinical trial expenses are payable to
clinical sites and clinical research organizations. Expenses for both of these
groups are accrued on a straight-line basis over the contracted period subject
to adjustment for actual activity based on such factors as the number of
subjects enrolled and number of subjects that have completed treatment for each
trial. A monthly reconciliation of costs accrued to cost incurred is performed
by Cellegy's clinical project managers and the finance department. However, if
activity levels associated with trials at a given point in time are
underestimated, we would have to record additional research and development
expenses in future periods that could be significant.
Investment Policy. Cellegy is subject to certain credit risk from our
investment in marketable securities. By policy, we restrict amounts invested by
investment type and by issuer, except for securities issued by the United States
government. Cellegy has an investment policy that is approved and periodically
reviewed by our Audit Committee. The policy states that investments must be
highly liquid with maturities of less than three years.
15
Cellegy's policy limits investments to the following: direct obligations of the
United States Government or fully guaranteed by a government agency or by any of
the states. Investments must have a rating of A1/P1 or A by Standard and Poors
(or an equivalent rating); money market instruments must be a member of the
Federal Reserve System with a net worth of at least $100 million and a rating of
A1/AA by Standard and Poors (or equivalent rating). Any exception to the above
requires approval of the Chief Financial Officer and the Chief Executive
Officer.
Results of Operations
Years Ended December 31, 2002, 2001 and 2000
Revenues. Cellegy had revenues of $1,402,000, $877,000, and $1,586,000
in 2002, 2001 and 2000, respectively. Revenues in 2002 consisted of $1,081,000,
relating to product sales primarily to Gryphon Development ("Gryphon"), the
product development arm of a major specialty retailer, $275,000 in Rectogesic
ointment sales in Australia and $46,000 in Canadian government grants. Revenues
in 2001 consisted of $660,000 in product sales to Gryphon and $217,000 in
Rectogesic sales in Australia. Revenues in 2000 consisted of $1,389,000 in
product sales to Gryphon, $125,000 in Rectogesic sales and $72,000 in SBIR grant
funding. The increase of $525,000 in total revenues in 2002 compared with 2001
was primarily due to a $421,000 or 64% increase in Gryphon sales relating to
additional unit sales, a $58,000 or 27% increase in Rectogesic sales and a
$46,000 increase in Canadian grants. The decrease of $709,000 in total revenue
in 2001 compared with 2000 was primarily due to a $729,000 or 52% decrease in
Gryphon sales, a $72,000 grant funding completed in 2000, offset by a $92,000 or
74% increase in Rectogesic sales.
Research and Development Expenses. Research and development expenses
were $10,672,000 in 2002 compared with $14,098,000 in 2001 and $9,574,000 in
2000. Total research and development expenses represented 61%, 65%, and 36% of
our total operating expenses in 2002, 2001 and 2000, respectively. Total
research and development expenses in 2002 compared with 2001 decreased by
$3,426,000 or by 24%. The decrease was due to completion of the Cellegesic Phase
III clinical trial and the completion of smaller Tostrex trials in 2001 and
non-cash charges of $750,000 relating to milestone payments made to Neptune
Pharmaceuticals in 2001. The increase of $1,098,000 or 11% in 2002 compared with
2000 was primarily due to spending associated with the Tostrex Phase III NDA
filing costs and non-cash compensation charges relating to stock options.
Research and development expenses include salaries and benefits, laboratory
supplies, external research programs, clinical studies and allocated overhead
costs such as rent, supplies and utilities. In addition to clinical site
payments, clinical costs include the manufacturing of clinical supplies and
related costs associated with product testing stability studies.
We expect our research and development expenses in 2003 to be
approximately equal to 2002 levels. Major expenses are planned for our Phase
II/III Tostrelle clinical study, the pending Cellegesic Phase III trial, and
for support of ongoing research in Cellegy Canada. Unexpected increases in
research and development expenses may occur if the FDA requires further trials
to support our NDA for Tostrex.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $6,816,000 in 2002 compared with $4,042,000 in 2001
and $3,631,000 in 2000. The increases in 2002 compared with both 2001 and 2000
consisted primarily of sales and marketing expenses totaling $2,094,000
primarily related to Cellegesic pre-launch activities in the first half of 2002.
In addition, we incurred non-cash compensation expenses and investment banking
fees, slightly offset by decreases in general office expenses. Our selling,
general and administrative expenses are expected to increase in the second half
of 2003 in support of our business development programs and product
commercialization efforts.
Acquired-In-Process Research and Development. Acquired-in-process
research and development expenses of $3,507,000 were incurred during 2001 as a
result of the Vaxis acquisition. There were no acquired-in-process research and
development expenses incurred during 2002 and 2000. The acquired technology was
at an early state of development such that, at the acquisition date,
technological feasibility had not been reached and no alternative use existed.
16
Interest Income and Other Net and Interest Expense. Cellegy recognized
$548,000 in interest income and other net, for 2002, compared with $1,532,000 in
2001, and $770,000 for 2000. Reductions in interest income were tied primarily
to lower average investment balances, interest rates and rental income during
2002. Interest expenses were approximately $27,000 in both, 2002 and 2001 and
$201,000 in 2000. Interest expenses for 2002 and 2001 were related to the Ventiv
loan and a separate commercial bank loan, respectively. Interest expense
decreased by $174,000 in 2001 compared with 2000 due to the full repayment of
commercial bank loan in 2001. Other income includes net rental income from our
sub-lessees of $119,000 in 2002, $897,000 in 2001, and $80,000 in 2000. One of
Cellegy's earlier sub-lease agreements expired in December 2001 and was replaced
by a new sublease agreement which became effective in August 2002.
Net Loss. The net loss in 2002 was $15,936,000 or $0.90 per share based
on 17,643,000 weighted average shares outstanding compared with the net loss in
2001 of $19,465,000 or $1.26 per share based on 15,503,000 weighted average
shares outstanding. In 2000, our net loss was $11,418,000 or $0.91 per share
based on 12,542,000 weighted average shares outstanding.
Liquidity and Capital Resources
We have experienced net losses from operations each year since our
inception. Through December 31, 2002, we had incurred an accumulated deficit of
$86.3 million and had consumed cash from operations of $53.1 million. Cash from
equity financing transactions have 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 follow-on public offering in November 1997, $10.0 million in net proceeds
from a private placement in July 1999, $11.6 million in net proceeds from a
private placement in October 2000, $15.2 million in net proceeds from a private
placement in June 2001 and $5.2 million in net proceeds from a private placement
in November 2002.
Our cash and investments were $23.9 million at December 31, 2002
compared with $17.2 million at December 31, 2001, including $227,000 and
$614,000 of restricted cash, respectively. The increase in cash and investments
of $6.6 million in 2002 was principally due to the net proceeds from the $5.2
million financing completed in November and $15.0 million in upfront payments
from the licensing agreement with PDI in December, partially offset by other net
cash used in operating activities of approximately $13.4 million. During the
fourth quarter of 2002, we had an operating burn rate of approximately $800,000
per month; we expect the burn rate for the first quarter of 2003 to be at
approximately the same level as the prior quarter. However, our operations have
used and will continue to use increased amounts of cash in future quarters.
Future expenditures and capital requirements depend on numerous factors
including, without limitation, the progress and focus of our research and
development programs, the progress and results of pre-clinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the
costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, our ability to establish new collaborative
arrangement and the initiation of commercialization activities and the purchase
of capital equipment and working capital increases associated with the scale up
and manufacture of Tostrex.
We have a ten-year operating lease commitment on our facility with our
current landlord. Our operating lease commitments are $1,288,000 for 2003 and
$7,036,000 thereafter in annual amounts of approximately $1.3 to $1.5 million.
Information about this commitment as of December 31, 2002 is presented in the
table below (in thousands):
Contractual
Obligations Total 2003 2004 - 2005 2006 - 2007 Thereafter
- -----------------------------------------------------------------------------------------------------------------------------------
Operating lease $8,324 $1,288 $2,691 $2,854 $1,491
In order to complete the research and development and other activities
necessary to commercialize our products, additional financing will be required.
As a result, we will seek private or public equity investments and future
collaborative arrangements or other transactions with third parties to meet such
needs. There is no assurance that financing will be available for us to fund our
operations on acceptable terms, if at all. Insufficient funding may
17
require us to delay, reduce or eliminate some or all of our research and
development activities, planned clinical trials, marketing, sales, product
promotion and administrative programs. We believe that available cash resources
and the interest thereon will be adequate to satisfy our capital needs through
at least December 31, 2004.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148 ("FAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure." FAS 148 amends FAS 123 "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123
to require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The additional disclosure
requirements of FAS 148 are effective for fiscal years ending after December 15,
2002. We have elected to continue to follow the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB
25), "Accounting for Stock Issued to Employees," to account for employee stock
options.
Factors That May Affect Future Operating Results
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in this Annual Report. Factors that might cause such a difference
include, but are not limited to, those discussed below.
We are subject to regulation by regulatory authorities including the FDA, which
could delay or prevent marketing of our products. Unexpected regulatory outcomes
could adversely affect our business and stock price.
Cellegy's prescription product candidates, and our ongoing research and
clinical activities such as those relating to our product candidates Cellegesic,
Tostrex and Tostrelle, are subject to extensive regulation by governmental
regulatory authorities in the United States and other countries. Before we
obtain regulatory approval for the commercial sale of our potential drug
products, we must demonstrate through pre-clinical studies and clinical trials
that the product is safe and efficacious for use in the clinical indication for
which approval is sought. The timing of NDA submissions, the outcome of reviews
by the FDA and the initiation and completion of other clinical trials are
subject to uncertainty, change and unforeseen delays. Under the Prescription
Drug User Fee Act, the FDA establishes a target date to complete its review of
an NDA. Although the FDA attempts to respond by the relevant PADUFA date to
companies which file NDAs, there is no assurance or obligation on the FDA's part
to do so. For example, because Cellegy has not received feedback from the FDA on
certain parts of our Tostrex NDA submission, the FDA could extend the
approvability decision for this NDA beyond the current PADUFA date of April 6,
2003. In addition, extensive current pre-clinical and clinical testing
requirements and the current regulatory approval process of the FDA in the
United States and of certain foreign regulatory authorities, or new government
regulations, could prevent or delay regulatory approval of Cellegy's products.
The process of developing and obtaining approval for a new
pharmaceutical product within this regulatory framework requires a number of
years and the expenditure of substantial resources. There can be no assurance
that necessary approvals will be obtained on a timely basis, if at all. Delays
in obtaining regulatory approvals could have a material adverse effect on us. If
we fail to comply with applicable regulatory requirements, we could be subject
to a wide variety of serious administrative or judicially imposed sanctions and
penalties, any of which would materially and adversely affect our business,
results of operations and stock price.
Disagreements may occur in the future, and one or more of our ongoing
or planned clinical trials could be delayed or be required to be repeated in
order to satisfy regulatory requirements. The FDA could impose requirements on
future trials that could delay or prevent the regulatory approval process for
Tostrex, Cellegesic or Tostrelle. For example, in June 2002, Cellegy announced
that it had submitted an NDA for Tostrex including data from a Phase III
clinical study using Tostrex to treat male hypogonadism. There can be no
assurance that the FDA will find the trial data, the statistical analysis
methodology used by Cellegy, or other sections of the NDA sufficient to approve
Tostrex for marketing in the United States. The FDA could require further
trials, decide to have an
18
Advisory Panel review the submission, with an uncertain outcome of such panel's
recommendation, or take other actions having the effect of delaying or
preventing commercial introduction of Tostrex. If the FDA delays its response
beyond the current PADUFA date for our Tostrex NDA, our business plans and the
market price of our common stock would be adversely affected.
Sales of Cellegy's products outside the United States are subject to
different regulatory requirements governing clinical trials and marketing
approval. These requirements vary widely from country to country and could delay
introduction of Cellegy's products in those countries.
Our clinical trial results are very difficult to predict in advance, and the
clinical trial process is subject to delays.Failure of one or more clinical
trials or delays in trial completion could adversely affect our business and our
stock price.
Results of pre-clinical studies and early clinical trials may not be
good predictors of results that will be obtained in later-stage clinical trials.
We cannot assure you that Cellegy's present or future clinical trials,
including, for example, the current Phase II/III study for Tostrelle, will
demonstrate the results required to continue advanced trial development and
allow us to seek marketing approval for this or our other product candidates.
Because of the independent and blind nature of certain human clinical testing,
there will be extended periods during the testing process when we will have only
limited, or no, access to information about the status or results of the tests.
Other pharmaceutical companies have believed that their products performed
satisfactorily in early tests, only to find their performance in later tests,
including Phase III clinical trials, to be inadequate or unsatisfactory, or that
FDA Advisory Committees have declined to recommend approval of the drugs, or
that the FDA itself refused approval, with the result that such companies' stock
prices have fallen precipitously.
Delays in the clinical trial process can be extremely costly in terms
of lost sales opportunities and increased clinical trial costs. The speed with
which we complete our clinical trials and our regulatory submissions, including
NDAs, will depend on several factors, including the following:
o the rate of patient enrollment, which is affected by the size of the
patient population, the proximity of patients to clinical sites, the
difficulty of the entry criteria for the study and the nature of the
protocol;
o the timely completion of clinical site protocol approval and obtaining
informed consent from subjects;
o analysis of data obtained from preclinical and clinical activities
which could delay, limit or prevent regulatory approval;
o changes in policies or staff personnel at regulatory agencies during
the lengthy drug application review; and
o the availability of experienced staff to conduct and monitor clinical
studies, internally or through contract research organizations.
We have a history of losses, and we expect losses to continue for at least
several years.
Our accumulated deficit as of December 31, 2002 was approximately $86.3
million. We have never operated profitably and, given our planned level of
operating expenses, we expect to continue to incur losses for at least the next
two years. We plan to increase our operating expenses as we continue to devote
significant resources to pre-clinical studies, clinical trials, administrative,
marketing, sales and patent activities. Accordingly, without substantial
revenues from new corporate collaborations, royalties on product sales or other
revenue sources, we expect to incur substantial operating losses in the
foreseeable future as our potential products move into commercialization, and we
continue to invest in research and clinical trials. Our losses may increase in
the future, and even if we achieve our revenue targets, we may not be able to
sustain or increase profitability on a quarterly or annual basis. The amount of
future net losses, and the time required to reach profitability, are both highly
uncertain. To achieve sustained
19
profitable operations, we must, among other things, successfully discover,
develop, obtain regulatory approvals for and market pharmaceutical products. We
cannot assure you that we will ever be able to achieve or sustain profitability.
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing could affect our ability to develop or market
products.
Throughout our history, we have consumed substantial amounts of cash.
Our cash needs are expected to continue to increase over, at least, the next two
years in order to fund the additional expenses required to expand our current
research and development programs and to commercialize our products once
regulatory approvals have been obtained. Cellegy has no current source of
significant ongoing revenues or capital beyond existing cash and investments,
certain product sales of Rectogesic in Australia, sales to Gryphon, the
development subsidiary of a major specialty retailer, and possible payments
under our license agreement with PDI relating to Tostrex. In order to complete
the research and development and other activities necessary to commercialize our
products, additional financing will be required.
Cellegy will seek private or public equity investments and future
collaborative arrangements with third parties to help fund future cash needs.
Such funding may not be available on acceptable terms, if at all. Including
proceeds from a private placement financing during 2002 and upfront payments
received from the Tostrex license agreement in the fourth quarter of 2002,
Cellegy believes that available cash resources and interest earned will be
adequate to satisfy its capital needs through at least December 31, 2004.
The type and scope of patent coverage we have may limit the commercial success
of our products.
Cellegy's success depends, in part, on our ability to obtain patent
protection for our products and methods, both in the United States and in other
countries. Several of Cellegy's products and product candidates, such as
Cellegesic, Tostrex and Tostrelle, are based on existing molecules with a
history of use in humans but which are being developed by us for new therapeutic
uses or in novel delivery systems which enhance therapeutic utility. We cannot
obtain composition patent claims on the compounds themselves, and will instead
need to rely on patent claims, if any, directed to use of the compound to treat
certain conditions or to specific formulations. This is the case, for example,
with our United States patents relating to Cellegesic and Tostrex. Such
method-of-use patents may provide less protection than a composition-of-matter
patent, because of the possibility of "off-label" use of the composition.
Cellegy may not be able to prevent a competitor from using a different
formulation or compound for a different purpose. No assurance can be given that
any additional patents will be issued to us, that the protection of any patents
that may be issued in the future will be significant, or that current or future
patents will be held valid if subsequently challenged.
The patent position of companies engaged in businesses such as
Cellegy's business generally is uncertain and involves complex legal and factual
questions. There is a substantial backlog of patent applications at the United
States Patent and Trademark Office ("USPTO"). Patents in the United States are
issued to the party that is first to invent the claimed invention. There can be
no assurance that any patent applications relating to Cellegy's products or
methods will issue as patents, or, if issued, that the patents will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide us a competitive advantage. For example, we earlier reported that
two oppositions had been filed with the European Patent Office regarding our
European patent protecting the manufacture and use of nitroglycerin ointment and
related compounds for the treatment of anal disorders, including fissures and
various hemorrhoidal conditions. An adverse outcome in either opposition
proceeding could have a negative effect on Cellegy, impacting the success of our
marketing efforts in Europe.
In addition, many other organizations are engaged in research and
product development efforts in drug delivery and topical formulations that may
overlap with Cellegy's products. Such organizations may currently have, or may
obtain in the future, legally blocking proprietary rights, including patent
rights, in one or more products or methods under development or consideration by
Cellegy. These rights may prevent us from commercializing technology, or may
require Cellegy to obtain a license from the organizations to use the
technology. Cellegy may not be able to obtain any such licenses that may be
required on reasonable financial terms, if at all, and cannot be sure that the
20
patents underlying any such licenses will be valid or enforceable. Moreover, the
laws of certain foreign countries do not protect intellectual property rights
relating to United States patents as extensively as those rights are protected
in the United States. The issuance of a patent in one country does not assure
the issuance of a patent with similar claims in another country, and claim
interpretation and infringement laws vary among countries, so the extent of any
patent protection is uncertain and may vary in different countries. As with
other companies in the pharmaceutical industry, we are subject to the risk that
persons located in other countries will engage in development, marketing or
sales activities of products that would infringe our patent rights if such
activities were in the United States.
Our product sales strategy involving corporate partners is highly uncertain.
Cellegy is seeking to enter into agreements with corporate partners
regarding commercialization of our lead product candidates. Other than the
recently completed Tostrex license agreement with PDI, Cellegy does not
currently have any other agreements with third parties to commercialize our
product candidates. Cellegy may not be able to establish any such collaborative
arrangements and we may not have the resources or the experience to successfully
commercialize any such products on our own. Failure to enter into any such
arrangements could prevent, delay or otherwise have a material adverse effect on
our ability to develop and market Tostrex in markets outside of North America or
other products that we desire to commercialize through third party arrangements.
With the current and future planned corporate partner arrangements, we
may rely on our partners to conduct clinical trials, obtain regulatory approvals
and, if approved, manufacture, distribute, market or co-promote these products.
However, reliance on third party partners can create risks to our product
commercialization efforts. Once agreements are completed, particularly if they
are completed at a relatively early stage of product development, Cellegy may
have little or no control over the development or marketing of these potential
products and little or no opportunity to review clinical data before or after
public announcement of results. Further, any arrangements that may be
established may not be successful.
In its annual report on Form 10-K for the year ended December 31, 2002,
PDI dislosed that on January 6, 2003, it was named as a defendant in a state
court action by Auxilium Pharmaceuticals, Inc.; that Auxilium was seeking
monetary damages and injunctive relief, based on several claims related to PDI's
alleged breaches of its contract sales force agreement with Auxilium and claims
that PDI misappropriated and is misappropriating Auxilium's trade secrets in
connection with PDI's exclusive license agreement with us; that a hearing in
Auxilium's preliminary injunction motion was conducted on February 11 through
13, 2003 and the court did not reach a decision; that final arguments in the
hearing were scheduled for March 2003; that PDI intended to continue contesting
the case vigorously; and that PDI believed the likelihood of any order enjoining
PDI from marketing and selling under its agreement with us for any significant
time was unlikely, as was the likelihood of any material damage award against
PDI. An adverse outcome in that litigation might adversely affect PDI's ability
to perform its obligations under our agreement with PDI and could have an
adverse effect on our ability to timely and successfully introduce and
commercialize our Tostrex product.
We do not have any history of manufacturing products, and we have a limited
number of critical suppliers.
Cellegy has no direct experience in manufacturing commercial quantities
of products and currently does not have any capacity to manufacture products on
a large commercial scale. We currently rely on a limited number of contract
manufacturers, primarily PanGeo Pharma, and suppliers to manufacture our
formulations. Although we believe that there will be adequate third party
manufacturers, there can be no assurance that we will be able to enter into
acceptable agreements with them. In the future, we may not be able to obtain
contract manufacturing on commercially acceptable terms for compounds or product
formulations in the quantities we need. Manufacturing or quality control
problems, lack of financial resources or qualified personnel could occur with
our contract manufacturers causing product shipment delays, inadequate supply,
or causing the contractor not to be able to maintain compliance with the FDA's
current good manufacturing practice requirements necessary to continue
manufacturing.. Such problems could reduce product sales, result in substantial
Cellegy liabilities under our Tostrex license agreement or otherwise adversely
affect Cellegy's business and stock price.
21
We face intense competition from larger companies, and in the future Cellegy may
not have the resources required to develop innovative products. Cellegy's
products are subject to competition from existing products.
The pharmaceutical industry is subject to rapid and significant
technological change. In the development and marketing of prescription drugs,
Cellegy faces intense competition. Cellegy is much smaller in terms of size and
resources than many of its competitors in the United States and abroad, which
include, among others, major pharmaceutical, chemical, consumer product,
specialty pharmaceutical and biotechnology companies, universities and other
research institutions. Cellegy's competitors may succeed in developing
technologies and products that are more effective than any that we are
developing and could render Cellegy's technology and potential products obsolete
and noncompetitive. Many of these competitors have substantially greater
financial and technical resources, clinical production and marketing
capabilities and regulatory experience. In addition, Cellegy's products are
subject to competition from existing products. For example, Cellegy's Tostrex
product, if commercialized in the United States, is expected to compete with two
currently marketed testosterone gel products sold by Unimed/Solvay and Auxillian
Pharmaceuticals, and a transdermal patch product sold by Watson Pharmaceuticals.
Cellegy's Cellegesic product, if commercialized, is expected to compete with
over-the-counter products, such as Preparation H marketed by American Home
Products, and various other prescription products. As a result, we cannot assure
you that Cellegy's products under development will be able to compete
successfully with existing products or innovative products under development by
other organizations.
We currently have no drug products we sell on our own and have limited sales and
marketing experience.
We may market certain of our products, if successfully developed and
approved, through a direct sales force in the United States and through sales
and marketing partnership or distribution arrangements outside the United
States. Cellegy has very limited experience in sales, marketing or distribution.
To market certain of our products directly, we may establish a direct sales
force in the United States or obtain the assistance of our marketing partner. If
we enter into marketing or licensing arrangements with established
pharmaceutical companies, our revenues will be subject to the terms and
conditions of such arrangements and will be dependent on the efforts of our
partner. Cellegy may not be able to successfully establish a direct sales force,
or our collaborators may not effectively market any of our products, and either
circumstance could have a material adverse effect on our business and stock
price.
We have very limited staffing and will continue to be dependent upon key
employees
Our success is dependent upon the efforts of a small management team,
including K. Michael Forrest, our chief executive officer. We have employment
agreements with certain officers, but none of our officers is bound to remain
employed for any specific term. We had a reduction in force of nine people in
August 2002 and an additional five people in December 2002. If key individuals
leave Cellegy, we could be adversely affected if suitable replacement personnel
are not quickly recruited. Our future success depends upon our ability to
continue to attract and retain qualified scientific, clinical, marketing and
administrative personnel. There is competition for qualified personnel in all
functional areas, and particularly intense competition in the San Francisco Bay
Area where our principal facility is located, which make it difficult to attract
and retain the qualified personnel necessary for the development and growth of
our business.
We are subject to the risk of product liability lawsuits.
The testing, marketing and sale of human health care products entails
an inherent risk of allegations of product liability. We are subject to the risk
that substantial product liability claims could be asserted against us in the
future. Cellegy has obtained $5 million in insurance coverage relating to our
clinical trials. There can be no assurance that Cellegy will be able to obtain
or maintain insurance on acceptable terms, particularly in overseas locations,
for clinical and commercial activities or that any insurance obtained will
provide adequate protection against potential liabilities.
Our stock price could be volatile.
Our stock price has from time to time experienced significant price and
volume fluctuations, particularly during 2002 and the first quarter of 2003.
Sometimes our stock price has varied depending on fluctuations in the NASDAQ
Stock Market generally, and sometimes fluctuations have resulted from matters
more specific to Cellegy, such as an
22
announcement of clinical trial or regulatory results or other corporate
developments. Announcements that could significantly impact our stock price
include:
o publicity or announcements regarding regulatory developments relating
to our products under review, particularly relating to Tostrex or
Cellegesic;
o clinical trial results, such as results of the Tostrelle trial;
o period-to-period fluctuations in our financial results, including our
cash and investment balance, operating expenses, cash burn rate or
revenues; or
o negative announcements or financial constraints by our key suppliers,
service providers or our corporate partners, particularly PDI.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cellegy invests its excess cash in short-term, investment grade, fixed
income securities under an investment policy. All of our investments are
classified as available-for-sale (see Financial Statements - Note 2). All of our
securities owned as of December 31, 2002 will mature in 2003, with the remainder
in money market funds. We believe that potential near-term losses in future
earnings, fair values or cash flows related to our investment portfolio are not
significant.
At December 31, 2002, our investment portfolio consisted of $2,000,000
in corporate notes. We currently do not hedge interest rate exposure. If market
interest rates were to increase by 100 basis points or 1% from December 2002
levels, the fair value of our portfolio would decline by no more than $20,000.
The modeling technique used measures the change in fair value from a
hypothetical shift in market interest rates.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are set forth below on
pages F-1 through F-21 of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
23
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 may be
found in the sections captioned "Election of Cellegy Directors" and "Compliance
under Section 16(a) of the Securities Exchange Act of 1934" appearing in the
definitive Proxy Statement (the "2003 Proxy Statement") to be delivered to
shareholders in connection with the Annual Meeting of Shareholders expected to
be held on June 4, 2003. Such information is incorporated herein by reference.
Information required by this Item with respect to executive officers may be
found in Part I hereof in the section captioned "Executive Officers of the
Registrant."
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the 2003 Proxy Statement and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section
captioned "Security Ownership of Certain Beneficial Owners and Management"
appearing in the 2003 Proxy Statement and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Certain Relationships and Related Transactions" appearing in the 2003
Proxy Statement and is incorporated herein by reference.
ITEM 14: 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 Rule13a-14 (c) promulgatied under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this annual
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.
24
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
(a) The following exhibits are attached hereto or incorporated herein by
reference:
Exhibit
Number Exhibit Title
------ -------------
2.1 Asset Purchase Agreement dated December 31, 1997 between the
Company and Neptune Pharmaceutical Corporation. (Confidential
treatment has been granted with respect to portions of this
agreement.) (Incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-3 file no. 333-46087
on February 11, 1998,as amended.
3.1 Amended and Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-93288
LA) declared effective on August 11, 1995 (the "SB-2").)
3.2 Certificate of Amendment of Amended and Restated Articles of
Incorporation filed with the California Secretary of State on
August 6, 2002.
3.3 Bylaws of the Company. (Incorporated by reference to Exhibit 3.3
to the SB-2.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the SB-2.)
*10.1 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 to the SB-2.)
*10.2 1995 Equity Incentive Plan (Incorporated by reference to Exhibit
4.03 to the Company's Registration Statement on Form S-8
(Registration No. 333-91588 on June 28, 2002.)
*10.3 1995 Directors' Stock Option Plan (Incorporated by reference to
Exhibit 10.8 to the Company's Form 10-Q for fiscal quarter ended
June 30, 2002.)
10.4 Loan and Security Agreement between Silicon Valley Bank and
the Company dated June 10, 1998 (Incorporated by reference
to Exhibit 10.01 to the Company's Form 10-QSB for the fiscal
quarter ended June 30, 1998.)
10.5 Lease Agreement between the Company and TCNorthern
California Inc. dated April 8, 1998 (Incorporated by
reference to Exhibit 10.01 to the Company's Form 10-QSB for
fiscal quarter ended March 31, 1998.)
*10.6 Employment Agreement dated November 20, 1996, between the
Company and K. Michael Forrest. (Incorporated by reference to
Exhibit 10.19 to the Company's Form 10-KSB for fiscal year ended
December 31, 1996 (the "1996 Form 10-KSB".)
10.7 Services Agreement dated as of August 10, 2001 by and among the
Company, Ventiv Health Inc. and VIS Financial LLC. (Incorporated
by reference to Exhibit 10.12 to the Company's Form 10-K for
fiscal year ended December 31, 2001. Confidential treatment has
been requested with respect to portions of this agreement.)
10.8 Funding Arrangement dated August 10, 2001 by and among the
Company, Ventiv Health Inc. and VIS Financial LLC.
((Incorporated by reference to Exhibit 10.13 to the Company's
Form 10-K for fiscal year ended December 31, 2001. Confidential
treatment has been requested with respect to portions of this
agreement.)
10.9 Share Purchase Agreement dated as of November 27, 2001, by and
among the Company, Vaxis
25
Therapeutics Corporation and certain stockholders of Vaxis.
(Incorporated by reference to Exhibit 10.14 to the Company's
Form 10-K for fiscal year ended December 31, 2001.)
10.10 Exclusive License Agreement dated as of December 31, 2002, by
and between the Company and PDI, Inc. (Confidential treatment
has been requested with respect to portions of this agreement.)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See signature page.)
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
A report on Form 8-K was filed by Cellegy on January 2, 2003 announcing
our exclusive agreement with PDI, Inc. to commercialize Tostrex in
North American markets. On January 13, 2003, we filed a Form 8-K
announcing that Mr. Julian Baker and his brother, Dr. Felix Baker
resigned from the Company's Board of Directors. On February 27, 2003,
we filed a Report on Form 8-K to report our fourth quarter and year-end
financial results.
(c) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
information required to be set forth therein is included in the
financial statements or notes thereto.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of South San Francisco, State of California, on the 21st of March, 2003.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ K. Michael Forrest
-----------------------------
K. Michael Forrest
Chairman, President and Chief
Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints each
of K. Michael Forrest and A. Richard Juelis, true and lawful attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
amendments to this Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and conforming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
---- ----- ----
Principal Executive Officer:
/s/ K. Michael Forrest Chairman, President, and Chief Executive March 21, 2003
- ------------------------------ Officer
K. Michael Forrest
Principal Financial Officer
and Principal Accounting Officer:
/s/ A. Richard Juelis Vice President, Finance, Chief Financial March 21, 2003
- ------------------------------ Officer and Secretary
A. Richard Juelis
Directors:
/s/ Jack L. Bowman Director March 21, 2003
- ------------------------------
Jack L. Bowman
/s/ Tobi B. Klar Director March 21, 2003
- ------------------------------
Tobi B. Klar, M.D.
/s/ Ronald J. Saldarini Director March 21, 2003
- ------------------------------
Ronald J. Saldarini, Ph.D.
/s/ Alan A. Steigrod Director March 21, 2003
- ------------------------------
Alan A. Steigrod
/s/ Larry J. Wells Director March 21, 2003
- ------------------------------
Larry J. Wells
27
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, K. MICHAEL FORREST, certify that:
1. I have reviewed this annual report on Form 10-K of Cellegy Pharmaceuticals,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual report whether 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: March 21, 2003 By: /s/ K. Michael Forrest
----------------------
K. Michael Forrest
President, Chief Executive Officer
28
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, A. RICHARD JUELIS, certify that:
1. I have reviewed this annual report on Form 10-K of Cellegy Pharmaceuticals,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
Date: March 21, 2003 By: /s/ A. Richard Juelis
---------------------
A. Richard Juelis
Chief Financial Officer
29
Index to Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors ...................... F-2
Consolidated Balance Sheets ............................................ F-3
Consolidated Statements of Operations .................................. F-4
Consolidated Statements of Shareholders' Equity ........................ F-5
Consolidated Statements of Cash Flows .................................. F-9
Notes to Consolidated Financial Statements ............................. F-11
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Cellegy
Pharmaceuticals, Inc. (a development stage company) as of December 31, 2002 and
2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2002, and for the period from June 26, 1989 (inception) through December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cellegy
Pharmaceuticals, Inc. (a development stage company) at December 31, 2002 and
2001 and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2002, and for the period
from June 26, 1989 (inception) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 13, 2003
F-2
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Balance Sheets
December 31,
--------------------------------
2002 2001
------------ ------------
Assets
Current assets
Cash and cash equivalents ............................................................ $ 21,628,517 $ 5,795,378
Short-term investments ............................................................... 2,002,123 4,053,280
Prepaid expenses and other current assets ............................................ 608,313 837,344
------------ ------------
Total current assets ....................................................................... 24,238,953 10,686,002
Property and equipment, net ................................................................ 2,616,193 2,467,907
Long-term investments ...................................................................... -- 6,727,240
Restricted cash ............................................................................ 227,500 613,999
Intangible assets, net ..................................................................... 1,196,622 1,522,266
Other assets ............................................................................... 100,000 350,000
------------ ------------
Total assets ............................................................................... $ 28,379,268 $ 22,367,414
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities ............................................. $ 2,005,279 $ 1,893,253
Accrued compensation and related expenses ............................................ 122,925 144,614
------------ ------------
Total current liabilities .................................................................. 2,128,204 2,037,867
Long term liabilities ...................................................................... 716,619 484,826
Deferred Revenue ........................................................................... 15,000,000 --
Commitments:
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares authorized: Series A
convertible preferred stock 1,100 shares designated; no shares
issued or outstanding at December 31, 2002 and 2001 ............................ -- --
Common stock, no par value; 35,000,000 shares authorized: 19,652,356
shares issued and outstanding at December 31, 2002 and 17,295,274
shares issued and outstanding at December 31, 2001 ............................. 96,835,062 90,137,811
Accumulated other comprehensive income (loss) ........................................ 11,831 83,458
Deficit accumulated during the development stage ..................................... (86,312,448) (70,376,548)
------------ ------------
Total shareholders' equity ................................................................. 10,534,445 19,844,721
------------ ------------
Total liabilities and shareholders' equity ................................................. $ 28,379,268 $ 22,367,414
============ ============
See accompanying notes.
F-3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Operations
Period from
June 26,
Years ended December 31, 1989 through
---------------------------------------------- December 31,
2002 2001 2000 2002
------------ ------------ ------------ ------------
Revenues:
Licensing and contract revenue from affiliate ............ $ -- $ -- $ -- $ 1,145,373
Licensing, milestone, and development funding ............ -- -- -- 1,551,408
Government grants ........................................ 45,798 566 71,793 548,133
Product sales ............................................ 1,355,828 876,925 1,513,830 5,102,412
------------ ------------ ------------ ------------
Total revenues ................................................. 1,401,626 877,491 1,585,623 8,347,326
Costs and expenses:
Cost of products sold .................................... 369,992 200,338 368,113 1,320,874
Research and development ................................. 10,672,146 14,097,746 9,574,293 61,886,316
Selling, general and administrative ...................... 6,816,213 4,041,642 3,630,616 27,376,962
Acquired in-process research and development ............. -- 3,507,134 -- 7,350,102
------------ ------------ ------------ ------------
Total costs and expenses ....................................... 17,858,351 21,846,860 13,573,022 97,934,254
------------ ------------ ------------ ------------
Operating loss ................................................. (16,456,725) (20,969,369) (11,987,399) (89,586,928)
Other income (expense):
Interest expense ......................................... (27,136) (27,283) (200,689) (1,503,729)
Interest income and other, net ........................... 547,961 1,531,929 769,875 6,226,714
------------ ------------ ------------ ------------
Net loss ....................................................... (15,935,900) (19,464,723) (11,418,213) (84,863,943)
Non-cash preferred dividends ................................... -- -- -- 1,448,505
------------ ------------ ------------ ------------
Net loss applicable to common shareholders ..................... $(15,935,900) $(19,464,723) $(11,418,213) $(86,312,448)
------------ ------------ ------------ ------------
Basic and diluted net loss per common share ............ $ (0.90) $ (1.26) $ (0.91)
============ ============ ============
Weighted average common shares used in computing basic and
diluted net loss per common share ............................ 17,642,640 15,502,918 12,542,232
============ ============ ============
See accompanying notes.
F-4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement of Shareholders' Equity
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Issuance of convertible preferred stock,
net of issuance cost through
December 31, 1999 ................... 27,649 $ 6,801,730 -- $ -- 477,081 $ 4,978,505
Issuance of Series A convertible
preferred stock and warrants
to purchase 14,191 shares of
Series A convertible preferred
stock in exchange for convertible
promissory notes and accrued
interest through December 31, 1999 .. 625,845 1,199,536 -- -- -- --
Issuance of convertible preferred
stock for services rendered,
and license agreement through
December 31, 1999 ................... 50,110 173,198 -- -- -- --
Issuance of Series B convertible
preferred stock in exchange
for convertible
promissory notes .................... -- -- 12,750 114,000 -- --
Non-cash preferred dividends ........... -- 1,448,505 -- -- -- --
Conversion of preferred stock,
including dividends, to
common stock through
December 31, 1999 ................... (703,604) (9,622,969) (12,750) (114,000) (477,081) (4,978,505)
Issuance of warrants in connection
with notes payable in financing ..... -- -- -- -- -- --
Issuance of common stock in
connection with private
placement of common stock in
July 1997, net of issuance
cost ................................ -- -- -- -- -- --
Issuance of common stock in
connection with the public
offering of common stock in
November 1997, net of issuance cost . -- -- -- -- -- --
Issuance of common stock in connection
with the acquisition of Neptune
Pharmaceutical ...................... -- -- -- -- -- --
See accompanying notes
Accumulated Deficit
Other Accumulated
Common Stock Comprehensive During the Total
------------ Income Development Shareholders'
Shares Amount (Loss) Stage Equity
------ ------ ------ ----- ------
Issuance of convertible preferred stock,
net of issuance cost through
December 31, 1999 ................... -- $ -- $-- $ -- $11,780,235
Issuance of Series A convertible
preferred stock and warrants
to purchase 14,191 shares of
Series A convertible preferred
stock in exchange for convertible
promissory notes and accrued
interest through December 31, 1999 .. -- -- -- -- 1,199,536
Issuance of convertible preferred
stock for services rendered,
and license agreement through
December 31, 1999 ................... -- -- -- -- 173,198
Issuance of Series B convertible
preferred stock in exchange
for convertible
promissory notes .................... -- -- -- -- 114,000
Non-cash preferred dividends ........... -- -- -- (1,448,505) --
Conversion of preferred stock,
including dividends, to
common stock through
December 31, 1999 ................... 3,014,644 14,715,474 -- -- --
Issuance of warrants in connection
with notes payable in financing ..... -- 487,333 -- -- 487,333
Issuance of common stock in
connection with private
placement of common stock in
July 1997, net of issuance
cost ................................ 1,547,827 3,814,741 -- -- 3,814,741
Issuance of common stock in
connection with the public
offering of common stock in
November 1997, net of issuance cost . 2,012,500 13,764,069 -- -- 13,764,069
Issuance of common stock in connection
with the acquisition of Neptune
Pharmaceutical ...................... 462,809 3,842,968 -- -- 3,842,968
See accompanying notes
F-5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement of Shareholders' Equity (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Issuance of common stock in connection
with IPO in August 1995 ................ -- -- -- -- -- -- 1,322,500 6,383,785
Issuance of common stock for cash
through December 31, 1999 .............. -- -- -- -- -- -- 953,400 126,499
Issuance of common stock for services
rendered through December 31, 1999 ..... -- -- -- -- -- -- 269,116 24,261
Issuance of common stock in connection
with the private placement of common
stock in July 1999, net of issuance cost 1,616,000 10,037,662
Repurchase of common shares in 1992 ....... -- -- -- -- -- -- (3,586) (324)
Issuance of common stock in exchange for
notes payable .......................... -- -- -- -- -- -- 42,960 268,500
Exercise of warrants to purchase common
stock ................................. -- -- -- -- -- -- 496,253 602,679
Exercise of options to purchase common
stock .................................. -- -- -- -- -- -- 275,820 961,775
Compensation expense related to the
extension of option exercise periods ... -- -- -- -- -- -- -- 338,481
Unrealized loss in investments ............ -- -- -- -- -- -- -- --
Net loss for the period June 26, 1989
(inception) to December 31, 1999 ....... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ---------- -----------
Balances at December 31, 1999 ............. -- -- -- -- -- -- 12,010,242 55,367,903
Issuance of common stock in connection
with the private placement of common
stock in October 2000, net of
issuance cost of $22,527 ............... -- -- -- -- -- -- 1,500,000 11,602,473
Exercise of warrants to purchase common
stock .................................. -- -- -- -- -- -- 62,833 315,800
Exercise of options to purchase common
stock .................................. -- -- -- -- -- -- 95,754 380,516
See accompanying notes.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement of Shareholders' Equity (Continued)
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Income Development Shareholders'
(Loss) Stage Equity
------ ----- ------
Issuance of common stock in connection
with IPO in August 1995 ................ -- -- 6,383,785
Issuance of common stock for cash
through December 31, 1999 .............. -- -- 126,499
Issuance of common stock for services
rendered through December 31, 1999 ..... -- -- 24,261
Issuance of common stock in connection
with the private placement of common
stock in July 1999, net of issuance cost -- -- 10,037,662
Repurchase of common shares in 1992 ....... -- -- (324)
Issuance of common stock in exchange for
notes payable .......................... -- -- 268,500
Exercise of warrants to purchase common
stock ................................. -- -- 602,679
Exercise of options to purchase common
stock .................................. -- -- 961,775
Compensation expense related to the
extension of option exercise periods ... -- -- 338,481
Unrealized loss in investments ............ (35,471) -- (35,471)
Net loss for the period June 26, 1989
(inception) to December 31, 1999 ....... -- (38,045,107) (38,045,107)
----------- ----------- -----------
Balances at December 31, 1999 ............. (35,471) (39,493,612) (15,838,820)
Issuance of common stock in connection
with the private placement of common
stock in October 2000, net of
issuance cost of $22,527 ............... -- -- 11,602,473
Exercise of warrants to purchase common
stock .................................. -- -- 315,800
Exercise of options to purchase common
stock .................................. -- -- 380,516
See accompanying notes.
F-6
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement of Shareholders' Equity (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- -----------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Fair value of warrants issued in Quay
acquisition .............................. -- -- -- -- -- --
Common stock issued in connection with
Quay acquisition ......................... -- -- -- -- -- --
Compensation expense related to
warrants and options granted to
non-employees ............................ -- -- -- -- -- --
Unrealized gain on investments .............. -- -- -- -- -- --
Foreign currency translation ................ -- -- -- -- -- --
Net loss .................................... -- -- -- -- -- --
Total Comprehensive Loss .................... -- -- -- -- -- --
------ ------ ------ ------- ------ ------
Balances at December 31, 2000 ............... -- -- -- -- -- --
Issuance of common stock in connection
with the private placement of common
stock in June 2001, net of
issuance costs of $184,795 .............. -- -- -- -- -- --
Exercise of warrants to purchase common stock -- -- -- -- -- --
Exercise of options to purchase common stock -- -- -- -- -- --
Common stock issued in connection with
Vaxis acquisition ........................ -- -- -- -- -- --
Compensation expense related to
warrants and options granted to
non-employees ............................ -- -- -- -- -- --
See accompanying notes.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement of Shareholders' Equity (Continued)
Accumulated Deficit
Other Accumulated
Common Stock Comprehensive During the Total
------------ Income Development Shareholders'
Shares Amount (Loss) Stage Equity
------ ------ ------ ----- ------
Fair value of warrants issued in Quay
acquisition .............................. -- 489,477 -- -- 489,477
Common stock issued in connection with
Quay acquisition ......................... 169,224 977,105 -- -- 977,105
Compensation expense related to
warrants and options granted to
non-employees ............................ -- 601,748 -- -- 601,748
Unrealized gain on investments .............. -- -- 8,201 -- 8,201
Foreign currency translation ................ -- -- (1,537) -- (1,537)
Net loss .................................... -- -- -- (11,418,213) (11,418,213)
Total Comprehensive Loss .................... -- -- -- -- (11,411,549)
Balances at December 31, 2000 ............... 13,838,053 69,735,022 (28,807) (50,911,825) 18,794,390
Issuance of common stock in connection
with the private placement of common
stock in June 2001, net of
issuance costs of $184,795 .............. 2,747,143 15,199,206 -- -- 15,199,206
Exercise of warrants to purchase common stock 12,000 48,000 -- -- 48,000
Exercise of options to purchase common stock 60,803 203,437 -- -- 203,437
Common stock issued in connection with
Vaxis acquisition ........................ 533,612 3,852,631 -- -- 3,852,631
Compensation expense related to
warrants and options granted to
non-employees ............................ -- 349,515 -- -- 349,515
See accompanying notes.
F-7
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Issuance of common stock in connection
with the achievement of Neptune
milestones .......................... -- -- -- -- -- -- 104,113 750,000
Unrealized gain/(loss) on investments .. -- -- -- -- -- -- -- --
Foreign currency translation ........... -- -- -- -- -- -- -- --
Net loss ............................... -- -- -- -- -- -- -- --
Total Comprehensive Loss ............... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ --------- ---------
Balances at December 31, 2001 .......... -- -- -- -- -- -- 17,295,724 90,137,811
Exercise of options to purchase common
stock ............................... -- -- -- -- -- -- 156,632 454,983
Issuance of common stock in connection
with the private placement of common
stock in November 2002, net
of issuance costs of $275,000 ....... -- -- -- -- -- -- 2,200,000 5,225,000
Compensation expense for options related
to non-employees .................... -- -- -- -- -- -- -- 72,224
Compensation expense related to stock
option modifications ................ -- -- -- -- -- -- -- 945,044
Unrealized gain (loss) on investments .. -- -- -- -- -- -- -- --
Foreign currency translation ........... -- -- -- -- -- -- -- --
Net loss ............................... -- -- -- -- -- -- -- --
Total Comprehensive Loss ............... -- -- -- -- -- -- -- --
Balances at December 31, 2002 .......... -- $ -- -- $ -- -- $ -- 19,652,356 $96,835,062
====== ====== ====== ====== ====== ====== ========== ==========
See accompanying notes.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity (Continued)
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Income Development Shareholders'
(Loss) Stage Equity
------ ----- ------
Issuance of common stock in connection
with the achievement of Neptune
milestones .......................... -- -- 750,000
Unrealized gain/(loss) on investments .. 130,655 -- 130,655
Foreign currency translation ........... (18,390) -- (18,390)
Net loss ............................... -- (19,464,723) (19,464,723)
Total Comprehensive Loss ............... -- -- (19,352,458)
------- ------------ ------------
Balances at December 31, 2001 .......... 83,458 (70,376,548) 19,844,721
Exercise of options to purchase common
stock ............................... -- -- 454,983
Issuance of common stock in connection
with the private placement of common
stock in November 2002, net
of issuance costs of $275,000 ....... -- -- 5,225,000
Compensation expense for options related
to non-employees .................... -- -- 72,224
Compensation expense related to stock
option modifications ................ -- -- 945,044
Unrealized gain (loss) on investments .. (82,916) -- (82,916)
Foreign currency translation ........... 11,289 -- 11,289
Net loss ............................... -- (15,935,900) (15,935,900)
Total Comprehensive Loss ............... -- -- (16,007,527)
Balances at December 31, 2002 .......... $11,831 $(86,312,448) $10,534,445
======= ============ ============
See accompanying notes.
F-8
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows
Period from
June 26, 1989
(inception)
Years ended December 31, through
-------------------------------------------- December 31,
2002 2001 2000 2002
------------ ------------ ------------ ------------
Operating activities
Net loss ........................................... $(15,935,900) $(19,464,723) $(11,418,213) $(84,863,943)
Adjustment to reconcile net loss to net cash used
in operating activities:
Acquired in-process technology .................. -- 3,507,134 -- 7,350,102
Depreciation and amortization ................... 484,028 530,643 502,470 2,229,116
Intangible assets amortization .................. 325,644 359,673 298,351 983,668
(Gain)/Loss on sale of fixed assets ............. (86,476) -- -- (86,476)
Non-cash compensation expense related to
warrants and options granted .................... 1,017,268 349,516 601,748 1,968,532
Compensation expense related to option grants ... -- -- -- 338,481
Amortization of discount on notes payable and
deferred financing costs ..................... -- -- -- 24,261
Issuance of common shares for services .......... -- -- -- 990,918
Issuance of common stock for services
rendered, interest, and Neptune milestones ... -- 750,000 -- 567,503
Changes in operating assets and liabilities:
Prepaid expenses and other current assets .... 229,032 18,732 70,250 (708,312)
Other assets ................................. 250,000 -- -- 250,000
Accounts payable and accrued liabilities ..... 112,026 450,023 729,227 2,005,279
Other long term liabilities .................. 231,793 484,826 -- 716,619
Deferred revenue ............................. 15,000,000 -- -- 15,000,000
Accrued compensation and related expenses .... (21,689) 5,541 32,850 122,925
------------ ------------ ------------ ------------
Net cash used in operating activities .............. 1,605,726 (13,008,635) (9,183,317) (53,111,327)
Investing activities
Purchases of property and equipment ................ (733,175) (150,530) (201,106) (4,837,420)
Purchases of investments ........................... -- (16,789,905) (10,575,000) (87,890,354)
Sales of investments ............................... 6,706,769 7,500,000 9,549,557 38,175,646
Maturities of investments .......................... 2,000,000 4,980,239 10,500,000 45,617,759
Proceeds from sale of property and equipment ....... 187,337 -- -- 187,337
Acquisition of Vaxis and Quay ...................... -- (142,556) (369,000) (511,556)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 8,160,931 (4,602,752) 8,904,451 (7,258,588)
Financing activities
Proceeds from notes payable ........................ $ -- $ -- $ -- $ 8,047,424
Proceeds from restricted cash ...................... 386,499 -- -- 386,499
Repayment of notes payable ......................... -- (882,070) (3,152,828) (6,610,608)
Net proceeds from issuance of common stock ......... 5,679,983 15,450,643 12,298,789 69,111,551
Other assets ....................................... -- -- (613,999) (613,999)
Other long-term liabilities ........................ -- -- (218,993) --
Issuance of convertible preferred stock,
net of issuance costs .............................. -- -- -- 11,757,735
Deferred financing costs ........................... -- -- -- (80,170)
------------ ------------ ------------ ------------
Net cash provided by financing activities .......... 6,066,482 14,568,573 8,312,969 81,998,432
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,833,139 (3,042,814) 8,034,103 $ 21,628,517
------------ ------------ ------------ ------------
Cash and cash equivalents, beginning of period ..... 5,795,378 8,838,192 804,089 --
Cash and cash equivalents, end of period ........... $ 21,628,517 $ 5,795,378 $ 8,838,192 $ 21,628,517
============ ============ ============ ============
See accompanying notes
F-9
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows (Continued)
Period from
June 26, 1989
through
December 31,
2002 2001 2000 2002
---- ---- ---- ----
Supplemental cash flow information
Interest Paid ................................................. $ 27,136 $ 27,281 $ 200,689 $ 639,987
============ ============ ============ ===========
Supplemental disclosure of non-cash transactions:
Issuance of common stock in connection with
acquired-in-process technology ............................. $ -- $ 3,507,134 $ -- $ 7,350,102
============ ============ ============ ===========
Conversion of preferred stock to common stock ................. $ -- $ -- $ -- $14,715,474
============ ============ ============ ===========
Issuance of common stock for notes payable .................... $ -- $ -- $ -- $ 277,250
============ ============ ============ ===========
Issuance of warrants in connection with notes payable financing $ -- $ -- $ -- $ 487,333
============ ============ ============ ===========
Issuance of convertible preferred stock for notes payable ..... $ -- $ -- $ -- $ 1,268,316
============ ============ ============ ===========
Issuance of common stock for milestone payments ......... $ -- $ 750,000 $ -- $ 750,000
============ ============ ============ ===========
See accompanying notes.
F-10
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
1. Accounting Policies
Description of Business and Principles of Consolidation
The consolidated financial statements include the accounts of
Cellegy Pharmaceuticals, Inc. and its subsidiaries (the "Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation.
The Company was incorporated in California in June 1989 and is a
development stage company. Since its inception, the Company has engaged
primarily in research and clinical development activities associated with its
current and potential future products and its transdermal drug delivery and
topical formulation expertise. The Company has conducted a number of clinical
trials using its products, including the preparation of manufactured clinical
materials. A number of sponsored, external research programs have been
undertaken.
Use of Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue Recognition and Research and Development Expenses
Revenues related to cost reimbursement provisions under development
contracts are recognized as the costs associated with the projects are incurred.
Revenues related to milestones specified under development contracts are
recognized as the milestones are achieved. The Company receives certain United
States government grants that support the Company's research effort in defined
research projects. These grants generally provide for reimbursement of approved
costs incurred as defined in the various grants. Revenues associated with these
grants are recognized as costs under each grant are incurred. Revenues related
to product sales are recognized upon shipment when title to goods has been
transferred to the customer. There is no right of return for product sales.
Up-front payments, such as the $15.0 million payment received from
PDI for the Tostrex license, are recorded as deferred revenue at the time the
cash is received. Amounts are recognized as revenue on a straight-line basis
over the longer of the life of the contract or the service period. Royalties
payable to Cellegy under the PDI License Agreement will be recognized as earned
when the royalties are no longer refundable to PDI under certain minimum royalty
terms defined in the agreement.
Research and development costs are expensed as incurred. The type of
costs included in research and development expenses include salaries and
benefits, laboratory supplies, external research programs, clinical studies and
allocated costs such as rent, supplies and utilities.
Clinical trial expenses are payable to clinical sites and clinical
research organizations. Expenses for both of these groups are accrued on a
straight-line basis over the contracted period subject to adjustment for actual
activity based on such factors as the number of subjects enrolled and number of
subjects that have completed treatment for each trial.
Cash, Cash Equivalents and Investments
Cash equivalents consist of highly liquid financial instruments with
original maturities of three months or less. The carrying value of cash and cash
equivalents approximates fair value at December 31, 2002 and 2001. The Company
considers all its investments as available-for-sale and reports these
investments at estimated fair market value using available market information.
Unrealized gains or losses on available-for-sale securities are included in
shareholders' equity as other comprehensive income (loss) until their
disposition. The cost of securities sold is based on the specific identification
method. Realized gains or losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income and
other, net.
F-11
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
The Company is subject to credit risk from its portfolio of
marketable securities. By policy, the Company restricts amounts invested in such
securities by investment type and by issuer except for securities issued by the
United States government.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Furniture and fixtures, and office and laboratory equipment are
depreciated using the straight-line method over estimated useful lives ranging
from three to five years. Amortization for leasehold improvements is taken over
the shorter of the estimated useful life of the asset or the remaining lease
term.
Goodwill and Other Intangible Assets
Goodwill that is related to the purchase of Quay Pharmaceuticals in June
2000, included in intangible assets, represents the excess purchase price over
the fair value of net assets acquired which was being amortized over 10 years
using the straight-line method. The carrying value of goodwill is based on
management's current assessment of recoverability using objective and subjective
factors. Effective January 1, 2002, the Company will no longer amortize the
remaining balance of goodwill of $814,400. We performed an impairment test of
goodwill upon transition to FAS 142 on January 1, 2002, and no impairment was
found for either period. We will continue to evaluate our goodwill for
impairment on an annual basis each year and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable. An
impairment loss, if needed, would be recognized based on the difference between
the carrying value of the asset and its estimated fair value, which would be
determined based on either discounted cash flows or other appropriate fair value
methods.
FAS 142 also requires that intangible assets with definite lives be
amortized over their estimated useful lives and reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. We currently amortize our other intangible assets
on a straight-line basis over their estimated useful lives ranging from three to
five years. Amortization taken to date as of December 31, 2002 was approximately
$983000.
Stock-Based Compensation
The Company accounts for its stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations. The Company has elected to
follow the disclosure-only alternative prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Compensation for options granted to
non-employees has been determined in accordance with FAS 123 and EITF 96-18 at
the fair value of the equity instruments issued. Stock based compensation is
recognized on a straight-line basis.
Foreign Currency Translation
The foreign subsidiaries functional currencies are their local
currencies. The gains and losses resulting from translating the foreign
subsidiaries' financial statements into US dollars have been reported in other
comprehensive income (loss).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and other comprehensive
income (loss). Accumulated other comprehensive income (loss) presented in the
consolidated balance sheets consists of the accumulated net unrealized gain
(loss) on available-for-sale investments and foreign currency translation
adjustments.
Basic and Diluted Net Loss per Common Share
Basic net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net loss
per common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. There is no difference
between basic and diluted net loss per common share, as presented in the
statement of
F-12
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
operations, because all options and warrants are anti-dilutive. The total number
of shares excluded was 1,864,551, 5,041,375 and 5,232,337 for the years ended
December 31, 2002, 2001 and 2000, respectively.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued
Financial Accounting Standard 146 ("FAS 146"), "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring,
discontinued operation, plant closing, or other exit or disposal activity. FAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. FAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of FAS 146
is not expected to have a significant impact on our financial position and
results of operations.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 elaborates on the existing disclosure requirements for most
guarantees, including residual value guarantees issued in conjunction with
operating lease agreements. It also clarifies that at the time a company issues
a guarantee, the company must recognize an initial liability for the fair value
of the obligation it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. Our adoption of FIN 45 did not have a material
impact on our results of operations and financial position.
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148 ("FAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure." FAS 148 amends FAS 123 "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123
to require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The additional disclosure
requirements of FAS 148 are effective for fiscal years ending after December 15,
2002. We have elected to continue to follow the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB
25), "Accounting for Stock Issued to Employees," to account for employee stock
options. See below in the "Shareholders' Equity" note for the disclosures
required by FAS 148.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options since, as discussed below,
the alternative fair market value accounting provided for under FAS 123 requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB Opinion No. 25, if the exercise price of the Company's stock
options is equal to the market price of the underlying stock on the date of
grant, no compensation expense is recognized related to employee or director
grants.
Pro forma information regarding net loss and net loss per common
share is required by FAS 123, which requires that the information be determined
as if the Company has accounted for its common stock options granted under the
fair market value method. The fair market value of options granted has been
estimated at the date of the grant using a Black-Scholes option pricing model.
The Company valued its options using the following weighted average
assumptions for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Risk-free interest rate............ 2.5% 3.5% 6.0%
Dividend yield..................... 0% 0% 0%
Volatility......................... 1.06 0.60 0.91
Expected life of options in years.. 4.3 4.3 4.3
F-13
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
The Black-Scholes option pricing model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair market value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended December 31 are as follows:
2002 2001 2000
------------ ------------ ------------
Net loss as reported ...................... $(15,935,900) $(19,464,723) $(11,418,213)
------------
Add: Stock-based employee compensation
costs included in the determination
of net loss, as reported................ 945,000 -- --
Deduct: Stock-based employee compensation
costs that would have been included
in the determination of net loss if the
fair value method had been applied
to all awards........................... (2,923,231) (2,687,751) (1,686,989)
------------ ------------ ------------
Net loss, proforma ........................ $(17,914,131) $(22,152,474) $(13,105,202)
Basic and diluted net loss per share
as reported ............................ $ (0.90) $ (1.26) $ (0.91)
Pro forma basic and diluted net loss
per share............................... $ (1.02) $ (1.43) $ (1.04)
The weighted average grant date fair value of options granted during the
years ended December 31, 2002, 2001, and 2000 was $3.80, $5.33 and $4.30,
respectively. The weighted average remaining contractual life of those options
is 9.01 years, 6.8 years and 7.2 years during the years ended December 31, 2002,
2001 and 2000, respectively.
The effects of applying FAS 123 pro forma disclosures are not likely to be
representative of the effects on reported net loss for future years.
Reclassification
Certain prior year balances have been reclassified for comparative
purposes.
2. Investments
At December 31, 2002 and 2001, investments consist of the following:
2002 2001
--------------------------------------- ----------------------------------------
Gross Gross
Unrealized Estimated Unrealized Estimated
Cost Gains Fair Value Cost Gains Fair Value
---- ----- ---------- ---- ----- ----------
Corporate notes ...... $ 2,001,580 $ 543 $ 2,002,123 $ 6,678,378 $ 79,642 $ 6,758,020
U.S. government notes. -- -- -- 2,000,000 22,500 2,022,500
Commercial paper ..... -- -- -- 2,000,000 -- 2,000,000
----------- ----------- ----------- ----------- ----------- -----------
$ 2,001,580 $ 543 $ 2,002,123 $10,678,378 $ 102,142 $10,780,520
=========== =========== =========== =========== =========== ===========
F-14
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
3. Property and Equipment
Property and equipment consist of the following:
December 31,
2002 2001
----------- -----------
Furniture and fixtures ....................... $ 184,305 $ 178,926
Office equipment ............................. 238,822 242,233
Laboratory equipment ......................... 978,485 742,882
Leasehold improvements ....................... 2,919,390 2,917,075
----------- -----------
4,321,002 4,081,116
Less accumulated depreciation and amortization (1,704,809) (1,613,209)
----------- -----------
$ 2,616,193 $ 2,467,907
=========== ===========
4. Lease Commitments
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Rent expense is recorded on a straight-line
basis over the term of the lease. During the third quarter of 2002, the Company
subleased a portion of its facility. Rental income is recorded as received.
Future minimum lease payments, net of future minimum sublease income at December
31, 2002, are as follows:
Lease Sublease Future Minimum
Years ending December 31, Commitments Income Lease Commitments
------------------------- ----------- ------ -----------------
2003........... 1,287,948 (1,111,123) 176,825
2004........... 1,326,144 (1,174,738) 151,406
2005........... 1,365,468 (1,209,979) 155,489
2006........... 1,405,992 (1,246,278) 159,714
2007........... 1,447,716 (1,283,666) 164,050
Thereafter........... 1,490,700 (1,322,175) 168,525
----------- ----------- -----------
$ 8,323,968 $(7,347,959) $ 976,009
=========== =========== ===========
Rent expense, net of sublease income, was $891,620, $1,653,337 and
$1,817,427 for the years ended December 31, 2002, 2001, and 2000, respectively.
The Company received $405,000 in sublease income during the year ended December
31, 2002.
Restricted cash at December 31, 2002 and 2001 was approximately
$227,500 and 614,000, respectively, and represents amounts that secure a letter
of credit related to our leases.
5. 401(k) Plan
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code. All employees are eligible to participate
on their first day of employment with the Company. Under the plan, employees may
contribute up to 15% of salaries per year subject to statutory limits. The
Company provides a matching contribution equal to 25% of the employee's rate of
contribution, up to a maximum contribution rate of 4% of the employee's annual
salary. Expenses related to the plan for the years ended December 31, 2002, 2001
and 2000 were not significant.
6. Restructuring
On July 23, 2002 and December 13, 2002 the Board of Directors formally
adopted reduction in force programs affecting primarily research and marketing
functions. The reductions resulted in a decrease of nine and five employees,
respectively. During the third and fourth quarters, we recorded severance and
other related charges of $210,000 and $143,000, respectively. In the fourth
quarter, we recorded a stock based compensation charge of $250,000 related to
the extension of the exercise period of certain options held by terminated
employees.
F-15
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
7. Acquisitions, Licenses and Other Agreements
Acquisitions
In December 1997, the Company acquired patent and related
intellectual property rights relating to Cellegesic (the "Agreement"), a topical
product candidate for the treatment of anal fissures and hemorrhoids from
Neptune Pharmaceuticals Corporation ("Neptune"). Under the terms of the
Agreement, the Company issued 429,752 shares of common stock to Neptune on
December 31, 1997. Upon the signing of a letter of intent on November 3, 1997,
33,057 shares of common stock were issued to Neptune. The Agreement calls for a
series of additional payments, payable in shares of common stock, upon
successful completion of various development milestones. Upon completion of
milestones in 2001, the Company issued 104,113 shares of common stock valued at
$750,000 which has been recorded to research and development expenses. The
remaining milestones, if achieved, would become payable over the next several
years. Depending on several factors, including the market price of the common
stock, such payments, which are fixed based on the Agreement, could result in
the issuance of a significant number of shares of common stock or cash. Future
potential milestones, if all paid in Cellegy common stock could result in the
issuance of up to an additional 1,285,000 shares of Cellegy common stock based
on the closing price of Cellegy stock at time of issuance. The Agreement does
not provide for the payment by the Company of any future product royalties in
connection with sales of Cellegesic.
In June 2000, Cellegy acquired all assets of Quay Pharmaceuticals
Pty Ltd ("Quay"), an Australian pharmaceutical company producing Rectogesic, a
drug similar to Cellegesic. The acquired assets consisted of Quay's inventory,
purchased at Quay's cost at the time of acquisition, other tangible assets and
purchased technology. The aggregate purchase price of $1,835,000 included the
aggregate value of the 169,224 shares of Cellegy common stock issued to Quay
with a value of $977,000, warrants to purchase 171,146 shares of common stock
with a fair value of $489,000, and cash payments of $369,000. The purchase price
was allocated to the 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 and goodwill were being amortized over
three and ten years, respectively. Following the adoption of FAS 142, the
goodwill will no longer be amortized as of January 1, 2002. This transaction has
been accounted for by the purchase method of accounting and accordingly, the
approximated purchase price, shown above, has been allocated to the net assets
acquired and the liabilities assumed based on the estimated fair values at the
date of acquisition, with the excess of the purchase price over assigned asset
values recorded as goodwill. The results of operating the acquired company have
been included in the Company's consolidated financial statements since the
acquisition date.
On November 27, 2001, Cellegy acquired Vaxis Therapeutics, a private
Canadian company. Vaxis, renamed Cellegy Canada, is a small early stage research
and development entity with access to scientists in the areas of sexual
dysfunction, peripheral vascular disorders and nitric oxide pharmacology. The
acquisition of this research is in line with the Company's goal of expanding its
pipeline of products and protecting its patents. The purchase price of $4.1
million consisted of 533,612 shares of our common stock and $142,000 in cash.
The purchase price was allocated as follows: $350,000 to intangible assets,
$250,000 to tangible assets and $3,500,000 to acquired in-process research and
development. The acquired technology was in an early stage of development that,
as of the acquisition date, technological feasibility had not been reached and
no alternative use existed. One of the assumptions used in determining the
purchase price allocation was a discount rate of 37% on probability of expected
cash flows. The intangible assets will be amortized over 5 years, the period of
contractual obligation.
The Vaxis purchase agreement contains earn-out provisions for seven
years that are based on commercial sales of any products developed by the
Company or other revenues generated from the acquired research. Any contingent
consideration paid in the future will be accounted for as a cost of earning the
related revenues. The results of operations of the acquired company have been
included in the Company's consolidated financial statements since the
acquisition date.
Accumulated amortization of the Vaxis intangible assets at December
31, 2002 was $75,000. The expected amortization expense for Vaxis for the next
four years will be approximately $68,800 per year. The expected amortization
expense for Quay for the next year will be approximately $107,000.
F-16
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Other Agreements
In October 1993, Cellegy entered into a license agreement with the
University of California providing for an exclusive, worldwide, royalty bearing
license, subject to customary government rights, for patent rights relating to
barrier repair formulations jointly held by the University and Cellegy, in
consideration of the issuance to the University of certain shares of preferred
stock (which subsequently converted into shares of common stock) and the payment
by Cellegy of a licensing fee. In March 1994, Cellegy entered into an exclusive,
worldwide, royalty bearing license agreement with the University for patent
rights, jointly held by the University of California and Cellegy, relating to
certain drug delivery technologies, in consideration of the payment by Cellegy
of a licensing fee, and an annual maintenance fee payable each year until
Cellegy is commercially selling a licensed product. In April 2000, Cellegy
terminated the Exclusive License Agreement relating to barrier repair
formulations and assigned its rights in the invention to the University. We are
now in the process of terminating our license patent right relating to drug
delivery technologies and assigning the rights to the University. The
termination of these licenses reflects, in part, a shift towards development of
products from the Company's own research efforts in areas which we believe have
the potential to be more commercially viable.
In August 2001, Cellegy announced a comprehensive agreement with
Ventiv Health, Inc. ("Ventiv"), a contract sales organization. Ventiv was to
provide certain sales and marketing services relating to the anticipated launch
of Cellegesic. In September 2002, Cellegy and Ventiv terminated the Cellegesic
License Agreement based on the delay in commercialization of Cellegesic due to
the withdrawal of the NDA and the subsequent decision to conduct another Phase
III clinical trial.
In December 31, 2002, Cellegy entered into a license agreement with
PDI, Inc. granting PDI the exclusive right to store, promote, sell and
distribute Tostrex, one of our products awaiting FDA approval, in North American
markets. Cellegy received an upfront payment of $15.0 million on the effective
date (December 31, 2002) and a payment of $10.0 million is due to us no later
than thirty days after we certify to PDI that Tostrex has received all FDA
approvals required to manufacture, sell and distribute the product in the United
States. We have recorded financing costs of $947,000 to selling, general and
administrative expenses for the year ended December 31, 2002 related to this
agreement. If we receive the $10.0 million payment, we will incur additional
financing costs of $600,000. Under the PDI agreement, Cellegy will also receive
royalties each year until the expiration of the last patent right related to
Tostrex of 20% - 30% of net sales and we will be reimbursed for 110% of burdened
costs for any product supplied to PDI. The $15 million upfront payment has been
included as deferred revenue as of December 31, 2002 and will be recognized as
revenue over the 18 year term of the agreement.
9. Shareholders' Equity
Common Stock Private Placements
In October 2000, Cellegy completed a private placement of 1,500,000 shares
of common stock at a price of $7.75 per share to a group of institutional
investors. Net proceeds were $11,602,473.
In June 2001, we completed a private placement of approximately 2,700,000
million shares of common stock at a price of $5.60 per share. Participants
included two current investors, as well as five new investors. Net proceeds were
$15,199,206.
In November 2002, we completed a private placement of approximately
2,200,000 million shares our common stock at a price of $2.50 per share to a
single investor, John M. Gregory, founder and former CEO of King Pharmaceuticals
and currently managing partner of SJ Strategic Investments LLC. Net proceeds
were $5,225,000.
Preferred Stock
The Company's Articles of Incorporation provide that the Company may issue
up to 5,000,000 shares of preferred stock in one or more series. The Board of
Directors is authorized to establish from time to time the number of shares to
be included in, and the designation of, any such series and to determine or
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred stock and to increase or
decrease the number of shares of any such series without any further vote or
action by the shareholders.
F-17
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Stock Option Plans
In 1995, Cellegy adopted the Equity Incentive Plan (the "Plan") to provide
for the issuance of incentive stock options and non-statutory stock options.
When the Plan was established, Cellegy reserved 700,000 shares for issuance.
From 1996 to 2002, a total of 4,150,000 shares were reserved for issuance under
the Plan. Options issued under the Plan have a term of 10 years and are
generally subject to vesting over 3 years.
Activity under the Plan is summarized as follows:
Shares Exercise Price Weighted
Under Range Average
Option Per Share Exercise Price
------ --------- --------------
Balance at January 1, 2000 . 2,187,763 $0.50 - $8.81 $ 4.82
Granted ................. 191,350 $3.31 - $9.00 $ 6.21
Canceled ................ (132,718) $3.00 - $9.00 $ 5.35
Exercised ............... (95,754) $1.81 - $6.25 $ 3.97
---------
Balance at December 31, 2000 2,150,641 $0.50 - $9.00 $ 5.00
Granted ................. 476,000 $4.56 - $15.00 $ 7.96
Canceled ................ (123,634) $3.69 - $7.87 $ 5.71
Exercised ............... (60,803) $1.81 - $4.62 $ 3.35
---------
Balance at December 31, 2001 2,442,204 $0.50 - $15.00 $ 5.59
Granted ................. 1,898,789 $1.80 - $8.59 $ 3.84
Canceled ................ (221,869) $1.80 - $9.00 $ 5.97
Exercised ............... (156,632) $0.50 - $3.87 $ 2.90
--------
Balance at December 31, 2002 3,962,492 $1.80 - $15.00 $ 4.83
=========
At December 31, 2002, options to purchase 2,362,446 shares of common stock
were vested and exercisable at exercise prices ranging from $1.80 to $15.00 per
share. At December 31, 2001 and 2000, options to purchase 1,576,834 and
1,283,744 shares of common stock were vested and exerciseable, respectively. At
December 31, 2002, options to purchase 242,718 shares of common stock were
available for future option grants under the Plan.
The following table summarizes information about stock options outstanding
and exercisable related to the Plan at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 2002 Contractual Life Price December 31, 2002 Price
----------------------- ----------------- ---------------- ----- ----------------- -----
$1.80 - $3.88.................... 1,830,078 6.8 years $2.48 1,106,644 $2.90
$4.00 - $6.99.................... 1,295,114 3.5 years $5.78 789,636 $5.37
$7.00 - $15.00................... 837,300 6.7 years $8.52 466,166 $7.91
Total............................ 3,962,492 5.6 years $4.83 2,362,446 $4.72
Director's Stock Option Plan
In 1995, Cellegy adopted the 1995 Directors' Stock Option Plan (the
"Directors' Plan") to provide for the issuance of non-qualified stock options to
eligible outside Directors. When the plan was established, Cellegy reserved
150,000 shares for issuance. From 1996 to 2002, a total of 350,000 shares were
reserved for issuance under the Directors' Plan. Options issued under the Plan
have a term of 10 years and are generally subject to vesting over 3 years.
F-18
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Activity under the Directors' Plan is summarized as follows:
Shares Price Weighted
Under Range Average
Option Per Share Exercise Price
------ --------- --------------
Balance at January 1, 2000......... 112,500 $3.25 - $8.50 $5.13
Granted......................... 70,000 $4.81 $4.81
--------
Balance at December 31, 2000....... 182,500 $3.25 - $8.50 $5.01
Granted......................... 46,000 $5.50 - $6.50 $5.85
--------
Balance at December 31, 2001....... 228,500 $3.25 - $8.50 $7.26
Granted......................... 64,000 $2.56 $2.56
--------
Balance at December 31, 2002....... 292,500 $2.56 - $8.50 $4.61
At December 31, 2002, options to purchase 179,330 shares of common stock
were vested and exercisable at exercise prices ranging from $3.25 to $8.50 per
share. At December 31, 2002, options to purchase 36,833 shares of common stock
were available for future option grants under the Directors' Plan.
The following table summarizes information about stock options outstanding
and exercisable related to the Directors' Plan at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 2002 Contractual Life Price December 31, 2002 Price
- ----------------------- ----------------- ---------------- ----- ----------------- -----
$2.56 - $3.25....... 68,000 9.1 years $2.60 4,000 $3.25
$4.50 - $5.50....... 206,500 6.2 years $5.08 167,996 $5.09
$6.50 - $8.50....... 18,000 7.9 years $6.72 7,334 $7.04
Total............... 292,500 6.7 years $4.61 179,330 $5.13
Shares reserved
As of December 31, 2002, we have reserved shares of common stock for
future issuance as follows:
Warrants............. 300,000
Stock Option Plans... 279,551
Neptune Agreement.... 1,285,000
---------
Total................ 1,864,551
=========
Warrants to purchase 300,000 shares of our common stock at an
average exercise price of $11.75 per share are outstanding as of December 31,
2002. The warrants expire between March and September 2005.
Non-cash Compensation Expense related to Stock Options
For the year ended December 31, 2002, the Company recorded non-cash
compensation expense of $1,017,000. $72,000 of this expense related to options
issued to non-employees under the Equity Incentive Plan. $250,000 related to the
extension of the exercise period of certain options issued to employees that
were terminated in December, 2002 (see Note 6 Restructuring). $695,000 related
to the modification of certain previously granted stock options. The
modification reduced the number of shares subject to the options and was
implemented in connection with the restoration of salaries and fees for certain
employees and board members whose compensation had been reduced earlier in 2002.
The modification resulted in a variable option accounting charge with respect to
the vested portion of the modified options. The expense reflected in the 2002
financial statements is based on the number of options vested multiplied by the
difference between the closing price of our common stock as of year end of $4.05
per share and the original exercise price of the options of $1.80. The
outstanding variable options to purchase 309,000 shares of our common stock as
of December 31, 2002 will be subject to re-measurement until the options are
exercised or cancelled.
10. Income Taxes
At December 31, 2002 the Company had net operating loss
carryforwards of approximately $55,000,000 and $10,000,000 for federal and state
purposes, respectively. The federal net operating loss carryforwards expire
between the years 2004 and 2022. The state net operating loss carryforwards
expire between the years 2004 and 2013. At December 31, 2002, the Company also
had research and development credit carryforwards of approximately $1,200,000
and $700,000 for federal and state purposes, respectively. The federal credits
expire between the years 2006 and 2022 and the state credits do not expire.
Pursuant to the "change in ownership" provisions of
F-19
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
the Tax Reform Act of 1986, utilization of the Company's net operating loss and
research and development tax credit carryforwards may be limited if a cumulative
change of ownership of more than 50% occurs within any three-year period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
December 31,
--------------------
2002 2001
------- -------
Deferred tax assets:
Net operating loss carryforwards $ 19,300 $ 20,200
Deferred revenue ............... 6,000 --
Credit carryforwards ........... 1,600 1,900
Capitalized intangibles ........ 1,900 1,800
Other, net ..................... 800 300
------- -------
Total deferred tax assets ......... 29,600 24,200
Valuation allowance ............... (29,600) (24,200)
------- -------
Net deferred tax assets ........... $ -- $ --
======= =======
The valuation allowance for deferred tax assets for 2002, 2001, and
increased by approximately $5,400,000, $5,700,000 and $3,500,000, respectively.
11. Segment Reporting
The Company has two business segments: pharmaceuticals and cosmeceuticals.
Pharmaceuticals include primarily research and clinical development expenses for
potential prescription products to be marketed directly by Cellegy or through
corporate partners.
Current pharmaceutical revenues consist primarily of Rectogesic sales in
Australia, in addition to the PDI License Agreement for Tostrex. The Company
expects to complete other corporate collaborations in the future for a number of
its potential pharmaceutical products, which may result in milestones,
development funding and royalties on sales.
Cellegy expects to generate future revenues on potential products it
intends to self-market.The cosmeceutical business segment includes development
expenses for non-prescription anti-aging products. During 2001 and 2000, Cellegy
incurred development expenses for its cosmeceutical products. No development
expenses were incurred in 2002. Our product sales are from one customer, Gryphon
Development, Inc., which is selling one of the Company's skin care products,
exclusively in the United States, through a major specialty retailer.
Cellegy allocates its revenues and operating expenses to each business
segment, but does not assess segment performance or allocate resources based on
a segment's assets and, therefore, asset depreciation and amortization and
capital expenditures are not reported by segment. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
The Company's segments are business units that will, in some cases,
distribute products to different types of customers through different marketing
programs. The potential future sales of cosmeceutical products require a
significantly different marketing effort than sales of pharmaceutical products
to physicians and other traditional pharmaceutical distribution channels.
Pharmaceutical products require more extensive clinical testing and ultimately
regulatory approval by the FDA and other worldwide health registration agencies,
requiring a more extensive level of development, manufacturing and compliance
than a cosmeceutical product.
The following table contains information regarding revenues and operating
income (loss) of each business segment for the years ended December 31, 2002,
2001, and 2000:
Total assets were minimal for the cosmeceutical segment.
F-20
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues:
Pharmaceuticals ..... $ 320,339 $ 217,439 $ 196,434
Cosmeceuticals ...... 1,081,287 660,052 1,389,189
------------ ------------ ------------
$ 1,401,626 $ 877,491 $ 1,585,623
============ ============ ============
Operating Income (Loss):
Pharmaceuticals ..... $(17,157,562) $(21,021,796) $(13,114,538)
Cosmeceuticals ...... 700,837 52,427 1,127,139
------------ ------------ ------------
$(16,456,725) $(20,969,369) $(11,987,399)
============ ============ ============
Revenue from Major Customer
Revenues from product sales to one customer represented approximately 70%,
75% and 88% of consolidated revenue for 2002, 2001 and 2000, respectively.
Geographic data
Approximately 20% of our total revenues are from sales of Rectogesic in
Australia. All other sales are in the United States. Primarily all our total
assets are located in the United States.
12. Related Party Transactions
Cellegy has paid fees to the Company's board members for their services on
the board, audit committee and compensation committee. The total fees paid to
these directors during 2002, 2001 and 2000 were $10,000, $30,000 and $46,500.
There were no consulting fees paid in cash to any board members in 2002.
For 2001, consulting fees of $ 80,000 were paid to two board members based on
consulting agreements.
The Company also recognized $33,000 in compensation expense during 2002
for a consulting agreement with a former board member. Cellegy issued stock
options to this board member for his consulting services.
Cellegy has an interest bearing $100,000 loan outstanding to a non-officer
employee, which was issued in conjunction with the purchase of his home.
13. Quarterly Financial Data ( unaudited )
(amounts in thousands except per share data)
2002 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------- ------------- -------------- --------------- --------------
Total revenue.................................... $ 267 $ 150 $ 145 $ 840 $ 1,402
Operating loss................................... (4,642) (5,753) (1,756) (4,306) (16,457)
Net loss......................................... (4,387) (5,624) (1,623) (4,302) (15,936)
Basic & diluted net loss per common share........ $ (0.25) $ (0.32) $ (0.09) $ (0.24) $ (0.90)
2001 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------------- ------------- -------------- --------------- --------------
Total revenue.................................... $ 41 $ 53 $ 265 $ 518 $ 877
Operating loss................................... (4,206) (4,352) (4,182) (8,229) (20,969)
Net loss......................................... (3,777) (4,156) (3,871) (7,661) (19,465)
Basic & diluted net loss per common share........ $ (0.27) $ (0.29) $ (0.23) $ (0.47) $ (1.26)
F-21
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
EXHIBITS
to
Form 10-K
Under
THE SECURITIES EXCHANGE ACT OF 1934
__________
CELLEGY PHARMACEUTICALS, INC.