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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-26372
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of principal executive offices, including zip code)
(650) 616-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's common stock at April 30,
2003 was 19,892,965.
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements ( Unaudited )
Condensed Consolidated Balance Sheets as of March 31,
2003 (Unaudited) and December 31, 2002 ............................ 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2003 and 2002, and the
period from June 26, 1989 (inception) through March 31,
2003 (Unaudited) .................................................. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002, and the
period from June 26, 1989 (inception) through March 31,
2003 (Unaudited) .................................................. 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) ....................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk ............ 11
Item 4. Controls and Procedures ........................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 12
Item 2. Changes in Securities and Use of Proceeds ......................... 12
Item 3. Defaults Upon Senior Securities ................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ............... 12
Item 5. Other Information ................................................. 12
Item 6. Exhibits and Reports on Form 8-K .................................. 13
Signature .................................................................. 14
Certifications ............................................................. 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share data)
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited) ( Note 1 )
Assets
Current assets:
Cash and cash equivalents ...................................................... $ 11,526 $ 21,629
Short-term investments ......................................................... -- 2,002
Prepaid expenses and other current assets ...................................... 573 608
-------- --------
Total current assets ................................................................ 12,099 24,239
Restricted cash ..................................................................... 227 227
Property and equipment, net ......................................................... 2,004 2,616
Long-term investments ............................................................... 9,161 --
Goodwill ............................................................................ 814 814
Intangible assets related to acquisition, net of accumulated amortization of
$1,065 and $983 as of March 31, 2003 and December 31, 2002, respectively ....... 301 383
Other assets ........................................................................ 100 100
-------- --------
Total assets ........................................................................ $ 24,706 $ 28,379
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities ....................................... $ 1,177 $ 2,005
Accrued compensation and related expenses ...................................... 129 123
Current portion of deferred revenue ............................................ 832 832
-------- --------
Total current liabilities ........................................................... 2,138 2,960
Other long term liabilities ......................................................... 718 717
Deferred revenue .................................................................... 13,960 14,168
Shareholders' equity:
Common stock, no par value; 35,000,000 shares authorized: 19,891,746 and
19,652,356 shares issued and outstanding at March 31, 2003 and
December 31, 2002, respectively ............................................ 97,322 96,835
Accumulated other comprehensive income ......................................... 12 11
Deficit accumulated during the development stage ............................... (89,444) (86,312)
-------- --------
Total shareholders' equity .......................................................... 7,890 10,534
-------- --------
Total liabilities and shareholders' equity .......................................... $ 24,706 $ 28,379
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
Period from
June 26, 1989
Three Months Ended March 31, (inception) to
---------------------------- March 31,
2003 2002 2003
-------- -------- ---------
Revenues:
Contract revenue (1) ........................................ $ 208 $ -- $ 2,905
Government grants ........................................... 13 -- 561
Product sales ............................................... 171 267 5,273
-------- -------- ---------
Total revenues ................................................... 392 267 8,739
Costs and expenses:
Cost of product sales ....................................... 34 71 1,355
Research and development .................................... 1,861 2,962 63,747
Selling, general and administrative ......................... 1,133 1,876 28,510
Acquired in-process technology .............................. -- -- 7,350
-------- -------- ---------
Total costs and expenses ......................................... 3,028 4,909 100,962
-------- -------- ---------
Operating loss ................................................... (2,636) (4,642) (92,223)
Interest and other income ................................... 46 255 6,273
Interest and other expense .................................. (542) -- (2,046)
-------- -------- ---------
Net loss ......................................................... (3,132) (4,387) (87,996)
Non-cash preferred dividends ..................................... -- -- 1,448
-------- -------- ---------
Net loss applicable to common shareholders ....................... $ (3,132) $ (4,387) $ (89,444)
======== ======== =========
Basic and diluted net loss per common share ...................... $ (0.16) $ (0.25)
======== ========
Weighted average common shares used in computing basic
and diluted net loss per share ................................... 19,852 17,303
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) Includes revenue from related parties of $208,000 for the three months ended
March 31, 2003.
4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Period from
June 26, 1989
Three Months Ended March 31, (inception) to
--------------------------- March 31,
2003 2002 2003
-------- ------- --------
Operating activities
Net loss ......................................................... $ (3,132) $(4,387) $(87,996)
Other operating activities ....................................... (226) 421 31,527
-------- ------- --------
Net cash used in operating activities ............................ (3,358) (4,808) (56,469)
Investing activities
Purchases of property and equipment .............................. (56) (56) (4,894)
Purchases of investments ......................................... (9,171) -- (97,061)
Sales and maturities of investments .............................. 2,000 2,089 87,794
Proceeds from sale of property and equipment ..................... 16 -- 203
Cash used in acquisition of Vaxis and Quay ....................... -- -- (511)
-------- ------- --------
Net cash provided by (used in) investing activities .............. (7,211) 2,033 (14,469)
Financing activities
Proceeds from notes payable ...................................... -- -- 8,047
Repayment of notes payable ....................................... -- -- (6,611)
Proceeds from restricted cash .................................... -- -- 386
Other assets ..................................................... -- -- (614)
Other long-term liabilities ...................................... -- 888 --
Net proceeds from issuance of common stock ....................... 466 26 69,578
Issuance of convertible preferred stock, net of issuance costs
and deferred financing costs .................................. -- -- 11,678
-------- ------- --------
Net cash provided by financing activities ........................ 466 914 82,464
-------- ------- --------
Net (decrease) increase in cash and cash equivalents ............. (10,103) (1,861) 11,526
Cash and cash equivalents, beginning of period ................... 21,629 5,795 --
-------- ------- --------
Cash and cash equivalents, end of period ......................... $ 11,526 $ 3,934 $ 11,526
======== ======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1.- Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared by Cellegy in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnote disclosures required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments (consisting of only
normal recurring adjustments) considered necessary for a fair presentation of
all periods presented. The results of Cellegy's operations for any interim
periods are not necessarily indicative of the results of operations for any
other interim period or for a full fiscal year.
The balance sheet at December 31, 2002 has been derived from the
audited financial consolidated statements at that date but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
Our condensed consolidated financial statements include the accounts of
Cellegy Australia Pty Ltd ("Cellegy Australia") and Cellegy Canada, Inc.
("Cellegy Canada"). All intercompany transactions have been eliminated in
consolidation.
For further information, refer to the financial statements and
footnotes thereto included in Cellegy's Annual Report on Form 10-K for the year
ended December 31, 2002.
Note 2. - Significant Accounting Policies
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,
Inc. ("PDI") for the Fortigel(TM) (testosterone gel) 2% 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.
6
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 no longer amortized 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 March 31, 2003 was approximately
$1,065,000.
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 ("APB
25"), "Accounting for Stock Issued to Employees," to account for employee stock
options. See below for the disclosures required by FAS 148.
The Company has elected to follow APB 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 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 had 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 quarters ended March 31, 2003 and 2002:
2003 2002
---- ----
Risk-free interest rate .............. 2.5% 4.5%
Dividend yield ........................ 0% 0%
Volatility ............................ 1.12 .70
Expected life of options in years ..... 4.2 4.3
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
7
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 our 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 three months ended March 31, 2003 and 2002 is as
follows (in thousands):
Three months ended March 31,
----------------------------
2003 2002
------- -------
Net loss as reported ................................ $(3,132) $(4,387)
Add: Stock-based employee compensation costs
included in the determination of net
loss, as reported ................................ 34 33
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 ...... (418) (419)
------- -------
Net loss, proforma .................................. $(3,516) $(4,773)
Basic and diluted net loss per share, as reported ... $ (0.16) $ (0.25)
Pro forma basic and diluted net loss per share ...... $ (0.18) $ (0.28)
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.
Note 3. - Comprehensive Loss
Accumulated other comprehensive income presented on the accompanying
balance sheet consists of the accumulated net unrealized gain or loss on
available-for-sale investments and foreign currency translation adjustments.
Total comprehensive loss for the three months ended March 31, 2003 was
$3,132,000 compared with $4,413,000 for the three months ended March 31, 2002.
Note 4. - Net Loss Per Share
Basic and diluted net loss per common share has been computed using the
weighted average number of shares of common stock outstanding during the period.
Shares issuable under outstanding stock options and warrants have been excluded
as their effect is antidiultive.
Note 5. - Segment Reporting
The following table contains information regarding revenues and loss
from operating each business segment for the three months ended March 31, 2003
and 2002 (in thousands):
Three months ended March 31,
-----------------------------
2003 2002
------- -------
Revenues:
Pharmaceuticals $ 337 $ 36
Cosmeceuticals 55 231
------- -------
$ 392 $ 267
======= =======
Operating Loss
Pharmaceuticals $(2,656) $(4,789)
Cosmeceuticals 20 147
------- -------
$(2,636) $(4,642)
======= =======
All company assets are related to the pharmaceutical segment.
8
Note 6. - Related Party Transacations
In December 2002, the Company entered into an exclusive license
agreement with PDI, Inc. ("PDI"), a public company, relating to the
commercialization by PDI of Cellegy's Fortigel(TM) (testosterone gel) 2% gel
product in North American markets. The agreement provides, among other things,
an upfront payment of $15.0 million, a $10.0 million milestone payment on FDA
approval of Fortigel and royalty payments to Cellegy of 20% to 30% of net sales
by PDI. The $15.0 million upfront payment is being recognized on a straight-line
basis over the 18 year term of the agreement. $832,000 of deferred revenue as of
December 31, 2002 has been reclassified to short-term, since it will being
recognized as revenue in 2003.
The decision by Cellegy's Board to approve the PDI License Agreement
was based on these superior financial terms compared with other alternative
offers. Charles T. Saldarini, the Chief Executive Officer of PDI, is the son of
Ronald J. Saldarini, Ph.D., a director of the Company. While the Board was aware
of this relationship during its consideration of the agreement, Dr. Saldarini
did participate, along with other directors, in Board discussions concerning the
agreement and other alternative proposals, but did not participate in any
negotiations regarding the terms of the agreement. The Board's approval of the
agreement was unanimous and Dr. Saldarini has excused himself from all current
and future discussions and resolutions relating to PDI.
Note 7. - Fixed Assets
During the first quarter of 2003, Cellegy recorded a non-operating
expense of $542,000 associated with the reassessment of our South San Francisco
facility sub-lease arrangement, primarily related to the write down of
capitalized tenant improvements. This write down was associated with
modifications made by our sub-tenant to a portion of the facility that the
sub-tenant occupies.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report contains forward-looking statements made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995,
which reflect management's intentions, hopes, beliefs, expectations or
predictions for the future. Investors are cautioned that these forward-looking
statements are subject to numerous risks and uncertainties, known and unknown,
which could cause actual results and developments to differ materially from
those expressed or implied in such statements. Such risks and uncertainties
relate to, among other factors: the completion and outcome of clinical trials;
the outcome and timing of review of our regulatory filings by the FDA and other
regulatory authorities, particularly with regard to our Fortigel NDA; our need
and ability to complete corporate partnerships; and uncertainties arising from
pending litigation between PDI and Auxilium Pharmaceuticals which, depending on
the outcome, could affect the marketing of Cellegy's Fortigel, delay product
launch or reduce its commercial potential. There can be no assurance that
Cellegy's products will be approved for marketing by regulatory authorities or
will be successfully marketed following approval. We undertake no obligation to
update or revise the forward-looking statements made herein, except as
specifically required by law. For more information regarding the above, and
other risk factors that may affect Cellegy's future results, investors should
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs in the areas of gastroenterology, sexual dysfunction in men
and women and women's health care. We are developing several prescription drug
candidates, including Cellegesic for the treatment of anal fissures and
hemorrhoids and two transdermal testosterone gel product candidates, Fortigel
(previously called Tostrex(TM) gel), for the treatment of male hypogonadism, a
condition that afflicts men generally above the age of forty, and Tostrelle(TM)
gel, for the treatment of sexual dysfunction in menopausal women. Other pipeline
product candidates include nitric oxide donors for the treatment of sexual
dysfunction in females, Raynaud's Disease, Restless Leg Syndrome, and prostate
and breast cancer.
General
In November 2001, we acquired a private Canadian based company, Vaxis
Therapeutics, valued at $4.1 million. The purchase price was payable primarily
in shares of Cellegy common stock. The purchase price was allocated to net
tangible assets of $250,000, intangible assets of $350,000 and $3,507,000
million of in-process research and development.
9
The intangibles of $350,000 are being amortized over five years and the
in-process research and development was expensed in the fourth quarter of 2001.
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 August 2001, Cellegy and Ventiv Health, Inc. signed a six year
License Agreement to commercialize Cellegesic in the United States. Ventiv was
to have delivered integrated marketing and sales solutions, provide pre-launch
support, and recruit and train a sales force which would have been jointly
managed by both companies. In September 2002, Cellegy and Ventiv terminated the
Cellegesic agreement based on a delay in commercialization of Cellegesic due to
our withdrawal of the Cellegesic NDA that was pending with the FDA.
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 Fortigel in North American markets. Under the
terms of the agreement, PDI's Pharmaceutical Products Group will be responsible
for the marketing and sale of Fortigel utilizing its existing sales and
marketing infrastructure. Cellegy received a payment of $15.0 million upon
signing of the agreement and will receive a milestone payment and royalties
assuming successful product launch. Cellegy will be responsible for supplying
finished product to PDI through Cellegy's contract manufacturer.
Results of Operations
Revenues. Cellegy had revenues of $392,000 and $267,000 for the three
months ended March 31, 2003 and 2002, respectively. During the first three
months of 2003, revenues consisted of $208,000 in licensing revenue from PDI,
our Fortigel licensee, $116,000 of Rectogesic(TM) (nitroglycerin ointment)
product sales in Australia, $55,000 in product sales to Gryphon Development, the
product development division of a major specialty retailer, and $13,000 in
Canadian government grants. During the first three months of 2002, revenues
consisted of $231,000 in product sales to Gryphon Development and $36,000 in
Rectogesic product sales in Australia.
The licensing revenue of $208,000 from PDI reflects the quarterly
recognition, over the expected commercial life of Fortigel, of the $15,000,000
upfront payment received from PDI in December 2002. This amount will continue to
be recorded as licensing revenue in subsequent quarters. Rectogesic sales in the
first quarter of 2003 increased significantly compared with last year's first
quarter, due to promotional and advertising programs initiated in Australia
during this February and March.
Research and Development Expenses. During the first quarter of 2003 and
2002, research and development expenses were $1,861,000 and $2,962,000,
respectively. Higher operating expenses in last year's first quarter resulted
primarily from the costs of completing Phase III clinical trials for Fortigel
and Cellegesic. Clinical expenses are expected to increase during the next three
quarters due to additional clinical personnel recently hired and the expected
start of a new Phase III Cellegesic trial. We have now completed discussions
with the FDA concerning the trial protocol, and intend to begin a confirmatory
Phase III trial during the second quarter of 2003.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,133,000 for the three months ended March 31,
2003, compared with $1,876,000 for the same period last year. Higher operating
expenses in last year's first quarter were primarily due to pre-launch marketing
costs for our Cellegesic product candidate. No additional marketing costs
related to Cellegesic are anticipated until successful completion of the new
Phase III trial. General and administrative expenses are expected to increase in
support of greater clinical activity and to comply with additional accounting
and public reporting requirements.
Interest and Other Income (Expense), Net. Cellegy had a $496,000
expense in interest, and other income (expense), net for the three months ended
March 31, 2003, compared with $255,000 of income for the same period last year.
During the first quarter of 2003, we recorded a non-operating expense of
$542,000 associated with the reassessment of our South San Francisco facility
sub-lease arrangement, primarily related to the write down of capitalized tenant
improvements. This write down was associated with modifications made by our
sub-tenant to a portion of the facility that the sub-tenant
10
occupies. We do not expect any further adjustments to these assets in the
foreseeable future.
Net Loss. Net loss applicable to common shareholders was $3,132,000 or
$0.16 per share for the three months ended March 31, 2003 based on 19,852,000
weighted average shares outstanding, compared with a net loss of $4,387,000 or
$0.25 per share for the same period in the prior year based on 17,303,000
weighted average shares outstanding.
Liquidity and Capital Resources
We have experienced net losses from operations each year since our
inception. Through March 31, 2003, we had incurred an accumulated deficit of
$89.4 million and had consumed cash from operations of $56.5 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 $20.9 million at March 31, 2003 compared
with $23.9 million at December 31, 2002, including $227,000 of restricted cash
at each date. The decrease in cash and investments of $3.0 million in 2003 was
principally due to cash used to support operations. 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 arrangements, the
purchase of capital equipment and working capital increases associated with the
scale up and pre-launch manufacture of Fortigel.
As a result of the above, we will require additional funds to finance
operations and will seek private or public equity investments, corporate
partnerships and other collaborative arrangements with third parties to meet
such needs. There is no assurance that such funding will be available for us to
finance our operations on acceptable terms, if at all, and any future equity
funding may involve significant dilution to our shareholders. Insufficient
funding may require us to delay, reduce or eliminate some or all of our research
and development activities, planned clinical trials, administrative programs,
personnel, outside services and facility costs. We believe that available cash
resources and the interest thereon will be adequate to satisfy our capital needs
through at least December 31, 2004.
Factors That May Affect Future Operating Results
This quarterly report contains forward-looking statements made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995,
which reflect management's intentions, hopes, beliefs, expectations or
predictions for the future. Investors are cautioned that these forward-looking
statements are subject to numerous risks and uncertainties, known and unknown,
which could cause actual results and developments to differ materially from
those expressed or implied in such statements. Such risks and uncertainties
relate to, among other factors: the completion and outcome of clinical trials;
the outcome and timing of review of our regulatory filings by the FDA and other
regulatory authorities, particularly with regard to our Fortigel NDA; our need
and ability to complete corporate partnerships; and uncertainties arising from
pending litigation between PDI and Auxilium Pharmaceuticals which, depending on
the outcome, could affect the marketing of Cellegy's Fortigel, delay product
launch or reduce its commercial potential. There can be no assurance that
Cellegy's products will be approved for marketing by regulatory authorities or
will be successfully marketed following approval. We undertake no obligation to
update or revise the statements made herein, except as specifically required by
law. For more information regarding the above, and other risk factors that may
affect Cellegy's future results, investors should refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
Item 3. Quantitative and Qualitative Disclosure Of Market Risk
We invest our excess cash in short-term, investment grade, fixed income
securities under an investment policy. All of our investments as of March 31,
2003 are classified as available-for-sale and 42% and 58% of our long-term
investments will mature by the end of 2004 and 2005, respectively. We believe
that potential near-term losses in future earnings, fair
11
values or cash flows related to our investment portfolio will not be
significant. There have been no significant changes to our quantitative and
qualitative disclosures from our Form 10-K.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this report.
Based on their evaluation, our principal executive officer and principal
accounting officer concluded that our disclosure controls and procedures are
effective.
(b) Changes in Internal Controls
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in paragraph (a) above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Board of Directors of the Company has adopted a Retention and Severance
Plan, and the Company intends to enter into related agreements with Officers of
the Company and other key employees as plan participants in the near future.
Under the plan, if an executive's employment is terminated "upon a change of
control," as that term is defined in the plan, the executive will receive a lump
sum payment in an amount equal to one year of base salary and one year of his or
her targeted bonus. In addition, the vesting and exercisability of outstanding
but unvested options held by the executive will be accelerated in full so that
the options are fully vested, and the executive will have 12 months after the
date of termination to exercise the options. The executive will receive paid
COBRA medical and health insurance coverage for 12 months. If the Company
terminates an executive's employment, without cause (as that term is defined in
the plan) in the absence of a change of control, the executive will receive his
or her base salary for a period of 6 months, reduced by the amount of any
compensation earned by the executive from other employment during that time. In
addition, the executive will have 6 months from the date of termination to
exercise options to the extent vested on the date of termination, and the
executive will receive paid COBRA medical and health insurance coverage for 6
months. As a condition of receiving benefits under the plan, the Company may
require the executive to sign a general release of claims in connection with the
executive's employment termination. The Company has no agreements and currently
is not involved in negotiations regarding a potential change of control
transactions.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.01 Retention and Severance Plan
A Agreement of Plan Participation
(b) Reports on Form 8-K
On March 26, 2003, the company filed a Report on Form 8-K disclosing that the
company had been advised that the U.S. Food and Drug Administration had extended
the target date under the Prescription Drug User Fee Act for a decision on the
approvabiliy of Cellegy's New Drug Application for Fortigel to July 3, 2003, and
that such extension was to allow the FDA additional time to review data from a
required study that Cellegy submitted in January 2003.
On February 28, 2003, the company filed a Report on Form 8-K providing
information concerning fourth quarter and year-end 2002 financial results.
On January 3, 2003, the company filed a Report on Form 8-K disclosing that it
had entered into an exclusive license agreement with PDI, Inc., relating to
commercialization of the Fortigel product in North American markets.
On January 13, 2003, the company filed a Report on Form 8-K disclosing that Mr.
Julian Baker and his brother Dr. Felix Baker had resigned from Cellegy's board
of directors.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLEGY PHARMACEUTICALS, INC.
Date: May 8, 2003 /s/ K. Michael Forrest
---------------------------------------
K. Michael Forrest
Chairman, President and
Chief Executive Officer
Date: May 8, 2003 /s/ A. Richard Juelis
---------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
14
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, K. Michael Forrest, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cellegy
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003 By: /s/ K. Michael Forrest
----------------------
Chairman, President and
Chief Executive Officer
15
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, A. Richard Juelis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cellegy
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Date: May 8, 2003 By: /s/ A. Richard Juelis
---------------------------
Vice President, Finance and
Chief Financial Officer
16