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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 7,
2003 was 20,020,876.
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements ( Unaudited )
Condensed Consolidated Balance Sheets as of September 30,
2003 (Unaudited) and December 31, 2002............................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2003 and
2002, and the period from June 26, 1989 (inception) to
September 30, 2003 (Unaudited)....................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002, and the period
from June 26, 1989 (inception) to September 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............................................ 10
Item 3. Quantitative and Qualitative Disclosure of Market Risk............... 13
Item 4. Controls and Procedures.............................................. 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................... 14
Item 2. Changes in Securities and Use of Proceeds ........................... 14
Item 3. Defaults Upon Senior Securities ..................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ................. 14
Item 5. Other Information ................................................... 14
Item 6. Exhibits and Reports on Form 8-K .................................... 14
Signatures .................................................................. 15
Certifications .............................................................. 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share data)
September 30, December 31,
2003 2002
-------- --------
(Unaudited) ( Note 1 )
Assets
Current assets:
Cash and cash equivalents .............................................. $ 8,501 $ 21,629
Short-term investments ................................................. 3,736 2,002
Prepaid expenses and other current assets .............................. 685 608
-------- --------
Total current assets ..................................................... 12,922 24,239
Restricted cash .......................................................... 227 227
Property and equipment, net .............................................. 1,835 2,616
Long-term investments .................................................... 2,007 --
Goodwill ................................................................. 814 814
Intangible assets related to acquisition, net of accumulated
amortization of $1,142 and $983 as of September 30, 2003 and
December 31, 2002, respectively .......................................... 224 383
Other assets ............................................................. 100 100
-------- --------
Total assets ............................................................. $ 18,129 $ 28,379
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities ............................... $ 1,360 $ 2,005
Accrued compensation and related expenses .............................. 111 123
Current portion of deferred revenue .................................... 832 832
-------- --------
Total current liabilities ................................................ 2,303 2,960
Other long-term liabilities .............................................. 715 717
Deferred revenue ......................................................... 13,543 14,168
Shareholders' equity:
Common stock, no par value; 35,000,000 shares authorized: 20,018,063 and
19,652,356 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively ...................................... 97,592 96,835
Accumulated other comprehensive income (loss) .......................... (30) 11
Deficit accumulated during the development stage ....................... (95,994) (86,312)
-------- --------
Total shareholders' equity ............................................... 1,568 10,534
-------- --------
Total liabilities and shareholders' equity ............................... $ 18,129 $ 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
Three Months Ended Nine Months Ended June 26, 1989
September 30, September 30, (inception) to
------------------------ ------------------------ September 30,
2003 2002 2003 2002 2003
--------- --------- --------- -------- ---------
Revenues:
Contract revenue ...................................... $ 208 $ -- $ 625 $ -- $ 3,321
Government grants ..................................... 0 27 13 27 561
Product sales ......................................... 206 118 431 535 5,534
--------- --------- --------- -------- ---------
Total revenues .......................................... 414 145 1,069 562 9,416
Costs and expenses:
Cost of product sales ................................. 46 11 86 98 1,407
Research and development .............................. 2,112 1,899 7,287 8,412 69,173
Selling, general and administrative ................... 230 (9) 3,075 4,203 30,452
Acquired in-process technology ........................ -- -- -- -- 7,350
--------- --------- --------- -------- ---------
Total costs and expenses ................................ 2,388 1,901 10,448 12,713 108,382
--------- --------- --------- -------- ---------
Operating loss .......................................... (1,974) (1,756) (9,379) (12,151) (98,966)
Interest and other income ............................. 106 161 364 546 6,569
Interest and other expense ............................ (100) (28) (667) (28) (2,149)
--------- --------- --------- -------- ---------
Net loss ................................................ (1,968) (1,623) (9,682) (11,633) (94,546)
Non-cash preferred stock dividends ...................... -- -- -- -- 1,448
--------- --------- --------- -------- ---------
Net loss applicable to common shareholders .............. $ (1,968) $ (1,623) $ (9,682) $ (11,633) $ (95,994)
========= ========= ========= ========= =========
Basic and diluted net loss per common share ............. $ (0.10) $ (0.09) $ (0.49) $ (0.67)
========= ========= ========= =========
Weighted average common shares used in
computing basic and diluted net loss per share ........ 20,018 17,305 19,941 17,304
========= ========= ========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Period from
June 26, 1989
Nine Months Ended September 30, (inception) to
---------------------------------- September 30,
2003 2002 2003
-------- -------- --------
Operating activities
Net loss ......................................................... $ (9,682) $(11,633) $(94,546)
Other operating activities ....................................... (38) 505 31,715
-------- -------- --------
Net cash used in operating activities............................. (9,720) (11,128) (62,831)
Investing activities
Purchases of property and equipment .............................. (202) (571) (5,039)
Purchases of investments ......................................... (11,027) 402 (98,918)
Sales and maturities of investments .............................. 7,286 8,684 93,080
Proceeds from sale of property and equipment ..................... 46 -- 233
Cash used in acquisition of Vaxis and Quay........................ -- -- (511)
-------- -------- --------
Net cash provided by (used in) investing activities .............. (3,897) 8,515 (11,155)
Financing activities
Proceeds from notes payable ...................................... -- -- 8,047
Repayment of notes payable ....................................... -- -- (6,611)
Proceeds from restricted cash .................................... -- -- 387
Other assets ..................................................... -- -- (614)
Other long-term liabilities....................................... -- -- --
Net proceeds from issuance of common stock........................ 489 25 69,600
Issuance of convertible preferred stock,
net of issuance costs and deferred financing costs .............. -- -- 11,678
-------- -------- --------
Net cash provided by financing activities......................... 489 25 82,487
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ............. (13,128) (2,588) 8,501
Cash and cash equivalents, beginning of period.................... 21,629 5,795 --
-------- -------- --------
Cash and cash equivalents, end of period.......................... $ 8,501 3,207 $ 8,501
======== ======== ========
The accompanying notes are an integral part of
these condensedconsolidated 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 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") under the License Agreement with PDI for Fortigel(TM) (testosterone
gel) 2%, 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 Fortigel License Agreement with PDI, 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. The carrying value of goodwill ($814,000)
is based on management's current assessment of recoverability using objective
and subjective factors. We 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 September 30, 2003 was
approximately $1,142,000.
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 nine month periods September 30,
2003 and 2002:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Risk-free interest rate ............ 2.7% 4.0% 2.6% 4.3%
Dividend yield ..................... 0% 0% 0% 0%
Volatility ......................... 0.89 0.98 0.89 0.98
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss as reported ........................................... $ (1,968) $ (1,623) $ (9,682) $(11,633)
Stock-based employee compensation costs and
credits included in the determination of net
loss, as reported ........................................... (694) -- (258) 15
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 ....................... (351) (528) (1,046) (2,123)
-------- -------- -------- --------
Net loss, pro forma ............................................ $ (3,013) $ (2,151) $(10,986) $(13,741)
Basic and diluted net loss per share, as reported .............. $ (0.10) $ (0.09) $ (0.49) $ (0.67)
Pro forma basic and diluted net loss per share ................. $ (0.15) $ (0.12) $ (0.55) $ (0.79)
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 (loss) 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 nine month periods
ended September 30, 2003 and 2002 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss as reported ............................................... $ (1,968) $ (1,623) $ (9,682) $(11,633)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities ............... (6) (14) 62 (80)
Foreign currency translation adjustment .......................... (90) (5) (104) (3)
-------- -------- -------- --------
Other comprehensive income (loss) .................................. (96) (19) (42) (83)
-------- -------- -------- --------
Comprehensive loss ................................................. $ (2,064) $ (1,642) $ (9,724) $(11,716)
======== ======== ======== ========
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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Pharmaceuticals $ 320 $ 102 $ 920 $ 233
Skin Care 94 43 149 329
-------- -------- -------- --------
$ 414 $ 145 $ 1,069 $ 562
======== ======== ======== ========
Operating income (loss):
Pharmaceuticals $ (2,034) $ (1,779) $ (9,416) $(12,355)
Skin Care 60 23 37 204
-------- -------- -------- --------
$ (1,974) $ (1,756) $ (9,379) $(12,151)
======== ======== ======== ========
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. - Related Parties
The licensing revenue of $208,000 and $625,000 for the three and nine months
ended September 30, 2003, respectively, and $625,000 for the period from
inception to September 30, 2003, reflects revenue recognized over the term of
the License Agreement with PDI, associated with the $15,000,000 upfront payment
received from PDI in December 2002.
Note 7. - Property and Equipment
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 8. - Subsequent Events
On October 24, 2003, Cellegy filed a Report on Form 8-K announcing that it
received a mediation notice from PDI, Inc., under the exclusive License
Agreement entered into on December 31, 2002, relating to Cellegy's Fortigel
product. If mediation procedures fail, Cellegy or PDI can initiate legal
proceedings at that time. Legal costs and the outcome of mediation cannot be
estimated at this time.
On November 4, 2003, Cellegy filed a Report on Form 8-K announcing the
resignation of Ernst & Young LLP as the Company's independent auditors and the
appointment of PricewaterhouseCoopers LLP, effective with the filing of this
Form 10-Q.
On November 6, 2003, Cellegy announced changes in the composition of its
Board of Directors, including the appointment of Mr. Richard C. Williams, as
Board Chairman, and Messrs. John Q. Adams, Sr. and Thomas M. Steinberg as new
directors, along with the resignation of Messrs. Bowman, Steigrod and Wells as
directors. In consideration of Mr. Williams' agreement to serve as Chairman and
as director, the Company agreed to pay Mr. Williams a fee of $100,000 per year.
The Company also granted a stock option to Mr. Williams to purchase 1,000,000
shares of common stock, with 400,000 shares at an exercise price equal to the
closing price of the stock on the grant date and 600,000 shares at an exercise
price of $5.00 per share. The option is vested and exercisable in full
immediately, although a portion of the option, covering up to 600,000 shares
initially and declining over time, is subject to cancellation to the extent the
portion has not been exercised, in the event that Mr. Williams voluntarily
resigns as Chairman and a director within certain time periods.
9
In addition, stock options held by directors who resigned were modified to
become exercisable in full immediately on resignation with an extension of the
exercise period on all options for five years from the resignation date.
Generally, similar modifications were approved for stock options held by
directors Ronald J. Saldarini, Ph.D. and Tobi B. Klar, M.D., if they are no
longer directors before November 2004. Certain modifications to all employee
stock options were also approved, including accelerated vesting, a longer
post-termination exercise period for options in some instances and certain
severance benefits, if employment is terminated for certain reasons before
November 2004.
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 and the outcome and timing of
discussing with the FDA and other regulatory authorities, particularly with
regard to additional requirements for marketing approval of Fortigel. There can
be no assurance that any of Cellegy's products will be approved for marketing by
regulatory authorities or that these product candidates can be successfully
marketed following approval. There is uncertainty regarding the outcome of
recently announced mediation proceedings initiated by PDI, Cellegy's Fortigel
licensee. If PDI or Cellegy initiates legal actions relating to the License
Agreement, there can be no assurances regarding the outcome, and the Company
could be required to devote significant time and resources to such proceedings.
An adverse outcome in any potential proceeding could have a material financial
impact on Cellegy. 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) for the treatment
of anal fissures and hemorrhoids and two transdermal testosterone gel product
candidates, Fortigel(TM) (testosterone gel) for the treatment of male
hypogonadism, a condition that afflicts men, generally above the age of forty,
and Tostrelle(TM) (testosterone gel), 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.
General
In August 2001, Cellegy and Ventiv Health, Inc. ("Ventiv") signed a six
year 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 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 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 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 may receive a milestone payment and royalties
following a
10
successful product launch. Cellegy is 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.
In October 2003, Cellegy announced that it received a mediation notice from
PDI under the exclusive License Agreement entered into in December 2002 relating
to Fortigel. The dispute resolution provisions of the agreement require
non-binding mediation before either party may initiate further legal
proceedings. The communication asserted several claims relating to the License
Agreement. If the mediation procedures fail, PDI or Cellegy could initiate legal
proceedings at that time. Legal costs and the outcome of mediation cannot be
estimated at this time.
Results of Operations
Revenues. Cellegy had revenues of $414,000 and $145,000 for the three
months ended September 30, 2003 and 2002, respectively. During the three months
ended September 30, 2003, revenues consisted of $112,000 in Rectogesic(R)
(nitroglycerin ointment) sales in Australia, $94,000 in skin care product sales
to Gryphon Development, the product development division of a major specialty
retailer and $208,000 in licensing revenue for Fortigel. For the same period
last year, revenues consisted of $75,000 in Rectogesic sales, $43,000 in skin
care product sales and $27,000 in Canadian government grants to Cellegy Canada.
Cellegy had revenues of $1,069,000 and $562,000 for the nine months ended
September 30, 2003 and 2002, respectively. During the nine months ended
September 30, 2003, revenues consisted of $282,000 in Australian Rectogesic
sales, $624,000 in licensing revenue for Fortigel, $150,000 in product sales to
Gryphon and $13,000 in Canadian government grants. For the nine months of last
year, revenues were comprised of $205,000 in Australian Rectogesic sales,
$225,000 in skin care product sales to Gryphon, $105,000 in other skin care
product sales and $27,000 in Canadian grant revenue.
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, associated with the $15,000,000 upfront payment
received from PDI in December 2002. The Company expects the balance to be
recorded as licensing revenue in subsequent quarters. Gryphon has placed orders
totaling approximately $160,000 covering their current skin care product
requirements for the remainder of 2003.
Research and Development Expenses. Research and development expenses were
$2,112,000 for the three months ended September 30, 2003, compared with
$1,899,000 for the same period last year. During the nine months ended September
30, 2003 and 2002, research and development expenses were $7,287,000 and
$8,412,000, respectively. Higher research and development expenses for the three
months ended September 30, 2003, compared with the same period last year, are
due to increases in clinical expenses associated with the Cellegesic Phase 3
trial and the on-going Phase 2 trial for Tostrelle. These were somewhat offset
by the winding down of our domestic research operations beginning in the third
quarter of 2002 and reduced facility expenses this year due to the sublease of a
significant portion of our South San Francisco laboratories which began in the
third quarter of last year.
Lower research and development expenses for the nine months ended September
30, 2003, compared with the same period last year, are primarily due to the
winding down of our domestic laboratory operations and a reduction in force,
affecting most of our research personnel, in the third quarter of 2002. In
addition, there were significant regulatory expenses, including an FDA User Fee,
associated with the filing of our Fortigel NDA during the second quarter of
2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $230,000 for the three months ended September 30,
2003, compared with a credit of $9,000 for the same period last year. During the
nine months ended September 30, 2003 and 2002, these expenses were $3,075,000
and $4,203,000, respectively. Excluding non-cash compensation expense, selling,
general and administrative expenses were lower for the three months ended
September 30, 2003, compared with the same period last year, primarily due to a
decrease in facility expenses associated with the sublease of a significant
portion of our South San Francisco offices. A significant non-cash compensation
credit of $465,000 was recognized in the third quarter of this year resulting
from the variable accounting treatment associated with the
11
cancellation of certain stock options in December 2002. For the same period last
year, a significant credit of $826,000 was recognized upon the termination of
the Ventiv Health Agreement.
For the nine months ended September 30, 2003, compared with the same period
last year, selling, general and administrative expenses decreased by $1,128,000.
Cellegy incurred significant pre-launch marketing costs relating to its
Cellegesic product candidate in the first half of last year, which were
discontinued when the Cellegesic NDA was withdrawn in the second quarter of
2002. Reductions in staff and further reductions in marketing expenses made in
the second half of last year have been maintained through the first nine months
of this year.
Excluding non-cash compensation charges associated with variable accounting
treatments, selling, general and administrative expenses are expected to remain
at the third quarter level throughout the rest of this year, primarily in
support of the Company's clinical programs and to assure compliance with
additional accounting and legislated internal control requirements. We do not
expect to incur domestic marketing expenses over the next several quarters.
Interest and Other Income (Expense), Net. For the three months ended
September 30, 2003, Cellegy had net interest and other income of $6,000,
comprised of $106,000 in interest income and other income and $100,000 in losses
from the disposal of fixed assets. For the three months ended September 30,
2002, Cellegy had net interest and other income of $133,000, comprised of
$72,000 in interest and other income, $89,000 in gains from disposal of fixed
assets and $28,000 in interest expense. For the nine months ended September 30,
2003, Cellegy recorded a net interest and other expense of $303,000, comprised
of interest and other income of $364,000 offset primarily by a write-down of
capitalized tenant improvements recorded during the first quarter and losses on
disposal of fixed assets totaling $667,000. For the nine months ended September
30, 2002, net interest and other income was $518,000, consisting of $457,000 in
interest income, $89,000 in gains from the disposal of fixed assets and $28,000
in interest expense.
Net Loss. Net loss was $1,968,000 or $0.10 per share based on 20,018,000
weighted average shares outstanding for the three months ended September 30,
2003, compared with a net loss of $1,623,000 or $0.09 per share based on
17,305,000 weighted average shares outstanding for the same period last year.
For the nine months ended September 30, 2003, the net loss was $9,682,000 or
$0.49 per share based on 19,941,000 weighted average shares outstanding,
compared with $11,633,000 or $0.67 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 September 30, 2003, we had incurred an accumulated deficit of
$96.0 million and had consumed cash from operations of $62.8 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 $14.5 million at September 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 $9.4 million in the first
three quarters 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 filing, prosecuting, defending and enforcing our intellectual property
rights and legal costs associated with the PDI mediation proceedings. Net cash
used in operations for the remainder of this year is expected to average about
$1.0 million per month.
As a result of the above factors, we will 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,
12
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 with additional financing and the interest thereon
will be adequate to satisfy our capital needs through at least December 31,
2004, assuming no material financial impact associated with the settlement of
potential proceedings related to mediation procedures initiated by PDI.
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,
and the outcome and timing of discussions with our regulatory filings by the FDA
and other regulatory authorities, particularly with regard to additional
requirements for marketing approval of Fortigel. There can be no assurance that
any of Cellegy's products will be approved for marketing by regulatory
authorities or that these product candidates can be successfully marketed
following approval. There is uncertainty regarding the outcome of recently
announced mediation proceedings initiated by PDI, Cellegy's Fortigel licensee.
If PDI or Cellegy initiates legal actions relating to the License Agreement,
there can be no assurances regarding the outcome, and the Company could be
required to devote significant time and resources to such proceedings. An
adverse outcome in any potential proceeding could have a material financial
impact on Cellegy. In addition, there may be supply disruptions relating to the
bankruptcy filing of PanGeo Pharma, our primary contract manufacturer, and there
may be delays and additional costs relating to the identification and validation
of alternate suppliers. 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 other SEC
filings, including our 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 September
30, 2003 are classified as available-for-sale and 64% and 36% 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 September 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Reports on Form 8-K
On October 25, 2003, the Company filed a Report on Form 8-K disclosing that it
received a mediation notice from PDI, Inc., under the exclusive License
Agreement entered into in December 2002 relating to Cellegy's product Fortigel.
On November 4, 2003, the Company filed a Report on Form 8-K announcing the
resignation of Ernst & Young LLP as the Company's independent auditors and the
appointment of PricewaterhouseCoopers LLP effective with the filing of this Form
10-Q.
On November 6, 2003, Cellegy announced changes in the composition of its Board
of Directors including the appointment of Mr. Richard C. Williams, as Board
Chairman, Messrs. John Q. Adams, Sr. and Thomas M. Steinberg as new directors,
along with the resignations of Messrs. Bowman, Steigrod and Wells as directors.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLEGY PHARMACEUTICALS, INC.
Date: November 14, 2003 /s/ K. Michael Forrest
-------------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Date: November 14, 2003 /s/ A. Richard Juelis
-------------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
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