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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10 - Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________


Commission File Num`ber 1-10352


COLUMBIA LABORATORIES, INC.
(Exact name of Company as specified in its charter)

 

 
  Delaware  59-2758596
 (State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
                             
                        
                        

 354 Eisenhower Parkway, Plaza 1, 2nd Floor
 Livingston, New Jersey  07039
 (Address of principal executive offices)   (Zip Code)
 

 
Company's telephone number, including area code: (973) 994-3999


Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x  No o

Number of shares of the Common Stock of Columbia Laboratories, Inc. issued and outstanding as of November 1, 2004: 41,751,934

 

 
     
 


PART 1 - FINANCIAL INFORMATION


Item 1. Financial Statements


The following unaudited, condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the interim periods reported have been made. Results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results for the year ending December 31, 2004.

Except for historical information contained herein, the matters discussed in this document are forward looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties including, but not limited to, economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products and prices, and other factors discussed elsewhere in this report.

 
 

 
  Page 2 of 19  
 

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 
   
September 30, 
 December 31, 
2004 
2003 
  
   
(Unaudited)  
        
ASSETS
            
   Current assets-            
Cash and cash equivalents
$
21,069,291
 
$
30,965,517
 
Accounts receivable, net
  
5,950,923
   
4,780,921
 
Inventories
  
3,374,820
   
2,469,224
 
Prepaid expenses and other current assets
  
1,141,608
   
2,240,920
 
Total current assets
  
31,536,642
   
40,456,582
 
             
Property and equipment, net
  
873,336
   
961,995
 
Intangible assets, net
  
-
   
920,418
 
Other assets
  
161,099
   
140,654
 
TOTAL ASSETS
$
32,571,077
 
$
42,479,649
 
             
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
            
Current liabilities-
            
Note payable
$
10,000,000
 
$
-
 
Current portion of financing agreements
  
3,220,717
   
1,228,865
 
Accounts payable
  
1,708,176
   
2,806,236
 
Accrued expenses
  
1,412,423
   
2,731,692
 
Total current liabilities
  
16,341,316
   
6,766,793
 
Note payable - long-term
  
-
   
10,000,000
 
Deferred revenue
  
4,394,956
   
3,879,618
 
Long-term portion of financing agreements
  
18,096,394
   
15,746,695
 
TOTAL LIABILITIES
  
38,832,666
   
36,393,106
 
Stockholders' equity (deficiency)-
            
Preferred stock, $.01 par value; 1,000,000 shares authorized:
            
Series B Convertible Preferred Stock, 130 shares issued and
            
outstanding in 2004 and 2003
  
1
   
1
 
Series C Convertible Preferred Stock, 3,250 shares issued
           
and outstanding in 2004 and 2003
 
32
   
32
 
Common stock, $.01 par value; 100,000,000 authorized
            
41,751,934 and 39,679,381 shares issued and outstanding
            
in 2004 and 2003, respectively
  
417,519
   
396,794
 
Capital in excess of par value
  
168,623,778
   
162,146,561
 
Accumulated deficit
  
(175,488,162
)
  
(156,648,214
)
Accumulated other comprehensive income
 
185,243
   
191,369
 
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)
  
(6,261,589
)
  
6,086,543
 
TOTAL LIABILITIES AND STOCKHOLDERS'
            
EQUITY (DEFICIENCY)
$
32,571,077
 
$
42,479,649
 
             
See notes to condensed consolidated financial statements

 


 
  Page 3 of 19  
 


 COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)



           
 
      
 
  
           
 
    
 
    
 
     Nine Months Ended
September 30,		   Three Months Ended
September 30,		  
 
2004
2003
2004
2003
  
                   
NET SALES
  
$
14,296,456
 
$
17,289,303
 
$
5,092,819
 
$
8,763,957
 
                           
COST OF GOODS SOLD
    
5,685,011
   
6,838,074
   
2,182,140
   
3,023,359
 
Gross profit
   
8,611,445
   
10,451,229
   
2,910,679
   
5,740,598
 
                           
OPERATING EXPENSES:
                          
Selling and distribution
    
14,958,153
   
16,012,352
   
5,210,005
   
7,470,881
 
General and administrative
    
5,687,018
   
4,471,313
   
1,904,281
   
1,491,025
 
Research and development
    
4,072,932
   
2,198,883
   
1,016,269
   
608,885
 
Total operating expenses
    
24,718,103
   
22,682,548
   
8,130,555
   
9,570,791
 
                           
Loss from operations
    
(16,106,658
)
  
(12,231,319
)
  
(5,219,876
)
  
(3,830,193
)
OTHER INCOME (EXPENSE):
                          
Interest income
    
182,321
   
65,836
   
63,345
   
54,388
 
Interest expense
    
(2,206,489
)
  
(1,242,750
)
  
(770,953
)
  
(517,535
)
Loss on sale of intangible assets
    
(577,917
)
  
-
   
-
   
-
 
Other, net
    
(131,205
)
  
83,008
   
(54,355
)
  
38,793
 
     
(2,733,290
)
  
(1,093,906
)
  
(761,963
)
  
(424,354
)
                           
Net loss
    
($18,839,948
)
  
($13,325,225
)
$
(5,981,839
)
$
(4,254,547
)
                           
NET LOSS PER COMMON SHARE:
                          
Basic and diluted
  
$
(0.47
)
$
(0.37
)
$
(0.14
)
$
(0.11
)
                           
WEIGHTED AVERAGE NUMBER OF
                          
COMMON SHARES OUTSTANDING:
                          
Basic and diluted
    
40,726,264
   
36,689,369
   
41,751,934
   
38,795,145
 
                           
                           

See notes to condensed consolidated financial statements
 

 
  Page 4 of 19  
 



COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)

 
    Nine Months Ended
September 30,		 Three Months Ended
September 30, 		 
   
2004
2003
2004
2003
  
                   
NET LOSS
  
$
(18,839,948
)
$
(13,325,225
)
$
(5,981,839
)
$
(4,254,547
)
                           
Other comprehensive income (loss):
                          
Foreign currency translation, net of tax
    
(6,126
)
  
77,793
   
10,666
   
(2,657
)
                           
Comprehensive loss
  
$
(18,846,074
)
$
(13,247,432
)
$
(5,971,173
)
$
(4,257,204
)
                           


See notes to condensed consolidated financial statements
 
 

 
  Page 5 of 19  
 



COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


   
Nine Months Ended September 30,
2004
2003
  
CASH FLOWS FROM OPERATING ACTIVITIES:
          
Net loss
  
$
(18,839,948
)
$
(13,325,225
)
Adjustments to reconcile net loss to net
              
cash used in operating activities-
              
Depreciation and amortization
    
301,712
   
431,241
 
Provision for doubtful accounts
    
48,917
   
80,350
 
Provision for returns and allowances
    
580,906
   
340,241
 
Writedown of inventories
    
511,323
   
227,760
 
Interest expense on financing agreements
    
1,639,969
   
670,384
 
Loss on sale of intangible assets
    
577,917
   
-
 
Issuance of options for consulting services
    
-
   
96,152
 
Issuance of options for sales services
    
10,130
   
-
 
               
Changes in assets and liabilities-
              
(Increase) decrease in:
              
Accounts receivable
    
(1,799,825
)
  
(7,491,318
)
Inventories
    
(1,416,919
)
  
(354,178
)
Prepaid expenses
    
1,099,312
   
(30,073
)
Loans receivable, related parties
    
-
   
17,885
 
Other assets
    
(20,445
)
  
12,576
 
Increase (decrease) in:
              
Accounts payable
    
(1,098,060
)
  
2,962,845
 
Accrued expenses
    
(1,319,269
)
  
1,166,440
 
Deferred revenue
    
515,338
   
100,633
 
Net cash used in operating activities
    
(19,208,942
)
  
(15,094,287
)
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Purchase of property and equipment
    
(170,683
)
  
(1,012,072
)
Sale of intangible assets
    
300,000
   
-
 
Net cash provided by (used in) investing activities
    
129,317
   
(1,012,072
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Proceeds from issuance of common stock, net
    
6,380,000
   
28,817,455
 
Exercise of options and warrants
    
229,688
   
6,730,990
 
Payment of note payable
    
-
   
(586,667
)
Proceeds from financing agreements
    
3,000,000
   
11,250,000
 
Payments pursuant to financing agreements
    
(298,418
)
  
(185,616
)
Dividends paid
    
(121,875
)
  
(137,500
)
Net cash provided by financing activities
    
9,189,395
   
45,888,662
 
               
               
               
(Continued)


 

 
  Page 6 of 19  
 

 COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
 

       
 
  
 
    Nine Months Ended September 30,
2004
2003
       
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
(5,996
)
  
76,573
 
               
NET INCREASE (DECREASE) IN CASH
              
AND CASH EQUIVALENTS
    
(9,896,226
)
  
29,858,876
 
               
CASH AND CASH EQUIVALENTS,
              
Beginning of period
    
30,965,517
   
5,018,365
 
               
CASH AND CASH EQUIVALENTS,
              
End of period
  
$
21,069,291
 
$
34,877,241
 
               
NON-CASH INVESTING AND FINANCING
              
ACTIVITIES
              
Related party loan repaid with common stock
  
$
-
 
$
193,273
 
               

 

See notes to condensed consolidated financial statements

 
 

 
  Page 7 of 19  
 


COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(1) SIGNIFICANT ACCOUNTING POLICIES:
 
    The accounting policies followed for quarterly financial reporting are the same as those disclosed in Note (1) of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

    Prior-year financial statements have been reclassified to conform to the 2004 presentations.

    As shown in the financial statements, the Company has had recurring losses from operations and has a stockholders' deficiency. The Company has been able to raise additional funds from equity offerings and finance arrangements and management believes it can continue to do so in the future. Management believes that the remaining availability under existing offering and Amended and Restated Common Stock Purchase Agreement is sufficient to sustain the Company's operations.


(2) INVENTORIES:

    Inventories consist of the following:


   
September 30,
December 31,
2004
2003
  
Finished goods
  
$
2,618,584
 
$
1,096,785
 
Raw materials
    
756,236
   
1,372,439
 
               
   
$
3,374,820
 
$
2,469,224
 
               

(3) NOTES PAYABLE:

    Notes payable consist of:
 

   
September 30,
December 31,
2004
2003
  
           
7.125% convertible subordinated note payable - due March 2005
  
$
10,000,000
 
$
10,000,000
 
Less: current portion
    
10,000,000
   
-
 
               
 
   $ -  
$
10,000,000
 
               

 

 
  Page 8 of 19  
 


(4) FINANCING AGREEMENTS:

In an agreement dated July 31, 2002, Quintiles Transnational Corp’s strategic investment group, PharmaBio Development, Inc., agreed to pay $4.5 million, in four equal quarterly installments commencing in the third quarter 2002, for the right to receive a 5% royalty on net sales of the Company’s women’s healthcare products in the United States for five years beginning in the first quarter of 2003. The royalty payments are subject to minimum ($8 million) and maximum ($12 million) amounts. Because the minimum amount exceeds $4.5 million, the Company has recorded the amounts received as liabilities. The excess of the minimum ($8 million) to be paid by the Company over the $4.5 million received by the Company is being recognized as interest expense over the five-year term of the agreement, assuming an interest rate of 12.51%. $159,644 and $141,896 were recorded as interest expense for the three months ended September 30, 2004 and September 30, 2003, respectively, and $460,657 and $352,038 were recorded as interest expense for the nine months ended September 30, 2004 and September 30, 2003, respectively. The agreement calls for a catch-up payment if, by February 28, 2005, the Company has not made $2,750,000 in royalty payments to PharmaBio. The Company has paid PharmaBio $690,936 through September 30, 2004 under this agreement.

In an agreement dated March 5, 2003, Quintiles Transnational Corp’s strategic investment group, PharmaBio Development, Inc., agreed to pay $15 million in five quarterly installments commencing with the signing of this agreement. In return, PharmaBio receives a 9% royalty on net sales of Striant® in the United States up to agreed annual sales revenues, and a 4.5% royalty of net sales above those levels. The royalty term is seven years. Royalty payments commenced in the 2003 third quarter and are subject to minimum ($30 million) and maximum ($55 million) amounts. Because the minimum amount exceeds the $15 million, the Company has recorded the amounts received as liabilities. The excess of the minimum ($30 million) to be paid by the Company over the $15 million received by the Company is being recognized as interest expense over the seven-year term of the agreement, assuming an interest rate of 10.67%. $422,469 and $186,798 were recorded as interest expense for the three months ended September 30, 2004 and September 30, 2003, respectively, and $1,179,312 and $322,346 were recorded as interest expense for the nine months ended September 30, 2004 and September 30, 2003, respectively. The agreement calls for a catch-up payment if, by September 30, 2006, the Company has not made $13,000,000 in royalty payments to PharmaBio. The Company has paid PharmaBio $452,808 through September 30, 2004 under this agreement.

 
Liabilities from financing agreements consist of the following:


   
September 30,
  
December 31,
  
   
2004
  
2003
  
July 31, 2002 financing agreement
  
$
4,870,338
 
$
4,648,018
 
March 5, 2003 financing agreement
    
16,446,773
   
12,327,542
 
     
21,317,111
   
16,975,560
 
Less current portion
    
3,220,717
   
1,228,865
 
   
$
18,096,394
 
$
15,746,695
 



 

 
  Page 9 of 19  
 


(5) SEGMENT INFORMATION:

The Company and its subsidiaries are engaged in the development and sale of pharmaceutical products, medical devices and cosmetics. The following table shows selected unaudited information by geographic area:


Net
Loss from
Identifiable
Sales
Operations
Assets
  
               
As of and for the nine months
              
ended September 30, 2004-
              
United States
  
$
9,292,983
 
$
(16,570,852
)
$
19,256,455
 
Europe
    
5,003,473
   
464,194
   
13,314,622
 
                     
   
$
14,296,456
 
$
(16,106,658
)
$
32,571,077
 
                     
As of and for the nine months
                    
ended September 30, 2003-
                    
United States
  
$
11,326,663
 
$
(12,562,996
)
$
40,634,780
 
Europe
    
5,962,640
   
331,677
   
9,575,975
 
                     
   
$
17,289,303
 
$
(12,231,319
)
$
50,210,755
 
                     
As of and for the three months
                    
ended September 30, 2004-
                    
United States
  
$
3,915,976
 
$
(4,880,318
)
      
Europe
    
1,176,843
   
(339,558
)
      
                     
   
$
5,092,819
 
$
(5,219,876
)
      
                     
As of and for the three months
                    
ended September 30, 2003-
                    
United States
  
$
6,699,117
 
$
(3,559,043
)
      
Europe
    
2,064,840
   
(271,150
)
      
                     
   
$
8,763,957
 
$
(3,830,193
)
      
                     
                     
 

 
  Page 10 of 19  
 



(6) LOSS PER COMMON AND COMMON EQUIVALENT SHARE:

The calculation of basic and diluted loss per common and common equivalent share is as follows:
 
 
   
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
                   
     
($18,839,948
)
  
($13,325,225
)
$
(5,981,839
)
$
(4,254,547
)
Less: Preferred stock dividends
    
(121,875
)
  
(137,500
)
  
(40,625
)
  
(43,750
)
                           
                           
common stock
    
($18,961,823
)
  
($13,462,725
)
$
(6,022,464
)
$
(4,298,297
)
                           
                           
Weighted average number of
                          
common shares outstanding
    
40,726,264
   
36,689,369
   
41,751,934
   
38,795,145
 
                           
Basic and diluted net loss per common share
  
$
(0.47
)
$
(0.37
)
$
(0.14
)
$
(0.11
)
 
(7) LEGAL PROCEEDINGS:

In August 2001, Ares Trading S.A. (“Serono”) filed a lawsuit in the Supreme Court of the State of New York (the “Action”) naming the Company as defendant. The Action set forth claims for an alleged breach of contract for failure to supply Crinone® in accordance with the supply agreement between the parties. In November 2001, the Company filed counterclaims against Serono. In June 2002, the Company reached a settlement with Serono. The companies agreed to release all claims against each other. Under the terms of the settlement, the Company sublicensed rights to market a second brand of its 8% and 4% progesterone gel products under the trade name “Prochieve®” to a defined audience of obstetricians, gynecologists and primary care physicians in the United States. As part of the settlement, Columbia gave Serono a note for $3.96 million, which was paid in March 2003, to cover out of pocket costs resulting from the recall.

Other claims and lawsuits have been filed against the Company. Although the results of pending litigation are always uncertain, the Company does not believe the results of any such actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operation. Additionally, the Company believes that it has adequate reserves or adequate insurance coverage for any unfavorable outcome resulting from these actions.

(8) RELATED PARTY TRANSACTIONS:

During 1993, the Company loaned an individual, who was an officer, director and stockholder of the Company, an aggregate of $110,350. These notes, bearing interest at 10% per annum and due on or before December 7, 1997, were subsequently extended through December 7, 1999. On June 30, 2003, the notes and accrued interest totaling $216,639 were paid in full by transferring to the Company Columbia stock valued at $193,237 and $23,402 in cash.

 

 
  Page 11 of 19  
 


(9) STOCK-BASED COMPENSATION:

The Company has elected to apply APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, the Company's net loss and net loss per common share for the nine and three month periods ended September 30, 2004 and 2003 would have been as follows:
 

 
   
Nine Months Ended
September 30, 
Three Months Ended
September 30,  
  
   
2004
2003
2004
2003
  
Net loss, as reported
  
$
(18,839,948
)
$
(13,325,225
)
$
(5,981,839
)
$
(4,254,547
)
Add: Value of options charged
                         
to operations
    
10,130
   
96,152
   
5,245
   
96,152
 
Deduct : Total stock-based compensation
                          
expense determined under fair value
                         
based method for all awards
    
(1,570,345
)
  
(1,591,831
)
  
(555,259
)
  
(620,375
)
Pro forma net loss
  
$
(20,400,163
)
$
(14,820,904
)
$
(6,531,853
)
$
(4,778,770
)
                           
Loss per share - basic and diluted
                          
As reported
  
$
(0.47
)
$
(0.37
)
$
(0.14
)
$
(0.11
)
Pro forma
  
$
(0.50
)
$
(0.41
)
$
(0.16
)
$
(0.12
)
                           
                           

(10) CAPITAL TRANSACTION:

    On May 19, 2004, the Company sold 2,000,000 shares of its common stock to an investor at a price of $3.20 per share. Gross proceeds amounted to $6,400,000.


(11) SALE OF OVER-THE-COUNTER PRODUCTS

    On June 29, 2004, the Company sold the worldwide rights to its over-the-counter products Advantage-S® Contraceptive Gel and RepHresh® Vaginal Gel and the foreign rights to Replens® Vaginal Moisturizer to Lil’ Drug Store Products, Inc. The Company also sold its existing finished goods inventory of these products to Lil’ Drug Store Products. Additionally, the companies executed a five year supply agreement, with minimums, and a two and one-half year agreement for Columbia’s sales force to continue to promote these products to obstetricians and gynecologists in the United States. Upon closing, the Company was entitled to payments amounting to $830,000 from the sale of the rights and inventory. At the closing, the Company recorded a loss of $577,917 on the loss of the sale of the intangibles assets associated with the products and also recorded $389,825 of product sales to Lil’ Drug Store Products at prices determined in the supply agreement. The Company will receive revenues from the manufacture and sale of product to Lil’ Drug Store Products, promotional fees under the professional services agreement and royalties on sales of products manufactured by third parties.
 
 

 
  Page 12 of 19  
 


 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

From time to time, the Company and its representatives may make written or verbal forward looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in the Company’s reports to stockholders, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, the Company’s expectations regarding sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions and general optimism about future operations or operating results. Some of these statements can be identified by the use of forward-looking terminology such as "prospects," "outlook," "believes," "estimates," "intends," "may," "will," "should," "anticipates," "expects" or "plans," or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategy or risks and uncertainties. Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include, without limitation: (i) the successful marketing of products by the Company and its licensees; (ii) increased competitive activity from companies in the pharmaceutical industry, some of which have greater resources than the Company; (iii) social, political and economic risks to the Company’s foreign operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; (iv) changes in the laws, regulations and policies, including changes in accounting standards, that affect or will affect the Company in the United States and abroad; (v) foreign currency fluctuations affecting the relative prices at which the Company and foreign competitors sell their products in the same market; (vi) failure to develop the Company’s products or delay in development of the Company’s products; and, (vii) the timely completion of studies and success in approvals by the FDA and international regulatory agencies. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the Cautionary Statements in this Quarterly Report. Readers are advised to consult any further disclosures the Company may make on related subjects in subsequent filings to the U.S. Securities and Exchange Commission on forms 10-Q, 8-K and 10-K.

Critical Accounting Policies and Estimates

The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the consolidated financial statements included in Item 14 of the Annual Report for the year ended December 31, 2003 on Form 10-K, beginning on page F-11. Note that the preparation of this Quarterly Report on Form 10-Q requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

    Revenue Recognition. The Company’s revenue recognition is significant because revenue is a key component of the Company’s results of operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and royalties. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Revenues from the sale of products are recorded at the time goods are shipped to customers. Provisions for returns, rebates and other allowances are estimated based on a percentage of sales and are recorded in the same period the related sales are recognized. Royalties and additional monies owed to the Company based on the strategic alliance partners sales are recorded as revenue as sales are made by the strategic alliance partners. License fees are recognized in net sales over the term of the license.

      Impairment of Intangible Assets. The Company periodically evaluates its intangible assets for potential impairment indicators. Judgments regarding the existence of impairment indicators are based on legal factors, market condition and operational performance. Future events could cause the Company to conclude that impairment factors exist and that certain intangible assets are impaired. Any resulting impairment loss could have a materially adverse impact on results of operations.
 

 
  Page 13 of 19  
 

    Accounting for PharmaBio Development Agreements. In July 2002 and March 2003, the Company entered into agreements with PharmaBio Development, Inc. under which the Company received upfront money paid in quarterly installments in exchange for royalty payments on certain of the Company’s products to be paid to PharmaBio for a fixed period of time. The royalty payments are subject to minimum and maximum amounts and, because the minimum amounts are in excess of the amount to be received by the Company, the Company has recorded the money received as liabilities. The excess of the minimums to be paid by the Company over the amounts received by the Company is being recorded as interest expense over the terms of the agreements.

 
Liquidity and Capital Resources

Cash and cash equivalents decreased from $30,965,517 at December 31, 2003 to $21,069,291 at September 30, 2004. During the nine months ended September 30, 2004 the Company used $19,208,942 for operations, and received $6,380,000, net of expenses, from the sale of 2,000,000 shares of stock, $3,000,000 from PharmaBio, $300,000 from the sales of certain intangible assets and $229,688 from the exercise of stock warrants. During the period, the Company paid $298,418 to PharmaBio, and spent $170,683 on property and equipment and $121,875 for dividends to holders of its Series C preferred stock.

    Effective February 6, 2001, the Company entered into the Amended and Restated Common Stock Purchase Agreement with Acqua Wellington to sell up to $16.5 million of the Common Stock, under the Registration Statement, the Prospectus, and the related Prospectus Supplement dated February 6, 2001 and amended on April 13, 2001. Pursuant to the Purchase Agreement, the Company may, from time to time over the term of the Purchase Agreement and at its sole discretion, issue and sell to Acqua Wellington up to $16.5 million of the Common Stock, subject to certain conditions, at a price per share based on the daily volume weighted average price of the Common Stock over a certain period of time less a discount ranging from 5% to 7%. In addition, during the period in which the Company elects to issue and sell shares of the Common Stock to Acqua Wellington, the Company may also, at its sole discretion, grant Acqua Wellington a call option at the same discount for the applicable period to purchase additional shares of the Common Stock up to the applicable amount being sold by the Company in such period, subject to the overall limit of $16.5 million described above. As of November 1, 2004, $9 million of the Common Stock may be sold under the Agreement, subject to the registration statement relating to the amendment becoming effective.

    As shown in the financial statements, the Company has had recurring losses from operations and has a stockholders' deficiency. The Company has been able to raise additional funds from equity offerings and finance arrangements and management believes it can continue to do so in the future. Management believes that the remaining availability under existing offering and Amended and Restated Common Stock Purchase Agreement is sufficient to sustain the Company's operations.

    In connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which assets consisted of the patents underlying the Company’s Bioadhesive Delivery System, other patent applications and related technology, the Company pays Bio-Mimetics a royalty equal to two percent of the net sales of products based on the Bioadhesive Delivery System, to an aggregate of $7.5 million. The Company is required to prepay a portion of the remaining royalty obligation, in cash or stock at the option of the Company, if certain conditions are met. Through September 30, 2004, the Company has paid approximately $2.8 million in royalty payments to Bio-Mimetics.
 
    As of September 30, 2004, the Company has outstanding exercisable options and warrants that, if exercised, would result in approximately $48.0 million of additional capital. There can be no assurance that any options or warrants will be exercised.

    Significant expenditures anticipated by the Company in the near future include funds to be spent on research and development related to new products and additional indications for current products. The Company also anticipates it will spend approximately $500,000 on property and equipment in 2004. In accordance with the PharmaBio Development financing agreement dated July 31, 2002, the Company agreed to pay a 5% royalty on the net sales of the Company’s women’s healthcare products in the United States for five years beginning in the first quarter of 2003. The agreement calls for a catch-up payment if, by February 28, 2005, the Company has not made $2,750,000 in royalty payments to PharmaBio. The Company has paid PharmaBio $690,936 through September 30, 2004, under this agreement. Additionally, the Company’s $10 million subordinated convertible note becomes due on March 15, 2005.


 
  Page 14 of 19  
 

    As of September 30, 2004, the Company had available net operating loss carryforwards of approximately $110 million to offset its future U.S. taxable income. In accordance with Statement of Financial Accounting Standards No. 109, as of September 30, 2004 and December 31, 2003, other assets in the accompanying consolidated balance sheets include deferred tax assets of approximately $39 and $32 million, respectively, comprised primarily of a net operating loss carryforward, for which a valuation allowance has been recorded since the ability of the deferred tax assets to be realized is not determinable.

Results of Operations - Nine Months Ended September 30, 2004 versus Nine Months Ended September 30, 2003

    Net sales decreased by approximately $2,993,000 from approximately $17,289,000 in 2003 to approximately $14,296,000 in 2004. Sales of products to wholesalers and chain drugstores were $4,509,000 in 2004 versus $6,800,000 in 2003. The decrease resulted from a reduction in sales in both the Company’s women’s healthcare products and Striant, which was introduced in the third quarter of 2003. Sales to the Company’s marketing partners were $8,281,000 in 2004 versus $9,171,000 in 2003. Sales of products to marketing partners are made in bulk shipments based on purchase orders and ordering patterns may vary from quarter to quarter. Total licensing fee income, product development fee income and royalty income was $1,506,000 in 2004 as compared to $1,318,000 in 2003.

    Gross profit as a percentage of net sales was 60% in both 2004 and 2003. The cost of goods sold for the Prochieve® products includes a 30% royalty to Serono on net sales. Under the Replens® Purchase and License Agreement dated April 18, 2000, between the Company and Lil’ Drug Store Products, Inc., the selling price for Replens® to Lil’ Drug Store Products for sale in the US is equal to the Company’s cost of goods. Lil’ Drug Store Products last received product under that Agreement in March 2004 and the Company does not expect any future orders for Replens for sale in the US. The Company receives a royalty on US sales of Replens by Lil’ Drug Store Products. The selling price for Advantage-S and RepHresh, worldwide, and Replens outside the US under the Supply Agreement dated June 29, 2004, between the Company and Lil’ Drug Store Products is greater than the cost of goods.

    Selling and distribution expenses decreased approximately $1,054,000 in 2004, from approximately $16,012,000 in 2003 to approximately $14,958,000 in 2004. The decrease reflects a reduction in marketing expenses. Included in the 2004 expenses were sales force costs of approximately $8,562,000 and product marketing expenses of approximately $3,672,000. Expenses in 2003 included approximately $8,431,000 in sales force costs and approximately $5,181,000 in product marketing expenses.

    General and administrative expenses increased by approximately $1,216,000 in 2004 from approximately $4,471,000 in 2003 to approximately $5,687,000 in 2004. The higher costs in 2004 were the result of increases in insurance premiums ($589,000), non-legal professional fees ($235,000) and salary expense including the hiring of additional administrative personnel subsequent to the third quarter of 2003 ($277,000).

    Research and development expense increased in 2004 by approximately $1,874,000 from approximately $2,199,000 in 2003 to approximately $4,073,000 in 2004. The increase is primarily related to the costs associated with PROTERM™, the Company’s Phase III trial for Prochieve® 8% in preventing preterm birth in pregnant women who are at high risk. Additionally, costs associated with the ongoing follow-up studies on Striant and fees and costs associated with the regulatory approvals of Striant in Europe also added to the increase.

    Interest expense increased by approximately $963,000 from approximately $1,243,000 in 2003 to approximately $2,206,000 in 2004, primarily as a result of expensing, as interest, the difference between the minimum amounts to be paid to PharmaBio Development and the amounts received. Interest expense related to the convertible subordinated note payable totaled approximately $534,000 in 2004 and 2003.


 
  Page 15 of 19  
 

In 2004, the Company recorded a loss of approximately $578,000 when it sold its intangible assets associated with its over-the-counter products to Lil’ Drug Store Products, Inc.

    As a result, the net loss for the nine months ended September 30, 2004 was $18,839,948 or $(0.47) per common share as compared to the net loss for the nine months ended September 30, 2003 of $13,325,225 or $(0.37) per common share.


Results of Operations - Three Months Ended September 30, 2004 versus Three Months Ended September 30, 2003

    Net sales decreased by approximately $3,671,000 from approximately $8,764,000 in 2003 to approximately $5,093,000 in 2004. Sales of products to wholesalers and chain drugstores were $3,050,000 in 2004 versus $4,866,000 in 2003. The decrease resulted from a reduction in sales of both Striant, which was introduced in the third quarter of 2003, and sales of the Company’s women’s healthcare products. Sales to the Company’s marketing partners were $1,471,000 in 2004, versus $3,424,000 in 2003. Sales of products to marketing partners are made in bulk shipments based on purchase orders and ordering patterns may vary from quarter to quarter. Total licensing fee income, product development fee income and royalty income was $572,000 in 2004 as compared to $474,000 in 2003.

    Gross profit as a percentage of net sales was 57% in 2004 as compared to 66% in 2003. The decrease in gross profit percentage from 2003 to 2004 was the result of the greater sales of Striant®, a higher margin product, in the third quarter of 2003. The cost of goods sold for the Prochieve® products includes a 30% royalty to Serono on net sales. Under the Replens® Purchase and License Agreement dated April 18, 2000, between the Company and Lil’ Drug Store Products, Inc., the selling price for Replens® to Lil’ Drug Store Products for sale in the US is equal to the Company’s cost of goods. Lil’ Drug Store Products last received product under that Agreement in March 2004, and the Company does not expect any future orders for Replens for sale in the US. The Company receives a royalty on US sales of Replens by Lil’ Drug Store Products. The selling price for Advantage-S and RepHresh, worldwide, and Replens outside the US under the Supply Agreement dated June 29, 2004, between the Company and Lil’ Drug Store Products is greater than the cost of goods.

     Selling and distribution expenses decreased approximately $2,261,000 in 2004, from approximately $7,471,000 in 2003 to approximately $5,210,000 in 2004. The decrease reflects a reduction in sales force costs reflecting the first quarter 2004 reorganization and downsizing of the sales force. Included in the 2004 expenses were sales force costs of approximately $2,703,000 and product marketing expenses of approximately $1,818,000. Expenses in 2003 included approximately $4,398,000 in sales force costs and approximately $1,982,000 in product marketing expenses.

    General and administrative expenses increased by approximately $413,000 in 2004, from approximately $1,491,000 in 2003 to approximately $1,904,000 in 2004. The higher costs in 2004 were the result of increases in insurance premiums ($185,000), non-legal professional fees ($98,000) and salary expense, including the hiring of additional administrative personnel subsequent to the third quarter of 2003 ($95,000).
 
    Research and development expense increased in 2004 by approximately $407,000 from approximately $609,000 in 2003 to approximately $1,016,000 in 2004. The increase is primarily related to the costs associated with PROTERM™, the Company’s Phase III trial for Prochieve® 8% in preventing preterm birth in pregnant women who are at high risk. Additionally, costs associated with the ongoing follow-up studies on Striant and salary expense including the hiring of additional research and development personnel subsequent to the third quarter of 2003 also added to the increase.

    Interest expense increased by approximately $253,000 from approximately $518,000 in 2003 to approximately $771,000 in 2004, primarily as a result of expensing, as interest, the difference between the minimum amounts to be paid to PharmaBio Development and the amounts received. Interest expense related to the convertible subordinated note payable totaled approximately $178,000 in 2004 and 2003.

    As a result, the net loss for the three months ended September 30, 2004 was $5,981,839 or $(0.14) per common share as compared to the net loss for the three months ended September 30, 2003 of $4,254,547 or $(0.11) per common share.


 
  Page 16 of 19  
 


Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company does not believe that it has material exposure to market rate risk. The Company has only a fixed rate debt obligation that comes due in 2005. The Company may, however, require additional financing to fund future obligations and no assurance can be given that the terms of future sources of financing will not expose the Company to material market risk.


Item 4. Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As of September 30, 2004, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.



 
  Page 17 of 19  
 


PART II - OTHER INFORMATION


Item 1. Legal Proceedings

Claims and lawsuits have been filed against the Company. Although the results of pending litigation are always uncertain, the Company does not believe the results of any such actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operation. Additionally, the Company believes that it has adequate reserves or adequate insurance coverage for any unfavorable outcome resulting from these actions.


Item 2. Changes in Securities

None.


Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

A.   Exhibits

31.1 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company
31.2 -- Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company
32.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

B.   Reports on Form 8-K

On August 4, 2004, the Company filed a Form 8-K in which it reported that on August 4, 2004 it had issued a press release setting forth Columbia’s second quarter and six-months results of operations for 2004.

On August 24, 2004, the Company filed a Form 8-K in which it reported that on August 20, 2004, its Board of Directors elected Edward A. Blechschmidt and Stephen G. Kasnet as directors of the Company.

On September 13, 2004, the Company filed a Form 8-K in which it reported that on September 9, 2004 it had entered into Indemnification Agreements in substantially the form filed and incorporated by reference to the Company’s 2003 Form 10-K as Exhibit 10.46, with Edward A. Blechschmidt and Stephen G. Kasnet, each of whom is a director of the Company.




 
  Page 18 of 19  
 


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

  COLUMBIA LABORATORIES, INC.


/S/ DAVID L. WEINBERG
DAVID L. WEINBERG, Vice President-
Finance and Chief Financial Officer
DATE: November 4, 2004
 
 

 
  Page 19 of 19