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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 June 30, 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b under the Securities Exchange Act of 1934). Yes ___ No _X_
The number of shares outstanding of the registrant's common stock at August 7,
2003 was 20,012,413.
19
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements ( Unaudited )
Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited)
and December 31, 2002........................................................................ 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2003 and 2002, and the period from June
26, 1989 (inception) to June 30, 2003 (Unaudited)............................................ 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002, and the period from June 26, 1989
(inception) to June 30, 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....................................... 12
Item 4. Controls and Procedures...................................................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 13
Item 2. Changes in Securities and Use of Proceeds.................................................... 13
Item 3. Defaults Upon Senior Securities.............................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Item 5. Other Information............................................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................................. 13
Signatures.............................................................................................. 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)
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 6,201 $ 21,629
Short-term investments 1,471 2,002
Prepaid expenses and other current assets 480 608
-------- --------
Total current assets 8,152 24,239
Restricted cash 227 227
Property and equipment, net 1,990 2,616
Long-term investments 9,666 --
Goodwill 814 814
Intangible assets related to acquisition, net of accumulated amortization of
$1,125 and $983 as of June 30, 2003 and December 31, 2002, respectively 241 383
Other assets 100 100
-------- --------
Total assets $ 21,190 $ 28,379
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,437 $ 2,005
Accrued compensation and related expenses 154 123
Current portion of deferred revenue 832 832
-------- --------
Total current liabilities 2,423 2,960
Other long-term liabilities 718 717
Deferred revenue 13,751 14,168
Shareholders' equity:
Common stock, no par value; 35,000,000 shares authorized: 20,012,413 and
19,652,356 shares issued and outstanding at June 30, 2003 and December
31, 2002, respectively 98,259 96,835
Accumulated other comprehensive income 65 11
Deficit accumulated during the development stage (94,026) (86,312)
-------- --------
Total shareholders' equity 4,298 10,534
-------- --------
Total liabilities and shareholders' equity $ 21,190 $ 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 Six Months Ended (inception) to
June 30, June 30, June 30,
2003 2002 2003 2002 2003
-------- -------- -------- -------- ---------
Revenues:
Contract revenue (1) $ 208 $ -- $ 416 $ -- $ 3,113
Government grants -- -- 13 -- 561
Product sales 55 150 226 417 5,328
-------- -------- -------- -------- ---------
Total revenues 263 150 655 417 9,002
Costs and expenses:
Cost of product sales 6 15 40 86 1,361
Research and development 3,314 3,551 5,175 6,513 67,061
Selling, general and administrative 1,712 2,337 2,845 4,213 30,222
Acquired in-process technology -- -- -- -- 7,350
Total costs and expenses 5,032 5,903 8,060 10,812 105,994
-------- -------- -------- -------- ---------
Operating loss (4,769) (5,753) (7,405) (10,395) (96,992)
Interest and other income 190 129 233 385 6,463
Interest and other expense (3) -- (542) -- (2,049)
-------- -------- -------- -------- ---------
Net loss (4,582) (5,624) (7,714) (10,010) (92,578)
-------- -------- -------- -------- ---------
Non-cash preferred stock dividends -- -- -- -- 1,448
-------- -------- -------- -------- ---------
Net loss applicable to common shareholders $ (4,582) $ (5,624) $ (7,714) $(10,010) $ (94,026)
======== ======== ======== ======== =========
Basic and diluted net loss per common share $ (0.23) $ (0.32) $ (0.39) $ (0.58)
======== ======== ======== ========
Weighted average common shares used in computing
basic and diluted net loss per share 19,951 17,313 19,901 17,304
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) Includes revenue from related parties of $208,000 and $416,000 for the three
and six months ended June 30, 2003, respectively, and $416,000 for the period
from inception to June 30, 2003.
4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Period from
June 26, 1989
Six Months Ended June 30, (inception) to
------------------------- June 30,
2003 2002 2003
-------- -------- --------
Operating activities
Net loss $ (7,714) $(10,010) $(92,578)
Other operating activities 1,015 179 32,768
-------- -------- --------
Net cash used in operating activities (6,699) (9,831) (59,810)
Investing activities
Purchases of property and equipment (127) (467) (4,965)
Purchases of investments (11,093) -- (98,983)
Sales and maturities of investments 2,000 6,739 87,794
Proceeds from sale of property and equipment 23 -- 210
Cash used in acquisition of Vaxis and Quay -- -- (511)
-------- -------- --------
Net cash provided by (used in) investing activities (9,197) 6,272 (16,455)
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 -- 1,478 --
Net proceeds from issuance of common stock 468 -- 69,580
Issuance of convertible preferred stock, net of issuance
costs and deferred financing costs -- -- 11,678
-------- -------- --------
Net cash provided by financing activities 468 1,478 82,466
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (15,428) (2,081) 6,201
Cash and cash equivalents, beginning of period 21,629 5,795 --
-------- -------- --------
Cash and cash equivalents, end of period $ 6,201 $ 3,714 $ 6,201
======== ======== ========
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 condensed and consolidated balance sheet at December 31, 2002 has been
derived from the audited consolidated financial 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.
The condensed consolidated financial statements include the accounts of
Cellegy Pharmaceuticals, Inc. and its subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
For further information, refer to the consolidated 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
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. 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, if any, 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 Expenses
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. These costs relate to both internally
funded programs, as well as incurred, in connection with development contracts.
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. We will continue to evaluate our goodwill for impairment on an annual
basis 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 June 30, 2003 was approximately
$1,125,000.
Employee Stock Compensation
The Company has elected to follow the intrinsic value method of accounting
as prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its stock options since, as discussed below, the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation ("FAS 123") requires use of option
valuation models that were not developed for use in valuing non-traded employee
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 as amended by FAS 148, 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 employee and director options using the following
weighted average assumptions for the three and six month periods June 30, 2003
and 2002:
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Risk-free interest rate 2.5% 4.5% 2.5% 4.5%
Dividend yield 0% 0% 0% 0%
Volatility 1.08 .70 1.10 .70
Expected life of options in years 4.2 4.3 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 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 is as follows (in thousands):
7
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- --------
Net loss as reported ................................... $(4,582) $(5,624) $(7,714) $(10,010)
Add: Stock-based employee compensation costs
included in the determination of net loss, as
reported ......................................... 417 9 436 43
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 ............................ (420) (640) (838) (1,184)
------- ------- ------- --------
Net loss, pro forma .................................... $(4,585) $(6,255) $(8,116) $(11,151)
Basic and diluted net loss per share, as reported ...... $ (0.23) $ (0.32) $ (0.39) $ (0.58)
Pro forma basic and diluted net loss per share ......... $ (0.23) $ (0.36) $ (0.40) $ (0.64)
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.
Note 3. - Comprehensive Loss
Accumulated other comprehensive income presented on the accompanying
balance sheets consists of the accumulated net unrealized gain or loss on
available-for-sale investments and foreign currency translation adjustments.
The components of comprehensive loss for the three and six month periods
ended June 30, 2003 and 2002 are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- --------
Net loss ......................................... $(4,582) $(5,624) $(7,714) $(10,010)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities 52 (38) 69 (64)
Foreign currency translation adjustment .......... 1 (1) (15) --
------- ------- ------- --------
Other comprehensive income (loss) ................ 53 (39) 54 (64)
Comprehensive loss ............................... $(4,529) $(5,663) $(7,660) $(10,074)
Note 4. - Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"), for all periods presented. In accordance with SFAS 128, basic and diluted
net loss per share has been computed using the weighted average number of shares
of stock outstanding during the period. Shares issuable under outstanding stock
options and warrants have been excluded from the computations as their effect is
antidilutive.
8
Note 5. - Segment Reporting
The following table contains information regarding revenues and income
(loss) from operating each business segment (in thousands):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------- ------- -------- --------
Revenues:
Pharmaceuticals $ 263 $ 95 $ 600 $ 131
Skin Care -- 55 55 286
------- ------- -------- --------
$ 263 $ 150 $ 655 $ 417
======= ======= ======== ========
Operating income (loss):
Pharmaceuticals $(4,726) $(5,787) $ (7,382) $(10,576)
Skin Care (43) 34 (23) 181
------- ------- -------- --------
$(4,769) $(5,753) $ (7,405) $(10,395)
======= ======= ======== ========
All of the Company's assets are related to the pharmaceutical segment and
most of these assets are located in the United States.
Note 6. - 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.
Note 7. - Subsequent Events
On July 7, 2003, Cellegy announced that it had received a Not Approvable
letter from the FDA relating to the Company's New Drug Application for
Fortigel(TM) (testosterone gel) 2%. We are in discussions with the FDA to
determine what additional information or actions, including possible additional
clinical trials, will be required to obtain marketing approval.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements that
are made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. Investors should be aware that these forward-looking
statements are subject to risks and uncertainties, known and unknown, which
could cause actual results and developments to differ materially from those
expressed or implied in such statements. Such risks and uncertainties relate to,
among other factors: the completion and outcome of clinical trials; the outcome
and timing of reviews by the FDA and other regulatory authorities; our need for
further financing and ability to complete potential financings; and various
uncertainties arising from the Not Approvable letter from the FDA for our New
Drug Application ("NDA") relating to Fortigel(TM) (testosetrone gel) 2%. There
can be no assurance that Cellegy's products will be approved for marketing by
regulatory authorities or will be successfully marketed following approval. You
are cautioned not to place undue reliance on forward-looking statements and we
undertake no obligation to update or revise statements made herein.
Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs in the areas of gastroenterology, sexual dysfunction and
nitric oxide technologies. We are developing several prescription drug
candidates, including Cellegesic(TM) (nitroglycerin ointment) 0.4%, for the
treatment of anal fissures and hemorrhoids and two transdermal testosterone gel
product candidates, Fortigel for the treatment of male hypogonadism, a condition
that afflicts men, generally above the age of forty, and Tostrelle(TM)
(testosterone gel) 0.5%, for the treatment of sexual dysfunction in menopausal
women. Other pipeline products include nitric oxide donors for the treatment of
female sexual dysfunction, Raynaud's Disease, restless leg syndrome, and
prostate cancer.
9
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. 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 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. ("Ventiv") 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.
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, if approved, utilizing its existing sales
and marketing infrastructure. Cellegy received a payment of $15.0 million upon
signing the agreement and will receive a milestone payment and royalties
following a successful product launch. Cellegy will be responsible for supplying
finished product to PDI through Cellegy's contract manufacturer.
In July 2003, we reported that the FDA issued a Not Approvable Letter for
our Fortigel product candidate. We are in discussions with the FDA to determine
what additional information or actions, including possible additional clinical
trials, will be required to obtain marketing approval. For at least the next two
quarters, there will likely be no revenues associated with this product.
Results of Operations
Revenues. Cellegy had revenues of $263,000 and $150,000 for the three
months ended June 30, 2003 and 2002, respectively. During the three months ended
June 30, 2003, revenues consisted of $55,000 in Rectogesic(TM) (nitroglycerin
ointment) sales in Australia and $208,000 in licensing revenue from PDI. For the
same period last year, revenues consisted of $95,000 in Rectogesic sales and
$55,000 in skin care product sales to Gryphon Development, the product
development division of a major specialty retailer.
Cellegy had revenues of $655,000 and $417,000 for the six months ended June
30, 2003 and 2002, respectively. During the six months ended June 30, 2003,
revenues consisted of $171,000 in Rectogesic sales in Australia, $416,000 in
licensing revenue from PDI, $55,000 in product sales to Gryphon, and $13,000 in
Canadian government grants. For the first six months of last year, revenues were
comprised of $286,000 in skin care product sales, primarily to Gryphon, and
$131,000 in Rectogesic sales in Australia. As of the filing date of this
quarterly report, we have not received an order from Gryphon for the third
quarter of 2003 and they have not provided a skin care product forecast for the
remainder of the year.
The licensing revenue of $208,000 from PDI for each of the first two
quarters of 2003 reflects the quarterly recognition, over the term of the
license agreement with PDI, 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. It is unlikely that Cellegy will receive milestone
payments or royalty revenue from PDI related to Fortigel for the remainder of
this year.
Research and Development Expenses. Research and development expenses were
$3,314,000 for the three months ended June 30, 2003, compared with $3,551,000
for the same period last year. During the six months ended June 30, 2003 and
2002, research and development expenses were $5,175,000 and $6,513,000,
respectively. Lower research and
10
development expenses for both periods this year, compared with the same periods
last year, are due to the winding down of our domestic research operations in
the second half of last year and the Fortigel NDA user fee incurred in the
second quarter of last year. Additional pre-launch manufacturing expenses
relating to Fortigel were incurred in this year's second quarter. We expect to
increase clinical expenses associated with the Cellegesic Phase 3 trial and the
on-going Phase 2 trial for Tostrelle for the rest of the year. We have not yet
determined the level of clinical, regulatory and manufacturing expenses for
Fortigel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,712,000 for the three months ended June 30,
2003, compared with $2,337,000 for the same period last year. During the six
months ended June 30, 2003 and 2002, these expenses were $2,845,000 and
$4,213,000, respectively. The decreases for both periods of this year, compared
with the same periods last year, were due to the discontinuation in the second
quarter of 2002 of pre-launch sales and marketing activities associated with
Cellegesic. Minimal sales and marketing expenses have been incurred since that
time and no significant expenses are currently anticipated throughout the rest
of this year. These reductions were offset somewhat in the first half of this
year by non-cash compensation expenses, totaling approximately $968,000,
relating to the cancellation of certain stock options, a payment made in stock
to acquire certain patent rights and bonus payments made in stock. Under
variable option accounting rules, there could be a significant non-cash
compensation credit recorded in the third quarter of 2003 if the Company's stock
price remains significantly below the June 30, 2003 closing price of $5.03.
Sales, general and administrative expenses, excluding any non-cash
compensation charges or credits, are expected to remain at the second quarter
level throughout the rest of this year primarily in support of the Company's
clinical programs and to assure compliance with additional accounting,
legislative and regulatory internal control requirements.
Interest Income and Other Income (Expense), Net. Cellegy had $187,000 in
interest and other income, net for the three months ended June 30, 2003,
compared with $129,000 in interest income for the same period last year. For the
six months ended June 30, 2003, Cellegy had a $309,000 expense in interest and
other expense, net. Interest income of $290,000 was more than offset by
capitalized tenant improvements recorded during the first quarter generated by a
non-operating expense of $542,000 and a write down on rental income of $57,000,
following reassessment of our South San Francisco facility sub-lease
arrangement. These expenses were associated with modifications made by our
sub-tenant to a portion of the facility that the sub-tenant occupies. We do not
expect any further adjustments to these assets in the foreseeable future. For
the six months ended June 30, 2002, interest and other income, net was $385,000.
Net Loss. Net loss was $4,582,000 or $0.23 per share based on 19,951,000
weighted average shares outstanding for the three months ended June 30, 2003,
compared with a net loss of $5,624,000 or $0.32 per share based on 17,313,000
weighted average shares outstanding for the same period last year. For the six
months ended June 30, 2003, the net loss was $7,714,000 or $0.39 per share based
on 19,901,000 weighted average shares outstanding, compared with $10,010,000 or
$0.58 per share based on 17,304,000 weighted average shares outstanding for the
same period last year.
Liquidity and Capital Resources
We have experienced net losses from operations each year since our
inception. Through June 30, 2003, we had incurred an accumulated deficit of
$94.0 million and had consumed cash from operations of $59.8 million. Cash from
equity financing transactions has 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 $17.6 million at June 30, 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 $6.3 million in the first
half of 2003 was principally due to cash used to support operations. Our
operations have used and will likely continue to incur a net use of cash in
future quarters. The amount of cash used will depend on numerous factors
including, without limitation: requirements in support of our development
programs, the progress and results of pre-clinical and clinical testing, the
time and costs involved in obtaining regulatory approvals, including the cost of
complying with potential additional FDA information and/or clinical trial
requirements to obtain marketing approval of our Fortigel product candidate, the
costs of
11
filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights and our ability to establish new collaborative
arrangements. Net cash used in operations for the second half of this year is
expected to average about $1.0 million per month.
As a result of the above factors, we may require additional funds to
finance operations and may 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. Cellegy could be subject to
de-listing by the Nasdaq National Market if certain financial standards are not
maintained. 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 uncertainties relating to
the Not Approvable status of our Fortigel NDA; possible supply disruptions
relating to the bankruptcy filing of PanGeo Pharma, our primary contract
manufacturer; and our need and ability to identify alternate suppliers and
complete corporate partnerships. 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 June 30,
2003 are classified as available-for-sale and 24% and 76% of our long-term
investments will mature by the end of 2004 and 2005, respectively. In order to
reduce the average maturity of our investments, we sold one long-term investment
in July at a gain and one other callable investment was called in July reducing
our long-term investments by a total of $5.3 million. We believe that potential
near-term losses in future earnings, fair values or cash flows related to our
investment portfolio will not be significant. There have been no significant
changes to our quantitative and qualitative disclosures from our Form 10-K.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).
Based upon this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that, as of June 30, 2003, our disclosure controls
and procedures were adequate to ensure that information required to be disclosed
in the reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the United States
Securities and Exchange Commission rules and forms.
During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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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
At the Company's Annual Meeting of Shareholders, held on June 4, 2003, two
matters were submitted to vote of the shareholders: (i) the election of
directors; (ii) the ratification of Ernst & Young as the Company's independent
auditors for the 2003 fiscal year.
(i) With respect to the election of directors, the following nominees
(constituting all of the Company's nominees for election) were elected
by the votes indicated:
Nominee For Withheld
- ------- --- --------
Jack L. Bowman 18,545,398 184,980
K. Michael Forrest 18,683,097 47,281
Tobi B. Klar, M.D. 18,683,771 46,607
Ronald J. Saldarini, Ph.D. 18,547,274 183,104
Alan A. Steigrod 18,536,318 194,060
Larry J. Wells 18,664,591 65,787
(ii) With respect to the ratification of Ernst & Young as the Company's
independent auditors for the 2003 fiscal year, 18,702,087 shares voted
in favor, 13,857 shares voted against and 14,434 shares were withheld.
Item 5. Other Information
The Board of Directors of the Company has adopted a Charter for the
Nominating and Governance Committee of the Board of Directors, included as an
exhibit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.01 Charter of the Nominating and Governance Committee of the
Board of Directors.
31.1 Certification of Chairman, President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1 Certification of Chairman, President and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Principal Financial and Accounting Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 7, 2003, the Company filed a Report on Form 8-K disclosing receipt of a
Not Approvable letter from the FDA for our Fortigel product candidate.
On May 21, 2003, the Company filed a Report on Form 8-K disclosing that it
entered into a new employment agreement with its Chairman, President and Chief
Executive Officer, K. Michael Forrest, effective January 1, 2003.
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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: August 13, 2003 /s/ K. Michael Forrest
---------------------------------------
K. Michael Forrest
Chairman, President and Chief
Executive Officer
Date: August 13, 2003 /s/ A. Richard Juelis
---------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
15