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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 2003
OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-26372
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code: (650) 616-2200
Securities registered pursuant to Section 12(b) of the Act:
None Nasdaq National Market
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES _X_ NO ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act of 1934).
YES ___ NO _X_
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2003, the last business day of the Registrant's most
recently completed second fiscal quarter, was $51,755,662, based on the closing
price for the common stock on The Nasdaq Stock Market on such date. This
calculation does not include a determination that persons are affiliates or
non-affiliates for any other purpose.
As of March 29, 2004, there were 20,117,211 of shares of common stock
outstanding.
Documents Incorporated By Reference:
The information called for by Part III of this Report, and certain information
called for by Part II, Item 5 of this Report, to the extent not set forth
herein, is incorporated by reference to the definitive Proxy Statement relating
to the Annual Meeting of Shareholders of the Company which will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the fiscal year to which this Report relates.
CELLEGY PHARMACEUTICALS, INC. 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Page
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Part I
Item 1. BUSINESS 3
Item 2. PROPERTIES 12
Item 3. LEGAL PROCEEDINGS 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT 12
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 13
Item 6. SELECTED FINANCIAL DATA 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 29
Item 9A. CONTROLS AND PROCEDURES 29
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 30
Item 11. EXECUTIVE COMPENSATION 30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 30
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30
Item 14. PRINCIPAL ACCOUNTANT, FEES AND SERVICES 30
Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 31
Unless the context otherwise requires, the terms "we", "our", and "Cellegy"
refer to Cellegy Pharmaceuticals, Inc., a California corporation, and its
subsidiaries. Cellegesic, Fortigel, Tostrelle, and Rectogesic are our
trademarks. We also refer to trademarks of other corporations and organizations
in this document.
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PART I
ITEM 1: BUSINESS
Cellegy Pharmaceuticals is a development stage specialty
biopharmaceutical company, incorporated in California in 1989, that develops and
intends to commercialize prescription drugs targeting primarily gastrointestinal
conditions and sexual dysfunction using proprietary topical formulations and
nitric oxide ("NO") donor technologies. In January 2004, Cellegy reported
positive results from a confirmatory Phase 3 study using Cellegesic(TM)
(nitroglycerin ointment) for the treatment of chronic anal fissure pain. We plan
to submit a New Drug Application ("NDA") to the United States Food and Drug
Administration ("FDA") in the second quarter of 2004.
In addition to the anal fissure indication, we are developing
Cellegesic for the treatment of hemorrhoids and a painful condition called
dyspareunia, which prevents or inhibits sexual intercourse in more than five
million women in the United States. Other early stage NO donor product
candidates in our pipeline address a number of conditions including prostate
cancer, Raynaud's Disease and Restless Leg Syndrome.
Cellegy is also developing two transdermal testosterone gel products.
Tostrelle(TM) (testosterone gel) 0.5% is for the treatment of female sexual
dysfunction in postmenopausal women. We have previously announced results of an
interim analysis of a Phase 2 study using Tostrelle for the treatment of female
sexual dysfunction showing a favorable response rate of 71% versus a placebo
response of 13%. Fortigel(TM) (testosterone gel) 2.0%, a replacement therapy for
male hypogonadism, was the subject of a Not Approvable letter by the FDA in July
2003. Cellegy has had discussions and exchanges with the FDA which we believe
may lead to agreement on any remaining work required for approval of the
product. There can, however, be no assurances regarding the timing and outcome
of these interactions and the FDA's decisions regarding Fortigel or our other
products.
Products Under Development
Cellegesic (nitroglycerin ointment for treatment of anal fissures, hemorrhoids
and dyspareunia)
Cellegesic is a topical, nitroglycerin-based prescription product being
developed for the treatment of anal fissures, hemorrhoids and dyspareunia.
Nitroglycerin is a drug that has safely and effectively been used for many years
to treat cardiac conditions, primarily angina pectoris.
Anal fissures are painful tears in the lining of the anal canal, a
condition afflicting men and women of all age groups and nationalities. The
condition is associated with increased pressure in the anal canal and a decrease
in blood supply to the region. Many chronic cases require a painful and
expensive surgical procedure (Lateral Internal Sphincterotomy), that is designed
to reduce anal pressure by severing the muscles of the inner anal sphincter.
This procedure, while highly effective, frequently leaves patients incontinent.
Cellegesic, which is applied intra-anally, works to reduce anal pressure by
gently relaxing the inner anal sphincter muscles. If approved, Cellegesic, will
likely reduce the number of surgeries and the associated incontinence risk.
There are currently no FDA approved drug therapies for anal fissures,
although anesthetics and anti-inflammatory agents which only partially relieve
the symptoms of the condition are currently prescribed. According to Verispan
audits, anal fissures afflict an estimated 750,000 Americans, resulting in over
one million physician visits each year. The most recent audit data for 2003 show
about 100,000 annual uses of pharmacy-compounded nitroglycerin for the treatment
of anal fissures. We believe that, if Cellegesic is approved, the extensive
compounding of nitroglycerin by pharmacies will decline as physicians begin to
prescribe Cellegesic, a stable, homogeneous formulation that will be to FDA
standards and will be consistent from batch to batch. We plan to enforce our
issued United States patents if compounding continues after FDA approval of
Cellegesic.
Hemorrhoids are dilated, swollen veins and tissue located either in or
near the anal canal. In the United States alone, there are approximately nine
million people who suffer from hemorrhoids each year, according to published
data. Hemorrhoids are also characterized by an increase in intra-anal pressure,
which has been shown to be effectively reduced by the application of Cellegesic.
Cellegy is currently conducting a Phase 2 clinical trial to test the efficacy of
Cellegesic ointment in the treatment of various symptoms of hemorrhoids.
3
Dyspareunia is a condition that is characterized by intense vaginal
pain. The condition can be recurrent and frequently causes significant
impairment to normal sexual functioning in woman. There are multiple possible
causes of dyspareunia but often the condition is present without any obvious
evidence of underlying disease. It has been reported that between 7% to 15% of
American women of sexually active age are affected by the condition. There are
no approved treatments for dyspareunia and while many different approaches are
used none are completely satisfactory. In a recent, non placebo controlled
clinical study of nitroglycerin ointment conducted by Dr. Jennifer Berman of the
University of California Los Angeles Medical Center, the product was reported to
reduce the pain of women suffering from vulvodynia, a condition that is a major
contributor to dyspareunia. Cellegy is now initiating a similar study and
intends to conduct additional trials using Cellegesic for the treatment of
vulvodynia.
Recent Cellegesic Clinical Trials Results
In January 2004, Cellegy announced results of a preliminary analysis of
its third Cellegesic Phase 3 clinical trial showing a statistically significant
(p<0.05) reduction in anal fissure pain compared with a placebo control during
the first three weeks of the trial, the primary efficacy endpoint of the study.
As observed in two earlier Phase 3 trials, the most common side effect was mild
to moderate headache. The double blind, placebo controlled trial was conducted
according to a Special Protocol Assessment ("SPA"), that was agreed to by the
Company and the FDA. An SPA is intended to provide assurance that if the
pre-specified primary endpoint is achieved and no unexpected safety issues are
seen, the FDA will approve the product for commercial sale. We are now preparing
an NDA submission for filing with the FDA in the second quarter of 2004.
Subjects who met the enrollment criteria for a chronic anal fissure
were randomized to receive either the placebo ointment or 0.4% nitroglycerin
ointment twice daily over an eight-week period. The daily records of average
pain intensity from 187 intent-to-treat subjects (89 Cellegesic-treated and 98
placebo-treated) were analyzed for statistical evidence of pain reduction during
the first 21 days of treatment as the primary efficacy endpoint. The primary
endpoint was achieved (p<0.05).
A secondary endpoint and several tertiary endpoints were also analyzed.
The secondary endpoint was time to 50% pain reduction. On average, the time to
50% pain reduction produced by Cellegesic was sooner than the reduction produced
by the placebo, although the difference was not statistically significant.
Tertiary endpoints included reduction of average pain over the eight-week (56
days) treatment period, reduction of pain upon defecation through days 21 and
56, and healing. Average pain reduction and defecation pain reduction were both
statistically significant over 56 days (p<0.05). However, the significance
achieved in these tertiary endpoints did not remain statistically significant
after applying adjustment to the p-values for the analysis of multiple
endpoints. These results were numerically superior to placebo and demonstrate an
important positive trend. There was no significant difference in fissure healing
between Cellegesic and the placebo control, as in earlier trials.
Side effects seen in the trial were consistent with those observed in
the previous two Phase 3 studies, with mild to moderate headache the most common
side effect. Five subjects dropped out of the study as a result of the headache.
The SPA, as agreed to with the FDA, required that subjects discontinuing due to
nitroglycerin related headache (one that occurs within 30 minutes of
application) should have their last daily pain intensity score, as recorded on
the day the subject dropped out, carried forward each day through day 21.
Clinical judgment, based on each subject's entire record, was used to determine
which of the five subjects discontinued due to nitroglycerin related headaches.
Last daily pain intensity scores were carried forward for three of the five
subjects. The other two subjects who withdrew from the trial due to headache had
all of their available pain data prior to dropout included in the analysis. We
believe we achieved the results specified in the SPA although the FDA will
conduct its own analysis, and could disagree with our conclusion.
Cellegy is also conducting a Phase 2 clinical trial using Cellegesic to
determine its effect on the symptoms of hemorrhoids. Hemorrhoids afflict an
estimated nine million people annually in the United States alone, according to
published data. We are also initiating a pilot study in dyspareunia, a painful
condition afflicting up to five million women in the United States.
4
Previous Cellegesic Clinical Trial Results
We completed our initial Phase 3 clinical trial using Cellegesic for
the treatment of anal fissures and announced the results in November 1999. The
trial, which included 304 patients, did not demonstrate a statistically
significant rate of healing compared with placebo, but did show significant pain
reduction. Based on this outcome, we initiated a second Phase 3 trial in 2000 to
confirm the drug's ability to reduce fissure pain, the primary trial endpoint,
with healing of chronic anal fissures as a secondary endpoint. The second Phase
3 clinical trial, which included 229 patients in several study centers in the
United States and overseas, was completed in September 2001. Patients received
either of two strengths of Cellegesic or placebo administered twice daily over
an eight week treatment period. The patient's pain scores were tabulated and the
patients were examined to determine whether the fissure had healed. Positive
results were achieved in the primary endpoint, which was pain reduction of
chronic anal fissures. Statistical significance was not achieved in healing.
In June 2001, we filed a rolling NDA with the FDA for the use of
Cellegesic for the treatment of pain associated with chronic anal fissures. We
amended the NDA upon completion of the second Phase 3 anal fissure pain study in
November 2001. In April 2002, we announced the withdrawal of our Cellegesic NDA
after it became clear that the FDA was not going to approve the NDA. We had
several subsequent discussions and meetings with the FDA to supply additional
information and to attempt to clarify and respond to the FDA's concerns and
questions. In September 2002, we announced that we believed most of the agency's
previously stated concerns had been satisfactorily addressed with the exception
that the FDA believed that some aspects of the statistical analysis methodology
used by Cellegy were not pre-specified in the statistical analysis plan
submitted prior to unblinding the trial. Cellegy believes that it had adequately
demonstrated that the statistical analysis methodology was properly set forth in
the original analysis plan and was correctly utilized. However, the FDA
concluded that the method was not pre-specified to its satisfaction and
indicated that it would require another Phase 3 trial before considering
approval of the product.
Tostrelle (testosterone gel for female hormone replacement therapy)
Normal blood concentrations of testosterone in women range from 10 to
20 times less than those of men. Nevertheless, in both sexes, testosterone plays
a key role in building muscle tissue or bone and in maintaining normal sexual
desire. In women, the ovaries and adrenal glands continue to synthesize
testosterone after menopause, although the rate of production may diminish by as
much as 50%. Testosterone deficiency in women frequently leads to diminished
libido, decreased bone and muscle mass and reduced energy levels. Approximately
15 million women in the United States suffer from symptoms of testosterone
deficiency. At the present time, there are no approved products for the
treatment of this condition, although it has been reported that testosterone
treatment is frequently being prescribed off-label for women by Obstetricians
and Gynecologists.
Based on the results of pharmacokinetic studies in men receiving
Fortigel, Cellegy's product candidate for male hypogonadism, our scientists
calculated the concentration of testosterone required to achieve normal
pre-menopausal hormone levels in postmenopausal women. The result is Cellegy's
Tostrelle, a product designed to safely restore normal testosterone levels in
hormone deficient women.
Cellegy has successfully completed two Phase 1/2 pharmacokinetic
studies in which we determined the proper dose necessary to restore normal
testosterone levels to normally menopausal and surgically-induced menopausal
women. In June 2003, we announced an interim analysis of a Phase 2 study in
women with sexual dysfunction showing a favorable response rate of 71% with
Tostrelle versus a 13% placebo response. Based on these results, we initiated an
amended Phase 2 clinical study in 2003. We now plan to meet with the FDA to
review the trial results and the overall Tostrelle program. Subject to the
outcome of this meeting, we intend to pursue advanced trials incorporating any
reasonable protocol changes that might be required by the FDA.
Fortigel (testosterone replacement therapy for male hypogonadism)
Fortigel is a transdermal testosterone gel designed to treat male
hypogonadism, a condition involving clinically deficient levels of the sex
hormone testosterone. Low levels of testosterone can result in lethargy,
depression and a decline in libido. In severely deficient cases, loss of muscle
mass and bone density can occur. Approximately five million men in the United
States, primarily in the aging (over 40) male population group, have deficient
levels of testosterone.
5
There are a number of companies currently marketing testosterone in
several different product forms in domestic and international markets. Cellegy
believes there is an important medical and market need for an improved product,
as the side effects and patient inconveniences associated with many of the
currently marketed products have limited their use to less than 10% of potential
patients, according to published prescription data. Current product forms
include injectables, a transdermal patch, two testosterone gel products and a
buccal tablet. The leading gel product currently priced at approximately $3,500
per year is now generating annual domestic revenues in excess of $350 million.
Cellegy's proprietary testosterone gel product candidate is
transparent, rapid-drying and non-staining. It is designed as a once-a-day
application from a unique metered dose dispenser to relatively small areas of
the skin. Based on the results of a 201-patient Phase 3 trial announced in
November 2001, Cellegy filed an NDA in June of 2002. However, Fortigel was
subsequently the subject of a Not Approvable letter by the FDA in July 2003. In
its letter, the FDA stated that in its opinion the following deficiencies in the
Fortigel NDA were found: (1) there is insufficient information to establish that
high supraphysiologic daily Cmax serum testosterone levels achieved in a
significant portion of participants in the major clinical study supporting the
NDA are safe under conditions of chronic administration; and, (2) there is
insufficient information provided to demonstrate that the dose of the product
can be adjusted to consistently preclude achieving these high supraphysiological
testosterone levels. Cellegy has had discussion and exchanges with the FDA which
Cellegy believes may lead to agreement on any remaining work required for
approval of the product, although there can be no assurances regarding the
timing and outcome of these interactions and the FDA's decision. We could be
required to conduct further clinical trials or undertake other time consuming or
costly actions necessary to satisfy the FDA's requirements.
Marketed Products
Rectogesic
Rectogesic(TM) (nitroglycerin ointment), a product similar in
formulation to Cellegesic, was approved by the Australian Therapeutic Goods
Administration and has been successfully marketed in Australia since early 1999
and is now on the market in New Zealand and South Korea. Rectogesic is the only
approved product for the treatment of anal fissures and, although it is not
indicated for hemorrhoids treatment, it has achieved the number 3 market
position in the much larger hemorrhoid product category in Australia, with sales
increasing by 27% in 2002 and another 40% in 2003. There have been no safety
issues reported with use of the product since its introduction.
Skin Care
Cellegy has completed development of certain consumer skin care blends,
including skin moisturizers and anti-aging lotions and creams. We are currently
marketing our C79 Intensive Moisturizer formulation to a major specialty
retailer which incorporates C79 into its products. Our revenues from sales of
C79 totaled $316,000 in 2003 with total sales of approximately $5 million since
product introduction in 1998.
Marketing and Commercialization Strategy
Cellegy intends to become a leader in the development and marketing of
selected specialty biopharmaceutical products that are directed towards the
treatment of gastrointestinal disorders, sexual dysfunction in both men and
women, and conditions affecting women's health. Key elements of our business and
commercialization strategy include the following:
o Self-Marketing to Specialty Physicians in United States.
Whenever practical, we plan to self market our products to a
targeted audience of key physician specialists, including
Gastroenterologists and Obstetrician-Gynecologists, through
the establishment of our own sales force. We plan to seek
pharmaceutical partners to assist in the promotion of products
prescribed by larger physician groups. Cellegy intends to
commercialize Cellegesic, if approved, initially on our own
and subsequently through co-promotion agreements with partners
in the United States as the use of Cellegesic expands
6
beyond the specialists. In most cases, we plan to outlicense
the overseas rights for products we develop.
o Acquisition of Complementary Products and Companies. As was
done with the acquisitions of Vaxis Therapeutics Corporation
("Vaxis") in Canada in November 2001, of Rectogesic(TM)
(nitroglycerin ointment) from Quay Pharmaceuticals Pty Ltd
("Quay") in Australia in June 2000 and of Cellegesic from
Neptune Pharmaceuticals ("Neptune") in the United States in
December 1997, we intend to acquire other products,
technologies or companies with products and distribution
capabilities consistent with our commercial objectives.
o Manufacturing. Cellegy has manufacturing arrangements with
PendoPharm Inc., ("PendoPharm") an FDA approved contract
manufacturing company based in Canada. PendoPharm, previously
called PanGeo and now an affiliate of Pharmasciences, has
successfully manufactured Cellegesic, Fortigel and Tostrelle
for our clinical trials and will be a commercial manufacturer
for these products, when approved. We are actively working to
validate a domestic contract manufacturer to serve as a second
manufacturing source for our product candidates.
o Distribution. Cellegy has entered into distribution agreements
for Rectogesic in New Zealand and South Korea. We intend to
contract with additional distributors in Asia and other major
overseas markets.
Research Programs
Cellegy's research and development programs focus on nitric oxide
pharmacology and related treatments for anorectal and gastrointestinal diseases,
sexual dysfunction, peripheral vascular disorders and cancer. The November 2001
acquisition of Vaxis, now Cellegy Canada, significantly broadened our
intellectual property and product candidate portfolio for the treatment of
female sexual dysfunction, male erectile dysfunction and has also expanded our
research into potential oncology treatments. Cellegy has rights to future
discoveries, technologies and products developed by Cellegy Canada. Most of the
current research programs are being conducted at Queen's University in Kingston,
Ontario or in our leased laboratories located at the University.
The expanded expertise in nitric oxide pharmacology has led to an
understanding of the role of nitric oxide as a signaling molecule, operating at
lower concentrations than is normally required for vasodilators, especially in
tissue under an abnormally vaso-spasmatic or vaso-constrictive state. This
discovery presents various potential approaches to treat conditions caused by
vaso-constriction, such as peripheral vascular insufficiency found in Raynaud's
disease, male erectile dysfunction and selected aspects of female sexual
dysfunction. We plan to verify and validate selected potential therapeutic
indications either in vivo animal testing or in pilot human studies.
We have also been investigating the role of nitric oxide in the
development of chemo-resistance and in attenuating cancer metastasis induced by
hypoxia (low oxygen), a condition that commonly exists in various difficult to
treat cancers. Results published in various peer-reviewed journals show that the
administration of nitric oxide donors, like nitroglycerin, prevented the
development of chemo-resistance to several well-established chemotherapeutic
agents such as 5-flurouracil and doxorubicin, and the metastasis of prostate,
breast and other human cancer cell lines and in spheroid cultures. In addition
to these mechanistic studies, Cellegy's collaborators at Queens University have
also established an in vivo tumor model to test the effect of a nitric oxide
donor in preventing the metastasis of existing tumors. A pilot human study using
topical nitroglycerin to attenuate the progressive increase of PSA
(prostate-specific antigen, a marker of biological failure in patients after a
prostectomy procedure) was presented at the American Urological Association
annual meeting in the second quarter of 2003.
Early observations by Cellegy Canada scientists showed that the
co-administration of nitric oxide releasing agents blocks nociceptive pain
response triggered by PGE1 injection. This concept is further supported by the
July 2002 publication of a pilot study in Journal of Gender Specific Medicine
reporting the efficacy of treating vulvar pain and pain with sexual activity in
women with vulvodynia using 0.2% topical nitroglycerin ointment. Cellegy is
7
now initiating a clinical study using topical nitroglycerin in treating vulvar
pain associated with vulvodynia and dyspareunia, which we intend to complete in
2004.
Patents and Trade Secrets
Cellegy has 22 issued United States patents, more than 60 issued
foreign patents, and over 80 pending patent applications worldwide. Two issued
United States patents and 15 pending patent applications relate to our
testosterone gel products for males and females. Two issued United States
patents, over 20 issued foreign patents, and more than 10 pending patent
applications relate to Cellegy's Cellegesic product for the treatment of anal
fissures and other anal diseases. While our European patent covering the
Cellegesic product was challenged and subsequently revoked during the opposition
proceedings in December 2003, Cellegy plans to file an appeal to the decision in
the next several months. Two issued United States patents and over 25 pending
patent applications relate to possible backup compounds for our Cellegesic
product. As part of Cellegy's acquisition of Cellegy Canada, Cellegy gained
rights to 5 issued United States patents, 3 issued foreign patents, and more
than 40 pending patent applications. These patents and applications disclose
methods of treatment of peripheral vascular conditions including male erectile
dysfunction, female sexual dysfunction, and Raynaud's disease, as well as other
conditions. United States and foreign patent applications disclosing novel
store-operated calcium influx (SOC) inhibitors and their use in the treatment of
various disorders are pending or have recently published. Additional patent
applications are being prepared for filing that will cover methods or products
currently under development. Corresponding patent applications for most of
Cellegy's issued United States patents have been filed in countries of
importance to us located in major world markets, including certain countries in
Europe, Australia, South Korea, Japan, Mexico and Canada.
Our policy is to protect our technology by, among other things, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to our technology, improvements to our technology and to
specific products that we develop. It is impossible to anticipate the breadth or
degree of protection that any such patents will afford, or whether we can
meaningfully protect our rights to our unpatented trade secrets. Cellegy also
relies upon unpatented trade secrets and know-how, and no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to our trade
secrets or disclose such technology. It is our policy to require our employees
to execute an invention assignment and confidentiality agreement upon
employment. Our consultants are required to execute a confidentiality agreement
upon the commencement of their consultancy. Each agreement provides that all
confidential information developed or made known to the employee or consultant
during the course of employment or consultancy will be kept confidential and not
disclosed to third parties except in specific circumstances. The invention
assignment generally provides that all inventions conceived by the employee
shall be the exclusive property of Cellegy. In addition, it is our policy to
require collaborators and potential collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection of our trade secrets. For additional risks and
uncertainties relating to our patents and intellectual property, particularly
the European opposition to our Cellegesic patents, see the discussion of our
patents and intellectual property under the heading, "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Factors That May
Affect Future Operating Results."
Product and Company Acquisitions
In November 2001, Cellegy acquired Vaxis Therapeutics Corporation, a
private Canadian company for $4.1 million primarily in Cellegy common stock.
Vaxis, subsequently renamed Cellegy Canada, is a wholly-owned research and
development subsidiary with prominent scientists focusing in the areas of sexual
dysfunction, peripheral vascular disorders, cancer and nitric oxide
pharmacology. This research supports our goals of expanding our product pipeline
and protecting our patents.
In June 2000, Cellegy acquired Quay Pharmaceuticals, an Australian
company marketing Rectogesic, a nitroglycerin ointment product similar to
Cellegesic. The acquisition cost totaled $1,835,000, consisting primarily of
Cellegy common stock and warrants. Cellegy continues to self-market Rectogesic
in Australia through its wholly-owned Cellegy Australia subsidiary and currently
sells Rectogesic through distributors in New Zealand and South
8
Korea. We plan to selectively sell Rectogesic through distributors in other
Pacific Rim countries and potentially in other major markets around the world.
In December 1997, Cellegy acquired patent and related intellectual
property rights relating to Cellegesic from Neptune Pharmaceuticals. Under the
purchase agreement, we issued 462,809 shares of common stock to Neptune in 1997
with a value of $3,750,000. The agreement calls for a series of additional
payments, payable in shares of common stock, upon successful completion of
various milestones tied to clinical trial results and commercialization of
Cellegesic in domestic and foreign markets. Cellegy has no future product
royalty obligations to Neptune in connection with potential Cellegesic product
revenues.
Government Regulation
FDA Requirements for Human Drugs. The research, development, testing,
manufacturing, storage, labeling, record keeping, distribution, advertising,
promotion and marketing of drug products are extensively regulated by numerous
governmental authorities in the United States and other countries. In the United
States, drugs are subject to rigorous FDA regulation pursuant to, among other
laws, the Food, Drug and Cosmetic Act or FD&C Act.
The steps ordinarily required before a new pharmaceutical product may
be marketed in the United States include: (i) preclinical tests, (ii) the
submission to the FDA of an Investigational New Drug Application, or IND, which
must be approved before human clinical trials commence; (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
product for its proposed indication; (iv) the submission of a New Drug
Application, or NDA, for a new drug or a Product License Application for a new
biologic to the FDA; and (v) FDA review and approval of the NDA or Product
License Application before any commercial sale or shipment of the product.
Preclinical tests include laboratory evaluation of product formulation and
animal studies (if an appropriate animal model is available) to assess the
potential safety and efficacy of the product. Formulations must be manufactured
according to the FDA's current Good Manufacturing Practice, or GMP,
requirements, and preclinical safety tests must be conducted by laboratories
that comply with FDA's Good Laboratory Practice regulations.
The results of preclinical testing are submitted to the FDA as part of
an IND and are reviewed by the FDA before commencement of human clinical trials.
Clinical trials may begin 30 days after the IND is received, unless the FDA
raises concerns or questions about the conduct of the clinical trials. If
concerns or questions are raised, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials. In some instances, the IND application process can result in
substantial delay and expense. Clinical trials to support NDAs are typically
conducted in three sequential phases, which may overlap and which usually
require several years to complete. A clinical trial may combine the elements of
more than one phase, and often two or more Phase 3 studies are required. The
FDA, upon request through a Special Protocol Assessment, can also provide
specific written guidance on the acceptability of protocol designs for selected
clinical trials.
After successful completion of the required clinical testing, generally
an NDA is submitted. FDA approval of the NDA (as described below) is required
before marketing may begin in the United States. The FDA reviews all NDAs
submitted and may request more information before it accepts the filing. The
review process is often extended significantly by FDA requests for additional
information or clarification. The FDA may refer the application to the
appropriate advisory committee, typically a panel of clinicians, for review,
evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee.
During the review process, the FDA generally will conduct an inspection of the
relevant drug manufacturing facilities and clinical sites to ensure that the
facilities are in compliance with applicable Good Manufacturing Practices
requirements. If FDA evaluations of the NDA application, manufacturing
facilities, and clinical sites are favorable, the FDA may issue either an
approvable letter or a not approvable letter, which contains a number of
conditions that must be met in order to secure approval of the NDA. When and if
those conditions have been met to the FDA's satisfaction, the FDA will issue an
approvable letter, authorizing commercial marketing of the drug for certain
specific indications. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the NDA
or issue a not approvable letter, outlining the deficiencies in the submission
and often requiring additional testing or information. Notwithstanding the
submission of any requested additional data or information in response to an
approvable or not approvable letter, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval. Even if FDA
approval is
9
obtained, a marketed drug product and its manufacturer are subject to continual
review and inspection, and later discovery of previously unknown problems with
the product or manufacturer may result in restrictions or sanctions on such
product or manufacturer, including withdrawal of the product from the market.
The process of developing and obtaining approval for a new
pharmaceutical product within this regulatory framework requires a number of
years and the expenditure of substantial resources. There can be no assurance
that necessary approvals will be obtained on a timely basis, if at all. Delays
in obtaining regulatory approvals could have a material adverse effect on us. If
we fail to comply with applicable regulatory requirements for marketing drugs,
we could be subject to administrative or judicially imposed sanctions such as
warning letters, fines, product recalls or seizures, injunctions against
production, distribution, sales, or marketing, delays in obtaining marketing
authorizations or the refusal of the government to grant such approvals,
suspensions and withdrawals of previously granted approvals, civil penalties and
criminal prosecution of Cellegy, our officers or our employees.
Manufacturing. Each domestic drug manufacturing facility must be
registered with the FDA. Domestic drug manufacturing establishments are subject
to routine inspection by the FDA and other regulatory authorities and must
comply with GMP requirements and any applicable state or local regulatory
requirements. Foreign manufacturing facilities are also subject to periodic FDA
inspections or inspections by foreign regulatory authorities. Among other
things, the FDA may withhold approvals of NDA's or other product applications if
deficiencies are found at the facility. Vendors that supply us finished products
or components used to manufacture, package and label products are subject to
similar regulation and periodic inspection. We have used and intend to continue
to use contract manufacturers that operate in conformance with these
requirements to produce our compounds and finished products in commercial
quantities. We cannot assure you that manufacturing or quality control problems
will not arise at the manufacturing plants of our contract manufacturers or that
such manufacturers will have the financial capabilities or management expertise
to be able to adequately supply product or maintain compliance with the
regulatory requirements necessary to continue manufacturing our products.
Foreign Regulation of Drugs. Whether or not FDA approval has been
obtained, approval of a product by comparable regulatory authorities may be
necessary in foreign countries before the commencement of marketing of the
product in such countries. The approval procedures vary among countries, can
involve additional testing, and the time required may differ from that required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general each country has its own procedures and
requirements, many of which are time consuming and expensive. Under European
Union regulatory systems, a company may submit marketing authorization
applications either under a centralized or decentralized procedure. The
centralized procedure, which is available for medicines produced by
biotechnology or which are highly innovative, provides for the grant of a single
marketing authorization that is valid for European Union member states. This
authorization is called a marketing authorization approval ("MAA"). The
decentralized procedure provides for mutual recognition of national approval
decisions. Under this procedure, the holder of a national marketing
authorization may submit an application to the remaining member states. Within
90 days of receiving the application and assessment report, each member state
must make their own determination regarding approval. This procedure is referred
to as the mutual recognition procedure. There can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. We expect to rely
principally on corporate partners, licensees and contract research
organizations, along with our expertise, to obtain governmental approval in
foreign countries of drug formulations utilizing our compounds.
Other Government Regulation. In addition to regulations enforced by the
FDA, Cellegy is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other similar federal and state
laws regarding, among other things, occupational safety, the use and handling of
radioisotopes, environmental protection and hazardous substance control.
Although we believe that we have complied with these laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, there can be no assurance that Cellegy will not be required to
incur significant costs to comply with environmental and health and safety
regulations in the future. Our research and development involves the controlled
use of hazardous materials, chemicals, and various radioactive compounds.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, Cellegy could
be held liable for any damages that result and any such liability could exceed
our resources.
10
Health Care Reform. In the United States, there have been, and Cellegy
expects there will continue to be, a number of federal and state proposals to
implement cost controls and other health care regulatory measures. Future
legislation could result in a substantial restructuring of the health care
delivery system. While we cannot predict whether any legislative or regulatory
proposals will be adopted or the effect such proposals may have on our business,
the uncertainty of such proposals could have a negative effect on our ability to
raise capital and to identify and reach agreements with potential partners, and
the adoption of such proposals could have an adverse effect on Cellegy. In both
domestic and foreign markets, sales of our therapeutic products, if any, will
depend in part on the availability of reimbursement from third-party payers.
There can be no assurance that our products will be considered cost effective or
that reimbursement will be available. We cannot predict the outcome of any
government or industry reform initiatives or the impact thereof on our financial
position or results of operations.
Competition
The pharmaceutical industry is characterized by extensive research
efforts and rapid and significant technological changes. In the development and
marketing of topical prescription drugs, Cellegy faces intense competition.
Cellegy is much smaller in terms of size and resources than many of its
competitors in the United States and abroad, which include, among others, major
pharmaceutical, chemical, consumer product, and biotechnology companies,
specialized firms, universities and other research institutions. Cellegy's
competitors may succeed in developing technologies and products that are safer,
more effective or less costly than any which are being developed by us that
would render our technology and potential products obsolete and noncompetitive.
Many of these competitors have substantially greater financial and technical
resources, clinical production and marketing capabilities and regulatory
experience than we have. In addition, Cellegy's products, if commercialized, are
subject to competition from existing products. Cellegesic, which is a
prescription product, is expected to compete with over-the-counter products,
such as Preparation H marketed by Wyeth, and various other prescription
products. Cellegy's Fortigel product, if commercialized, is expected to compete
with a currently marketed transdermal patch product sold by Watson
Pharmaceuticals, two transdermal testosterone gel products marketed by
Unimed/Solvay and Auxilium Pharmaceuticals and a buccal tablet marketed by
Columbia Laboratories. As a result, we cannot assure you that Cellegy's products
under development will be able to compete successfully with existing products or
possible generic products under development by other organizations.
Therapies for sexual dysfunction and women's health products represent
a large market opportunity, especially as the overall population continues to
age, and many large companies currently market and are developing a wide variety
of products in these markets. As the size of the market continues to grow,
competition will expand. The approval and marketing of competitive products and
other products that treat the indications targeted by Cellegy could adversely
affect the market acceptance of Cellegy's products. The presence of directly
competitive products could also result in more intense price competition than
might otherwise exist, which could have a material adverse effect on Cellegy. We
believe there are other pharmaceutical companies that are developing
prescription testosterone replacement products for women, other generic
manufacturers developing testosterone replacement products for men, and that
competition will be intense for all of its female and male sexual dysfunction
product candidates.
Employees
As of March 21, 2004, we had seventeen full-time and three part-time
employees. Eleven of these employees, including one M.D. and three Ph.D.'s, are
engaged in clinical research and development. In addition, we utilize the
services of several professional consultants, as well as contract manufacturing
and clinical research organizations to supplement our internal staff's
activities. None of our employees are represented by a labor union. We have
experienced no work stoppages and we believe that our employee relations are
good.
Available Information
We are subject to the reporting requirements under the Securities
Exchange Act of 1934. Consequently, we are required to file reports and
information with the Securities and Exchange Commission (SEC), including reports
on the following forms: annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. These reports and other information concerning us may be obtained at the
SEC's Public Reference Room at
11
450 Fifth Street, N.W., Washington, D.C. 20549 or accessed through the SEC's
website at http://www.sec.gov. The SEC's Public Reference Room phone number is
1-800-SEC-0330. In addition, electronic copies of our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are posted to our website
(www.cellegy.com). Such filings are placed on our website as soon as reasonably
possible after they are filed with the SEC.
ITEM 2: PROPERTIES
Cellegy currently leases 65,340 square feet of space located in South
San Francisco, California with an estimated total 2004 rental cost of
approximately $109,000 per month or $1,311,000 for 2004. Approximately 49,920
square feet of this space is currently subleased to one tenant with estimated
2004 offsetting total rental income of approximately $98,000 per month or
$1,176,000 for 2004. We believe our current facilities will be adequate for our
needs for expansion for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
Except as described below, Cellegy is not a party to any material legal
proceedings.
In December 2002, Cellegy entered into an exclusive license agreement
with PDI, Inc. ("PDI") to commercialize Fortigel in North American markets.
Under the terms of the agreement, PDI's Pharmaceutical Products Group is
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 is entitled to receive a milestone
payment on FDA approval and royalties following a successful product launch.
Cellegy is responsible for supplying finished product to PDI through Cellegy's
contract manufacturer. In July 2003, the FDA issued a Not Approvable letter for
our Fortigel NDA. In October 2003, Cellegy announced that it received a
mediation notice from PDI. The dispute resolution provisions of the license
agreement require non-binding mediation before either party may initiate further
legal proceedings. The communication asserted several claims relating to the
agreement, including Cellegy's breach of several provisions of the agreement and
failure to disclose relevant facts, and PDI claimed several kinds of alleged
damages, including return of the initial license fee that PDI paid to Cellegy
when the agreement was signed. The parties subsequently conducted mediation as
contemplated by the agreement but did not reach any resolution of the claims.
In December 2003, Cellegy and PDI then both initiated legal proceedings
against each other relating to the agreement. Cellegy filed a declaratory
judgment action in federal district court in San Francisco against PDI, and PDI
initiated an action in federal district court in New York against Cellegy. In
its action, Cellegy seeks, among other things, a declaration that it has fully
complied with the license agreement and that PDI's claims are without merit.
There can be no assurances regarding the outcome of either proceeding. The
Company could be required to devote significant time and resources to the
proceedings, and an adverse outcome could have a material adverse impact on our
business and financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the
fourth quarter of the year ended December 31, 2003.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
K. Michael Forrest 60 President and Chief Executive Officer,
Director
John J. Chandler 62 Vice President, Corporate Development
A. Richard Juelis 55 Vice President, Finance and Chief Financial
Officer
David A. Karlin, M.D. 60 Vice President, Clinical Research
K. Michael Forrest. Mr. Forrest has been President, CEO, and a director
since December 1996. He also held the position of the Chairman of the Board from
May 2000 to November 2003. From January 1996 to November
12
1996, he served as a biotechnology consultant. From November 1994 to December
1995, he served as President and CEO of Mercator Genetics, a private
biotechnology company. From March 1991 to June 1994, he served as President and
CEO of Transkaryotic Therapies, Inc., a public biotechnology company. From 1968
to 1991, Mr. Forrest held a series of positions with Pfizer, Inc. and senior
management positions with American Cyanamid, including Vice President of Lederle
U.S. and Lederle International. He is a director of INEX Pharmaceuticals, a
public company developing anti-cancer products. Mr. Forrest holds a B.S. in
Business Administration from Georgetown University, with concentrations in
Marketing, Finance and Economics.
John J. Chandler. Mr. Chandler became Vice President, Corporate
Development in May 1998. From January 1995 to March 1998, he served as Vice
President, Europe for the Medical Device Division of American Home Products, now
Wyeth. During 1994, he was Area Director, Europe/Latin America for Wyeth. From
1968 to 1993, he held a series of management and senior management positions
with American Cyanamid Company. Mr. Chandler holds an M.B.A. in Marketing from
Seton Hall University and a B.S. in Biology from the Queens College of the City
University of New York.
A. Richard Juelis. Mr. Juelis became Vice President, Finance and Chief
Financial Officer in November 1994. From October 1990 to September 1994 he
served as Vice President, Finance and Chief Financial Officer for two other
publicly-traded biotechnology companies. Mr. Juelis has also held domestic and
international financial and general management positions for seven years each
with Hoffmann-LaRoche and Schering-Plough. He holds a B.S. in Chemistry from
Fordham University and an M.B.A. from Columbia University.
David A. Karlin, M.D. Dr. Karlin joined Cellegy as Vice President,
Clinical Research in October 2002. From February 2002 to July 2002, he served as
Vice President, Clinical Development for Genteric, Inc., a privately held
company specializing in gene therapy. From August 1999 to October 2001, Dr.
Karlin was Senior Medical Director at Matrix Pharmaceuticals, a cancer and drug
delivery company. He was Vice President, Clinical Research at SciClone
Pharmaceuticals from 1995 to 1999. Prior to SciClone, Dr. Karlin held various
positions at Syntex Corporation over a nine-year period. Before joining the
pharmaceutical industry, Dr. Karlin was an Associate Professor at Temple
University School of Medicine and an Assistant Professor at University of Texas
M.D. Anderson Hospital and Tumor Institute. He was an instructor at the
University of Chicago, where he received his medical degree, and had
Gastroenterology and Gastrointestinal Oncology training at that University.
Executive officers are chosen by and serve at the discretion of the
Board of Directors, subject to any written employment agreements with Cellegy.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Cellegy's common stock currently trades on The Nasdaq Stock Market
under the symbol "CLGY." The following table sets forth the range of high and
low sales prices for the common stock as reported on The Nasdaq Stock Market for
the periods indicated below.
2002 High Low
- ---- ---- ---
First Quarter........................................ $ 8.80 $ 5.15
Second Quarter....................................... 6.90 2.02
Third Quarter........................................ 2.44 1.66
Fourth Quarter....................................... 4.35 1.50
2003
- ----
First Quarter........................................ $ 5.60 $ 3.71
Second Quarter....................................... 5.54 3.81
Third Quarter........................................ 5.22 2.25
Fourth Quarter....................................... 3.20 2.45
13
Holders
As of March 21, 2004, there were approximately 450 shareholders of
record excluding beneficial holders of stock held in street name.
Dividend Policy
We have never paid cash or declared dividends on our common stock. We
do not anticipate that we will declare or pay cash dividends on our common stock
in the foreseeable future. We currently intend to retain our earnings, if any,
for future growth. Future dividends on our common stock or other securities, if
any, will be at the discretion of our board of directors and will depend on,
among other things, our operations, capital requirements and surplus, general
financial condition, contractual restrictions and such other factors as our
board of directors may deem relevant.
Information with respect to equity compensation plans, including both
stockholder approved plans and non-stockholder approved plans, is included in
Item 12.
ITEM 6: SELECTED FINANCIAL DATA
The following unaudited selected historical information has been
derived from audited consolidated financial statements of Cellegy. The financial
information as of December 31, 2003 and 2002 and for each of the three years in
the period ended December 31, 2003 are derived from our audited consolidated
financial statements included elsewhere in this Form 10-K. The financial
statements, related Notes thereto, and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K should be read carefully.
Years ended December 31,
----------------------------------------------------------------
Statements of Operations Data: 2003 2002 2001 2000 1999
(In thousands, except per share data) -------- -------- -------- -------- --------
(Restated)
Revenues ..................................................... $ 1,620 $ 1,402 $ 877 $ 1,586 $ 1,045
Costs and expenses (1) ....................................... 15,512 17,163 21,847 13,573 10,847
-------- -------- -------- -------- --------
Operating loss ............................................... (13,892) (15,761) (20,970) (11,987) (9,802)
Other income (expense) ....................................... 360 520 1,505 569 501
-------- -------- -------- -------- --------
Net loss ..................................................... $(13,532) $(15,241) $(19,465) $(11,418) $ (9,301)
-------- -------- -------- -------- --------
Basic and diluted net loss per common
share ........................................................ $ (0.68) $ (0.86) $ (1.26) $ (0.91) $ (0.85)
======== ======== ======== ======== ========
Weighted average common shares used in computing basic
and diluted net loss per common share
19,964 17,643 15,503 12,542 10,914
14
(1) For the year ended December 31, 2003, Cellegy recorded total non-cash
compensation of $579,000 associated primarily with the modification of certain
stock options and bonuses paid in stock.
For the year ended December 31, 2002, Cellegy recorded net non-cash credits of
$504,000 of which non-cash compensation expense totaled $322,000. These were
more than offset by a non-cash credit of $826,000 relating to the termination of
the Ventiv Health marketing and sales agreement for Cellegesic in the third
quarter of 2002.
During the year ended December 31, 2001, we recorded non-cash charges totaling
$4,257,000, consisting of $3,507,000 for in-process research and development
associated with the Vaxis acquisition and $750,000 in non-cash charges for two
milestones paid in Cellegy stock to Neptune Pharmaceuticals.
Data for 2002 has been adjusted in a Form 10-K/A filing in March 2004 to reflect
the Company's adjustment to the accounting treatment associated with certain
employee and director stock options that had been cancelled in the fourth
quarter of 2002. See also Note 13 to the Financial Statements. The adjustment
reversed $695,000 of non-cash expense previously recorded in the fourth quarter
of 2002 related to the intrinsic value of the vested options.
Quarterly Statements of Operations Data (unaudited):
(in thousands, except for per share data)
2003 (2)
---------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------------------- --------------------- --------------------- ---------- ----------
(Previously (Previously (Previously
reported) (Restated) reported) (Restated) reported) (Restated)
--------- ---------- --------- ---------- --------- ---------- ---------- ----------
Revenues ........................... $ 392 $ 392 $ 263 $ 263 $ 414 $ 414 $ 551 $ 1,620
Operating loss ..................... (2,636) (3,284) (4,769) (4,352) (1,974) (2,676) (3,580) (13,892)
Net loss ........................... (3,132) (3,113) (4,582) (4,165) (1,968) (2,670) (3,584) (13,532)
Basic and diluted net loss
per common share ................... $ (0.16) $ (0.16) $ (0.23) $ (0.21) $ (0.10) $ (0.13) $ (0.18) $ (0.68)
(2) Quarterly financial data for 2003 has been adjusted in amended Form 10-Q/A
filings in March 2004.
2002
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(3) Total
-------- -------- -------- --------- --------
Revenues ................................................ $ 267 $ 150 $ 145 $ 840 $ 1,402
Operating loss .......................................... (4,642) (5,753) (1,756) (3,610) (15,761)
Net loss ................................................ (4,387) (5,624) (1,623) (3,607) (15,241)
Basic and diluted net loss per common share ............. $ (0.25) $ (0.32) $ (0.09) $ (0.20) $ (0.86)
(3) The financial data for the fourth quarter of 2002 has been adjusted in an
amended Form 10-K/A filing in March 2004. The adjustment reversed $695,000 of
non-cash expense previously recorded in the fourth quarter of 2002.
15
December 31,
----------------------------------------------------------------
Balance Sheet Data: 2003 2002 2001 2000 1999
(In thousands) -------- -------- -------- -------- --------
(Restated)
Cash, cash equivalents, restricted cash and investments(4) ... $ 11,564 $ 23,858 $ 17,190 $ 15,923 $ 16,737
Total assets ................................................. 15,331 28,379 22,367 21,259 20,913
Long term portion of deferred revenue ........................ 13,335 14,168 -- -- --
Deficit accumulated during the development stage (5) ......... (99,149) (85,617) (70,377) (50,912) (39,494)
Total shareholders' equity (deficit) ........................ $ (1,580) $ 10,534 $ 19,845 $ 18,794 $ 15,839
(4) Includes restricted cash of $227,500 in 2003 and 2002, and $614,000 in 2001.
(5) The financial data for 2002 has been adjusted in a Form 10-K/A filing in
March 2004. The adjustment reduced the accumulated deficit by $695,000.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report includes forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but are based on current expectations, estimates and
projections about our industry, our beliefs and our assumptions. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. These forward-looking statements are not
guarantees of future performance and concern matters that could subsequently
differ materially from those described in the forward-looking statements. Actual
events or results may also differ materially from those discussed in this Annual
Report. These risks and uncertainties include those described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Operating Results" and elsewhere in this Annual
Report. Except as required by law, we undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this Annual Report.
Cellegy Pharmaceuticals is a development stage specialty
biopharmaceutical company that develops and commercializes prescription drugs
targeting primarily gastrointestinal conditions and sexual dysfunction using
proprietary topical formulations and nitric oxide donor technologies. In January
2004, Cellegy reported positive results from a confirmatory Phase 3 clinical
trial using Cellegesic(TM) (nitroglycerin ointment) for the treatment of chronic
anal fissure pain. We now plan to submit an NDA to the FDA in the second quarter
of this year. We are also developing other prescription drugs, including two
transdermal testosterone gel products: Fortigel for the treatment of male
hypogonadism and Tostrelle for the treatment of sexual dysfunction in menopausal
women.
The Consolidated Financial Statements as of and for the year ended
December 31, 2002 included in this Form 10-K have been restated. For additional
information regarding the restatement, please refer to Note 13 to the
Consolidated Financial Statements included in this Item 8. All applicable
financial information presented in this Item 7 takes into account the effects of
the restatement described in Note 13 to the Consolidated Financial Statements.
16
General
In November 2001, we acquired a private Canadian based company, Vaxis
Therapeutics, valued at $4.1 million. The purchase was payable primarily in
shares of Cellegy stock with the purchase price 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 Cellegy Canada are included
in our consolidated financial statements since the acquisition date.
In September 2002, Cellegy and Ventiv Health, Inc., a leading contract
sales organization, terminated their services and funding Agreements related to
Cellegesic based on the delay in commercialization of Cellegesic due to the
withdrawal of the NDA and Cellegy's subsequent decision to conduct another Phase
3 trial. Cellegy and Ventiv originally signed a six-year Agreement in August
2001 to collaboratively commercialize Cellegesic in the United States. Ventiv
was to have delivered integrated marketing and sales solutions providing
pre-launch support, recruiting and training a sales force which would have been
jointly managed by both companies.
In November 2002, we completed a private placement of 2.2 million
shares of our common stock resulting in approximately $5.5 million of gross
proceeds to Cellegy. The financing was with a single investor, John M. Gregory,
founder and former CEO of King Pharmaceuticals and currently managing partner of
SJ Strategic Investments LLC. Along with shares acquired in other open market
purchases SJ Strategic Investments currently owns 5,828,993 shares or about 29%
of Cellegy's outstanding shares.
In January 2004, Cellegy entered into a Structured Secondary Offering
("SSO") facility agreement with Kingsbridge Capital Limited. The facility
requires Kingsbridge to purchase up to 3.74 million shares of newly issued
common stock at times and in amounts selected by Cellegy over a period of up to
two years, subject to certain restrictions.
Critical Accounting Policies and Estimates
Use of Estimates. The preparation of consolidated financial statements,
in conformity with accounting principles generally accepted in the United
States, requires management to make estimates, judgements and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. We have identified below some
of our more significant accounting policies. For further discussion of our
accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements.
Revenue Recognition. Revenues related to cost reimbursement provisions
under development contracts are recognized as the costs associated with the
projects are incurred. Revenues related to substantive and at risk
non-refundable milestones specified under development contracts are recognized
as the milestones are achieved. Cellegy has received certain government grants
that support our research effort in defined research projects. These grants
generally provide for reimbursement of approved costs incurred as defined in the
various grants. Revenues associated with these grants are recognized as costs
under each grant are incurred. Revenues related to product sales are recognized
upon shipment when title to the goods and risk of loss have been transferred to
the customer. There is no right of return for our skin care product sales.
Up-front payments, such as the $15.0 million payment received from PDI
for the Fortigel license, are recorded as deferred revenue at the time the cash
is received. Amounts are recognized as revenue on a straight-line basis over the
longer of the life of the contract or the service period. Royalties payable to
Cellegy under the PDI License Agreement will be recognized as earned when the
royalties are no longer refundable to PDI under certain minimum royalty terms
defined in the agreement.
Long-Lived and Intangible Assets and Goodwill. Goodwill and other
intangible assets are included in our December 31, 2003 balance sheet.
Management reviews goodwill for impairment either on an annual basis or
quarterly if an event occurs that might reduce the fair value of the long-lived
asset below its carrying value. All other long-lived and intangible assets are
reviewed for impairment whenever events or circumstances indicate that the
17
carrying amount of the asset may not be recoverable. An impairment loss would be
recognized based on the difference between the carrying value of the asset and
its estimated fair value, which would be determined based on either discounted
future cash flows or other appropriate fair value methods. The evaluation of
goodwill and other intangibles for impairment requires management to use
significant judgments and estimates including, but not limited to, projected
future revenue, operating results and cash flows.
Although management currently believes that the estimates used in the
evaluation of goodwill and other intangibles are reasonable, differences between
actual and expected revenue, operating results and cash flow could cause these
assets to be deemed impaired. Based on management's analysis, no impairment was
deemed to have occurred through December 31, 2003. If an impairment were to
occur, Cellegy would be required to charge to earnings the write-down in value
of such assets, which could have a material adverse effect on our results of
operations and financial position.
Clinical Trial Expenses. Clinical trial expenses are payable to
clinical sites and clinical research organizations. Expenses for both of these
groups are accrued based on actual activity including such factors as the number
of subjects enrolled and number of subjects that have completed treatment for
each trial. A monthly reconciliation of costs accrued to cost incurred is
performed by Cellegy's clinical project managers and the finance department.
Investment Policy. Cellegy is subject to certain credit risks from our
investment in marketable securities. By policy, we restrict amounts invested by
investment type and by issuer, except for securities issued by the United States
government. Cellegy has an investment policy that has been approved and is
periodically reviewed by our Audit Committee. The policy states that investments
must be highly liquid with maturities of less than three years. Cellegy's policy
limits investments to the following: direct obligations of the United States
Government or fully guaranteed by a government agency or by any of the states.
Non-government investments must have a rating of A1/P1 or A by Standard and
Poors (or an equivalent rating); money market instruments must be a member of
the Federal Reserve System with a net worth of at least $100 million and a
rating of A1/AA by Standard and Poors (or equivalent rating).
Results of Operations
Years Ended December 31, 2003, 2002 and 2001
Revenues. Cellegy had revenues of $1,620,000, $1,402,000 and $877,000
in 2003, 2002 and 2001, respectively. Revenues in 2003 consisted of $385,000 in
Australian Rectogesic ointment sales, $67,000 in initial Rectogesic sales in
South Korea, $316,000 in skin care product sales to Gryphon Development, the
product development arm of a major specialty retailer, $19,000 in Canadian
government grants and $833,000 in licensing revenue for Fortigel. Revenues in
2002 consisted of $275,000 in Australian Rectogesic sales, $1,081,000 in product
sales primarily to Gryphon and $46,000 in Canadian government grants. Revenues
in 2001 were comprised of $217,000 in Australian Rectogesic sales and $660,000
in Gryphon sales.
Rectogesic revenues in Australia increased 40% in 2003, compared with
2002 following a 27% year over year increase in 2002 compared with 2001. The
Company believes it has the potential to continue to gain market share and
increase revenues in the future. Rectogesic was launched in the fourth quarter
of 2003 in South Korea. We are not yet able to assess the market acceptance and
revenue potential in South Korea. Skin Care moisturizer sales to Gryphon
decreased by $765,000 or about 71% in 2003, compared with 2002. Gryphon sales
will likely continue to fluctuate from period to period depending on their
seasonal ordering patterns. We do not now expect any Gryphon sales orders
through, at least, the first quarter of 2004. In 2003, Cellegy recorded total
licensing revenue of $833,000 from PDI, with about $208,000 realized in each of
the four quarters of 2003 reflecting the amortization over the expected
commercial life of Fortigel of the initial $15.0 million received from PDI on
the agreement date in December 2002. The Company expects the balance to be
recorded as licensing revenue at the same quarterly rate in subsequent periods.
See also Item 3: "Legal Proceedings."
Research and Development Expenses. Research and development expenses
were $10,558,000 in 2003, compared with $10,403,000 in 2002 and $14,098,000 in
2001. Total research and development expenses, which are
18
primarily related to the costs of clinical trials and regulatory filings,
represented 69%, 62% and 65% of our total operating expenses in 2003, 2002 and
2001, respectively. Total research and development expenses in 2003, compared
with 2002, increased by $155,000 or about 2%. The increase was due to clinical
expenses relating to the completion of a third Phase 3 Cellegesic clinical
trial, primarily in the second half of 2003, as well as the write down of
certain tenant improvements in our South San Francisco facility. These expenses
were partially offset by Fortigel Phase 3 clinical trial costs and FDA user fees
associated with the Fortigel NDA filing in 2002. Total research and development
expenses in 2002, compared with 2001, decreased by $3,695,000 or about 26%. The
decrease was due to higher spending levels associated with a second Cellegesic
Phase 3 clinical trial and other clinical trials in 2001 and non-cash charges of
$750,000 relating to Cellegesic milestone payments made in stock to Neptune
Pharmaceuticals in 2001. In addition, during the second half of 2002, we
eliminated our domestic research operations and reduced our research staff. We
have continued to operate at these reduced staffing levels through 2003.
Current research and development expenses consist primarily of internal
salaries and allocated costs as well as external clinical costs, including:
clinical site payments, costs of manufacturing, testing and shipping clinical
supplies and service fees to clinical research organizations ("CROs") that
monitor the clinical sites and perform other related trial support services.
Additionally, research expenses consist of regulatory costs, including the cost
of filing product approval applications around the world, particularly NDAs in
the United States, and the costs of various functional consultants to support
the filings. We expect our clinical trial and regulatory filing expenses to
continue to constitute the majority of our operating expenses in 2004. Excluding
non-cash compensation expenses, we anticipate that our research and development
expenses will decline during the first half of 2004 and increase thereafter with
total 2004 clinical and regulatory expenses at about the 2003 level. Additional
increases in clinical trial and regulatory filing expenses may occur if the FDA
requires extensive additional clinical trials to support Fortigel marketing
approval.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4,768,000 in 2003, compared with $6,390,000 in
2002, and $4,042,000 in 2001. Total selling, general and administrative expenses
in 2003 decreased by $1,622,000 or about 25%, compared with 2002 and were in
turn $2,348,000 higher in 2002, compared with 2001. The higher spending level in
2002, compared with both 2003 and 2001, resulted primarily from Cellegesic
pre-launch sales and marketing expenses of $2,094,000 in the first half of 2002.
In addition, we incurred certain higher non-cash compensation expenses and
investment banking fees in 2002.
Our selling, general and administrative expenses are expected to
increase in the later half of 2004 in support of our business development
programs and product commercialization efforts for Cellegesic, assuming a
favorable response from the FDA on the Cellegesic NDA that we plan to file in
the second quarter of 2004.
Non-cash Charges and Credits. Operating expenses for 2003, 2002 and
2001 were impacted by various non-cash charges and credits. Some of the non cash
compensation charges are subject to periodic remeasurements and ongoing charges
and credits are expected to vary in subsequent quarters.
Acquired-In-Process Research and Development. There were no
acquired-in-process research and development expenses for 2003 and 2002.
Acquired-in-process research and development expenses of $3,507,000 were
incurred during 2001 as a result of the Vaxis acquisition.
Other Income (Expense). Cellegy recognized a net interest and other
income of $360,000 for 2003, compared with net interest and other income of
$521,000 and $1,505,000 for 2002 and 2001, respectively. The net interest and
other income in 2003 consisted of $212,000 in interest income from cash and
investments and $148,000 in rental and other income. In 2002, other income
consisted primarily of $342,000 in interest income from cash and investments,
$119,000 in rental income and a gain of $87,000 from disposal of certain
laboratory equipment, offset by interest expense of $27,000. In 2001, other
income was comprised of $635,000 in interest income on cash and investments and
$897,000 in rental income, offset by interest expense of $27,000. Reductions in
interest income over the last three years were due to lower average investment
balances and interest rates. Interest expenses for 2002 and 2001 were related to
the Ventiv loan and a commercial bank loan, respectively. Cellegy incurred no
interest expense in 2003.
Net Loss. The net loss in 2003 was $13,532,000 or $0.68 per share based
on 19,964,000 weighted average shares outstanding, compared with a net loss in
2002 of $15,241,000 or $0.86 per share based on 17,643,000 weighted average
shares outstanding, and a net loss in 2001 of $19,465,000 or $1.26 per share
based on 15,503,000 weighted average shares outstanding.
19
Liquidity and Capital Resources
We have experienced net losses from operations each year since our
inception. Through December 31, 2003, we had incurred an accumulated deficit of
$99.1 million and had consumed cash from operations of $65.6 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, restricted cash and investments were $11.6 million at
December 31, 2003 compared with $23.9 million at December 31, 2002 and $17.2
million at December 31, 2001, including $227,000 of restricted cash in 2003 and
2002 and $614,000 of restricted cash, at year end 2001. The increase in cash,
restricted cash and investments of $6.7 million in 2002 was principally due to
the net proceeds from the $5.2 million financing completed in November and $15.0
million in payments from the licensing agreement with PDI in December, partially
offset by other net cash used in operating activities of approximately $13.5
million. Cash, restricted cash and investments decreased by $12.3 million in
2003 principally due to cash used in support of operating activities of $12.5
million. The Company did not complete any financings in 2003.
During the fourth quarter of 2003 our cash, restricted cash and
investment balance declined by $2.9 million. This is in line with Cellegy's goal
to preserve cash and focus on key clinical and product development programs. We
expect our cash use for the first quarter of 2004 to be at approximately the
same monthly level as in the fourth quarter of 2003. Our cash needs throughout
the rest of 2004 are expected to decrease due to a reduction in clinical trial
activity followed by an increase in cash use in 2005. 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 progress and outcome of the Cellegy/PDI
litigations, the costs of filing, prosecuting, defending and enforcing patent
claims, oppositions and appeals, our ability to establish new collaborative
arrangement and the initiation of commercialization activities and working
capital increases associated with the scale up and manufacture of Cellegesic.
At December 31, 2003, the Company had a deficit accumulated during the
development stage of $99.1 million. The Company expects negative cash flow from
operations to continue for at least the next two years, with the need to
continue or expand their development programs and to commercialize products once
regulatory approvals have been obtained. Management believes that its existing
cash balances will be sufficient to meet the Company's capital and operating
requirements through December 31, 2004.
However, expenditures required to achieve the Company's growth and
profitability in the long term may be greater than projected or the cash flow
generated from operations may be less than projected. As a result, the Company's
long-term capital needs may require the Company to seek to obtain additional
funds through equity or debt financing, collaborative or other arrangements with
other companies, bank financing and other sources. There can be no assurance
that the Company will be able to obtain additional debt or equity financing on
terms acceptable to the Company, or at all. If adequate funds are not available,
the Company could be required to delay development or commercialization of
certain products, to license to third parties the rights to commercialize
certain products that the Company would otherwise seek to commercialize
internally, or to reduce resources devoted to product development. Accordingly,
the failure of the Company to obtain sufficient funds on acceptable terms when
needed could have a material adverse effect on the Company's ability to achieve
its longer term business objectives.
In the fourth quarter of 1998, we entered into a ten-year operating
lease commitment on our facility with our current landlord. Our operating lease
commitments are $1,337,000 for 2004 and $5,700,000 thereafter in annual amounts
of approximately $1.3 to $1.5 million. Information about this commitment as of
December 31, 2003 is presented in the table below (in thousands):
Contractual
Obligations Total 2004 2005 2006 2007 2008
------ ------ ------ ------ ------ ------
Operating lease $7,037 $1,337 $1,377 $1,415 $1,433 $1,475
We sublease a portion of our facility and receive rental income from
our sublease. Future sublease income is approximately $1,176,000 for 2004 and
$4,843,000 thereafter in annual amounts of approximately $1.0 to $1.3 million.
In January 2004, Cellegy entered into a Structured Secondary Offering
("SSO") facility agreement with Kingsbridge Capital Limited. The facility
requires Kingsbridge to purchase up to 3.74 million shares of newly issued
common stock at times and in amounts selected by Cellegy over a period of up to
two years, subject to certain restrictions. Cellegy may begin to draw down funds
after the effectiveness of a registration statement that the Company intends to
file with the Securities and Exchange Commission. The dollar amount of stock
that Cellegy may require Kingsbridge to purchase will depend in part on the
market price of the common stock at the time that the registration statement is
filed and that shares are sold. The agreement does not prohibit Cellegy from
conducting additional debt or equity financings, including PIPEs, shelf
offerings, secondary offerings or any other non-fixed or future priced
securities. The timing and amount of any draw downs are at Cellegy's sole
discretion, subject to certain timing conditions, and are limited to certain
maximum amounts depending in part on the then current market capitalization of
the Company. Kingsbridge is not obligated to purchase shares at market prices
below $1.25 per share. The purchase price of the common stock will be at
discounts ranging from 8% to 12% of the average market
20
price of the common stock prior to each future draw down. The lower discount
applies to higher stock prices. In connection with the agreement, Cellegy issued
warrants to Kingsbridge to purchase 260,000 common shares at an exercise price
of $5.27 per share. Cellegy can, at its discretion and based on its cash needs,
determine how much, if any, of the equity line it will draw down in the future,
subject to the other conditions in the agreement.
In order to complete the research and development and other activities
necessary to commercialize our products, financings in addition to the
Kingsbridge SSO will likely be required. As a result, we may seek private or
public equity investments and future collaborative arrangements or other
transactions with third parties to meet such needs. However, there is no
assurance that financing will be available for us to fund our operations on
acceptable terms, if at all. We believe that available cash resources and the
interest thereon will be adequate to satisfy our capital needs through, December
2004, assuming no material adverse financial impact associated with PDI
litigation and any subsequent legal proceedings.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We do not expect the adoption of EITF issue No. 00-21 to
have a material impact on our financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. During December
2003, the FASB issued FIN 46R, a revision to FIN 46. FIN 46R provides a broad
deferral of the latest date by which all public entities must apply FIN 46 to
certain variable interest entities, to the first reporting period ending after
March 15, 2004. We do not expect the adoption of FIN 46 to have a material
impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability or an asset in some circumstances. Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the issuance
date of SFAS No. 150 and still existing at the beginning of the interim period
of adoption. While the effective date of certain elements of SFAS No. 150 has
been deferred, we do not expect the adoption of SFAS No. 150 to have a material
impact on our financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," which codifies, revises and rescinds certain
sections of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material adverse effect on the Company's financial position
or results of operations.
Factors That May Affect Future Operating Results
Risks Relating to Our Business
We are subject to regulation by regulatory authorities including the FDA, which
could delay or prevent marketing of our products. Unexpected regulatory outcomes
could adversely affect our business and stock price.
21
Cellegy's prescription product candidates, and our ongoing research and
clinical activities such as those relating to our product candidates Cellegesic,
Fortigel and Tostrelle, are subject to extensive regulation by governmental
regulatory authorities in the United States and other countries. Before we
obtain regulatory approval for the commercial sale of our potential drug
products, we must demonstrate through pre-clinical studies and clinical trials
that the product is safe and efficacious for use in the clinical indication for
which approval is sought. The timing of NDA submissions, the outcome of reviews
by the FDA and the initiation and completion of other clinical trials are
subject to uncertainty, change and unforeseen delays. Under the Prescription
Drug User Fee Act ("PDUFA"), the FDA establishes a target date to complete its
review of an NDA. Although the FDA attempts to respond by the relevant PDUFA
date to companies that file NDAs, there is no obligation on the FDA's part to do
so. In addition, extensive current pre-clinical and clinical testing
requirements and the current regulatory approval process of the FDA in the
United States and of certain foreign regulatory authorities, or new government
regulations, could prevent or delay regulatory approval of Cellegy's products.
The process of developing and obtaining approval for a new
pharmaceutical product within this regulatory framework requires a number of
years and substantial expenditures. There can be no assurance that necessary
approvals will be obtained on a timely basis, if at all. Delays in obtaining
regulatory approvals could have a material adverse effect on us. If we fail to
comply with applicable regulatory requirements, we could be subject to a wide
variety of serious administrative or judicially imposed sanctions and penalties,
any of which would materially and adversely affect our business, results of
operations and stock price.
One or more of our ongoing or planned clinical trials could be delayed,
or the FDA could issue a Not Approvable letter with respect to our future NDAs,
as it did with our Fortigel NDA in July 2003. Such actions could result in
further clinical trials or necessitate other time consuming or costly actions to
satisfy regulatory requirements. The FDA may decide to have an Advisory Panel
review the submission of our product candidates with an uncertain outcome of
such panel's recommendation, or take other actions having the effect of delaying
or preventing commercial introduction of our products. Similarly, the FDA or
other regulatory agencies could impose requirements on future trials that could
delay the regulatory approval process for our products. There can be no
assurance that the FDA or other regulatory agencies will find any of our trial
data, including our soon to be filed NDA for Cellegesic or other sections of our
regulatory submissions, sufficient to approve any of our product candidates for
marketing in the United States or in other overseas markets.
In January 2004, Cellegy reported positive results from its
confirmatory Phase 3 study using Cellegesic for the treatment of chronic anal
fissure pain. We now plan to submit an NDA to the FDA in the second quarter of
2004. The trial was conducted according to a Special Protocol Assessment
("SPA"), that was agreed upon by Cellegy and the FDA. An SPA is intended to
provide assurance that if the pre-specified primary endpoint is achieved and no
unexpected results are seen, the FDA will approve the product for commercial
sale. Cellegy believes that it achieved the primary endpoint specified in the
SPA; however, the FDA will conduct its own analysis and may reach a different
conclusion. Failure of the FDA to approve Cellegesic for marketing or imposition
by the FDA of significant additional studies or other requirements before
granting marketing approval, could have a material adverse effect on Cellegy's
business and stock price.
Sales of Cellegy's products outside the United States are subject to
different regulatory requirements governing clinical trials and marketing
approval. These requirements vary widely from country to country and could delay
introduction of Cellegy's products in those countries.
Our clinical trial results are very difficult to predict in advance, and the
clinical trial process is subject to delays. Failure of one or more clinical
trials or delays in trial completion could adversely affect our business and our
stock price.
Results of pre-clinical studies and early clinical trials may not be
good predictors of results that will be obtained in later-stage clinical trials.
We cannot assure you that Cellegy's present or future clinical trials,
including, for example, the Phase 2 study for Tostrelle or the Cellegesic Phase
2 hemorrhoid trial, will demonstrate the results required to continue advanced
trial development and allow us to seek marketing approval for these or our other
product candidates. Because of the independent and blind nature of certain human
clinical testing, there will be extended periods during the testing process when
we will have only limited or no access to information about the
22
status or results of the tests. Cellegy and other pharmaceutical companies have
believed that their products performed satisfactorily in early tests, only to
find their performance in later tests, including Phase 3 clinical trials, to be
inadequate or unsatisfactory, or that FDA Advisory Committees have declined to
recommend approval of the drugs, or that the FDA itself refused approval, with
the result that stock prices have fallen precipitously.
Delays in the clinical trial process can be extremely costly in terms
of lost sales opportunities and increased clinical trial costs. The speed with
which we complete our clinical trials and our regulatory submissions, including
NDAs, will depend on several factors, including the following:
o the rate of patient enrollment, which is affected by the size
of the patient population, the proximity of patients to
clinical sites, the difficulty of the entry criteria for the
study and the nature of the protocol;
o the timely completion of clinical site protocol approval and
obtaining informed consent from subjects;
o analysis of data obtained from preclinical and clinical
activities;
o changes in policies or staff personnel at regulatory agencies
during the lengthy drug application review; and
o the availability of experienced staff to conduct and monitor
clinical studies, internally or through contract research
organizations.
We have a history of losses, and we expect losses to continue for at least
several years. We could be subject to delisting by the Nasdaq National Market.
Our accumulated deficit as of December 31, 2003 was approximately $99.1
million. We have never operated profitably and, given our planned level of
operating expenses, we expect to continue to incur losses through at least 2004.
We plan to increase our operating expenses as we continue to devote significant
resources to pre-clinical studies, clinical trials, administrative, marketing,
sales and patent activities. Accordingly, without substantial revenues from new
corporate collaborations, royalties on product sales or other revenue sources,
we expect to incur substantial operating losses in the foreseeable future as our
potential products move through development, and we continue to invest in
research and clinical trials. Our losses may increase in the future, and even if
we achieve our revenue targets, we may not be able to sustain or increase
profitability on a quarterly or annual basis. The amount of future net losses,
and the time required to reach profitability, are both highly uncertain. To
achieve sustained profitable operations, we must, among other things,
successfully discover, develop, obtain regulatory approvals for and market
pharmaceutical products. We cannot assure you that we will ever be able to
achieve or sustain profitability.
Cellegy's common stock is currently listed on the NASDAQ National
Market. There are several requirements for the continued listing of our common
stock on the NASDAQ National Market, including requirements relating to stock
price and to compliance with certain financial standards. If we fail to satisfy
one or more of the criteria for continued listing and are unable to demonstrate
compliance within the time periods permitted by NASDAQ, our common stock would
be delisted from the NASDAQ National Market and we would likely seek a listing
on the NASDAQ SmallCap Market or some other market. Delisting from the NASDAQ
National Market would have a material adverse effect on our business and stock
price.
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing could affect our ability to develop or market
products.
Throughout our history, we have consumed substantial amounts of cash.
Our cash needs are expected to decrease throughout 2004 due to a reduction in
clinical trial activity followed by an increase in 2005 in order to fund the
additional expenses required to continue or expand our development programs and
to commercialize our products once regulatory approvals have been obtained.
Cellegy has no current source of significant ongoing revenues or capital beyond
existing cash and investments, certain product sales of Rectogesic and skin care
moisturizers and access to funding through the Kingsbridge SSO. The amount of
cash required 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
23
clinical trial requirements to obtain marketing approval of our Fortigel product
candidate, the costs of filing, prosecuting, defending and enforcing our
intellectual property rights, the outcome of the PDI litigation, and legal costs
and/or potential settlement payments associated with these legal proceedings. In
order to complete the development, manufacturing and other pre-launch marketing
activities necessary to commercialize our products, additional financing will be
required.
In addition to the Kingsbridge SSO facility, Cellegy may seek private
or public equity investments and future collaborative arrangements with third
parties to help fund future cash 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. Under certain circumstances we could be prevented from or be
limited in fully utilizing planned funding from the Kingsbridge SSO.
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. In addition, Cellegy
would be subject to de-listing by the NASDAQ National Market if certain
financial standards are not maintained. Cellegy believes that available cash
resources and interest earned thereon will be adequate to satisfy its capital
needs through December 2004, assuming no material adverse financial impact
associated with PDI litigation and any subsequent legal proceedings.
The type and scope of patent coverage we have may limit the commercial success
of our products.
Cellegy's success depends, in part, on our ability to obtain patent
protection for our products and methods, both in the United States and in other
countries. Several of Cellegy's products and product candidates, such as
Cellegesic, Fortigel and Tostrelle, are based on existing molecules with a
history of use in humans but which are being developed by us for new therapeutic
uses or in novel delivery systems which enhance therapeutic utility. We cannot
obtain composition patent claims on the compounds themselves, and will instead
need to rely on patent claims, if any, directed to use of the compound to treat
certain conditions or to specific formulations. This is the case, for example,
with our United States patents relating to Cellegesic and Fortigel. Such
method-of-use patents may provide less protection than a composition-of-matter
patent, because of the possibility of "off-label" use of the composition.
Cellegy may not be able to prevent a competitor from using a different
formulation or compound for a different purpose.
No assurance can be given that any additional patents will be issued to
us, that the protection of any patents that may be issued in the future will be
significant, or that current or future patents will be held valid if
subsequently challenged. For example, oppositions have been filed with the
European Patent Office regarding our European patent protecting the manufacture
and use of nitroglycerin ointment and related compounds for the treatment of
anal disorders, including fissures and various hemorrhoidal conditions. In
December 2003, we reported that the Board of Opposition of the European Patent
Office had rendered a verbal decision revoking Cellegy's European patent
relating to its Cellegesic product and related compounds for the treatment of
anal disorders, including fissures and various hemorrhoidal conditions. Although
Cellegy intends to appeal this decision, an additional adverse outcome in the
appeal process could have a negative effect on Cellegy, impacting the success of
our marketing and corporate licensing efforts in Europe and adversely affecting
our business and stock price.
The patent position of companies engaged in businesses such as
Cellegy's business generally is uncertain and involves complex legal and factual
questions. There is a substantial backlog of patent applications at the United
States Patent and Trademark Office ("USPTO"). Patents in the United States are
issued to the party that is first to invent the claimed invention. There can be
no assurance that any patent applications relating to Cellegy's products or
methods will issue as patents, or, if issued, that the patents will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide us a competitive advantage.
In addition, many other organizations are engaged in research and
product development efforts in drug delivery and topical formulations that may
overlap with Cellegy's products. Such organizations may currently have, or may
obtain in the future, legally blocking proprietary rights, including patent
rights, in one or more products or methods under development or consideration by
Cellegy. These rights may prevent us from commercializing technology, or may
require Cellegy to obtain a license from the organizations to use the
technology. Cellegy may not be able to obtain any such licenses that may be
required on reasonable financial terms, if at all, and cannot be sure that the
patents underlying any such licenses will be valid or enforceable. Moreover, the
laws of certain foreign countries do
24
not protect intellectual property rights relating to United States patents as
extensively as those rights are protected in the United States. The issuance of
a patent in one country does not assure the issuance of a patent with similar
claims in another country, and claim interpretation and infringement laws vary
among countries, so the extent of any patent protection is uncertain and may
vary in different countries. As with other companies in the pharmaceutical
industry, we are subject to the risk that persons located in other countries
will engage in development, marketing or sales activities of products that would
infringe our patent rights if such activities were in the United States.
Our product sales strategy involving corporate partners is highly uncertain.
Cellegy is seeking to enter into agreements with corporate partners
regarding commercialization of our lead product candidates. Besides the Fortigel
license agreement with PDI, which is currently subject to litigation between the
parties, Cellegy currently has a limited number of other agreements with third
parties to commercialize our product candidates. Cellegy may not be able to
establish other collaborative arrangements and we may not have the resources or
the experience to successfully commercialize any such products on our own,
particularly in overseas markets. Failure to enter into other arrangements could
prevent, delay or otherwise have a material adverse effect on our ability to
develop and market products, including our Cellegesic product in the United
States, and our Tostrex and Rectogesic products, in markets outside of North
America.
With the current and future planned corporate partner arrangements, we
may rely on our partners to conduct clinical trials, obtain regulatory approvals
and, if approved, manufacture, distribute, market or co-promote these products.
Reliance on third party partners can create risks to our product
commercialization efforts. Once agreements are completed, particularly if they
are completed at a relatively early stage of product development, Cellegy may
have little or no control over the development or marketing of these potential
products and little or no opportunity to review clinical data before or after
public announcement of results. Further, any arrangements that may be
established may not be successful or may be subject to dispute or litigation
between the parties.
In October 2003, Cellegy announced that it had received a communication
on behalf of PDI invoking mediation procedures under the exclusive license
agreement between PDI and Cellegy relating to Fortigel. The dispute resolution
provisions of the agreement required non-binding mediation before either party
could initiate further legal proceedings. Mediation proceedings were completed
in early December 2003, after which both PDI and Cellegy initiated litigation
proceedings. Although Cellegy believes PDI's claims are without merit, there can
be no assurances regarding the outcome of any such proceedings, or any potential
counterclaims by PDI, and the Company could be required to devote significant
time and resources to the proceedings. An adverse outcome in any such proceeding
could have a material adverse financial impact on Cellegy.
We do not have any history of manufacturing products, and we have a limited
number of critical suppliers.
Cellegy has no direct experience in manufacturing commercial quantities
of products and currently does not have any capacity to manufacture products on
a large commercial scale. We currently rely on a limited number of contract
manufacturers, primarily PendoPharm Inc., and certain other suppliers to
manufacture our formulations. Although we are developing other contract
manufacturers, there can be no assurance that we will be able to enter into
acceptable agreements with them or successfully validate their facilities on a
timely basis. In the future, we may not be able to obtain contract manufacturing
on commercially acceptable terms for compounds or product formulations in the
quantities we need. Manufacturing or quality control problems, lack of financial
resources or qualified personnel could occur with our contract manufacturers
causing product shipment delays, inadequate supply, or causing the contractor
not to be able to maintain compliance with the FDA's current good manufacturing
practice requirements necessary to continue manufacturing. Such problems could
limit our ability to produce clinical or commercial product and otherwise
adversely affect Cellegy's business and stock price.
In July 2003, PanGeo Pharma, Cellegy's major contract manufacturer,
filed for bankruptcy protection under Canadian law. Under a re-organization
plan, PanGeo sold its facilities to an affiliate of Pharmasciences, another
Canadian manufacturer, and was re-named PendoPharm Inc. Uncertainty exists
concerning the future operations of the manufacturing plant that is used to
manufacture products for Cellegy, and there can be no assurance that PendoPharm
will be able to meet Cellegy's clinical and product requirements on a timely
basis, if at all, in the future. Cellegy is engaged in establishing production
arrangements at a domestic location, although this is an expensive and
25
time consuming process. There may be delays and additional costs relating to the
technical transfer and validation of alternate suppliers.
We currently have no drug products we sell on our own and have limited sales and
marketing experience.
We may market certain of our products, if successfully developed and
approved, through a direct sales force in the United States and through sales
and marketing partnership or distribution arrangements outside the United
States. Cellegy has very limited experience in sales, marketing or distribution.
To market certain of our products directly, we may establish a direct sales
force in the United States or obtain the assistance of our marketing partner. If
we enter into marketing or licensing arrangements with established
pharmaceutical companies, our revenues will be subject to the terms and
conditions of such arrangements and will be dependent on the efforts of our
partner. Cellegy may not have the financial capability to successfully establish
a direct sales force or our collaborators may not effectively market our
products. Either circumstance could have a material adverse effect on the
successful commercialization of our products and ultimate profitability.
We have very limited staffing and will continue to be dependent upon key
employees.
Our success is dependent upon the efforts of a small management team
and staff. We have employment agreements and a severance/retention plan in place
with certain executives, but none of our executives are legally bound to remain
employed for any specific term. If key individuals leave Cellegy, we could be
adversely affected if suitable replacement personnel are not quickly recruited.
Our future success depends upon our ability to continue to attract and retain
qualified scientific, clinical, marketing and administrative personnel. There is
competition for qualified personnel in all functional areas, which makes it
difficult to attract and retain the qualified personnel necessary for the
development and growth of our business.
Risks Relating to Our Industry
We face intense competition from larger companies, and in the future Cellegy may
not have the resources required to develop innovative products. Cellegy's
products are subject to competition from existing products.
The pharmaceutical industry is subject to rapid and significant
technological change. In the development and marketing of prescription drugs,
Cellegy faces intense competition. Cellegy is much smaller in terms of size and
resources than many of its competitors in the United States and abroad, which
include, among others, major pharmaceutical, chemical, consumer product,
specialty pharmaceutical and biotechnology companies, universities and other
research institutions. Cellegy's competitors may succeed in developing
technologies and products that are safer and more effective than any that we are
developing and could render Cellegy's technology and potential products obsolete
and noncompetitive. Many of these competitors have substantially greater
financial and technical resources, clinical production and marketing
capabilities and regulatory experience. In addition, Cellegy's products are
subject to competition from existing products. For example, Cellegy's Fortigel
product, if ever commercialized in the United States, is expected to compete
with two currently marketed testosterone gel products sold by Unimed/Solvay and
Auxilium Pharmaceuticals, a transdermal patch product sold by Watson
Pharmaceuticals, a Buccal tablet from Columbia Laboratories and potential
generic products which may be introduced before or after Fortigel is
commercialized.
Cellegy's Cellegesic product, if commercialized, is expected to compete
with over-the-counter products, such as Preparation H marketed by Wyeth, and
various prescription products. As a result, we cannot assure you that Cellegy's
products under development will be able to compete successfully with existing
products or innovative products under development by other organizations.
We are subject to the risk of product liability lawsuits.
The testing, marketing and sale of human health care products entails
an inherent risk of allegations of product liability. We are subject to the risk
that substantial product liability claims could be asserted against us in the
future. Cellegy has obtained $5 million in insurance coverage relating to our
clinical trials. There can be no assurance that Cellegy will be able to obtain
or maintain insurance on acceptable terms, particularly in overseas locations,
for
26
clinical and commercial activities or that any insurance obtained will provide
adequate protection against potential liabilities.
Risks Relating to Our Stock
Our stock price could be volatile.
Our stock price has from time to time experienced significant price and
volume fluctuations. Since becoming a public company, our stock price has
fluctuated in conjunction with the Nasdaq Stock Market generally and sometimes
on matters more specific to Cellegy, such as an announcement of clinical trial
or regulatory results or other corporate developments. Announcements that could
significantly impact our stock price include:
o Publicity or announcements regarding regulatory developments
relating to our products particularly Fortigel and Cellegesic;
o Clinical trial results, particularly the outcome of our more
advanced studies; or negative responses from regulatory
authorities with regard to the approvability of our products;
o Period-to-period fluctuations in our financial results,
including our cash and investment balance, operating expenses,
cash burn rate or revenues;
o Negative announcements, additional legal proceeding or
financial problems of our key suppliers, particularly relating
to our Canadian manufacturer and our service providers;
o A negative outcome in litigation or other potential legal
proceedings with PDI relating to the Fortigel license
agreement; or
o Other potentially negative financial announcements, including
delisting from the Nasdaq National Market or SEC, review of
any of our filings by the Securities and Exchange Commission,
changes in accounting treatment or restatement of previously
reported financial results or delays in our filings with the
SEC.
The Kingsbridge SSO financing arrangement may have a dilutive impact on our
stockholders. The SSO arrangement imposes certain limitations on our ability to
issue equity or equity-linked securities
There are 4,000,000 shares of our common stock that are reserved for
issuance under the Kingsbridge SSO, 260,000 of which is related to the warrant
issued to Kingsbridge. In certain circumstances where the registration statement
covering these shares that the Company is obligated to file is not effective or
available to Kingsbridge, additional shares may be issuable to Kingsbridge under
the agreement. The issuance of shares under the SSO, at a discount to the market
price of the common stock, and upon exercise of the warrants will have a
dilutive impact on other shareholders and the issuance or even potential
issuance of such shares, if any, could have a negative effect on the market
price of our common stock. If we sell stock to Kingsbridge when our share price
is decreasing, such issuance will have a more dilutive effect and may further
decrease our stock price.
To the extent that Kingsbridge sells shares of our common stock issued
under the SSO to third parties, our stock price may decrease due to the
additional selling pressure in the market. The perceived risk of dilution from
sales of stock to or by Kingsbridge may cause holders of our common stock to
sell their shares or encourage short sales. This could contribute to decline in
our stock price.
During the two-year term of the Kingsbridge SSO, we are subject to
certain restrictions on our ability to engage in certain equity or equity-linked
financings without the consent of Kingsbridge. These restrictions primarily
relate to non-fixed, future-priced securities. We may not issue securities that
are, or may become, convertible or exchangeable into shares of common stock
where the purchase, conversion or exchange price for such common stock is
determined using a floating or otherwise adjustable discount to the market price
of the common stock during the two year term of our agreement with Kingsbridge.
However, the agreement does not prohibit us from conducting most kinds of
additional debt or equity financings, including PIPES, shelf offerings, and
secondary offerings.
27
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cellegy invests its excess cash in short-term, investment grade, fixed
income securities under an investment policy. All of our investments are
classified as available-for-sale (see Financial Statements - Note 2). All of our
securities owned as of December 31, 2003 will mature in 2004, with the remainder
in money market funds. We believe that potential near-term losses in future
earnings, fair values or cash flows related to our investment portfolio are not
significant.
At December 31, 2003, our investment portfolio consisted of $3,687,000
in corporate notes. We currently do not hedge interest rate exposure. If market
interest rates were to increase by 100 basis points or 1% from December 2003
levels, the fair value of our portfolio would decline by no more than $5,000.
The modeling technique used measures the change in fair value from a
hypothetical shift in market interest rates.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are set forth below on
pages F-1 through F-24 of this report.
Index to Financial Statements F-1
Report of PricewaterhouseCoopers LLP, Independent Auditors F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-12
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
The disclosure called for by this Item has previously been provided by
the Company on a Report on Form 8-K filed with the Securities and Exchange
Commission on November 4, 2003, as amended by a report on Form 8-K/A filed
November 20, 2003.
ITEM 9A: CONTROLS AND PROCEDURES (Additional language forthcoming from PWC)
(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-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), as of December 31, 2003. Based on
their evaluation, our principal executive officer and principal accounting
officer concluded that our disclosure controls and procedures were effective as
of December 31, 2003.
As discussed in Note 13 to the Consolidated Financial Statements, the
Company has restated certain financial results and filed in an amended 2002
Annual Report on Form 10-K/A and amended quarterly reports on Form 10-Q/A for
the first three quarters of 2003 in March 2004. The circumstances causing the
restatement arose due to the complex nature of the accounting treatment of
certain stock options that had been cancelled. As a result of the restatement,
we reevaluated the effectiveness of our disclosure controls and procedures.
Based upon this reevaluation we believe that our controls and procedures are
effective and that no changes in such procedures or our internal controls are
necessary or appropriate.
(b) Changes in Internal Controls
28
There were no changes in the Company's internal controls over financial
reporting identified in connection with the evaluation by the Chief Executive
Offer and Chief Financial Officer that occurred during the Company's fourth
quarter that have materially affected or are reasonably likely to materially
affect the Company's internal controls over financial reporting.
29
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 may be
found in the sections captioned "Election of Cellegy Directors" and "Compliance
under Section 16(a) of the Securities Exchange Act of 1934" appearing in the
definitive Proxy Statement (the "2004 Proxy Statement") to be delivered to
shareholders in connection with the Annual Meeting of Shareholders expected to
be held in June 2004. Such information is incorporated herein by reference.
Information required by this Item with respect to executive officers may be
found in Part I hereof in the section captioned "Executive Officers of the
Registrant."
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the 2004 Proxy Statement and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the sections
captioned "Security Ownership of Certain Beneficial Owners and Management" and
"Equity Compensation Plans" appearing in the 2004 Proxy Statement and is
incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Certain Relationships and Related Transactions" appearing in the 2004
Proxy Statement and is incorporated herein by reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this Item may be found in the section
captioned "Principal Accountant Fees and Services" appearing in the 2004 Proxy
Statement and is incorporated herein by reference.
30
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
(a) The following exhibits are attached hereto or incorporated
herein by reference:
Exhibit
Number Exhibit Title
------ -------------
2.1 Asset Purchase Agreement dated December 31, 1997 between the
Company and Neptune Pharmaceutical Corporation. (Confidential
treatment has been granted with respect to portions of this
agreement.) (Incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-3, file no. 333-46087,
filed on February 11, 1998, as amended.)
3.1 Amended and Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-93288
LA) declared effective on August 11, 1995 (the "SB-2").)
3.2 Certificate of Amendment of Amended and Restated Articles of
Incorporation filed with the California Secretary of State on
August 6, 2002.
3.3 Bylaws of the Company. (Incorporated by reference to Exhibit 3.3
to the SB-2.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the SB-2.)
*10.1 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 to the SB-2.)
*10.2 1995 Equity Incentive Plan. (Incorporated by reference to Exhibit
4.03 to the Company's Registration Statement on Form S-8
(Registration No. 333-91588) filed on June 28, 2002.
*10.3 1995 Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.8 to the Company's Form 10-Q for the fiscal quarter
ended filed June 30, 2002.)
10.4 Loan and Security Agreement between Silicon Valley Bank and the
Company dated June 10, 1998. (Incorporated by reference to
Exhibit 10.01 to the Company's Form 10-QSB for the fiscal quarter
ended June 30, 1998.)
10.5 Lease Agreement between the Company and TCNorthern California
Inc. dated April 8, 1998. (Incorporated by reference to Exhibit
10.01 to the Company's Form 10-QSB for the fiscal quarter ended
March 31, 1998.)
*10.6 Employment Agreement, effective January 1, 2003, between the
Company and K. Michael Forrest.
10.7 Share Purchase Agreement dated as of November 27, 2001, by and
among the Company, Vaxis Therapeutics Corporation and certain
stockholders of Vaxis. (Incorporated by reference to Exhibit
10.14 to the Company's Form 10-K for the fiscal year ended
December 31, 2001.)
10.8 Exclusive License Agreement dated as of December 31, 2002, by and
between the Company and PDI, Inc. (Confidential treatment has
been requested with respect to portions of this agreement.)
(Incorporated herein by reference to Exhibit 10.10 to the
Company's Form 10-K for the year ended December 31, 2002.)
10.9 Common Stock Purchase Agreement dated January 16, 2004 between
Cellegy Pharmaceuticals, Inc. and Kingsbridge Capital Limited.
10.10 Registration Rights Agreement dated January 16, 2004 between
Cellegy Pharmaceuticals, Inc. and Kingsbridge Capital Limited.
10.11 Warrant dated January 16, 2004 issued to Kingsbridge Capital
Limited.
10.12 Retention and Severance Plan.
31
10.13 Form of Agreement of Plan Participation under Retention and
Severance Plan.
*10.14 Letter agreement dated November 6, 2003 between Cellegy
Pharmaceuticals, Inc. and Richard C. Williams.
*10.15 Stock option agreement dated November 6, 2003 between Cellegy
Pharmaceuticals, Inc. and Richard C. Williams.
*10.16 Form of Indemnity Agreement between the Company and its directors
and executive officers.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See signature page.)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Information regarding reports on Form 8-K and 8-K/A that we filed
during our fourth quarter ended December 31, 2003, is as follows:
- --------------------------------- ----------------------- -------------------------------------------------------------------------
Date Filed or Item
Furnished Number Description
- --------------------------------- ----------------------- -------------------------------------------------------------------------
October 27, 2003 Items 5 and 7 Initiation by PDI, Inc. of Non-Binding Mediation Proceedings
- --------------------------------- ----------------------- -------------------------------------------------------------------------
November 4, 2003 Items 4 and 7 Change in Registrant's Independent Accountant
- --------------------------------- ----------------------- -------------------------------------------------------------------------
November 6, 2003 Items 12 and 7 Third Quarter Financial Results
- --------------------------------- ----------------------- -------------------------------------------------------------------------
November 7, 2003 Items 5 and 7 Announcement of Changes to Cellegy's Board of Directors
- --------------------------------- ----------------------- -------------------------------------------------------------------------
November 20, 2003 Items 4 and 7 Change in Registrant's Independent Accountant
- --------------------------------- ----------------------- -------------------------------------------------------------------------
December 15, 2003 Items 4 and 7 Announcement of Resignation of Director, Dr. Ronald J. Saldarini;
Filing of Declaratory Judgement Action against PDI, Inc.;
European Patent Board's Decision regarding Cellegesic Patent
- --------------------------------- ----------------------- -------------------------------------------------------------------------
(c) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
information required to be set forth therein is included in the
financial statements or notes thereto.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of South San Francisco, State of California, on the 6th of April, 2004.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ K. Michael Forrest
--------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints each
of K. Michael Forrest and A. Richard Juelis, true and lawful attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
amendments to this Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
---- ----- ----
Principal Executive Officer:
/s/ K. Michael Forrest President, Chief Executive Officer and April 6, 2004
- ---------------------------------- Director
K. Michael Forrest
Principal Financial Officer
and Principal Accounting Officer:
/s/ A. Richard Juelis Vice President, Finance, Chief Financial April 6, 2004
- ---------------------------------- Officer and Secretary
A. Richard Juelis
Directors:
/s/ Richard C. Williams Chairman of the Board, Director April 6, 2004
- ----------------------------------
Richard C. Williams
/s/ John Q. Adams, Sr. Director April 6, 2004
- ----------------------------------
John Q. Adams, Sr.
/s/ Tobi B. Klar, M.D. Director April 6, 2004
- ----------------------------------
Tobi B. Klar, M.D.
/s/ Robert B. Rothermel Director April 6, 2004
- ----------------------------------
Robert B. Rothermel.
/s/ Thomas M. Steinberg Director April 6, 2004
- ----------------------------------
Thomas M. Steinberg
33
Index to Financial Statements
Page
----
Report of PricewaterhouseCoopers LLP, Independent Auditors F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-11
F-1
Report of Independent Auditors
To the Board of Directors and Shareholders of
Cellegy Pharmaceuticals, Inc.:
In our opinion, the consolidated financials statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Cellegy Pharmaceuticals, Inc. and its subsidiaries (a development
stage company) at December 31, 2003, and the results of their operations and
their cash flows for the year then ended and, cumulatively for the period from
January 1, 2003 to December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We did not
audit the cumulative totals of the Company for the period from June 26, 1989
(inception) to December 31, 2002, which totals reflect a deficit of 86.4 percent
of the related total cumulative amount accumulated during the development stage.
Those cumulative totals were audited by other auditors whose report, dated
February 13, 2003 (except for Note 13, as to which the date is March 24, 2004),
expressed an unqualified opinion on the cumulative amounts and included an
explanatary paragraph that indicated that the consolidated financial statements
as of and for the year ended December 31, 2002 have been restated as described
in Note 13. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewatershouseCoopers LLP
San Jose, California
April 6, 2004
F-2
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheet of Cellegy
Pharmaceuticals, Inc. (a development stage company) as of December 31, 2002, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 2002, and
for the period from June 26, 1989 (inception) through December 31, 2002 (not
separately presented herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cellegy
Pharmaceuticals, Inc. (a development stage company) at December 31, 2002 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 2002, and for the period from June 26,
1989 (inception) through December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements as of and for the year ended
December 31, 2002 have been restated as discussed in Note 13.
/s/ Ernst & Young LLP
Palo Alto, California
February 13, 2003 (except for Note 13,
as to which the date is March 24, 2004)
F-3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Balance Sheets
December 31,
------------------------------
2003 2002
------------ ------------
Assets: (Restated,
see note 13)
Current assets
Cash and cash equivalents ................................................................ $ 7,649,878 $ 21,628,517
Short-term investments ................................................................... 3,686,919 2,002,123
Prepaid expenses and other current assets ................................................ 508,123 608,313
------------ ------------
Total current assets ........................................................................... 11,844,920 24,238,953
Property and equipment, net .................................................................... 1,891,726 2,616,193
Restricted cash ................................................................................ 227,500 227,500
Intangible assets, net ......................................................................... 256,688 275,204
Goodwill ....................................................................................... 1,009,973 921,418
Other assets ................................................................................... 100,000 100,000
------------ ------------
Total assets ................................................................................... $ 15,330,807 $ 28,379,268
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued liabilities ................................................. $ 1,908,057 $ 2,005,279
Accrued compensation and related expenses ................................................ 111,989 122,925
Current portion of deferred revenue ...................................................... 832,000 833,340
------------ ------------
Total current liabilities ...................................................................... 2,852,046 2,961,544
Long term liabilities .......................................................................... 724,560 716,619
Deferred revenue ............................................................................... 13,334,660 14,166,660
------------ ------------
Total liabilities .............................................................................. 16,911,266 17,844,823
------------ ------------
Commitments and contingencies (Note 4)
Shareholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares authorized: no shares issued or
outstanding at December 31, 2003 and 2002 .............................................. -- --
Common stock, no par value; 35,000,000 shares authorized: 20,045,000 shares issued
and outstanding at December 31, 2003 and 19,652,356 shares issued and
outstanding at December 31, 2002 ....................................................... 97,293,984 96,139,764
Accumulated other comprehensive income ................................................... 274,855 11,831
Deficit accumulated during the development stage ......................................... (99,149,298) (85,617,150)
------------ ------------
Total shareholders' equity (deficit) ........................................................... (1,580,459) 10,534,445
------------ ------------
Total liabilities and shareholders' equity (deficit) ........................................... $ 15,330,807 $ 28,379,268
============ ============
See accompanying notes.
F-4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Operations
Period from
June 26,
Years ended December 31, 1989 through
------------------------------------------------- December 31,
2003 2002 2001 2003
------------- ------------- ------------- -------------
(Restated,
see note 13)
Revenues:
Licensing and contract revenue from affiliate ........ $ -- $ -- $ -- $ 1,145,373
Licensing, milestone, and development funding ........ 833,340 -- -- 2,384,748
Government grants .................................... 18,833 45,798 566 566,966
Product sales ........................................ 768,325 1,355,828 876,925 5,870,737
------------- ------------- ------------- -------------
Total revenues ............................................. 1,620,498 1,401,626 877,491 9,967,824
------------- ------------- ------------- -------------
Costs and expenses:
Cost of products sold ................................ 185,891 369,992 200,338 1,506,765
Research and development ............................. 10,558,174 10,403,214 14,097,746 72,175,558
Selling, general and administrative .................. 4,768,529 6,389,847 4,041,642 31,719,125
Acquired in-process research and development ......... -- -- 3,507,134 7,350,102
------------- ------------- ------------- -------------
Total costs and expenses ................................... 15,512,594 17,163,053 21,846,860 112,751,550
------------- ------------- ------------- -------------
Operating loss ............................................. (13,892,096) (15,761,427) (20,969,369) (102,783,726)
Other income (expense):
Interest expense ..................................... -- (27,136) (27,283) (1,503,729)
Interest income and other, net ....................... 359,948 547,961 1,531,929 6,586,662
------------- ------------- ------------- -------------
Net loss ................................................... (13,532,148) (15,240,602) (19,464,723) (97,700,793)
Non-cash preferred dividends ............................... -- -- -- 1,448,505
------------- ------------- ------------- -------------
Net loss applicable to common shareholders ................. $ (13,532,148) $ (15,240,602) $ (19,464,723) $ (99,149,298)
============= ============= ============= =============
Basic and diluted net loss per common share ........ $ (0.68) $ (0.86) $ (1.26)
============= ============= =============
Weighted average common shares used in computing
basic and diluted net loss per common share ................ 19,963,552 17,642,640 15,502,918
============= ============= =============
See accompanying notes.
F-5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity (Deficit)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------- ---------------------- -----------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- ------- -------- -------- ----------
Issuance of convertible preferred
stock, net of issuance cost through
December 31, 2000 ..................... 27,649 $ 6,801,730 -- $ -- 477,081 $ 4,978,505
Issuance of Series A convertible
preferred stock and warrants to
purchase 14,191 shares of Series A
convertible preferred stock in
exchange for convertible
promissory notes and accrued
interest through
December 31, 2000 ...................... 625,845 1,199,536 -- -- -- --
Issuance of convertible preferred
stock for services rendered, and
license agreement through
December 31, 2000 ...................... 50,110 173,198 -- -- -- --
Issuance of Series B convertible
preferred stock in exchange for
convertible promissory notes ........... -- -- 12,750 114,000 -- --
Non-cash preferred dividends ............. -- 1,448,505 -- -- -- --
Conversion of preferred stock,
including dividends, to common
stock through December 31, 2000 ........ (703,604) (9,622,969) (12,750) (114,000) (477,081) (4,978,505)
Issuance of warrants in connection
with notes payable in financing ........ -- -- -- -- -- --
Issuance of common stock in
connection with private placement
of common stock in July 1997, net
of issuance cost ....................... -- -- -- -- -- --
Issuance of common stock in connection
with the public offering of common
stock in November 1997, net of
issuance cost ......................... -- -- -- -- -- --
Issuance of common stock in connection
with the acquisition of Neptune
Pharmaceutical ........................ -- -- -- -- -- --
Issuance of common stock in connection
with IPO in August 1995 ............... -- -- -- -- -- --
Issuance of common stock for cash
through December 31, 2000 ............ -- -- -- -- -- --
Accumulated Deficit
Other Accumulated
Common Stock Comprehensive During the Total
--------------------- Income Development Shareholders'
Shares Amount (Loss) Stage Equity (Deficit)
------ ------ ------ ----- ----------------
Issuance of convertible preferred
stock, net of issuance cost
through December 31, 2000 ...................... -- $ -- $ -- $ -- $ 11,780,235
Issuance of Series A convertible
preferred stock and warrants to
purchase 14,191 shares of Series A
convertible preferred stock in
exchange for convertible
promissory notes and accrued
interest through
December 31, 2000 .............................. 6 -- -- -- -- 1,199,536
Issuance of convertible preferred stock
for services rendered, and license
agreement through December 31, 2000 ........... -- -- -- -- 173,198
Issuance of Series B convertible preferred
stock in exchange for convertible
promissory notes .............................. -- -- -- -- 114,000
Non-cash preferred dividends ..................... -- -- -- (1,448,505) --
Conversion of preferred stock, including
dividends, to common stock through
December 31, 2000 ............................. 3,014,644 14,715,474 -- -- --
Issuance of warrants in connection with
notes payable in financing .................... -- 487,333 -- -- 487,333
Issuance of common stock in connection
with private placement of common
stock in July 1997, net of issuance
cost .......................................... 1,547,827 3,814,741 -- -- 3,814,741
Issuance of common stock in connection
with the public offering of common
stock in November 1997, net of
issuance cost ................................. 2,012,500 13,764,069 -- -- 13,764,069
Issuance of common stock in connection
with the acquisition of Neptune
Pharmaceutical ................................ 462,809 3,842,968 -- -- 3,842,968
Issuance of common stock in connection
with IPO in August 1995 ....................... 1,322,500 6,383,785 -- -- 6,383,785
Issuance of common stock for cash
through December 31, 2000 .................... 953,400 126,499 -- -- 126,499
F-6
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity (Deficit) (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Issuance of common stock for
services rendered through
December 31, 2000 .................................. -- -- -- -- -- --
Issuance of common stock in
connection with the private
placement of common stock in
July 1999, net of issuance cost .................... -- -- -- -- -- --
Issuance of common stock in
connection with the private
placement of common stock in
October 2000, net of issuance
cost of $22,527 .................................... -- -- -- -- -- --
Repurchase of common shares in 1992 .................. -- -- -- -- -- --
Issuance of common stock in
exchange for notes payable ......................... -- -- -- -- -- --
Compensation expense related to the
extension of option exercise periods ............... -- -- -- -- -- --
Exercise of warrants to purchase
common stock through December 31, 2000 ............. -- -- -- -- -- --
Exercise of options to purchase
common stock through December 31, 2000 ............. -- -- -- -- -- --
Unrealized loss in investments
through December 31, 2000 .......................... -- -- -- -- -- --
Fair value of warrants issued
in Quay acquisition ................................ -- -- -- -- -- --
Common stock issued in connection
with Quay acquisition .............................. -- -- -- -- -- --
Compensation expense related
to warrants and options granted
to non-employees ................................... -- -- -- -- -- --
Foreign currency translation ......................... -- -- -- -- -- --
Net loss for the period June 26, 1989
(inception) to December 31, 2000 ................... -- -- -- -- -- --
Total Comprehensive Loss
through December 31, 2000 .......................... -- -- -- -- -- --
--------- ---------- ----------- ----------- ---------- ----------
Accumulated Deficit
Other Accumulated
Common Stock Comprehensive During the Total
--------------------- Income Development Shareholders'
Shares Amount (Loss) Stage Equity (Deficit)
------ ------ ------ ----- ----------------
Issuance of common stock for
services rendered through
December 31, 2000 ........................... 269,116 24,261 -- -- 24,261
Issuance of common stock in
connection with the private
placement of common stock in
July 1999, net of issuance cost ............. 1,616,000 10,037,662 -- -- 10,037,662
Issuance of common stock in
connection with the private
placement of common stock in
October 2000, net of issuance
cost of $22,527 ............................. 1,500,000 11,602,473 -- -- 11,602,473
Repurchase of common shares in 1992 ........... (3,586) (324) -- -- (324)
Issuance of common stock in
exchange for notes payable .................. 42,960 268,500 -- -- 268,500
Compensation expense related to the
extension of option exercise periods ........ -- 338,481 -- -- 338,481
Exercise of warrants to purchase
common stock through December 31, 2000 ...... 59,086 918,479 -- -- 918,479
Exercise of options to purchase
common stock through December 31, 2000 ...... 371,574 1,342,291 -- -- 1,342,291
Unrealized loss in investments
through December 31, 2000 ................... -- -- (27,270) -- (27,270)
Fair value of warrants issued
in Quay acquisition ......................... -- 489,477 -- -- 489,477
Common stock issued in connection
with Quay acquisition ....................... 169,224 977,105 -- -- 977,105
Compensation expense related
to warrants and options granted
to non-employees ............................ -- 601,748 -- -- 601,748
Foreign currency translation .................. -- -- (1,537) -- (1,537)
Net loss for the period June 26, 1989
(inception) to December 31, 2000 ............ -- -- -- (49,463,320) (49,463,320)
-----------
Total Comprehensive Loss
through December 31, 2000 ................... -- -- -- -- (49,492,127)
--------- ---------- ----------- ----------- ----------
F-7
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity (Deficit) (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balances at December 31, 2000 ........................ -- -- -- -- -- --
Exercise of options to purchase common
stock ............................................. -- -- -- -- -- --
Exercise of warrants to purchase common
stock ............................................. -- -- -- -- -- --
Compensation expense related to
warrants and options granted to
non-employees ..................................... -- -- -- -- -- --
Issuance of common stock in connection
with the private placement of
common stock in June 2001, net of
issuance costs of $184,795 ....................... -- -- -- -- -- --
Common stock issued in connection with
Vaxis acquisition ................................. -- -- -- -- -- --
Issuance of common stock in connection
with the achievement of Neptune
milestones ........................................ -- -- -- -- -- --
Unrealized gain/(loss) on investments ................ -- -- -- -- -- --
Foreign currency translation ......................... -- -- -- -- -- --
Net loss ............................................. -- -- -- -- -- --
Total Comprehensive Loss ............................. -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Balances at December 31, 2001 ........................ -- -- -- -- -- --
Exercise of options to purchase common
stock ............................................. -- -- -- -- -- --
Issuance of common stock in connection
with the private placement of common
stock in November 2002, net of
issuance costs of $275,000 ........................ -- -- -- -- -- --
Compensation expense related to stock
option modifications (restated) ................... -- -- -- -- -- --
Compensation expense for options
related to non-employees .......................... -- -- -- -- -- --
Unrealized gain (loss) on investments ................ -- -- -- -- -- --
Foreign currency translation ......................... -- -- -- -- -- --
Accumulated Deficit
Other Accumulated Total
Common Stock Comprehensive During the Shareholders'
-------------------------- Income Development Equity
Shares Amount (Loss) Stage (Deficit)
---------- ---------- ------- ----------- ----------
Balances at December 31, 2000 ................... 13,838,053 69,735,022 (28,807) (50,911,825) 18,794,390
Exercise of options to purchase common
stock ........................................ 60,803 203,437 -- -- 203,437
Exercise of warrants to purchase common
stock ........................................ 12,000 48,000 -- -- 48,000
Compensation expense related to
warrants and options granted to
non-employees ................................ -- 349,515 -- -- 349,515
Issuance of common stock in connection
with the private placement of
common stock in June 2001, net of
issuance costs of $184,795 .................. 2,747,143 15,199,206 -- -- 15,199,206
Common stock issued in connection with
Vaxis acquisition ............................ 533,612 3,852,631 -- -- 3,852,631
Issuance of common stock in connection
with the achievement of Neptune
milestones ................................... 104,113 750,000 -- -- 750,000
Unrealized gain/(loss) on investments ........... -- -- 130,655 -- 130,655
Foreign currency translation .................... -- -- (18,390) -- (18,390)
Net loss ........................................ -- -- -- (19,464,723) (19,464,723)
-----------
Total Comprehensive Loss ........................ -- -- -- -- (19,352,458)
---------- ---------- ------- ----------- ----------
Balances at December 31, 2001 ................... 17,295,724 90,137,811 83,458 (70,376,548) 19,844,721
Exercise of options to purchase common
stock ........................................ 156,632 454,983 -- -- 454,983
Issuance of common stock in connection
with the private placement of common
stock in November 2002, net of
issuance costs of $275,000 ................... 2,200,000 5,225,000 -- -- 5,225,000
Compensation expense related to stock
option modifications (restated) .............. -- 249,746 -- -- 249,746
Compensation expense for options
related to non-employees ..................... -- 72,224 -- -- 72,224
Unrealized gain (loss) on investments ........... -- -- (82,916) -- (82,916)
Foreign currency translation .................... -- -- 11,289 -- 11,289
F-8
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Shareholders' Equity (Deficit) (Continued)
Series A Series B Series C
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
----------------- ----------------- ----------------- ------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Net loss (restated) ............. -- -- -- -- -- -- -- --
Total Comprehensive Loss
(restated) .................... -- -- -- -- -- -- -- --
--- ---- --- ---- --- ---- ------------ ------------
Balances at December 31, 2002
(restated) .................... -- -- -- -- -- -- 19,652,356 96,139,764
Exercise of options to purchase
common stock .................. -- -- -- -- -- -- 273,196 537,700
Compensation expense for options
related to non-employees ...... -- -- -- -- -- -- -- 153,784
Issuance of shares to CEO upon
renewal of employment
contract ...................... -- -- -- -- -- -- 107,118 425,000
Issuance of common stock for
services ...................... -- -- -- -- -- -- 12,330 50,000
Financing fees .................. -- -- -- -- -- -- -- (12,264)
Changes in unrealized gain (loss)
on investments ................ -- -- -- -- -- -- -- --
Gain on foreign currency
translation ................... -- -- -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- -- -- --
Total Comprehensive Loss ........ -- -- -- -- -- -- -- --
--- ---- --- ---- --- ---- ------------ ------------
Balances December 31, 2003 ...... -- $ -- -- $ -- -- $ -- 20,045,000 $ 97,293,984
=== ==== === ==== === ==== ============ ============
Accumulated Deficit
Other Accumulated Total
Comprehensive During the Shareholders'
Income Development Equity
(Loss) Stage (Deficit)
------------ ------------ ------------
Net loss (restated) .................................. -- (15,240,602) (15,240,602)
-------------
Total Comprehensive Loss (restated) .................. -- -- (15,312,229)
------------ ------------ ------------
Balances at December 31, 2002 (restated) ............. 11,831 (85,617,150) 10,534,445
Exercise of options to purchase common
stock ............................................. -- -- 537,700
Compensation expense for options related
to non-employees .................................. -- -- 153,784
Issuance of shares to CEO upon renewal
of employment contract ............................ -- -- 425,000
Issuance of common stock for sevices ................. -- -- 50,000
Financing fees ....................................... -- -- (12,264)
Changes in unrealized gain (loss) on investments ..... (424) -- (424)
Gain on foreign currency translation ................. 263,448 -- 263,448
Net loss ............................................. -- (13,532,148) (13,532,148)
-------------
Total Comprehensive Loss ............................. -- -- (13,259,611)
------------ ------------ ------------
Balances December 31, 2003 ........................... $ 274,855 $(99,149,298) $ (1,580,459)
============ ============ ============
See accompanying notes
F-9
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows
Period from
June 26, 1989
(inception)
Years ended December 31, through
-------------------------------------------------- December 31,
2003 2002 2001 2003
------------ ------------ ------------ ------------
(Restated,
see note 13)
Operating activities
Net loss ............................................... $(13,532,148) $(15,240,602) $(19,464,723) $(97,700,793)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Acquired in-process technology ......................... -- -- 3,507,134 7,350,102
Depreciation and amortization .......................... 369,590 484,028 530,643 2,598,706
Intangible assets amortization ......................... 193,409 325,644 359,673 1,177,077
Loss (gain) on disposal of fixed assets ................ 666,875 (86,476) -- 580,399
Non-cash equity compensation expense ................... 578,784 321,970 349,516 2,190,499
Amortization of discount on notes payable and
deferred financing costs ............................. -- -- -- 24,261
Issuance of common stock for services .................. 50,000 -- -- 1,040,918
Issuance of common stock for services rendered,
interest, and Neptune milestones ..................... -- -- 750,000 567,503
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ........... 100,190 229,032 18,732 (608,122)
Other assets ........................................ -- 250,000 -- 250,000
Accounts payable and accrued liabilities ............ (90,621) 112,026 450,023 1,914,658
Other long term liabilities ......................... -- 231,793 484,826 716,619
Deferred revenue .................................... (832,000) 15,000,000 -- 14,168,000
Accrued compensation and related expenses ........... (10,936) (21,689) 5,541 111,989
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities ........................................... (12,506,857) 1,605,726 (13,008,635) (65,618,184)
------------ ------------ ------------ ------------
Investing activities
Purchases of property and equipment .................... (362,335) (733,175) (150,530) (5,199,755)
Purchases of investments ............................... (11,019,220) -- (16,789,905) (98,909,574)
Sales of investments ................................... 5,334,000 6,706,769 7,500,000 43,509,646
Maturities of investments .............................. 4,000,000 2,000,000 4,980,239 51,617,759
Proceeds from sale of property and equipment ........... 50,337 187,337 -- 237,674
Acquisition of Vaxis and Quay .......................... -- -- (142,556) (511,556)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities ........................................... (1,997,218) 8,160,931 (4,602,752) (9,255,806)
------------ ------------ ------------ ------------
Financing activities
Proceeds from notes payable ............................ -- -- -- 8,047,424
Proceeds from restricted cash .......................... -- 386,499 -- 386,499
Repayment of notes payable ............................. -- -- (882,070) (6,610,608)
Net proceeds from issuance of common stock ............. 525,436 5,679,983 15,450,643 69,636,987
Other assets ........................................... -- -- -- (613,999)
Issuance of convertible preferred stock, net of
issuance costs ....................................... -- -- -- 11,757,735
Deferred financing costs ............................... -- -- -- (80,170)
------------ ------------ ------------ ------------
Net cash provided by financing activities .............. 525,436 6,066,482 14,568,573 82,523,868
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... (13,978,639) 15,833,139 (3,042,814) 7,649,878
Cash and cash equivalents, beginning of period ......... 21,628,517 5,795,378 8,838,192 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ............... $ 7,649,878 $ 21,628,517 $ 5,795,378 $ 7,649,878
============ ============ ============ ============
See accompanying notes
F-10
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows (Continued)
Period from
June 26, 1989
(inception)
through
December 31,
2003 2002 2001 2003
---- ---- ---- ----
(Restated,
see note 13)
Supplemental cash flow information
Interest paid ...................................................... $ -- $ 27,136 $ 27,281 $ 639,987
======= =========== =========== ===========
Supplemental disclosure of non-cash transactions:
Issuance of common stock in connection with acquired-in-process
technology ...................................................... $ -- $ -- $ 3,507,134 $ 7,350,102
======= =========== =========== ===========
Conversion of preferred stock to common stock ...................... $ -- $ -- $ -- $14,715,474
======= =========== =========== ===========
Issuance of common stock for notes payable ......................... $ -- $ -- $ -- $ 277,250
======= =========== =========== ===========
Issuance of warrants in connection with notes payable financing .... $ -- $ -- $ -- $ 487,333
======= =========== =========== ===========
Issuance of convertible preferred stock for notes payable .......... $ -- $ -- $ -- $ 1,268,316
======= =========== =========== ===========
Issuance of common stock for milestone payments .................... $ -- $ -- $ 750,000 $ 750,000
======= =========== =========== ===========
See accompanying notes.
F-11
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
1. Accounting Policies
Description of Business and Principles of Consolidation
The consolidated financial statements include the accounts of Cellegy
Pharmaceuticals, Inc. and its subsidiaries, Cellegy Australia Pty Ltd and
Cellegy Canada Inc. (collectively the "Company"). All significant inter-company
balances and transactions have been eliminated in consolidation.
Cellegy Pharmaceuticals, Inc. was incorporated in California in June
1989 and is a development stage company. Since its inception, the Company has
engaged primarily in research and clinical development activities associated
with its current and potential future products and its transdermal drug delivery
and topical formulation expertise. The Company has conducted a number of
clinical trials using its products, including the preparation of manufactured
clinical materials. A number of sponsored, external research programs have been
undertaken.
Liquidity and Capital Resources
At December 31, 2003, the Company had a deficit accumulated during the
development stage of $99.1 million. The Company expects negative cash flow from
operations to continue for at least the next two years, with the need to
continue or expand their development programs and to commercialize products once
regulatory approvals have been obtained. Management believes that its existing
cash balances will be sufficient to meet the Company's capital and operating
requirements through December 31, 2004.
However, expenditures required to achieve the Company's growth and
profitability in the long term may be greater than projected or the cash flow
generated from operations may be less than projected. As a result, the Company's
long-term capital needs may require the Company to seek to obtain additional
funds through equity or debt financing, collaborative or other arrangements with
other companies, bank financing and other sources. There can be no assurance
that the Company will be able to obtain additional debt or equity financing on
terms acceptable to the Company, or at all. If adequate funds are not available,
the Company could be required to delay development or commercialization of
certain products, to license to third parties the rights to commercialize
certain products that the Company would otherwise seek to commercialize
internally, or to reduce resources devoted to product development. Accordingly,
the failure of the Company to obtain sufficient funds on acceptable terms when
needed could have a material adverse effect on the Company's ability to achieve
its longer term business objectives.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition and Research and Development Expenses
Revenues related to cost reimbursement provisions under development
contracts are recognized as the costs associated with the projects are incurred.
Revenues related to substantive and at risk non-refundable milestone payments
specified under development contracts are recognized as the milestones are
achieved. The Company may receive 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 and risk of loss have been transferred to the
customer. There is no right of return for sales of our skin care products.
Research and development costs are expensed as incurred. The type of
costs included in research and development expenses are salaries and benefits,
laboratory supplies, external research programs, clinical studies, consulting
and other expenses associated with regulatory filings and internally 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 based on
actual activity and on such factors as the number of subjects enrolled and
number of subjects that have completed certain treatment phases for each trial.
Cash, Cash Equivalents and Investments
Cash equivalents consist of highly liquid financial instruments with
original maturities of three months or less. The carrying value of cash and cash
equivalents approximates fair value at December 31, 2003 and 2002. The Company
considers all its investments as available-for-sale and reports these
investments at estimated fair market value using available market information.
Unrealized gains or losses on available-for-sale securities are included in
shareholders' equity (deficit) as other comprehensive income (loss) until their
disposition. The cost of securities sold is based on the specific identification
method. Realized gains or losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income and
other, net.
F-12
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
The Company is subject to credit risk from its portfolio of marketable
securities. By policy, the Company invests only in highly rated, liquid
securities and restricts amounts invested in such securities by investment type
and by issuer, except for securities issued by the United States government.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization of property and equipment is
computed using the straight-line method over the estimated useful lives of the
respective assets.
Useful Life
-----------
Furniture and Fixtures 3 years
Office Equipment 3 years
Laboratory Equipment 5 years
Amortization for leasehold improvements is taken over the shorter of
the estimated useful life of the asset or the remaining lease term. Upon sale or
retirement, the assets' cost and related accumulated depreciation are removed
from the accounts and only related gain or loss is reflected in operations.
Goodwill and Other Intangible Assets
Goodwill that is related to the purchase of Quay Pharmaceuticals in
June 2000, represents the excess purchase price over the fair value of net
assets acquired and 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 amortizes the remaining balance of
goodwill. The Company performed impairment tests of goodwill upon transition to
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets", and no impairment was identified at that time or in
conjunction with the annual impairment test for fiscal years 2002 and 2003. The
Company will continue to evaluate 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.
SFAS No. 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. The Company currently amortizes intangible assets
on a straight-line basis over their estimated useful lives of five years.
Amortization recorded to date as of December 31, 2003 was approximately
$1,177,000.
Reclassification
Certain prior year balances have been reclassified to conform to
current year presentation.
Foreign Currency Translation
The foreign subsidiaries functional currencies are their local
currencies. The gains and losses resulting from translating the foreign
subsidiaries' financial statements into United States dollars have been reported
in other comprehensive income (loss).
F-13
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and other
comprehensive income (loss). Accumulated other comprehensive income presented in
the consolidated balance sheets consists of the accumulated net unrealized gain
(loss) on available-for-sale investments and foreign currency translation
adjustments.
Stock-Based Compensation
The Company accounts for its stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations. The Company has elected to
follow the disclosure-only alternative prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure". Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. Compensation for options granted to non-employees has been
determined in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services,"
at the fair value of the equity instruments issued.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options since the alternative fair
market value accounting provided for under SFAS No. 123 requires use of option
valuation models that were not developed for use in valuing stock options. Under
APB Opinion No. 25, if the exercise price of the Company's stock options is
equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized related to employee or director grants.
F-14
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Pro forma information regarding net loss and net loss per common share
is required by SFAS No. 123, which requires that the information be determined
as if the Company has accounted for its common stock options granted under the
fair market value method. The fair market value of options granted has been
estimated at the date of the grant using a Black-Scholes option pricing model.
Had compensation cost for the Company's stock-based compensation plans
been determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's pro forma net loss and net loss per share as
reported would have been increased to the pro forma amounts indicated below:
Year ended December 31,
--------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
(Restated,
see note 13)
Net loss as reported ............................................. $(13,532,148) $(15,240,602) $(19,464,723)
Add: Stock-based employee compensation costs included in
reported net loss ............................................. 425,000 249,746 --
Deduct: Stock-based employee compensation costs determined
under the fair value based method for all awards .............. (1,839,447) (2,227,933) (2,687,751)
------------ ------------ ------------
Net loss, pro forma .............................................. $(14,946,595) $(17,218,789) $(22,152,474)
============ ============ ============
Basic and diluted net loss per share, as reported ................ $ (0.68) $ (0.86) $ (1.26)
Basic and diluted net loss per share, pro forma .................. $ (0.75) $ (0.98) $ (1.43)
The Company valued its options on the date of grant using the
Black-Scholes valuation model with the following weighted average assumptions:
Year ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Risk-free interest rate 2.9% 2.5% 3.5%
Dividend yield 0% 0% 0%
Volatility 0.98 1.06 0.60
Expected life of options in years 4.3 4.3 4.3
The weighted average per share grant date fair value of options granted
during the years ended December 31, 2003, 2002, and 2001 was $3.28, $3.80 and
$5.33, respectively.
Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF Issue No. 00-21 did not have a material impact on the Company's
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. During December
2003, the FASB issued FIN 46R, a revision to FIN 46. FIN 46R provides a broad
deferral of the latest date by which all public entities must apply FIN 46 to
certain variable interest entities, to the first reporting period ending after
March 15, 2004. The Company does not expect the adoption of FIN 46 to have a
material impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability or an asset in some circumstances. Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the issuance
date of SFAS No. 150 and still existing at the beginning of the interim period
of adoption. While the effective date of certain elements of SFAS No. 150 has
been deferred, the Company does not expect the adoption of SFAS No. 150 to have
a material impact on its financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," which codifies, revises and rescinds certain
sections of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on the Company's financial position or
results of operations.
Basic and Diluted Net Loss per Common Share
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. There is no difference
between basic and diluted net loss per common share, as presented in the
statement of operations, because all options and warrants are anti-dilutive. The
total number of shares excluded was 6,426,899, 1,864,551, and 5,041,375 for the
years ended December 31, 2003, 2002 and 2001, respectively.
F-15
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
2. Investments
At December 31, 2003 and 2002, investments consist of the following:
2003 2002
---------------------------------------------- ----------------------------------------------
Gross Gross
Unrealized Unrealized
Cost Gains Fair Value Cost Gains Fair Value
---------- ---------- ---------- ---------- ---------- ----------
Corporate notes ........ $3,686,800 $ 119 $3,686,919 $2,001,580 $ 543 $2,002,123
========== ========== ========== ========== ========== ==========
The Company's investments in corporate notes of $1,433,000 and
$2,253,000 will mature in April and July, 2004, respectively.
3. Property and Equipment, net
Property and equipment, net consist of the following:
December 31,
2003 2002
----------- -----------
Furniture and fixtures ................. $ 185,815 $ 184,305
Office equipment ....................... 238,550 238,822
Laboratory equipment ................... 874,753 978,485
Leasehold improvements ................. 2,063,636 2,919,390
----------- -----------
3,362,754 4,321,002
Less: accumulated depreciation
and amortization ..................... (1,471,028) (1,704,809)
----------- -----------
$ 1,891,726 $ 2,616,193
=========== ===========
4. Lease Commitments and Contingencies
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Rent expense is recorded on a straight-line
basis over the term of the lease. During the third quarter of 2002, the Company
subleased a portion of its facility. Rental income is recorded on a
straight-line basis over the term of the sublease. Future minimum lease
payments, net of future minimum sublease income at December 31, 2003, are as
follows:
Future Minimum
Lease Sublease Lease
Years ending December 31, Commitments Income Commitments
- --------------------------------------------------------------------------------
2004 $1,337,194 $(1,176,166) $161,028
2005 1,377,005 (1,211,451) 165,554
2006 1,414,747 (1,247,795) 166,952
2007 1,432,716 (1,285,228) 147,488
2008 1,475,700 (1,099,341) 376,359
---------- ----------- ----------
$7,037,362 $(6,019,981) $1,017,381
========== =========== ==========
Rent expense, net of sublease income, was $335,661, $891,620 and
$1,653,337 for the years ended December 31, 2003, 2002, and 2001, respectively.
The Company received $148,000, $405,000 and $897,000 in sublease income, which
is reflected in other income (expense), during the year ended December 31, 2003,
2002 and 2001, respectively.
Restricted cash at December 31, 2003 and 2002 was $227,500 and
represents amounts that secure a letter of credit related to the Company's
leases.
Litigation
In December 2002, Cellegy entered into an exclusive license agreement
with PDI, Inc. ("PDI") to commercialize Fortigel in North American markets.
Under the terms of the agreement, PDI's Pharmaceutical Products Group is
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
F-16
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
signing the agreement and is entitled to receive a milestone payment on FDA
approval and royalties following a successful product launch. Cellegy is
responsible for supplying finished product to PDI through Cellegy's contract
manufacturer. In July 2003, the FDA issued a Not Approvable letter for our
Fortigel NDA. In October 2003, Cellegy announced that it received a mediation
notice from PDI. The dispute resolution provisions of the license agreement
require non-binding mediation before either party may initiate further legal
proceedings.
The communication asserted several claims relating to the agreement,
including Cellegy's breach of several provisions of the agreement and failure to
disclose relevant facts, and PDI claimed several kinds of alleged damages,
including return of the initial license fee that PDI paid to Cellegy when the
agreement was signed. The parties subsequently conducted mediation as
contemplated by the agreement but did not reach any resolution of the claims.
In December 2003, Cellegy and PDI both initiated legal proceedings
against each other relating to the agreement. Cellegy filed a declaratory
judgment action in federal district court in San Francisco against PDI, and PDI
initiated an action in federal district court in New York against Cellegy. In
its action, Cellegy seeks, among other things, a declaration that it has fully
complied with the license agreement and that PDI's claims are without merit.
There can be no assurances regarding the outcome of either proceeding. The
Company could be required to devote significant time and resources to the
proceedings, and an adverse outcome could have a material adverse impact on our
business and financial position. Such potential loss is not estimatable at this
time.
5. 401(k) Plan
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code. All employees are eligible to participate
on their first day of employment with the Company. Under the plan, employees may
contribute up to 15% of salaries per year subject to statutory limits. The
Company provides a matching contribution equal to 25% of the employee's rate of
contribution, up to a maximum contribution rate of 4% of the employee's annual
salary. Expenses related to the plan for the years ended December 31, 2003, 2002
and 2001 were not significant.
6. Restructuring
On July 23, 2002 and December 13, 2002 the Board of Directors formally
adopted reduction in force programs affecting primarily research and marketing
functions. The reductions resulted in a decrease of nine and five employees,
respectively. During the third and fourth quarters of 2002, the Company recorded
severance and other related charges of $210,000 and $143,000, respectively. In
the fourth quarter of 2002, the Company recorded a stock based compensation
charge of $250,000 related to the extension of the exercise period of certain
options held by terminated employees. All these amounts were paid and there is
no remaining accrual balance as of December 31, 2003.
7. Acquisitions, Licenses and Other Agreements
Acquisitions
In December 1997, the Company acquired patent and related intellectual
property rights relating to Cellegesic (the "Agreement"), a topical product
candidate for the treatment of anal fissures and hemorrhoids from Neptune
Pharmaceuticals Corporation ("Neptune"). Under the terms of the Agreement, the
Company issued 429,752 shares of common stock to Neptune on December 31, 1997.
Upon the signing of a letter of intent on November 3, 1997, the Company issued
33,057 shares of common stock to Neptune. The Agreement calls for a series of
additional payments, payable in shares of common stock, upon successful
completion of various development milestones. Upon completion of milestones in
2001, the Company issued 104,113 shares of common stock valued at $750,000 which
has been recorded to research and development expenses. The remaining
milestones, if achieved, would become payable over the next several years.
Depending on several factors, including the market price of the common stock,
such payments, which are fixed based on the Agreement, could result in the
issuance of a significant number of shares of common stock or cash. Future
potential milestones, if all paid in Cellegy common stock could result in the
issuance of up to an additional 1,285,000 shares of Cellegy common stock based
on the closing price of Cellegy stock at time of issuance. The Agreement does
not provide for the payment by the Company of any future product royalties in
connection with sales of Cellegesic.
In June 2000, Cellegy acquired all assets of Quay Pharmaceuticals Pty
Ltd ("Quay"), an Australian pharmaceutical company producing Rectogesic, a drug
similar to Cellegesic. The acquired assets consisted of Quay's inventory,
purchased at Quay's cost at the time of acquisition, other tangible assets and
purchased technology. The aggregate purchase price of $1,835,000 included the
aggregate value of the 169,224 shares of Cellegy common stock issued to Quay
with a value of $977,000, warrants to purchase 171,146 shares of common stock
with a fair value of $489,000 and cash payments of $369,000. The purchase price
was allocated to the net tangible assets of $97,000, purchased technology of
$770,000, and goodwill of $968,000, based on their estimated fair values on the
acquisition date. Previously, purchased technology and goodwill was amortized
over three and ten years, respectively. Following the adoption of SFAS No. 142,
the
F-17
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
goodwill was no longer amortized as of January 1, 2002. This transaction has
been accounted for by the purchase method of accounting and accordingly, the
approximated purchase price, has been allocated to the net assets acquired and
the liabilities assumed based on the estimated fair values at the date of
acquisition, with the excess of the purchase price over assigned asset values
recorded as goodwill. The results of operating the acquired company have been
included in the Company's consolidated financial statements since the
acquisition date.
On November 27, 2001, Cellegy acquired Vaxis Therapeutics Corporation
("Vaxis"), a private Canadian company. Vaxis, renamed Cellegy Canada, is a small
early stage research and development entity with access to scientists in the
areas of sexual dysfunction, peripheral vascular disorders and nitric oxide
pharmacology. The acquisition of this research is in line with the Company's
goal of expanding its pipeline of products and protecting its patents. The
purchase price of $4.1 million consisted of 533,612 shares of common stock and
$142,000 in cash. The purchase price was allocated as follows: $350,000 to
intangible assets, $250,000 to tangible assets and $3,500,000 to acquired
in-process research and development. The acquired technology was in an early
stage of development that, as of the acquisition date, technological feasibility
had not been reached and no alternative use existed and therefore was expensed.
One of the assumptions used in determining the purchase price allocation was a
discount rate of 37% on probability of expected cash flows. The intangible
assets will be amortized over 5 years, the period of contractual obligation.
The Vaxis purchase agreement contains earn-out provisions for seven
years that are based on commercial sales of any products developed by the
Company or other revenues generated from the acquired research. Any contingent
consideration paid in the future will be accounted for as a cost of earning the
related revenues. The results of operations of the acquired company have been
included in the Company's consolidated financial statements since the
acquisition date.
Accumulated amortization of the Vaxis intangible assets at December 31,
2003 was $144,000. The expected amortization expense for Vaxis for the next
three years will be approximately $82,217 per year. Amortization for Quay was
fully recognized in May 2003.
Other Agreements
In August 2001, Cellegy announced a comprehensive agreement with
Ventiv Health, Inc. ("Ventiv"), a contract sales organization. Ventiv was to
provide certain sales and marketing services relating to the anticipated launch
of Cellegesic. In September 2002, Cellegy and Ventiv terminated the Cellegesic
License Agreement based on the delay in commercialization of Cellegesic due to
the withdrawal of the NDA and the subsequent decision to conduct another Phase 3
clinical trial.
In December 2002, Cellegy entered into a license agreement with PDI,
Inc. ("PDI") granting PDI the exclusive right to store, promote, sell and
distribute Fortigel, one of the Company's products awaiting FDA approval, in
North American markets. Cellegy received an upfront payment of $15.0 million on
the effective date of December 31, 2002 with an additional of $10.0 million
payable no later than thirty days after the Company certifies to PDI that
Fortigel has received all FDA approvals required to manufacture, sell and
distribute the product in the United States. The Company recorded costs of
$947,000 to selling, general and administrative expenses for the year ended
December 31, 2002 related to this agreement. If the $10.0 million payment is
received, the Company will incur additional financing costs of $600,000 payable
to an investment bank. Under the PDI agreement, the Company would also receive
royalties each year until the expiration of the last patent right related to
Fortigel of 20% - 30% of net sales and the Company would be reimbursed for 110%
of burdened costs for any product supplied to PDI. The $15.0 million upfront
payment was initially included as deferred revenue as of December 31, 2002 and
is being recognized as revenue over the 18 year term of the agreement. As of
December 31, 2003, total remaining deferred revenue of $14.2 million relates to
this payment.
In October 2003, Cellegy received mediation notice from PDI. In
December 2003, Cellegy and PDI initiated legal proceedings against each other.
See also Note 4: "Litigation".
8. Shareholders' Equity (Deficit)
Common Stock Private Placements
In October 2000, the Company completed a private placement of 1.5
million shares of common stock at a price of $7.75 per share to a group of
institutional investors. Net proceeds were $11,602,473.
In June 2001, the Company completed a private placement of
approximately 2.7 million shares of common stock at a price of $5.60 per share.
Participants included two existing investors, as well as five new investors. Net
proceeds were $15,199,206.
In November 2002, the Company completed a private placement of
approximately 2.2 million shares of common stock at a price of $2.50 per share
to a single investor, John M. Gregory, founder and former CEO of King
Pharmaceuticals and currently managing partner of SJ Strategic Investments LLC.
Net proceeds were $5,225,000.
F-18
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Preferred Stock
The Company's Articles of Incorporation provide that the Company may
issue up to 5,000,000 shares of preferred stock in one or more series. The Board
of Directors is authorized to establish from time to time the number of shares
to be included in, and the designation of, any such series and to determine or
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred stock and to increase or
decrease the number of shares of any such series without any further vote or
action by the shareholders.
Stock Option Plans
The Company has two stock option plans that were approved by the Board
and the shareholders of the Company in 1995: the 1995 Equity Incentive Plan (the
"Plan") and the 1995 Directors' Stock Option Plan (the "Directors' Plan"). Both
plans are administered by the Board. Subject to the overall supervision of the
Board, the Board has designated the Compensation Committee as the administrator
of both plans.
The Plan provides for the grant of options and other awards to
employees, directors and consultants. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options may be granted only to employees. The Compensation Committee determines
who will receive options or other awards under the Plan and their terms,
including the exercise price, number of shares subject to the option or award,
and the vesting and exercisability thereof. Options granted under the Plan
generally have a term of ten years from the grant date, and exercise price
typically is equal to the closing price of the common stock on the grant date.
Options typically vest over a three-year or four-year period. Options granted
under the Plan typically expire if not exercised within 90 days (or such other
period not to exceed five years) from the date on which the optionee is no
longer an employee, director or consultant. The vesting and exercisability of
options may also be accelerated upon certain change of control events.
Equity Incentive Plan
When the Plan was established in 1995, the Company reserved 700,000
shares for issuance. From 1996 to 2003, a total of 4,150,000 additional shares
were reserved for issuance under the Plan.
Activity under the Plan is summarized as follows:
Shares Weighted
Under Average
Option Exercise Price
------ --------------
Balance at January 1, 2001 ............... 2,150,641 $5.00
Granted .................................. 476,000 $7.96
Canceled ................................. (123,634) $5.71
Exercised ................................ (60,803) $3.35
---------- -----
Balance at December 31, 2001 ............. 2,442,204 $5.59
Granted .................................. 1,898,789 $3.84
Canceled ................................. (221,869) $5.97
Exercised ................................ (156,632) $2.90
---------- -----
Balance at December 31, 2002 ............. 3,962,492 $4.83
Granted .................................. 363,500 $3.05
Canceled ................................. (1,123,080) $5.11
Exercised ................................ (273,196) $1.97
---------- -----
Balance at December 31, 2003 ............. 2,929,716 $4.77
==========
F-19
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
At December 31, 2003, options to purchase 2,173,078 shares of common
stock were vested and exercisable at exercise prices ranging from $1.80 to
$15.00 per share. At December 31, 2002 and 2001, options to purchase 2,362,446
and 1,576,834 shares of common stock were vested and exercisable, respectively.
At December 31, 2003, 882,850 shares of common stock were available for future
option grants under the Plan.
The following table summarizes information about stock options
outstanding and exercisable related to the Plan at December 31, 2003:
Options Outstanding Options Vested
-------------------------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
- ------------------------ ------- ---------------- ----- ------- -----
$1.80 - $3.90 .................. 1,538,836 7.5 years $2.78 1,073,404 $2.87
$4.00 - $6.50 .................. 691,180 4.2 years $5.18 626,608 $5.18
$7.00 - $15.00 ................. 699,700 6.1 years $8.75 473,066 $8.55
--------- ---------
Total .......................... 2,929,716 6.4 years $4.77 2,173,078 $4.77
========= =========
Director's Stock Option Plan
In 1995, Cellegy adopted the 1995 Directors' Stock Option Plan (the
"Directors' Plan") to provide for the issuance of non-qualified stock options to
eligible outside Directors. When the plan was established, Cellegy reserved
150,000 shares for issuance. From 1996 to 2003, a total of 350,000 shares were
reserved for issuance under the Directors' Plan.
The Directors' Plan provides for the grant of initial and annual
non-qualified stock options to non-employee directors. Initial options vest over
a four year period and subsequent annual options vest over three years. The
exercise price of options granted under the Directors' Plan is the fair market
value of the common stock on the grant date. Options generally expire 10 years
from the grant date, and generally expire within 90 days of the date the
optionee is no longer a director. The vesting and exercisability of options may
also be accelerated upon certain change of control events.
Activity under the Directors' Plan is summarized as follows:
Shares Weighted
Under Average
Option Exercise Price
------ --------------
Balance at January 1, 2001 ............... 182,500 $5.01
Granted .................................. 46,000 $5.85
-------
Balance at December 31, 2001 ............. 228,500 $7.26
Granted .................................. 64,000 $2.56
-------
Balance at December 31, 2002 ............. 292,500 $4.61
Granted .................................. 60,000 $5.00
Canceled ................................. (84,000) $4.41
-------
Balance at December 31, 2003 ............. 268,500 $4.75
=======
At December 31, 2003, options to purchase 251,167 shares of common
stock were vested and exercisable at exercise prices ranging from $2.56 to $8.50
per share. At December 31, 2003, options to purchase 60,833 shares of common
stock were available for future option grants under the Directors' Plan.
The following table summarizes information about stock options
outstanding and exercisable related to the Directors' Plan at December 31, 2003:
F-20
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Options Outstanding Options Vested
-------------------------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Range of Exercise Prices Options Contractual Life Price Options Price
- ------------------------ ------- ---------------- ----- ------- -----
$2.56 - $3.25 ............... 44,000 8.0 years $2.62 38,667 $2.63
$4.50 - $5.50 ............... 206,500 6.1 years $5.04 194,500 $5.04
$6.50 - $8.50 ............... 18,000 6.9 years $6.72 18,000 $6.72
------- -------
Total ....................... 268,500 6.4 years $4.75 251,167 $4.79
======= =======
In November 2003, the Company granted an initial stock option to Mr.
Richard Williams, on his appointment to become Chairman of the Board, to
purchase 1,000,000 shares of common stock. 400,000 of the options have an
exercise price equal to $2.89 per share, the closing price of the stock on the
grant date and 600,000 of the options have an exercise price of $5.00 per share.
The option is vested and exercisable in full on the grant date, although a
portion of the option, covering up to 600,000 shares initially and declining
over time, is subject to cancellation if they have not been exercised, in the
event that Mr. Williams voluntarily resigns as Chairman and a director within
certain future time periods.
Shares reserved
As of December 31, 2003, the Company has reserved shares of common
stock for future issuance as follows:
Equity Plan 3,812,566
Directors' Plan 329,333
Chairman Options 1,000,000
Neptune Agreement 1,285,000
---------
Total 6,426,899
Non-cash Compensation Expense Related to Stock Options
For the year ended December 31, 2003, the Company recorded non-cash
stock compensation expense of $579,000 associated primarily with the
modification of certain stock options and the renewal of employment contract of
the CEO paid in stock. For the year ended December 31, 2002, the Company
recorded non-cash compensation expense of $322,000.
9. Income Taxes
At December 31, 2003 the Company had net operating loss carryforwards
of approximately $70,715,000 and $ 15,817,000 for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between the
years 2004 and 2023. The state net operating loss carryforwards expire between
the years 2004 and 2023. The state net operating loss carryforwards expire
between the years 2004 and 2013. At December 31, 2003, the Company also had
research and development credit carryforwards of approximately $1,757,000 and
$995,000 for federal and state purposes, respectively. The federal credits
expire between the years 2006 and 2023 and the state credits do not expire.
Pursuant to the "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the Company's net operating loss and research and development tax
credit carryforwards may be limited if a cumulative change of ownership of more
than 50% occurs within any three-year period. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax liabilities
and assets are as follows (in thousands):
F-21
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
December 31,
--------------------------
2003 2002
-------- --------
Deferred tax assets:
Net operating loss carryforwards ........ $ 25,000 $ 19,300
Deferred revenue ........................ 5,600 6,000
Credit carryforwards1 ................... 2,400 1,600
Capitalized intangibles ................. 2,100 1,900
Other, net .............................. 20 --
Depreciation and amortization ........... 1,120 800
-------- --------
Total deferred tax assets .................. 36,240 29,600
Valuation allowance ........................ (36,240) (29,600)
-------- --------
Net deferred tax assets .................... $ -- $ --
======== ========
2003
----------------------------
$ %
-------- ------
Net loss ............................... ($13,532)
Tax at Federal statutory rate .......... (4,601) 34.00%
State, net of Federal benefit .......... (832) 6.15%
Meals and entertainment ................ 9 -0.07%
Stock compensation expense ............. 46 -0.34%
Foreign rate differential .............. 85 -0.63%
Research credits ....................... (542) 4.00%
Deferred taxes not benefited ........... 5,968 -44.10%
True up ................................ (134) 0.99%
-------- -------
Provision for taxes .................... $ -- $ --
======== =======
The valuation allowance for deferred tax assets for 2003, 2002, and
2001 increased by approximately $6,640,000, $5,400,000, and $5,700,000,
respectively.
10. Segment Reporting
The Company has two business segments: pharmaceuticals and skin care.
Pharmaceuticals include primarily research and clinical development expenses for
potential prescription products to be marketed directly by Cellegy or through
corporate partners.
Current pharmaceutical revenues consist primarily of Rectogesic sales
in Australia and South Korea, in addition to the PDI license revenue for
Fortigel. The Company expects to complete other corporate collaborations in the
future for a number of its potential pharmaceutical products, which may result
in milestones, development funding and royalties on sales.
Cellegy expects to generate future revenues on potential products it
intends to self-market. The skin care business segment includes development
expenses for non-prescription moisturizer and anti-aging products. During 2001,
Cellegy incurred development expenses for its skin care products. No development
expenses were incurred in 2003 and 2002. The Company's product sales are to one
customer, Gryphon Development, Inc., which is selling one of the Company's skin
care products, exclusively in the United States, through a major specialty
retailer.
Cellegy allocates its revenues and operating expenses to each business
segment, but does not assess segment performance or allocate resources based on
a segment's assets and, therefore, asset depreciation and amortization and
capital expenditures are not reported by segment. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
The Company's segments are business units that will, in some cases,
distribute products to different types of customers through different marketing
programs. The potential future sales of skin care products require a
significantly different marketing effort than sales of pharmaceutical products
to physicians and other traditional pharmaceutical distribution channels.
Pharmaceutical products require more extensive clinical testing and ultimately
regulatory approval by the FDA and other worldwide health registration agencies,
requiring a more extensive level of development, manufacturing and compliance
than a skin care product.
The following table contains information regarding revenues and
operating income (loss) of each business segment for the years ended December
31, 2003, 2002, and 2001:
F-22
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31,
------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
(Restated,
see note 13)
Revenues:
Pharmaceuticals ........ $ 1,304,498 $ 320,339 $ 217,439
Skin care .............. 316,000 1,081,287 660,052
------------ ------------ ------------
$ 1,620,498 $ 1,401,626 $ 877,491
============ ============ ============
Operating income (loss):
Pharmaceuticals ........ $(14,039,351) $(16,462,264) $(21,021,796)
Skin care .............. 147,255 700,837 52,427
------------ ------------ ------------
$(13,892,096) $(15,761,427) $(20,969,369)
============ ============ ============
Total assets were minimal for the skin care segment.
Revenue from Major Customer
Revenues from product sales to one customer represented approximately
20%, 70% and 75% of total revenue for 2003, 2002 and 2001, respectively.
Geographic data
Approximately 28%, 20% and 25% of total revenues in 2003, 2002 and
2001, respectively, are from sales of Rectogesic in Australia and South Korea.
All other sales are in the United States. Most of the Company's assets are
located in the United States.
11. Related Party Transactions
The Company has paid fees to their board members for their services on
the board, audit committee and compensation committee. The total fees paid to
these directors during 2003, 2002 and 2001 were $103,000, $10,000 and $30,000,
respectively. Cash compensation paid to the Chairman of the Board in 2003 was
$15,300.
There were no consulting fees paid in cash to any board members in 2003
and 2002. For 2001, consulting fees of $80,000 were paid in cash to two board
members based on consulting agreements. In addition, the Company recognized
$131,000 and $33,000 in non-cash compensation expense during 2003 and 2002,
respectively, associated with the valuation of vested stock options that were
previously issued under a consulting agreement to a former board member.
Cellegy had an interest bearing $100,000 loan outstanding to a
non-officer employee, which was issued in 1999 in conjunction with the purchase
of his home. This loan had an interest rate of 5% and repayment was due at the
end of the 15 year term of the loan or sooner. The loan was paid in full in
April 2004.
12. Subsequent Events
In January 2004, Cellegy entered into a Structured Secondary Offering
("SSO") facility agreement with Kingsbridge Capital Limited. The facility
requires Kingsbridge to purchase up to 3.74 million shares of newly issued
common stock at times and in amounts selected by Cellegy over a period of up to
two years, subject to certain restrictions. Cellegy may begin to draw down funds
after the effectiveness of a registration statement that the Company intends to
file with the Securities and Exchange Commission. The dollar amount of stock
that Cellegy may require Kingsbridge to purchase will depend in part on the
market price of the common stock at the time that the registration statement is
filed and that shares are sold. The agreement does not prohibit Cellegy from
conducting additional debt or equity financings, including PIPEs, shelf
offerings, secondary offerings or any other non-fixed or future priced
securities. The timing and amount of any draw downs are at Cellegy's sole
discretion, subject to certain timing conditions, and are limited to certain
maximum amounts depending in part on the then current market capitalization of
the Company. Kingsbridge is not obligated to purchase shares at market prices
below $1.25 per share. The purchase price of the common stock will be at
discounts ranging from 8% to 12% of the average market price of the common stock
prior to each future draw down. The lower discount applies to higher stock
prices. In connection with the agreement, Cellegy issued warrants to Kingsbridge
to purchase 260,000 common shares at an exercise price of $5.27 per share.
Cellegy can, at its discretion and based on its cash needs, determine how much,
if any, of the equity line it will draw down in the future, subject to the other
conditions in the agreement.
13. Restatement
In the course of preparing its financial statements for the year ended
December 31, 2003, the Company determined that it was necessary to adjust the
accounting treatment for certain employee and director stock options that had
been cancelled during the fourth quarter of 2002. The Company initially
accounted for the cancellation of certain unvested options as a modification to
the stock options and applied variable accounting treatment to the uncancelled
portion of the stock options. Subsequently, the Company determined that was not
the appropriate application under generally accepted accounting principles, and
reversed the $695,000 of expense previously recorded in the fourth quarter of
2002. Cellegy has filed an amended annual report on Form 10-K/A for 2002 and
amended quarterly reports on Form 10-Q/A for each of the first three quarters of
2003.
F-23
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
A summary of the effect of this adjustment on the 2002 financial
statements is as follows: in the statement of operations, research and
development expense, selling, general and administrative expense and the net
loss were reduced by $269,000, $426,000 and $695,000, respectively; on the
consolidated balance sheet, common stock and the accumulated deficit were both
reduced by $695,000.
F-24